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American Greetings Corporation (NYSE:AM-OLD)

F3Q10 Earnings Call

December 23, 2009 9:00 am ET

Executives

Greg Steinberg - Treasurer and Director of Investor Relations

Zev Weiss – CEO

Steve Smith – CFO

Analysts

Jeff Stein – Soleil Securities

Mimi Noel – Sidoti & Company

Brian Carlton – Atlantic Investments

Operator

(Operator Instructions) Welcome to the American Greetings Corporation Third Quarter 2010 Earnings Conference Call. At this time I’d like to turn the conference over to Mr. Greg Steinberg.

Greg Steinberg

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 earnings for the third quarter fiscal 2010 this morning. If you do not yet have our third quarter press release, you can find a copy within the Investors section of the American Greetings website at 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 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 our SEC filings, previous earnings releases as well as our 10-Qs, 10-Ks and annual report are available on the Investors 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 Weiss

Today I will cover three topics. First, I will share my thoughts on our fiscal 2010 third quarter including a few of our new and innovative product offerings. Second, I’ll provide a brief update on the status of the Recycled Paper Greetings and Papyrus integrations. Finally, I’ll share a few directional comments on our outlook for the balance of fiscal year 2010. Steve will then present more details behind our third quarter financial results.

For a third consecutive quarter I can state that I’m pleased with our quarterly performance. While revenues are down from the same quarter last year they are not down as much as we expected. However, our operating income improved meaningfully over last year, putting aside for a moment the unusual charges incurred both this year and last. In addition, our year to date cash flow from operations less capital expenditures of $53 million exceeded our expectations.

During last quarter’s call we shared that the strategic investments we made over the last several years to enhance our leadership position in the greeting card category may have contributed to the improvements in our performance. I think this quarter’s results continue to support that assertion. Our yield, also called sell through, has improved compared to last year. I believe the improvement is partially due to our strategy to consistently develop new products that offer the consumer unique and fresh offerings that resonate with them when they shop the greeting card aisle.

One of those unique brand offerings is our exclusive partnership with Country and Pop Music star Taylor Swift. Miss Swift has chosen to personally work with our editorial and creative teams to create a line of greeting cards, gift packaging, stationery, online photo personalization products, and online greetings. Each product will be infused with her creative touch. The greeting cards are expected to hit the market next year.

In addition to working with extraordinary content creators like Taylor Swift, we have enhanced our efforts to find innovative ways to utilize technology in our greeting cards. For example, we’ve recently taken the use of music in cards to the next level by including a compact disc with a greeting card. The compact disc may include a compilation of music created for a specific occasion or may feature a specific artist. In either case, the consumer benefits from an enhanced greeting card experience.

We continue to expand our product line to allow consumers to further personalize their greetings. On such offerings a recordable photo frame where you can personalize a photo card with your own recorded voice. Just in time for the holiday season we introduced the first ever digital slideshow greeting card. The patent pending greeting card includes a small LCD screen, holds up to 50 digital images, plays a beautifully composed original holiday soundtrack and even allows the sender to add their own vocal message to the greeting.

We also continue to innovate within our AG interactive online business. We recently re-launched our PhotoWorks website with a fresh look, enhanced navigation and great new products. We now offer beautiful Papyrus photo cards on PhotoWorks. I’m also proud to say that Information Week recently ranked AG interactive 19th in its annual rankings of the top 500 companies with the most innovative uses of information technology.

This handful of examples of new products across multiple media and distribution channels represents our fresh new products that better than ever before, enabled the consumers to express, connect, and celebrate life’s special moments.

I will now switch topics from a review of the recent product roll outs to give you a brief update on the integration of Recycled Paper Greetings and Papyrus. We believe these two companies provide best in class products for their consumers. As a result, I would like to remind you of our integration strategy to keep RPG and Papyrus separate in order to protect what makes their products unique while looking to leverage the scale of the broad organization.

The integration teams have recently moved from the planning phase to the implementation phase and are working diligently on the integration process. Last quarter we told you we estimated one time cash costs associated with the integration would be about $20 million, with a few million dollars spent this fiscal year and with the balance paid out over the subsequent 12 months.

We also estimated the future earnings contribution from the two acquisitions due primarily to leveraging the scale of our overall supply chain to be an annual run rate of $15 to $20 million of operating income. Now that we are into the earliest stages of implementation we would suggest that at this time we continue to believe these estimates of costs, run rate savings, and the rough timing for each are still reasonable.

