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Russ Berrie & Company (RUS)

Q4 2007 Earnings Call

April 2, 2008 10:00 am ET

Executives

Bruce G. Crain – President, Chief Executive Officer

Anthony P. Cappiello – Executive Vice President, Chief Administrative Officer, A/Chief Financial Officer

Leigh Parrish – Financial Dynamics

Analysts

David Liebowicz – Vernham

Arnie Brief – Goldsmith & Harris

Richard Stanley – Longpor Partners

Gerrick Johnson – BMO Capital Markets

Nelson Obis – Winfield Capital

Operator

Good morning, ladies and gentlemen, and welcome to the Russ Berrie & Company conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions).

Any reproduction of this call in whole or in part is not permitted without prior express written authorization of the company. And as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today’s call, Ms. Leigh Parrish of FD. Please go ahead.

Leigh Parrish

Thank you. Good morning, everyone, and welcome to Russ Berrie’s fourth quarter and full year 2007 conference call. If you have not viewed the press release issued yesterday afternoon and would like to receive one by E-mail or fax please feel free to call us at FD at 212-850-5600 and someone will send one to you 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 on line shortly after the conference call for 90 days. A replay of the conference call will be available through April 9th, 2008, by dialling 1-800-642-1687 with the access code 41071714.

We will begin the call with comments from management and then we’ll 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.

And now I would like to turn the call over to Bruce Crain, CEO and President of Russ Berrie. Bruce?

Bruce G. Crain

Thanks, Leigh. Good morning and thank you, everyone, for joining us. I’m going to start with a brief overview of 2007 and then Tony Cappiello, our chief administrative officer and interim chief financial officer, will provide a more detailed discussion of our financial results.

In addition to our financial results we will also announce two acquisition agreements today and the planned expansion of our existing infant and juvenile credit facility, all of which will support our further growth in our infant juvenile business. We’re very excited by these growth-oriented developments and I’ll spend more time towards the end of this call before we open it up for your questions.

Let me begin by saying I’m very pleased to have joined Russ during an important and pretty exciting transformational phase for Russ. Russ Berrie’s a business I’ve tracked pretty darn closely over the last part of my career and I’m really excited now to be joining and leading the company.

In the last few years the company has experienced great growth in its infant and juvenile segment while at the same time taking steps to restructure the gift business for greater operational efficiencies. I look forward to building on these achievements and leading Russ through its business evolution.

As you can see from our results, we’ve been on a multi-year improvement quest here and there’s a lot of dramatic change. We’re particularly pleased with our strong sales results for 2007, as well as our ability to significantly improve further our bottom line results year over year. These results are particularly gratifying in light of the weakening retail environment and the impact of rising raw materials and labour costs that our industry has faced during the last year and continues to face.

Given external pressures in the macro environment that created head winds for many of our retail and consumer products companies during 2007 our ability to navigate through these conditions and generate top and bottom line growth for the year I think demonstrates our ability to deliver our strategic initiatives fairly well.

We’re also pleased to begin to see the benefit our gift segment restructuring efforts, as well as new product innovation throughout the year. Now let me briefly explain some of these and share some of these accomplishments from 2007.

First, we successfully launched many branded, design-led, and proprietary products in both our infant and juvenile and our gift segment last year. Some examples of these: Sassy successfully launched Earth Brights. It’s a new line of environmentally friendly products. This further built our strong portfolio brands and extended a lot of what our very important Sassy brand is all about. We also further expanded into other product categories, including baby gear, we penetrated new and existing distribution channels, and we added a lot of new retail customers.

As you’ve heard us mention in prior calls, in our gift segment 70% of our products are new and that was the case in 2007. Shining Stars importantly was one of the most successful products. As you know, it capitalized on our product development strengths and the growing market for dimensional products that include a viral or web-based component. Entering 2008 we had over a million registered users of Shining Stars’ website.

