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Executives

Zev Weiss - Chief Executive Officer

Steve Smith - Chief Financial Officer

Gregory Steinberg - Treasurer and Director of Investor Relations

Analysts

Jeff Stein - Soleil Securities

Carla Casella - JP Morgan

Phil Austin - Zelanore

Brian Courville - Mentor Partners

Robert Haley - Gabelli

American Greetings Corp. (AM-OLD) F4Q09 Earnings Call April 28, 2009 9:00 AM ET

Operator

Good day, and welcome to the American Greetings Corporation fourth quarter 2009 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Gregory Steinberg. Please go ahead, sir,

Gregory Steinberg

Thank you, Deanna. Good morning everyone and welcome to our fourth quarter conference call. I’m Greg Steinberg the company’s treasurer and I help manage our Investor Relations. Joining me today on the call are Zev Weiss our CEO, and Steve Smith our CFO.

We released our warnings for the fourth quarter fiscal 2009 this morning. If you do not yet have our fourth quarter press release you can find a copy within the investor section of the American Greetings website at www.investors.americangreetings.com.

As you may expect some of our comments today 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 the 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 our SEC filings. Previous earnings releases as well as our 10-Qs, 10-Ks and Annual Report are available on the investor section of the American Greetings website. We will now proceed with comments from both our CEO and CFO followed by a question-and-answer session. Zev.

Zev Weiss

Thank you, Greg and good morning everyone. Today I’ll cover three broad topics. First I will share with you our fiscal 2009, fourth quarter results. Second I will speak about the recent strategic moves we made to strengthen our business model by focusing even more on our core business and third, I will share a few directional comments on our outlook for the fiscal year 2010.

Steve will then present more details behind our fourth quarter performance. This past fiscal year has been a challenge for us. During the first half of the year we were pleased to see increasing sales, but we were faced with margin pressure from a variety of factors, some of our own creation.

During the second half of the year revenue softened and we took action to more aggressively reduced costs, including headcount reductions in both December and January. During the fourth fiscal quarter revenue was down across all of our businesses and our margins were negatively impacted by our operating leverage. We are dissatisfied with our overall performance.

We have and will continue to be more vigilant in managing our supply chain and becoming more cost efficient. On a positive note you may have seen the recent news about our acquisition of both Recycled Paper Greeting and Papyrus brand, and a sale of our Carlton retail stores. We are very excited about this transaction as they strengthen our foundation for the future. I will share more with you about these activities in a few minutes.

During the fourth quarter, as we look at our core operations we experience softness across all our businesses. However it was more pronounced in both the international and retail segments. Within our U.K. based business we were impacted by the weakening economy and as we discussed last quarter the loss of a major customer in that region to bankruptcy.

The lower level of sales and the inability to quickly adjust down our cost structure negatively impacted earning. We have already begun to take action to more appropriate line to cost structure and our team in the U.K. is focused on streamlining the business longer term through supply chain efficiency projects.

Our retail business continued to struggle during the fourth quarter. We have been attempting to trim the losses from these stores over the past few years. We have closed over 290 under performing stores during the past five years. However we were unable to achieve our internal target for return on the capital deployed in the business. As a result we decide to sell the retail store chain. We have been in the retail business for over 30 years and while we believe this is the right financial decision we recognize the impacted that it had on our employees.

I would like to take this opportunity to recognize the dedication and hard work of the associates who supporter our retail business throughout the years. I’m pleased to share with you some additional information about the strategic transaction we recently completed, namely the acquisition of Recycled Paper Greeting and the acquisition of the Papyrus wholesale distribution and sale of our Carlton retail stores.

We are very excited about our two recent actions; first Recycled Paper Greetings which we refer to as RPG; and seconds in April as part of a complex multi-part transaction we acquired the wholesale division of Schurman Fine Papers called the Papyrus. I will discuss both transactions in a few minutes.

The acquisitions are part of a multiyear strategy to reinvest the greeting card category. The strategy began with consumer research and lifestyle segmentation followed by American Greetings new retail fixtures and now the addition of RPGs and Papyrus best -in-class card offerings.

We believe that we can bring together the strength of RPG and Papyrus brands to satisfy the full range of consumers needs to help them connect with friends and loved once. The consumer will be able to count on us for a unique mix of fresh and relevant cards. RPG will enhance our ability to deliver already and topical content printed at our Recycled Paper.

Papyrus will help consumers celebrate life’s special moments with modern and elegant designs. Both RPG and Papyrus have unique creative models used to develop a full range of consumer preferred cards. Several years before we began the effort to reinvent the card category, we deliberately and effectively drove the net debt of the corporation to almost zero. Then we left the balance sheet under leverage with the intent that this financial position might enable bold moves of either the strategic or financial type.