During each of our quarterly calls this year we shared with you some thoughts about our outlook for this fiscal year. Initially we estimated that the cash flow from operations minus capital expenditures would be at least $70 million. Then last quarter, as we saw our performance exceeding our plan, we estimated that cash flow from operations less capital expenditures could exceed $125 million. We continue to experience relatively healthy performance year to date, although our rate of over performance versus our plan is slowing.

As a result of the year to date over performance and in light of our view of the fourth quarter, our outlook for cash flow this fiscal year has improved further. We now expect our full year cash flow from operations less capital expenditures to exceed $160 million. The increased to our cash flow estimate is predominantly driven by earnings but is also benefiting from lower cash taxes then we had previously estimated. The $160 million does include projected benefits from working capital, deferred costs and taxes as well as this year’s anticipated cash cost associated with the two integration efforts. We not expect our capital expenditures will be just below $35 million.

I want to remind you that our two biggest holidays, Christmas and Valentine’s Day fall in our fiscal fourth quarter. Consequently, our results for this year, as well as the baseline for fiscal 2011 are very hard to predict.

Before I pass the microphone to Steve, I would like to provide one last comment and is directed to my colleagues at American Greetings. I cannot thank them enough for their teamwork and commitment over the last couple of years. They have made the personal sacrifices during a very unpredictable period in order for us to achieve our current results.

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

Steve Smith

I have three sections to my prepared remarks today. I will start with comments on a few large items that impacted our consolidated results this quarter. Then I will share a review of our reported segments. Finally, a quick walk through of a few key components of our financials. We will then open the line for questions.

As Zev mentioned, we had a good third quarter. There were three primary reasons driving our improved performance. First, the benefits of achieving better yield, including lower supply chain and scrap costs. Second, the change in our business portfolio, especially the sale of our retail operations. Third, the reduced overhead costs due to the actions we took at the end of the last fiscal year.

Our consolidated revenue of $440 million was down about $14 million or 3% from last year’s third quarter revenue of $454 million. However, included in our reported revenue this quarter was the adverse impact from foreign exchange of $3 million versus the prior year’s third quarter. So, holding aside the foreign exchange impact, revenue was down about $11 million or 2.4%.

About $3 million of the $11 million decline was the result of the net revenue lost due to the combination of the divestiture of the retail business partially offset by the revenue pick up from the RPG and Papyrus acquisitions. Holding aside both, the impact of the foreign exchange as well as the net impact of the transactions revenue was down approximately $8 million or about 1.8% for the third fiscal quarter.

Our operating income of $42 million was about $265 million better then the operating loss of $222 million in the prior year’s third quarter. However, this year’s operating income included both pre-tax employee termination costs and estimated impairment costs of $6 million associated with the distribution model changes made in our Mexican operation, changes we announced in early September.

Included within the quarter’s results we also recognized a typical incremental variable compensation expense of approximately $12 million due to better than expected performance. Holding aside the employee termination costs, asset impairment costs and the atypical variable compensation expense, operating income was approximately $60 million.

Last year’s operating loss of $222 million include a goodwill and intangible asset impairment of $243 million, other asset impairments of $4 million and a severance charge of $7 million. Holding aside the goodwill, asset impairment and severance charges, operating income was about $32 million. Recall that in the prior year’s third quarter we also had an atypical benefit from the reduction in variable compensation expense of $11 million.

Removing the effects of the asset impairments, severance and lower than typical variable comp expense, operating income in the prior year’s third quarter was about $21 million. Quarter on quarter, cutting through all the puts and takes, our third quarter operating income was up about $39 million versus the prior year’s third quarter from approximately $21 million to approximately $60 million.

Let me now shift to the second component of my prepared remarks which will be a preview of the reported segments and how they differ from the prior year’s results. Before I begin, I would like to remind you that we no longer have a retail operations segment, as we divested that business during this year’s first fiscal quarter.

In the prior year’s third quarter the retail operations segment reported revenues of about $37 million and a segment loss of approximately $10 million which included approximately $4 million of asset impairments. Our North American segments revenues of $330 million were up about $30 million or about 10% versus the prior year’s third quarter revenue. The revenue increase was driven by the benefit of $33 million of RPG and Papyrus revenues which we did not have last year. Holding aside the benefit from the acquired companies, revenues were down about $3 million or 1%. During the quarter we had lower sales from our Mexican unit.