Although we’re pleased with the additional consumer excitement received in 2007 from Shining Stars, we do expect sales to moderate significantly in the coming year. We’re already beginning to see saturation due to more company’s entering the market with competing products and strategies. Shining Stars, however, will remain a really important part of our gift portfolio and we anticipate some of the reduction in Shining Stars sales will be compensated for by sales of other new products which we’ve launched, some of which were recently introduced at the toy fair.

Second, in our licensing area we identified areas for growth and improvement also. In the infant and juvenile area we signed new licences products for Kids Line, including a new line of Carter’s branded infant bedding accessories. This has allowed us to compete in new market sectors and to establish relationships with new customers in different channels of distribution. Another example of Sassy where we introduced new Leap Frog brand electronic games.

In our gift segment we continued to eliminate unprofitable licences while adding some exciting new ones. In 2007 our key licences in gift include Shining Stars, Corduroy, Raggedy Ann, Simpsons, as well as several others.

A third accomplishment area was our international business area where we believe we’ve done a solid job of driving expansion and profitability and we see further opportunities ahead in that area. Some examples there. We continue to grow our presence in Europe, Japan and China through both Sassy and Kids Line. Another example: in August we launched a new Disney licence under Kids Line Australia and further increased our recognition outside our core US market and distribution channels, which we think helped throughout with our global branding.

In our gift segment we took significant steps to return our Australian business to profitability, to continue to turn around our European business as part of the multi-year restructuring of our gift segment that we’ve been on.

Finally, as part of our commitment to offer the best customer service to our retail partners within our gift segment in the US we launched a new business-to-business website and expanded our telesales operations. To support our very strong field sales team within our gift sales organization we’ve also introduced laptops to automate the field selling operation. In addition, a new B-to-B (sic) site provides our customers with greater flexibility and convenience if they want to work with us that way. For our larger national accounts we continue to have very strong key account management programs.

So in summary, if you look across our gift selling operation we now have four ways to do business with Russ really tailored around our customers’ preferences and needs.

We’ve accomplished a lot in 2007 and despite a difficult economy we weren’t deterred at all from aggressively executing our operational goals as planned. I think our bottom line and top line results for the year reflect our efforts.

Before I finish up on just some overall comments I want to very importantly, especially as the new leader of Russ, thank all of our more than a thousand employees that have allowed us to achieve the results both for our shareholders and our other stakeholders in 2007.

Now let me turn it over to Tony for some details on our financial performance before I come back and discuss our strategic objectives for 2008 and our recent infant and juvenile acquisitions which we think fit really nicely with all these objectives. Tony?

Anthony P. Cappiello

Thanks, Bruce. As Bruce mentioned, we are pleased with our performance for 2007 which reflects the results of our simplified business model and execution of our strategic initiatives.

Consolidated net sales for the fourth quarter increased 14.3% to $84.5 million compared to $73.9 million for the fourth quarter of 2006. For the full year consolidated net sales increased 12.4% to $331.2 million compared to $294.8 million for 2006. Growth for both the quarter and full year was driven by our focus on developing design-led, innovative products and expanding distribution in both of our operating segments.

Consolidated gross profit in the fourth quarter was $25.3 million or 30% of net sales compared to $29.5 million or 39.9% of net sales for the fourth quarter of 2006. We recorded a $6.4 million impairment charge in cost of sales, cost of goods sold related to Sassy MAM distribution in the fourth quarter of 2007. Excluding this charge consolidated gross profit would have been $31.7 million or 37.6% of sales. Adjusted gross profit dollars increased due to a higher sales volume by gross profit as a percentage of sales decreased due to lower margins in the infant and juvenile segment that were only partially offset by a higher margin in the company’s gift segment.

Infant and juvenile segment margins were negatively impacted by market pricing constraints, a shift in product mix, higher raw material costs, and unfavourable foreign currency fluctuations. While gift segment margins increased primarily as a result of higher margin products in 2007 product line.