Over the last few years, we have made bold moves to try and enhance shareholder value. As acquisitions were extremely expensive during the period 2004 to 2007, we bought back our shares. Over the last year, the economy has depressed values in our industry we have taken advantage of our balance sheet position to act on strategic options involving both RPG and Papyrus. In the end, we believe that the combination of these transactions positions us well for the future in order to take advantage of the economic recovery when it occurs.

Let me take a few minutes and discuss our objectives for both the RPG and Papyrus transaction and share our thoughts on our initial integration efforts. With regard to RPG first, our goal is to protect everything that makes RPGs product distinct, specifically including the creative model and grow the business by utilizing complementary strengths of our two companies.

RPG operations will continue to reside in Chicago and their freelance base of artists will remain at the core of their creative model. We recognize that preserving the essence of RPG does not come without cost. We understand the respect of the creative model they use and we intend to leverage our economies at scale to benefit the group overtime.

With regard to Papyrus, we entered into an agreement with Schurman Fine Papers to buy its Papyrus brand and wholesale distribution. Papyrus is a designer and specialty retailer of greeting cards and other social expression product. Our objective was to strengthen our higher ends card portfolio.

Through this second transaction, we also sold our North American retail business to Schurman. Schurman will operate the retail stores under the Papyrus, American Greetings and Carlton brands. This sale will allow management, once this transition is complete to focus more of its attention on the core card business. We saw this transaction as the most cash efficient opportunity to exit our retail business.

We also entered into agreements, whereby we will source and distribute the Papyrus brand and cards to Schurman’s retail stores. We will also supply Schurman with American Greetings and Carlton branded products with the American Greetings and Carlton branded stores now owned by Schurman.

For fiscal 2010, we expect the combination of these three strategic actions to negatively impact revenue by about 2% or $40 million. However, exclusive of the transaction and transition related costs to be slightly accretive to earnings this year. Looking beyond this year, we fully expect to achieve the full benefit of these transactions during the subsequent 12 to 24 months.

Moving on to the pending sale of our Strawberry Shortcake and Care Bears properties; you may recall that last year we entered into an agreement with the company named Cookie Jar Entertainment, whereby they agreed to purchase our Strawberry Shortcake and Care Bears properties.

They did not close on the transactions, but pursuant to an agreement we have with them, they retained the right to match any subsequent offer for the properties based on various terms and conditions.

Last month the company named MoonScoop agreed to purchase the Strawberry Shortcake and Care Bears properties. Subsequently, Cookie Jar exercised their matching rights. We continue to work on the transaction that will be update you with new information as appropriate.

Shifting to go a few other capital deployment activities of the fourth quarter, we repurchased approximately $4.9 million shares at an average price of $4.96 per share for a total of about $24 million. We are also pleased to have announced our quarterly dividends in February.

We do not have any specific plans to change the dividends at this time. The annual cash usage of our dividend as it currently stands is less than $20 million and based on our cash flow and current anticipated sources and uses of cash, this seems to be a reasonable level. Beyond these items, we will continue to consider all options for capital deployment including growth options, capital expenditures and the opportunity to repurchase our shares or simply reducing debt.

Let me now share with you some thoughts about our outlook for this fiscal year. Given the continuing volatile global economic conditions, our ability to accurately project earnings is difficult. Therefore, we feel it is appropriate to make adjustments to our historical practice of providing specific earnings guidance, rather than offer a full year earnings per share range, we are instead offering components of our financial model.

We expect the economy to remain challenging at least through the first half of the fiscal year, but we hope to see improvements latter in the year, our strategy is to remain conservative until that time. Holding aside the recent transactions including the acquisitions of Recycled Paper and Papyrus and the divestiture of our retail store operation, we expect to decline a net revenues this year of roughly 5% driven primarily by the continued decline in our non-card product lines particularly gift packaging.

Despite a revenue decline on a consolidated basis, we anticipate margins to benefit from cost reduction efforts taken during the fourth fiscal quarter. The biggest cost reduction efforts we undertook were headcount related. In addition we redoubled our efforts to improve sell-through yield in cards by producing a more precise quantity of mix of what consumer’s desire and by really focusing hard on reducing supply chain costs.

In addition to constraining expense dollars, we are also constraining capital dollars. We plan to reduce our capital expenditures to about $35 million to $45 million this year, down from of spend of about $56 million in fiscal 2009. Despite the week retail environment and directly as a result of significantly tightened control on operating expenses and capital deployment, we are targeting a significant improvement in cash flow when compared to 2009.

From a cash flow perspective, the combination of both, tighter expense and tighter capital controls as well as anticipated benefits from working capital, deferred cost and taxes, means cash flow from operations after capital expenditures could exceed $70 million. I should note that some cash flow will be deployed to integrate and strengthen RPG and to transition the retail store operations to Schurman. With all that said, our team will be working hard to focus on the core business and balance the integration of these wonderful new opportunities.