Our North American segment’s earnings were up $13 million versus the prior year. The improvement was predominantly driven by a combination of improved yield and realization of cost reduction initiatives we put in place near the end of last year. Improved yield means that we reduced excess volumes in the system by producing a more precise mix of what consumers desire and as a result, the company yielded manufacturing and distribution efficiencies. Variance improvement was partially offset by $6 million of employee termination and asset impairment costs associated with strategic changes to our Mexican operation.

Switching now to our International segment, revenues were about $62 million which is an increase of $1 million versus the prior year. This increase was driven primarily by improvement in non-card product sales. Segment earnings improved $62 million versus the prior year quarter. This year segment earnings were about $8 million compared to a segment loss of $54 million in the prior year period.

Two primary items drove the variance. The prior year included both a goodwill impairment of $59 million and increased bad debt charges of $2 million related to the bankruptcy of a former retail customer. Holding aside the impairment and bad debt charges from the prior year’s figures, this year’s third quarter segment earnings increased by $1 million. While we are pleased with the quarter on quarter performance in International the general economic conditions in the UK continue to be challenging which may put pressure on our International segments performance for at least the remainder of this fiscal year.

Let me move now from the Social Expression segment to our Interactive Segment. Revenues were $19 million which was about $1 million less then the prior year as advertising revenue continues to be depressed. Segment earnings were about $1 million this year compared to a loss of $154 million in the prior year. The prior year included asset impairment charges of $154 million. Holding aside the asset impairment charge, segment earnings improved $1 million quarter on quarter. The improvement is related to cost reduction efforts taken late last fiscal year along with less intangible asset amortization as a result of the impairment of intangibles that I just mentioned.

Let me shift from a segment analysis to briefly comment on the status of our licensing performance. Licensing revenue for the quarter which is reported on our income statement within other revenue was about $8.7 million down about $1 million versus the prior year. Licensing expenses were $6 million this year, down $3 million compared to last year. For the third quarter, the company’s net licensing effort, or revenues less expenses, improved about $2 million compared to the prior year’s third quarter as expenses were reduced faster then revenues.

Now let me move to the third part 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 $18 million compared to last year’s third quarter. About two thirds of the improvement in MLOPC was the result of improve yield. Specifically, lower volumes and improved plant efficiencies compared to last year.

As we discussed last quarter, our supply chain continues to operate more efficiently as we reduced excess volumes in the system. There was also a benefit of about $3 million from foreign exchange.

Selling, distribution and marketing, or SD&M costs were down about $36 million versus the prior year’s second quarter. In this line item you plainly see how the portfolio changes since February have altered our financial statements. About 50% of the reduction in SD&M was the result of the combination of exiting our retail store businesses, partially offset by the acquisition of RPG and Papyrus. Another 40% was related to the improved yield and cost reduction efforts. Lastly, about 10% was related to reduced expenses within our licensing effort which I mentioned a few moments ago.

The administrative and general expenses were up $18 million versus the prior year’s third quarter, last year included a benefit from the reversal of variable compensation expense of $11 million. This year, however, due to better than expected performance, we recognized extra variable comp expense of $12 million. The additional variable compensation expense benefits a broad group of employees. These variable compensation items account for more than the total variance in administrative and general expense. Partially offsetting the increase was a reduction in overhead expense due in part to actions we took at the end of last fiscal year.

Moving down the income statement, the next item I will address is our tax rate. Our effective tax rate for the quarter was 22.1%. The lower then statutory effective tax rate was due to two major factors; the tax impact of the closing of our Mexican facility, and the favorable settlement of foreign tax audits.

Let’s now shift gears from a review of the income statement to take a brief look at four key components of our balance sheet. On our balance sheet, accounts receivable were about $30 million higher then the prior year. The increase is primarily related to the acquisitions of RPG and Papyrus. Despite the fact that the acquired and sold businesses were almost revenue neutral, because the acquired businesses were wholesale business models, while the divested business was a retail operation, we now have more accounts receivable.

Inventories decreased by $69 million compared to the prior year. While our accounts receivable increased due to the net effect of the transactions, our inventory decreased due to the transactions. As the business sold was a retail business, we eliminated a much larger inventory position then we acquired with RPG and Papyrus. About 40% of the inventory reduction was the result of the sale of our retail store operations, only partially offset by the acquisitions of RPG and Papyrus. The balance of the decrease versus last year is the result of more efficient inventory management across all of our product lines as we had relatively high levels of inventory in the prior year.

Our net deferred costs decreased about $20 million from $326 million a year ago to $306 million at the end of the third quarter. The four line items of the deferred costs on our balance sheet at the end of the third quarter were; prepaid expenses of $112 million, other assets of $246 million, other current liabilities of $50 million, and other liabilities of $2 million.

