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Russ Berrie and Company, Inc. (RUS)

Q2 2008 Earnings Call

August 19, 2008 10:00 am ET

Executives

Erica Pettit – Financial Dynamics

Bruce Crain – President &CEO
Anthony Cappiello – CAO & Interim CFO

Analysts

Arnie Brief – Goldsmith & Harris

[Dan Kern] – Blue Sky Asset Management

Unidentified Analyst

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Russ Berrie and Company conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Ms. Erica Pettit of Financial Dynamics; please go ahead.

Erica Pettit

Good morning everyone and welcome to Russ Berrie’s second quarter 2008 conference call. If you have not viewed the press release issued this morning and would like to receive one by email or fax please call Financial Dynamics at 212-850-5600 and someone will send you one immediately.

As stated in the company’s earnings release this call is being webcast and can be accessed on the company’s website at www.russberrie.com. The webcast of the call will be archived online shortly after the conference call for 90 days. A replay of the call will be available through August 26, 2008 by dialing 800-642-1687 access code 60012738.

We will begin the call with comments from management and then we will open up the line for questions. Before we begin we would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

Now I would like to turn the call over to Bruce Crain, Chief Executive Officer and President of Russ Berrie.

Bruce Crain

Thanks Erica, good morning and thank you for joining everyone. I’m going to start with a review of recent performance and then Anthony Cappiello, our Chief Administrative Officer and Interim Financial Officer will provide a more detailed discussion of our financial results. Later I’ll come back and briefly discuss our plans going forward.

During the second quarter we achieved double-digit sales growth primarily due to the solid performance of LaJobi and CoCaLo which we acquired very early in the second quarter as well as sales growth in both our Kids Line and Sassy businesses.

However earnings results were very disappointing for us. Sales in our Gift segment were impacted by the overall difficult consumer and retail environment and this resulted in inventory adjustments from some of our retailers as well as weak sell-in during the quarter.

We experienced significant margin pressure particularly in our Infant and Juvenile business due to spikes of cost of goods. Although this is consistent with many consumer companies sourcing in US dollars, our cost of finished goods in the first half of 2008 escalated considerably given the weak US dollar Chinese Yuan exchange rate, compounded by higher raw material, labor and freight costs.

Combining these external factors have created a more challenging operating environment and affected our bottom line results. Additionally our results for the quarter were influenced by certain significant unusual and mostly non-cash financial items which we will discuss in more details when we review the performance of both of our segments.

All that said, we continue to implement appropriate strategies to assure the long-term success of each of our businesses and also take more time to discuss those strategies throughout this morning’s call.

Let me begin with a few second quarter highlights for our Infant and Juvenile segment. First, demand for Infant and Juvenile items remained really strong as the long-term favorable demographic trends in this recession resistant industry are very attractive. We believe that having a core business that can leverage these trends is extremely important during difficult economic times, and we’re pleased with our ability to continue to generate significant top line growth in this segment.

In fact, we’ve been able to protect our shelf space at our retail customers as we remain focused on leading with our innovative designs and well branded product lines and we have gained market share in some areas, even in the difficult macro environment.

This is especially encouraging given that our I and J retail customers have also been prudently managing their own inventory levels to appropriately address their views on consumer demand for 2008 and despite this, we grew our sales.

Beyond our organic business initiatives the important strategic and accretive acquisitions of LaJobi and CoCaLo that were completed during the quarter advanced our leadership position in the Infant and Juvenile market. In addition we were able to capture additional market share driven by their branded, trend light and quality products, we also benefit from their extremely high service level business models.

During the quarter we seamlessly completed the initial phase of integration of these businesses under the Russ Berrie Infant and Juvenile segments umbrella and are now deeply involved in helping them grow and drive synergies across the entire segment. I’m very encouraged by the progress across these new businesses as well as our ongoing progress of Kids Line and Sassy units.

Finally on the debt capital structure side of the I and J segment, we are pleased to amend our Infant and Juvenile credit facility early in the second quarter in order to finance the LaJobi and CoCaLo acquisitions and to support the overall growth of our I and J segment.

The facility now consists of a term loan in the amount of $100 million and a revolving credit facility up to $75 million. In connection with this change for our credit facility we did write-off [inaudible] financing expenses a portion of which were related to an earlier phase of the facility and as a result we recorded a non-cash charge of approximately $700,000 in Q2 for that.

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