Now, let me turn the call over to Steve, who will provide a detailed review of the quarter and then we will take your questions. Steve.

Steve Smith

Thanks, Zev. I’ve three components to my prepared remarks today. I’ll start with comments on several major items that impacted our consolidated results this quarter. Then I’ll share review of our reported segments, finally a quick walk through a few key components of our financials. We will then open the line for questions.

As many of you know, we acquired Recycled Paper Greetings or RPG at the end of our fourth fiscal quarter. As a result their financial statements are included in our consolidated financial statements. There was essentially, no income statement effect during our fourth fiscal quarter, since the transaction occurred at the end of the quarter. Going forward the results of RPG will become part of our North American Social Expressions segment.

In addition, as part of the transaction we garnered two additional benefits that are not readily visible in our financials. First, one of the outcomes of purchasing RPG through a prepackaged bankruptcy is the recognition of cancellation of debt income on RPG’s books. That cancellation of debt income does not directly affect our financials, but does benefit our covenant calculations for fiscal 2010.

Beyond the covenant benefits, we are expecting our cash flow to benefit from significant tax attributes associated with the transaction. One of the more significant aspects of the transaction beyond their creative model was the tax attributes we gained by buying this company out of bankruptcy. We expect the present value of the cash tax attributes to be greater than $35 million.

Switching gears from a couple of the major financial benefits of the RPG transaction to our performance in the quarter, our consolidated revenue was down $71 million from last year’s fourth quarter or 14%, included in our $423 million of revenue with the adverse impact from foreign exchange of $31 million over the prior year’s fourth quarter.

So, holding aside the foreign exchange impact, revenue was down about $40 million which is about 8.1%. The majority of the revenue decline was related to both our retail and our international segments, which were each down roughly 16% revenue. However, our operating loss of $58 million was about $74 million lower than the operating income of $16 million in the prior years fourth quarter.

Let me pause here and walk you through at a very high level. Some of the charges that impacted operating income this quarter to help you understand our operating performance during the period. I have six components to my verbal bridge.

First we reported an operating loss of $58 million, which equates to a loss of $1.13 per share. Second, the primary reason for the operating loss as we recorded goodwill impairment charges of $47 million, which if cured crudely through the EPS equates to $0.97. Third, the company recognized expenses in its licensing business due to changes in the market conditions that caused a change in the estimate of ultimate revenues related to our film-based production costs of about $16 million, which translates to about $0.23 per share.

Fourth, due to the reductions in force that occurred during the fourth quarter, we took a severance charge of $8 million, which caused about $0.10 of EPS drag. Fifth, we recorded a long lived asset impairment charge within the retail operations segment of $2 million that reduced EPS by $0.02 during the quarter. Sixth and finally we recognized lower verbal compensation expenses such as bonuses of about $10 million, which gave a list to EPS of roughly $0.14.

If you wanted to look at operating income holding aside these items, you would see operating income of about $5 million, which equates to roughly $0.05 per share. You may recall that during our third fiscal quarter of this year, we had conducted the preliminary assessment of goodwill testing and recognized impairment in a couple of our business units.

The continued softness in the global economy and the drop in equity values during the fourth fiscal quarter caused us to again review the value of our remaining goodwill. As a result of that review and additional goodwill testing, we recorded a $47 million impairment of goodwill during the fourth quarter.

Before I get into more detail on the fourth quarter, I’d like to speak very briefly about our full year results. Full year revenue of $1.7 billion was $86 million or 5% lower than last year. Foreign exchange accounted for about half the decrease, so excluding FX, revenue was down 2.5%.

The majority of the decline was in the North American Social Expressions segment, driven by our non-card product lines, particularly gift packaging in order of magnitude by the retail and international segments. We had a full year operating loss of $253 million or $4.89 per share. This compares to last year’s operating income of $129 million.

As I did for the fourth quarter I’ll walk you through a few of the major charges that impact with our earnings this year. First, the majority of the loss was a result of goodwill and other intangible asset impairment charges of $290 million or roughly $5.28 of earnings per share. Second, as I stated for the fourth quarter, we recognized expenses in our licensing business related to film-based production cost of about $16 million, which translates to about $0.22 per share.

Third, our full year severance costs were $16 million, roughly a drag on EPS of $0.21. Fourth, we recorded a long lived asset impairment charge within the retail operation segment of $5 million that reduced earnings per share by $0.07.

Finally we recognized lower variable compensation expenses such as bonuses, of $32 million, which gave a list to EPS of roughly $0.42 cents. Looking at full year operating income, holding aside these particular items it would be about $43 million, which equates to about $0.47 per share.

Now I’ll return to the fourth quarter to talk to the segment results and how they differ from the prior year’s results. Our North American Social Expressions segments revenues were down about $10 million or 3.6% versus the prior year’s fourth quarter. The revenue decrease was spread across our non-card product lines and was especially steep in our gift packaging and party good lines, partially offset by fewer scan-based trading conversions in the current year period.