The last item I would like to comment on is accounts payable. Accounts payable were down about $48 million at the end of the quarter compared to the prior year. About one quarter of the reduction was the result of lower spending. About 20% was the result of the sale of our retail store operations, only partially offset by the acquisitions of RPG and Papyrus. The balance was timing of some of our payments.

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

Question-and-Answer Session

Operator

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

Jeff Stein – Soleil Securities

Can you talk a little bit about the dilutive effect that stock options might have on the fourth quarter and full year share averaging due to the rise in the share price? Based upon your best guesstimate and why don’t we say that if the stock were to trade at these levels for roughly the remainder of the quarter.

Steve Smith

We haven’t given specific line item guidance on that item but there is some dilution that it be in the millionish kind of share range, putting downward pressure then on diluted EPS.

Jeff Stein – Soleil Securities

This would be for the fourth quarter?

Steve Smith

For the fourth quarter.

Zev Weiss

As you know, that’ll depend on both share price as well as the level of earnings in the quarter that then has an effect on the amount of dilution that’ll show up in the quarter as well.

Jeff Stein – Soleil Securities

I’m wondering if you could talk a little bit about what success you’ve had thus far in gaining new shelf space for both Papyrus and RPG in existing accounts and if in fact you have so far, are you gaining incremental space or is it cannibalizing existing space?

Zev Weiss

Right now what’d I’d say is there’s a lot of interest in the marketplace. A lot of the retailers we talk to recognize that there is strength in that product and that there’s potential. There have been some moves, not a lot, some moves in terms of replacing some of the AG space with some of that product. That’s been most of it; I think for the most part right now there’s definitely some interest. Again, if you look at what’s happening a lot of it has to do with some of the AG product in the AG space may be transitioning over to some of that product as well.

Jeff Stein – Soleil Securities

It sounds like at this point it’s mainly a substitution.

Zev Weiss

Yes, again I think that there’s interest but the selling process of these things are often long. It remains to be seen.

Jeff Stein – Soleil Securities

It sounds like you guys have some really exciting new product and technology cards. I’m wondering at this point if you can maybe share with us the number of skus of technology cards that you have in your stores, let’s say your average mass retail stores, let’s say a Target or a Sears or Wal-Mart compared to prior year and what this mix is doing to average retail selling price.

Zev Weiss

If you go out to retail you could actually see this now out at retail. In terms of the footages it ranges obviously depending on the size of the store, but it wouldn’t be unusual to see a four or in some cases maybe an eight foot statement in the everyday section. Then in seasons it depends on the seasons but if you go out and look at what’s out at Christmas right now especially in some of the larger departments it would not be uncommon to see something in the two foot range in terms of product for Christmas. That would go up and down depending on how strong we thought that holiday was relative to the technology products.

Jeff Stein – Soleil Securities

How would that compare to prior year?

Zev Weiss

From a footprint perspective it’s not a whole lot different then where we were last year. What you’re seeing is the type of product is evolving from really being cards that played music. If you go out and see what’s at Christmas although the truth you’d see probably a lot of it sold down at this point, you see a lot of that moving towards product that doesn’t just play music, there’s recordable features to it, there might be movement, lights, or some kind of a three dimensional aspect to the product. That’s all products that have been selling over the last four weeks or eight weeks for this holiday period.

Jeff Stein – Soleil Securities

In terms of getting the type of sell through you’re getting on these cards, when you look at the productivity of this space relative to your paper and ink cards, would you say that it is more productive, I presume its more productive because its higher price point but are you getting more gross margin dollars out of that space then you were a year ago?

Zev Weiss

I wouldn’t necessarily get into the gross margin aspect of it, what I would say is from a productivity perspective in terms of what its doing out at retail we feel very good about it.

Jeff Stein – Soleil Securities

Relating to PhotoWorks, this would be the company’s big quarter I presume and I’m wondering how you’re feeling about that business this year relative to a year ago when the business was not performing very well.

Zev Weiss

I would say that we definitely feel better then we did a year ago. We redid the site in the fall and both the look of the site and the functionality as well as the product offerings we’re very pleased with the response we’re getting from consumers has been very strong. Overall we feel good. If the marketplace remains a little bit challenging just in terms of the price points of what is out there and what the market is willing to bear I think given the economic times, it remains to be a very competitive environment.

If you get a chance to see the site I know you do that, the site looks terrific, the product looks terrific, we’re getting good response from customers both in terms of the activity but more importantly the feedback that we’re getting has been excellent.