For the full year consolidated gross profit was $125.4 million or 37.9% of net sales compared to gross profit of $118.1 million or 40.1% of net sales for 2006. In the third and fourth quarter recorded an aggregate impairment charge of $10 million in cost of sales related, again, to the Sassy MAM distribution agreement. Excluding this charge consolidated gross profit would have been $135.4 million or 40.9% of net sales. The increase in gross profit dollars on an adjusted and actual basis and the increase in gross profit for percentage on an adjusted basis over 2006 were driven by an increase in gift segment margins resulting from the introduction of new products. This was partially offset by lower margins in the infant and juvenile segment reflecting a negative impact of market pricing constraints, a shift in product mix, higher raw material costs, and unfavourable currency fluctuations.

Consolidated SG&A expenses for the fourth quarter was $30.9 million or 36.6% of sales compared to $25.3 million or 34.2% of net sales in the fourth quarter of 2006. For the full year consolidated SG&A expenses were down $1.8 million to $110.2 million or 33.3% of net sales compared to $112 million or 38% of net sales for 2006. SG&A for the fourth quarter and full year reflect benefits from the successful implementation of the profit improvement program for the gift segment and the impact of investments related to growth and marketing. There were also a number of special items that affected SG&A, as well as our bottom line, and we’ll detail those for you in a moment.

Consolidated net loss for the fourth quarter of 2007 was $8.3 million or $0.39 per share for basic and diluted share. Results for the fourth quarter of 2007 include a $7.3 million of special charges.

Consolidated net income for the full year was $8.9 million or $0.42 per diluted share compared to a consolidated net loss of $9.4 million or $0.45 per basic and diluted share for 2006. This represents an improvement of $18.3 million or $0.87 per diluted share.

Consolidated net income for 2007 included special charges totalling $10.9 million which consists of the following: a non-cash accident impairment charge of $10 million related to the write up of intangibles associated with Sassy brand distribution agreements and a charge of $940,000 for the write-down of a note receivable related to the divestiture from 2005. Excluding these charges adjusted net income for the full year would have been $18.7 million or $0.88 per share, which represents an improvement of $28.1 million or $1.33 per share over 2006.

In addition to the special items in 2007 that I just outlined, both 2007 and 2006 included severance and inventory write-down expenses which we do not anticipate being included in our SG&A or net income run rate in the future of approximately $4 million to $5 million, which I’ve discussed in more detail on our Form 10K.

Consolidated debt outstanding was approximately $66.8 million at December 31st, 2007, compared to $54.3 million at the end of 2006. Throughout 2007 we repaid approximately $16 million of debt. However, this was offset by December 2000 payment of $28.5 million for approximately 90% of Earnout consideration due in connection with the company’s 2004 acquisition of Kids Line. The remaining $3.6 million of the Kids Line Earnout consideration was paid in January 2008.

Now in order to support our growth strategy we also announced yesterday that we intend to expand our infant and juvenile credit facility from $95 million to $175 million, which will be used to finance our intended acquisitions of LaJobi and CoCaLo, as well as to provide the additional borrowing capacity. Given the current state of the credit market and overall economy, we are very pleased to have been able to expand our bank facility into good terms and pricing. This expanded facility will enhance our capital structure and demonstrate the confidence that others have in our infant and juvenile business. Importantly, this credit facility will help facilitate the execution of our branded products and category expansion plans for our infant and juvenile segment.

Now I’d like to turn the call back over to Bruce for closing remarks.

Bruce G. Crain

Thanks, Tony. I’d like to close up today by outlining our key objectives for 2008, as well as our two most important recent acquisitions, the acquisition agreements, that is, and how they fit into our growth strategy. Let me begin by discussing some of the demographic industry trends that we see for each of our segments and that we believe support our strategies for 2008 and the long term.

As some of you know, we view the infant and juvenile market as a highly attractive and dynamic industry. Let me just run through a few of the highlights that we keep our eyes on.