Our North American segment earnings were down $42 million versus the prior year. As I mentioned earlier this segment recognized a goodwill impairment of $48 million. Holding aside the goodwill impairment earnings were about $6 million better than the prior year’s fourth quarter. Recall that the prior year’s fourth quarter included a $12 million drag on earnings from the rollout of our new Canadian product line.

Switching now to our International Social Expression segment, revenues were $77 million, which is down $15 million versus the prior year. The decrease was driven by lower than expected sales especially in our U.K. based business, where we were impacted by the weakening economy and as we discussed last quarter, a loss of the major customer to bankruptcy.

Segment earnings were down about $13 million quarter-on-quarter. The lower level of sales and our inability to quickly reduce our cost structure drove the earnings decline. In addition we recognized about $2 million of severance within the quarter.

Let me now move from the Social Expression segments to our retail stores segment. As Zev mentioned, after our fiscal year end, we sold our retail stores to another specialty greeting card company.

During the fourth quarter, revenues were about $65 million, which was down about $12 million compared to the prior year’s fourth quarter. Same-store sales declined 6.1% during the quarter. Segment earnings were down $11 million versus the prior year. This was driven by the lower sales, increased promotional pricing and the asset impairment.

We ended the quarter with 341 doors, down almost 20% from the 414 doors we operated in the fourth quarter of last year. Stepping back and looking at the full year for the retail segment, total revenues were $184 million, which was down $14 million from the year prior.

For the full-year, we recognized a loss in the segment of $19 million compared to a loss of $4 million in the prior year. This year’s results include about $5 million of expense as a result of asset impairments, while the prior year included about $1 million of expense related to asset impairments.

For the quarter, our AG Interactive segment’s revenues of $22 million were down $1 million versus the prior year. Segment earnings were up about $2 million. Recall that in the prior year’s fourth quarter, we incurred additional costs related to the integration of the back office processes for the photo businesses.

Let me shift from the segment analysis, to briefly comment on the status of our licensing performance. Licensing revenue for the quarter, which is reported in our income statement as other revenue, was about $19 million, which is down about $2 million versus the prior year. Licensing expense were about $29 million compared to $20 million the year before.

So for the fourth quarter, the company’s net licensing effort or revenues less expenses was about $11 million worse than the prior year’s fourth quarter. The decline in licensing performance was driven by the increased expenses related to film-based production costs I mentioned earlier.

Now let me move to the third component of my comments today, a review of several of the key components of our financial statements. The company’s manufacturing labor and other production costs or MLOPC were down about $10 million compared to last year’s fourth quarter. While our MLOPC benefited from foreign exchange and lower net sales, we incurred higher film-based production costs, higher scrap related costs and about $2 million of severance.

Selling, distribution and marketing costs were down about $23 million versus the prior year’s fourth quarter; about one half of the reduction of our FD&M costs was related to favorable foreign exchange. The balance of the reduction was the result of lower revenues.

The administrative and general expenses were down about $12 million versus the prior year’s fourth quarter. The decline was driven by $10 million of lower variable compensation expense. In addition, we benefited from reduced corporate overhead, which was mostly offset by severance.

Moving down the income statement, the next item I will address is taxes. Our effective tax rate for the quarter was 26.2%. The difference between the statutory rate and the effective tax rate was primarily related to the goodwill impairment charges. Of the $47 million in impairment charges, only a portion was deductible for tax purposes.

Let’s now shift gears from a review in income statement to take a brief look at our balance sheet and then at our cash flow. On our balance sheet, our net deferred costs decreased about $35 million from about $338 million a year ago to $303 million at the end of the fourth quarter.

The full line items of deferred cost on our balance sheet at the end of the fourth quarter were; one, prepaid expenses of $108 million; other assets of $273 million; other current liabilities of $56 million and other liabilities of $22 million. So our net deferred costs have come down meaningfully over the last five years from approximately $700 million in February 2004 to about $300 million this past February.

The next item on our balance sheet I will address is our debt. Our long term debt increased by approximately $169 million versus prior. The increase was driven by a combination of a drawdown on our term loan of $100 million, increased borrowings of $42 million on our credit facility and the new long term debt issuance associated with the acquisition of RPG.

I will now offer a new topic this quarter, a few comments on our debt covenants. First, let me share that we are in compliance with covenants in our debt agreements. We have two key financial covenants under our credit agreement. We have a leverage ratio which must be maintained below 3.0 times and an interest coverage ratio which must be held above 3.0 times.

At the end of the fourth quarter, our leverage ratio was approximately 1.5 times and our interest coverage ratio was approximately 10 times. In other words, we past both covenants and we are in full compliance with our credit agreement and all of its financial and other covenants.