Jeff Stein – Soleil Securities

Fourth quarter last year your retail revenues were about $65 million. How should we be thinking about the loss of those revenues relative to what you’re going to pick up from RPG and Papyrus? I presume that given the fourth quarter is a heavy quarter for retail normally the negative impact would be greater in Q4 then we saw in Q3.

Steve Smith

We haven’t forecast that specific line item. Year to date we’re roughly flat between the two but your logic is correct as it relates to the seasonality of the two different businesses. I would say you’re correct in your assumption.

Operator

Your next question comes from Mimi Noel – Sidoti & Company

Mimi Noel – Sidoti & Company

Would you remind me what the impact to operations from RPG and Papyrus was, did it yield a loss this quarter?

Steve Smith

The combination of the two businesses actually wasn’t a loss in the quarter it was slightly positive a couple million dollars. The loss that you might be referring to was related to the prior year loss associated with our Carlton Retail operations which we divested.

Mimi Noel – Sidoti & Company

When you acquired RPG and Papyrus it was operating at a loss, they were operating with losses and you haven’t begun any kind of integration so to what can I ascribe the improvement?

Zev Weiss

I think what you’re seeing is some slight improvement related to some of the supply chain aspects that we were able to take on very quickly. A lot of the integration it will take time but there’s certain things that you could jump into right away where there are contracts that AG has that could apply to the new businesses. You’re able to pick up a couple million from that.

Mimi Noel – Sidoti & Company

Would you remind me what your priorities for free cash flow are and can you give me an idea of what degree of urgency do you have with regard to deployment of that cash flow?

Zev Weiss

What I’d say is probably consistent with what we said in the past. Our primary goal has always been a very conservative balance sheet. That overall philosophy is from a long term perspective is something that we’ll continue to aspire to and want to maintain. Beside that we’re going to look for growth opportunities and we’ll look in our card business and we’ll look in the interactive side. As we’ve often talked about, our world is not that big, relatively episodic, when they happen they happen.

It’s not so much from a sense of urgency to our part we have a high sense of urgency to grow both organically and through acquisitions, those two categories. If the opportunities come up we’re going to want to do them. Beyond that we look to return cash to shareholders in both dividends and stock buy backs have been things that we’ve been very comfortable with in the past and we’ll continue to evaluate those in the future. I think that’s the way we’ve thought about it for the last number of years and I think it remains pretty consistent to where we are right now.

Mimi Noel – Sidoti & Company

Do you have any sort of perhaps internally, minimum thresholds for ROE for example, where you’d want to keep certain degree of leverage on the balance sheet. Do you have an idea of where your balance sheet is most efficient, never mind conservative?

Zev Weiss

I think we appreciate the point that if you’re too underleveraged it may not be efficient enough. I think we want to find a good balancing point around that. We don’t have an exact number. We feel that because we want to be prepared for growth opportunities as they’re presented its important that we’ve got flexibility. We don’t want to be in the position where an opportunity presents itself but we don’t have the flexibility to act on it. I think it’s a balancing point between understanding the inefficiencies of being too underleveraged; at the same time want to be able to act when we need to.

Operator

Your next question comes from Brian Carlton – Atlantic Investments

Brian Carlton – Atlantic Investments

I saw the press release yesterday with regard to your association with Amscan and it seemed like from that press release there was a payment that American Greetings would receive, something like $25 million, am I remembering that right?

Zev Weiss

That’s correct.

Brian Carlton – Atlantic Investments

Is that included in the free cash flow guidance?

Zev Weiss

No its not.

Brian Carlton – Atlantic Investments

With regard to how we try to think about 2011 just a couple of points. Variable comp obviously is running pretty high because the sales has outperformed while costs have come down. You called that out as $12 million in this quarter and I guess probably there’s some amount of that in Q4 as well. That’s normalized next year. If I’m remembering correctly the acquisition occurred in February and April so we’ll be on the other side like improving base operations but on the top line they will be included for most of next year. Again, I’m trying to make sure that I understand the year over year changes potentially here.

Zev Weiss

I think the history of what you’re saying is factually correct. In terms of how that will apply to next year and all the other moving pieces around it I know this isn’t what you want hear but it really is too early for us to be talking about what happens next year. There’s still a lot that has to happen this year and then there’s lot of work going on our side from a planning perspective.

Brian Carlton – Atlantic Investments

The tax rate going forward we should be comfortable with mid 30’s is that reasonable?