First is a small sort of baby echo boom going on in the US especially. Recent research indicates that the US birth rate continues to increase after a period of variable declines throughout the last decade. In fact, current US birth rates are the highest seen since the early 1960s.

Second, parents on average are having children later in life when they have more disposable income. Some data that supports that is that, according to the national centre for health studies, the number of women giving birth over the age of 30 has been rising since 1990 when the rate was 30.2%.

Third, research shows that grandparents now purchase many of the necessary nursery and related day-to-day items for infants. This baby-boomer population is one of the largest and most powerful consumer segments in the US today.

Fourth, many items in this industry are non-discretionary. As a result, this industry is somewhat protected from the negative impacts of recession as purchases for children, we believe, are among the last places that parents and grandparents look to cut spending.

Finally, the infant and juvenile sector really has little seasonality. This provides a more consistent revenue stream throughout the year and requires limited maintenance working capital support business requirements, especially for profit-generating players in the industry.

All these factors together suggest to us that this is an attractive area for us to continue to focus on and strategically grow.

Turning to the gift segment, this industry continues to however be affected by certain trends that present a very challenging environment. These include the ongoing pressures on specialty and independent retailers in both North America and Europe that have been further impacted by a challenging consumer environment. It’s also important to note that at the same time we will be operating in a weaker external environment we also see the anniversary of our Shining Stars product launch in the coming year.

With this said, we are optimistic about several new product launches and will continue to focus on improving our profitability in this segment. We remain enthusiastic about both the Russ Berrie and Applause brands, we’ve got great customer relationships across our gift segment, we really have global scale and sourcing operations in gift and, importantly, I think we’ve really re-energized our product development area within our gift segment. Net-net, new products and scale are the keys for success in our gift segment and we’re working hard to enhance both of these.

With these segment trends in mind we have identified two objectives for 2008. We believe that will allow us to build on momentum we achieved in 2007 and position us to deliver long-term shareholder value. The first one of these is intended to advance our leadership position in the marketplace by investing in organic growth and acquisitions in addition to design and branded product invasion and retail consumer and customer relationships. Second, we will seek to further leverage our infrastructure by driving efficiencies throughout our logistics, sourcing, and other cost areas.

Let me provide more detail on our first strategic objective, which is advancing our market leadership positions. We believe that a core opportunity for investing in our growth will be executing a disciplined acquisition strategy in our infant and juvenile business. As many of you saw in the release we issued yesterday, we have signed agreements to acquire two businesses that Tony mentioned earlier also, LaJobi and CoCaLo. Both of these intended acquisitions provide growth opportunities to product and distribution channel expansion. We believe that these two accretive acquisitions will enhance our leadership position as we seek to extend our presence throughout the baby nursery and take advantage of the positive industry trends I discussed earlier.

Let’s talk a little bit about LaJobi. Specifically for them, branded infant furniture will allow us to enter the crib market, which we think is the cornerstone or anchor of the nursery. We expect this new product category will complement the existing products we offer and is a natural expansion opportunity for our business.

CoCaLo’s branded products represent a key opportunity to expand and further enhance our presence in the infant bedding and accessories area. Those that know the product, CoCaLo offers really design-led brands and also complements our existing portfolio.

We plan to maintain individual brand identities and management structures within both LaJobi and CoCaLo businesses. We look forward to building on the strengths of these companies to grow our infant and juvenile segment while we seek to create collaborative based synergies across all of our infant and juvenile branded businesses over time.

In addition to our acquisition based growth we believe that all of our businesses have opportunities to drive organic growth. To further capitalize in the consumer’s interest for design-led, trusted, and branded products we also continue to invest in design and branded product innovation. Let me talk about some examples there.

Within the Kids Line and Sassy area we continue to constantly drive new design that strengthens our presence in the infant and juvenile market. We’ve also identified new growth opportunities for both LaJobi and CoCaLo and we’ll be discussing these a lot more throughout 2008.

