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American Greetings (AM)

Q2 2013 Earnings Call

September 28, 2012 9:00 am ET

Executives

Gregory M. Steinberg - Director of Investor Relations and Treasurer

Stephen J. Smith - Chief Financial Officer and Senior Vice President

Analysts

Carla Casella - JP Morgan Chase & Co, Research Division

Michael Schechter

Jeffrey S. Stein - Northcoast Research

Victor B. Anthony - Topeka Capital Markets Inc., Research Division

Presentation

Operator

Good day, and welcome to the American Greetings Corporation Second Quarter Fiscal 2013 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gregory Steinberg, Treasurer and Executive Director of Investor Relations. Please go ahead, sir.

Gregory M. Steinberg

Thank you, Cynthia. Good morning, everyone, and welcome to our second quarter conference call. Joining me today on the call is Steve Smith, our CFO. We released our earnings for the second quarter fiscal 2013 this morning. If you do not yet have our second quarter press release, you can find a copy within the Investors section of American Greetings' website at investors.americangreetings.com.

As you may expect, some of our comments today may include statements about projections for the future. Those projections involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We cannot guarantee the accuracy of any forecasts or estimates, and we do not plan to update any forward-looking statements.

If you would like more information on our risks involved in forward-looking statements, please see our annual report or SEC filings. Previous earnings releases as well as our 10-Qs, 10-Ks and our annual report are available on the Investors section of the American Greetings website.

We will now proceed with comments from our CFO, followed by a question-and-answer session. Steve?

Stephen J. Smith

Thanks, Greg. In light of a purchase proposal that was announced on Wednesday, this conference call will have a slightly modified format. First, Zev Weiss, our CEO, will not be participating in today's call. Second, I will not be discussing the proposal that was announced Wednesday. Third, I will be restricting my remarks and the answers to questions during the question-and-answer period for the second quarter and first fiscal half, and we'll not be commenting on the balance of the fiscal year, either with regard to the company's performance or with regard to investments or uses of capital.

I have 3 components to my prepared remarks today. I will start with comments on how the Clinton's transaction impacted our consolidated results this quarter, then move to a review of our reported segments, and finally, I will touch on a few key components of our financials. We will then open the line for questions, again, focusing on the year-to-date performance only.

I would like to first start with comments on how the recent acquisition of certain assets of Clinton Cards is impacting our financial results. As you likely know, during the first fiscal quarter, we acquired the senior secured debt of Clinton Cards and incurred bad debt and other related expenses as Clinton Cards filed for administration.

During the second fiscal quarter, we acquired certain assets from Clinton Cards for about $37 million, which included approximately 400 stores and related overhead as well as the Clinton Cards brand.

If you cut through the financial noise associated with the Clinton's transaction, that is, if you put aside the Clinton's effect, within our core business, our revenue and operating margin are tracking slightly ahead of our internal expectations due to a combination of sales running ahead of internal plans as well as expenses, especially overhead, being carefully managed.

Since the acquisition of the Clinton's assets, our strategy to improve the operations has included reevaluating the overall product offering within the stores, remodeling a handful of stores, remerchandising the card assortment, aggressively renegotiating leases and reducing overhead costs. We are encouraged with the progress so far as well as the preliminary results, although we are in the early days of our journey. We still expect fiscal 2013 to be year of transition for these stores as we work to turn around their performance.

In addition to turning around this business, forecasting its performance at this time is also difficult as it is a highly seasonal business, and the ultimate number of stores that we will own and operate has not been finalized.

You will see that within this quarter's financials, we've added a new segment called Retail Operations. This segment represents the ongoing activities of those U.K.-based stores, which we are branding Clinton's. You will also see that within the International Social Expression product segment, we've added a line for inter-segment items to account for the inter-segment sales and profits from our wholesale business in the U.K. to those retail stores in the U.K.

During our second fiscal quarter, the Clinton's acquisition impacted both the operating and nonoperating sections of our income statement. In addition, those impacts were both transactional and operational. In order to aid your understanding of the effect Clinton is having on our financial statements, we have included a supplemental exhibit to our earnings release. The supplemental exhibit outlines some of the more significant effects of the Clinton's, both during the quarter and year-to-date periods. Let me take a few minutes and verbally explain those effects.

We recognized a net increase in revenue of about $26 million, which was comprised of both the $40 million of revenue from the new Retail Operations segment and the eliminations associated with the inter-segment revenue, the revenue from our U.K. Wholesale business that I just mentioned, of $14 million.

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