Steve Smith

That’s reasonable. We typically give a little bit of a hit of what we think the next quarter might be but we haven’t been that accurate frankly historically in our predictions of future effective tax rates so we’ve shied away from long term forecasts. Our team has worked pretty hard at maximizing the cash component of our tax effort and we’ve been successful at doing that this year.

Brian Carlton – Atlantic Investments

You mentioned stock options maybe would be $1 million dilutive in the fourth quarter. If I think about a full year though does that mean $4 million dilutive?

Steve Smith

We really have to defer on that one because it really is dependent on stock price and so the near term again we might give a little bit of guidance but going out a full year is tough.

Brian Carlton – Atlantic Investments

If I look at the change in share count, you’ll have to forgive me for not having enough history, were there significant buy backs within the last year?

Steve Smith

There were buy backs in January and over the last four years have been quite a few.

Brian Carlton – Atlantic Investments

I wonder if perhaps you could speak a little bit about how retailers are approaching the card category overall. Walgreen’s obviously is going through some trial resets now where I think that they’re shifting some space maybe away from some cards and towards food. I wonder about Wal-Mart and some other big retailers, what their perspective is towards cards and how they’re managing that and how you manage in that kind of environment.

Zev Weiss

I think there’s always some moving. When you look a the changes at retail its hard for them to happen quickly so they don’t move at a rapid rate because its the kind of thing where you’ve got to really rearrange almost the entire area in order to execute those changes. If you were to add up the plusses and the minuses there are some retailers who are making changes in their store who might be reducing cards, they’re probably just as many who are expanding cards. From an overall footage perspective it’s just a question of which retailers have what commitments to which categories.

Brian Carlton – Atlantic Investments

Do you see yourself gaining versus competition, versus Hallmark for example?

Zev Weiss

You mean going forward or historically?

Brian Carlton – Atlantic Investments

Going forward. As retailers adjust and as you have more offerings available can you be a bigger presence as a percentage of total space in the card space?

Zev Weiss

Clearly that’s our hope. The changes that happen at retail they happen in a relatively slow pace just because of the long term relationships that often supplies have with retailers and also the difficulty that sometimes it entails in terms of moving departments. Clearly our hope is to gain space. When that happens it happens episodically and it happens over a long period of time.

Operator

Your next question comes from Jeff Stein – Soleil Securities

Jeff Stein – Soleil Securities

How about the tax rate for the fourth quarter, any thoughts there?

Steve Smith

We expect the tax rate to be slightly below our statutory rate for the fourth quarter.

Jeff Stein – Soleil Securities

Talking about the Amscan transaction yesterday, wondering if you could give us a little bit of insight in terms of what you would expect the earnings per share impact to be on a go forward basis?

Zev Weiss

When you take a big step back it shouldn’t have a big shift one way or the other. In the short term there may be some revenue that was going into some of the channels that we were selling into and the margin associated with that, that’s lost. The hope is in the longer term that we make that up with either additional revenue in the other channels through some of the new products that we’re able to sell or some of the efficiencies that we’re able to gain as part of the transaction.

Jeff Stein – Soleil Securities

Can you tell us roughly what the annual revenue run rate of this segment is?

Zev Weiss

No, we’re not looking to get into that. I think overall these are not huge numbers.

Jeff Stein – Soleil Securities

The $25 million would you expect to capture that before the end of the fiscal year?

Zev Weiss

Yes we would.

Jeff Stein – Soleil Securities

I presume the charges you will take associated with this will also be captured in Q4.

Steve Smith

Most likely.

Operator

Your next question comes from Mimi Noel – Sidoti & Company

Mimi Noel – Sidoti & Company

I was wondering as you look at your portfolio do you think there are other candidates or other potential agreements along the lines of Amscan as well?

Zev Weiss

We always look and we’re always exploring better ways to operate and if there are better ways for us to operate within an existing unit we’re going to look and evaluate it. Beyond that there isn’t anything that I could say about it.

Mimi Noel – Sidoti & Company

Does that include your packaging, your gift-wrap business?

Zev Weiss

No it does not.

Operator

With no other questions, I’d like to turn the call back to Mr. Steinberg for any additional or closing comments.

Greg Steinberg

That concludes the question and answer portion of today’s conference call. We look forward to speaking with you again at our fourth quarter conference call which we expect to occur in the spring 2010. We thank you for joining us this morning and wish everyone a very Happy Holiday Season! Thank you.

Operator

That does conclude today’s call. Thank you for your participation.

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Source: American Greetings Corporation F3Q10 (Qtr End 11/27/09) Earnings Call Transcript
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