Additionally, given the popularity surrounding viral or web-enhanced plush products that we all saw in the last year, and especially our initial success with Shining Stars and our ongoing success with products like Yamico (sp) or brands like Yamico that we have. Our design team will continue to develop what we believe are trend right, differentiated, and quality products that we think our consumers and retail customers expect from the Russ Berrie and Applause brands.

Another core market leadership growth opportunity for us will be continuing to build strong relationships with all of our retail customers. The key will be to appropriately build our selling organizations and tools to meet the needs of different customers. In our infant and juvenile segment we believe there are opportunities across all these businesses to grow by expanding the new and existing domestic and international channels where we can reach additional consumers that are seeking specially design-led and branded products.

Looking at our gift business, we anticipate that specialty retailers may continue to be impacted by more than the mass retailers as customer traffic slows. Given this, we believe that continuing to enhance our web and tele-sales based selling organizations and structures to service the specialty channel will be appropriate to meet the needs while we will also continue to invest in our strong field and key account sales teams.

In addition, we will continue to focus on strengthening our presence in the mass channel while carefully managing this distribution to ensure that we appropriately meet demand and have high service levels. We believe there are great opportunities to collaborate closely with our mass channel retailers while reducing inventory risk together. For example here, Russ enjoys a great business across many of its business units doing FOB selling.

Our second strategic focus area for 2008 is seeking to enhance and leverage our infrastructure. Let me talk about some examples there. Logistics and sourcing will be a key area of focus for us as we work to create industry leading cost structures. Part of our focus with our retail partnerships is on ensuring our supply chain is appropriately aligned with the needs of these key customers.

At the same time, we anticipate that certain logistics and sourcing costs will continue to increase throughout 2008 and beyond. As was the case in 2007, we anticipate the cost of goods continuing to rise. Specifically raw material inflation, higher labour costs, continued weakness in the US dollar will be examples of this. However, I think we’re pretty proactive right now in mitigating many of the near term price increases. Some examples of that are diversifying our sourcing industry that is both within and beyond China and even with new acquisitions like LaJobi we think they’re going to bring many new operations to us in other parts of Asia where we can further diversify.

Due to increased commitment to safety from our manufacturers, part of our higher costs relate to ensuring that our products meet rigorous safety and quality standards. Our internal investment as well as our external partnerships with leading testing labs gives us great confidence that we will continue to offer products that will meet or exceed applicable safety standards. While we do expect these external factors will pressure sales and margins during 2008, our focus continues to be on enhancing our global efficiencies to position our company for long-term growth.

I look forward to opportunities ahead for the company. In my four months here I think I’ve carefully reviewed almost every element of the business on a global basis. And we’ve made a lot of progress in positioning the company to drive future growth now. While external pressures and difficult comparisons for our gift segment provide us with conservative near-term outlooks, we continue to leverage our design expertise and the power of our brands to build our leadership position in gift, as well as in the infant and juvenile markets. We also expect that our two acquisitions will help drive incremental growth. Our overriding goal remains to enhance long-term value for our shareholders.

Now let me turn it over to some questions. Operator, please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). One moment, please, for the first question. Thank you. Our first question is coming from David Liebowicz (sp) with Vernham (sp).

David Liebowicz – Vernham

Good morning. A few questions, if we may. The LaJobi, you don’t state what their revenues were for the year. I was wondering ... no. You have it for LaJobi. For CoCaLo. Why is there no revenue figure for them in the release?

Bruce G. Crain

You’re specifically asking about CoCaLo, which is how you pronounce that.

David Liebowicz – Vernham

Right. I apologize.

Bruce G. Crain

In the release we do not have a revenue number based on the size of the business, basically. Pretty significant increase for us though. And it is quite a bit smaller than LaJobi.