For covenant purposes we use a non-GAAP adjusted EBITDA for purposes of calculating our leverage ratio and interest coverage ratio, which meaningfully benefited from what is called cancellation debt income which I mentioned earlier as RPG’s recognized as part of our restructuring. The cancellation of debt income used in the covenant calculation was in excess of $100 million.

Moving on to our cash flow statement, let us look at one line that has been unfavorable all year, accounts payable and other liabilities. Accounts payable and other liabilities used $68 million of cash this year compared to a source of $19 million in the prior year. The change was primarily due to lower accruals related to variable compensation.

Variable compensation accruals were substantially lower as a result of our performance. In addition income taxes payable were meaningfully lower this year due to our reduced earnings, as were our value-added taxes in foreign jurisdictions.

That concludes our prepared comments for today. I would like to now turn the call over to the operator to handle our question-and-answer period. Deanna.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Stein - Soleil Securities

Jeff Stein - Soleil Securities

I was wondering if you could just address some of the acquisitions that you’ve just announced in terms of some of the one time costs that you foresee during 2009 and ultimately if you look at RPG, if you look at their revenue run rate and expenses on the date you acquired them, where do you see each of those components of the P&L a year from now?

Steve Smith

So let me talk about the one time costs, I’ll do that one first. Because we did these two moves so close to each other and they are both related in certain ways, we are still putting together this rather complex integration plan that involves basically AG, Papyrus and RPG. So, I don’t have that yet, so it’s not something that we can give you just yet. We will have it pretty quickly and it’s something we hope to be able to get moving on as quickly as possible.

I think in terms of the revenue and expenses I think where we are trying to get at is what should we work in as the long term run rate for profitability, which is what I think you are trying to get at; so, we are not yet sharing that information, let me share a couple of things.

While we believe that it will be slightly accretive in this year, from a long term perspective I think there’s two things just to keep in mind as you’re working that through in your mind; one of them is, that this is primarily a greeting card business and from that prospective it ought to be something that works very well into the model that we’re very used to as a company and then therefore ought to be very profitable.

Balancing that is going to be the need to run this and our desire to run this as a standalone business and to maintain some of the strengths that has made that company very strong over the past number of years and that will involve some incremental fixed costs. It’s going to be balancing out those two that will lead to the long term run rate profitability.

Jeff Stein - Soleil Securities

Just from a high level Zev, if you were to compare that relative to the profit potential Papyrus, just looking at it on kind of link a percent of sales after its fully integrated, it would just seem to me that Papyrus produces higher value product, higher cost product and therefore if you look, brought everything down to the operating income line it would just seem to me from a high level that Papyrus is probably a less profitable revenue stream?

Zev Weiss

I think I understand what you’re saying and as you’re particularly saying as it relates to the way the cost of goods structure works, in Papyrus versus RPG. I’m not sure if I would necessarily jump to that conclusion. I see where you’re coming from with it. They also sell at a higher price point.

So, I think at this point, both of them really have similar characteristics and that we’re going to want to maintain some standalone nature to the business, which will involve some ongoing fixed cost, yet there should be benefit to it, because it be a card business and I think that the two ought to be relatively similar in that manner.

Jeff Stein - Soleil Securities

Then finally, could you talk a little bit about again, strategically your decision to make an investment into Schurman Fine Paper and your conviction level that they’re going to be able to run this business and make progress with this business, given the fact that we are dealing with a very difficult retail environment and the fact that they have their own retail business, which we really no very little about and how is that performing in the current environment?

Zev Weiss

First of all I think the opportunity for them to remain entirely focused on retail, is going to be a real strength for them. In the past it was a relatively small business and it had a retail component and a wholesale component, which meant it really had to keep its eye on two different games which is a very difficult thing to do. I think the fact that they’re going to be 100% focused on driving the retail stores, is going to be a real strength for them.

I also think that the management team there really does an outstanding job when it comes to product development and they’ve shown that in the Papyrus stores. I think they’re going to be able to bring that strength in a broader way beyond just cards and wrapping stationery into the AG stores and the Carlton stores. I think that’s going to be a positive as well.

So I think there’s a really strong management team. They ran a really outstanding store in their Papyrus stores and I think they’re going to bring that strength to Carlton and AG as well.

Jeff Stein - Soleil Securities

Are you guys going to go on their board and will any of your retail management team stay-on as part of the new retail business of Schurman?

Zev Weiss

We have a small equity stake. We do intent to, we will be on the board and there will be a transfer of some of the management of our retail group to that group as well.

Operator

Your next question comes from Carla Casella – JP Morgan.

Carla Casella – JP Morgan

One clarification question, you talked a lot about covenants, I appreciate that color. The $100 million of cancellation of debt income, will that recur in 2010 and where is that flowing through in the income statement currently?

Gregory Steinberg

This is Greg Steinberg. That was an item that occurred with respect to RPG’s bankruptcy and then recapitalization. So we would not expect that to occur again in the future and that’s actually reflected on RPG’s books. It does not show up directly on American Greetings consolidated financial statements.

Carla Casella - JP Morgan

Okay. So in 2010 we’ll be looking at more testing the covenant versus just American Greetings EBITDA?

Gregory Steinberg

Yes, that would be the expectation.

Carla Casella - JP Morgan

Then on the retail side, your retail customer side, are you noticing any change in their payment practices or have you changed any of your terms with any of your retailers?

Zev Weiss

Actually, we just looked at our DSO pretty recently and I did not see any change in that.

Steve Smith

If you look at our DSO, in the full year just ended versus the full year prior we were right at the same 13 days year-on-year.

Operator

We will take our next question with Phil Austin - [Zelanore]

Phil Austin - Zelanore

I had a couple of quick questions. One is can you comment on the change in volume versus price in the domestic greeting card business?

Zev Weiss

Yes, when you look at what’s going on in price, I think there’s a couple of things happening and those are all balancing out and maybe Steve you could talk about how they balance out. I think you’re seeing two dynamics going on. On the one hand, there is some pricing mixing up because of what we’re doing with music and technology cards and so some of that’s happening.

At the same time there are some more cards being sold at value prices and I think that’s happening for two reasons; one, of them is because of just this strength probably in terms of the dollar store segment, but also perhaps, and this is just a speculation that towards the back half of the year there might have been some trading down as well.

So, you had two dynamics going on, probably a little bit more happening on the value cards and then you also had some of that being offset by some mixing up happening with the music and technology cards.

Steve Smith

Yes, that’s exactly right. Tomorrow when you file our K, you will see for the year in cards across the globe, we are basically flat in total dollars with pieces up a little more than 2% and prices down due to mix shift as Zev mentioned, toward more value pieces down about 2%, so they roughly offset each other.

Phil Austin - Zelanore

I was hoping you could do two things. The last caller asked about the over $100 million tax benefit. I was just doing the quick math on the implied EBITDA from your covenant calculation and if you could just help me out with it, I think I get to $260 million of trailing full quarter implied EBITDA; is that right?

Steve Smith

EBITDA is a non-GAAP number and so we historical have not provided that publicly as it requires reconciliation.

Phil Austin - Zelanore

Yes, but you’re providing a leverage ratio and your total debt was 390. So is there a difference between providing those two numbers and then dividing one by the other and getting the implied EBITDA.

Steve Smith

In addition to the debt that is publicly stated, Greg noticed that we have in addition to that Phil, letters of credit that go into the calculation too.

Phil Austin - Zelanore

How much are those?

Steve Smith

We haven’t shared that at this point.

Phil Austin - Zelanore

Is there a reason why you can’t share them?

Steve Smith

No, we can share them Greg, about $26 million at the end of the quarter.

Phil Austin - Zelanore

So, you’ll add $26 million to the balance sheet debt to get total debt?

Steve Smith

That would get you, yes, roughly right in that spot.

Phil Austin - Zelanore

Okay. So then the implied EBITDA from that is even higher, it’s like $277 million; is that correct?

Steve Smith

Don’t forget that the debt calculation Phil is a net debt calculation, so you subtract off cash on the balance sheet.

Phil Austin - Zelanore

Okay and that was about 60?

Steve Smith

That’s correct.

Phil Austin - Zelanore

Okay and so assuming implied numbers to around 237, 240 implied EBITDA. Is that right?

Steve Smith

Directionally yes, you’re correct Phil.

Phil Austin - Zelanore

Okay. I guess if I take off that, when you said it was in excess of $100 million, the tax benefit from RPG, is $100 million a good number to use for that?

Steve Smith

Let me clarify that Phil. The tax benefit from RPG was greater than $35 million. The Cody income was in excess of $100 million.

Phil Austin - Zelanore

And the Cody income is what goes into the leverage calculation?

Steve Smith

Yes, it goes into the EBITDA trailing basis, correct.

Phil Austin - Zelanore

If I take that $100 million out of there, then that would sort of be an implied EBITDA number, excluding that for the last 12 months. Is that a fair statement? If I take that $100 million Cody number out of the 237, that would get me sort of a pure EBITDA number for the leverage calculation?

Steve Smith

I’m not sure what you mean by pure. The number for the leverage calculation does include the Cody income.

Phil Austin - Zelanore

Okay, so I guess my question is, excluding the Cody income, are there any other add backs to that number?

Steve Smith

Yes, there are series of other non-cash add backs that would go into an EBITDA number as you would expect, thing like impairments associated with the goodwill, other intangibles, the non-cash impairment at our retail stores. So, they capture our variety of those other type items that would be in the crediting agreement defined EBITDA non-GAAP number.

Phil Austin - Zelanore

Is there any way you guys can provide a schedule of how those role-off in the quarters?

Steve Smith

We can consider it, Phil. We hadn’t thought about it.

Phil Austin - Zelanore

Yes, it’d be really helpful for I think the investment community to be able to calculate some pretty key numbers for the company.

Steve Smith

Alright, we’ll think about it.

Phil Austin - Zelanore

Then can you guys also just comment on what’s in the other liabilities account on the balance sheet, there’s 105 in current and then 150 in long-term, so it’s a total of about $255 million?

Steve Smith

Other liabilities is mostly related to our deferred cost asset account.

Phil Austin - Zelanore

What does that mean exactly, sorry?

Zev Weiss

Well Phil and maybe we can take this offline later, but in our business there’s a whole concept around entering into multiyear contracts with retailers; that includes different types of advance discounts, which can then be capitalized. There’s also different types of agreements to make payments to retailers overtime associated with those contracts that are then liabilities. In Steve’s prepared remarks, he walked through the details of that in his balance sheet comments, but I’d be glad to walk you through that in further detail if you’d like.

Phil Austin - Zelanore

Yes, that would be good. I don’t want to waste anymore time on the call with that. I guess if I could just ask two more quick questions; you did a little bridge from the net loss to adding back a bunch of thing earlier. I’m wondering if you can do a bridge for us as well from the $17 million of cash flow after CapEx this year to the 70 and just some sort of big buckets, what’s margin improvement, how much cash flow from the acquisitions, big buckets like that.

Then just if you could also just answer one other question which is the deal dynamics around the Care Bear’s and Strawberry Shortcakes. You were a little bit vague in your description of it. Where are you in the process or the next steps, that sort of thing?

Steve Smith

So on the first question, we haven’t given specific earnings guidance Phil for you, but we could give you a rough assessment of how you could get to the greater than $70 million, given what’s already out there on the street. So, let me start there and see if that satisfies your need and then I’ll let Zev talk to the deal dynamics that you ask about.

If you look at what’s out there currently on the street, again, we can’t say we do or don’t endorse that with just what’s available to you. You would see that the street has about a $35 million plus or minus net income that’s out there. If you add back the D&A of the corporation in the prior year and you subtract off the midpoint of the CapEx guidance which we did provide, which we said was 35 to 45, take 40 out of it.

You then look at our comments and we said that the combination of working capital and deferred cost together will be positive and people have speculated that’s anywhere from $10 million to $40 million. Why don’t you just pick a mid point there? Then you look at the tax benefits that we mention from RPG. If you sum total it all up, you’ll see that cash flow from operations, less the CapEx that I mentioned of about $40 million would be greater than the $70 million for the fiscal year 2010.

Zev Weiss

In terms of the deal, I’m not sure I want to get into the details of the deal dynamics. I could just walk you through the steps. We had received an offer from MoonScoop. I think it was towards the ends of February and that was pretty quickly, the folks at Cookie Jar exercised their right to match that offer and they’re currently in that period of time where they’d match the offer, they’re lining up their financing and then that’s sort of the point where we’re at right now and when there’s an update to be shared beyond that, we will share it.

Operator

Your next question comes from Jeff Stein - Soleil Securities.

Jeff Stein - Soleil Securities

The $35 million of tax benefit, are you expecting to realize all of that in the current fiscal year?

Steve Smith

No Jeff, definitely not, that’s stretched out over multi-years. That’s the NPV of that multiyear cash flow benefit from taxes.

Jeff Stein - Soleil Securities

So, could you give us just a rough guesstimate in terms of how much Steve, would fall in the current fiscal year?

Steve Smith

A small fraction of that Jeff, in the current fiscal year.

Jeff Stein - Soleil Securities

As we go back to the fourth quarter, I’m wondering if you could possibly adjust out all of those fixed components. Obviously, the biggest one is isolated on the P&L, but looking at, for example what line items the licensing expense, what line items the $0.10 of severance expense and the accrual for bonus adjustments; what line items are affected on the P&L and by how much?

Steve Smith

Sure, okay this will take a minute Jeff, but let me run quickly through it. Well, first let me start with the largest goodwill impairment. Goodwill impairment we said it was $47 million. You’ll see that running through the non-recurring gains and losses. For the production write-downs that was $16 million in our MLOPC; for the severance that ran across three categories of the P&L, roughly $2 million in MLOPC, $4 million in SD&M and roughly $1.5 million in A&G.

We had a loss as we talked about in the quarter on the RPG debt. That occurs in other non-operating income and expense of about $2.7 million and then lastly, we mentioned that we benefited from the prior year’s comparison to bonus and profit sharing. There is about a $10 million item in the A&G.

Zev Weiss

Steve, one additional item, there was the retail fixed asset impairment of about $1.5 million that ran through our selling distribution and marketing line.

Jeff Stein - Soleil Securities

Could you explain the licensing component, because I’m not sure I understand that, the $60 million item; and should we be looking at that as a non-recurring item?

Steve Smith

It’s related to the production costs during the year. Hard to say whether you should look at it as non-recurring or not; we just disclosed that as cost and expenses of the quarter.

Jeff Stein - Soleil Securities

So that runs through MLOPC?

Steve Smith

Yes.

Jeff Stein - Soleil Securities

Okay and this is part of your licensing business. So if this deal closes, that would go away?

Steve Smith

We wouldn’t recognize those in the future other than possibly at close.

Jeff Stein - Soleil Securities

Are you going to maintain your licensing division on a go forward basis?

Steve Smith

No.

Zev Weiss

I think at this point Jeff, we are going to take everyday as it comes and we have to get through this transaction and then we’ll decide what we do with the remaining properties that we have.

Jeff Stein - Soleil Securities

Depreciation and amortization, can you tell us what that number is estimated to be, will it be similar to the $50 million you reported last year?

Steve Smith

We didn’t give you an exact figure, but it’s likely to be slightly down off of prior.

Operator

Your next question comes from Brian Courville - Mentor Partners.

Brian Courville - Mentor Partners

You disclosed how much stock you bought within the quarter out of the $75 program. Can you tell us what you’ve done subsequent to quarter ends in the last two months or so?

Zev Weiss

We haven’t historically commenced about intra quarter Brian, on our performance on share repurchases, so we prefer to wait until end of June to comment on this particular quarters activities. We just have to draw the line somewhere.

Operator

Your next question comes from Robert Haley - Gabelli.

Robert Haley - Gabelli

Looking at your acquisitions, RPG, Papyrus, can you talk just talk about the customer overlap you see there and the possible synergies from that?

Zev Weiss

There are some and I can’t tell you the percentage; I don’t know the percentage offhand. There are definitely some accounts where we sell into, RPG sells into and Papyrus does. There are also many that are separate. So, there could be some savings as it relates to the overlap, but it’s not 100% overlap.

Robert Haley - Gabelli

How about the net change in headcount that you’re going to see? You’re getting rid of some of your retail stores, but taking on the wholesale operation?

Zev Weiss

Yes, that’s the plan that I had mentioned earlier; that we’re in the process of putting together and we don’t have any specifics that we’re ready to share yet.

Robert Haley - Gabelli

Can you talk about your M&A strategy more generally; the recent acquisitions. Obviously you need traditional cards category and looking back a year or two, you did more digital focused M&A, with shots PhotoWorks? Is this a change in the vision of where you think the business is going?

Zev Weiss

No, I think it gets back to the comments real that will Steve had said, that when you look at the businesses that we’re looking to grow, we want to grow our core social expression businesses, which are the greeting cards and things that you would find; sort of a social expressions products out at retail and we want to grow our interactive business. That’s been the main thrust of growth that we’ve been looking for, for the last number of years.

I think the way the market was going back two, three, four years ago, it was very difficult for us to get any acquisitions done, that we thought a sense to us and so we were more focused really. We did a little bit on the interactive side and the truth was we were more focused on our shares.

I think more recently as opportunity to come up, we’ve been able to take advantage of them, but apparently the approaches change. It’s more that the market has shifted and then things then becoming more available, but I think our historical end, going forward strategy is going to be to grow our core card and social expression businesses and grow our interactive social expression businesses.

Robert Haley - Gabelli

So, not necessarily any shift in focus between interactive versus core there?

Zev Weiss

No, not at all.

Robert Haley - Gabelli

Just a few details, on the CapEx coming down year-over-year, could you talk about what is driving those savings?

Steve Smith

We haven’t and don’t intend to share the specifics. As Zev said in his comments, tighten down both expense dollars as well as capital dollars across the corporation; much of what’s being reduced is in our North American Social Expressions segment.

Robert Haley - Gabelli

Okay. Then on the working capital and deferred costs, I think you indicated that that should benefit cash this year? Can you talk about the components of that, maybe what are the big pieces that will be cash sources?

Zev Weiss

Again, we haven’t talked about the details. The combination of the two will be positive to cash flow, but we prefer not to get into line item by line item detail.

Operator

It appears that there are no further questions. Mr. Steinberg, I’d like to turn the call back to you for any final remarks.

Gregory Steinberg

Thank you, Deanna. That does conclude the question-and-answer portion of our conference today. We look forward to speaking with you again at our first quarter fiscal 2010 earnings conference call, which is anticipated to occur in late June. We thank you for joining us this morning.

Operator

Once again ladies and gentlemen, this concludes today’s conference call. Thank you for your participation.

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Source: American Greeting Corp. F4Q09 (Qtr End 28/02/09) Earnings Call Transcript
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