David Liebowicz – Vernham

Now, LaJobi you bought for less than one-time sales. Can we make the same belief for CoCaLo?

Bruce G. Crain

I don’t think we really have a comment there. I mean, I think we’re pretty pleased with the valuation that it was a very fair number. And kind of industry standards, but we feel like we had a very, very fair deal there.

David Liebowicz – Vernham

Okay. The MAM situation, could you go into some more detail as to how that came about and why there was such a large write down?

Bruce G. Crain

It’s MAM, M-A-M. It’s a really long-term relationship that Sassy has had with MAM, which is a great brand in the infant area. We’ve had a very long-term relationship. A couple issues in there; all the product that we source for MAM comes from the MAM Corporation in Europe and all that product is sourced for us in Euros. As you all know, the Euro has really moved pretty dramatically against us here and the constraints of the contract are such that we don’t really have any flexibility on that front. So I think a core reason for us to terminate that relationship at this point and that distribution agreement is really driven by the lack of profitability due to where the product comes from.

I think a second concern for us is embedded in the agreement are several things having to do with competition and, as you can see, we’ve really started out on a pretty aggressive growth strategy built around acquisitions in our infant and juvenile area. Given that that relationship and distribution agreement constrains us somewhat from being in competitive areas we also felt it was something we wanted to move beyond to free us up to be able to look at these categories across other businesses or enter these categories ourselves.

So I think those are the two key things: the Euro and the competitive nature of the agreement. But we’ll continue to work with MAM throughout this year and then sort of post our wind-down period we’ll have a lot of opportunities to get back in these same categories. But again, as Tony mentioned, non-cash charge really from good will from six and a half years ago from the acquisition.

David Liebowicz – Vernham

Okay. And electronics. Roughly what percentage of your revenue in a perfect world would you hope to achieve with electronic items this year? Regardless of what the dollar amount is, that’s not what we’re discussing here. Simply as you would break out the business what percentage might come from electronics?

Bruce G. Crain

I don’t think we really, well, first of all, I don’t think we really track it from electronics. We believe that the web elements of much of our gift business, in particular, will continue to be very important, but we don’t really break it out that way and we’re not projecting it that way. But this viral aspect and the web aspect has certainly become a very important area across this whole industry and the gift industry and we will play a very aggressive part of that. Which continues not only with our Shining Stars product, but we’ve got several new introductions for those that were at toy show or some of the other trade shows that you’re going to see that we have several new offerings in that area that we believe will be meaningful parts of our revenue. But we don’t really break it out and we certainly don’t project it at this point.

David Liebowicz – Vernham

Another issue. You increased your credit line, it looks like, to $175 million. The acquisitions clearly don’t come anywhere near to that. Are we to take that to mean that you are looking to make incremental acquisitions as this year goes forward?

Bruce G. Crain

I think I’ll let Tony comment a little bit more on the details. Let’s remember within Russ we have two parts of our debt structure, there’s a piece over on the gift side which handles all of our gift and corporate activities, and then on the infant and juvenile side we’ve had a credit facility in place. As Tony made some comments, during last year we had drawn down a bit of that, especially to fund the latter parts of the Kids Line Earnout. So this raising of money both, in a sense, refinanced the piece that was already outstanding, funded these acquisitions, and does provide us with quite a bit of growth capacity. Whether that growth capacity gets used to fund internal growth as we continue to grow these businesses or it can be supported and we work with our banks to have it fund other things, that’s up in the air at this point. But do remember that part of the use of this is not just for the acquisitions but was also to refinance and roll the part that was outstanding on the current line on our infant and juvenile side.

David Liebowicz – Vernham

And is the line prohibiting you from purchasing stock in the open market?

Bruce G. Crain

That line is an operating line. Tony can have some comments, but that’s not a line that we would use for corporate purposes at all. It’s not the intended purpose at all of the line.

David Liebowicz – Vernham

Okay. And looking at the four quarters of this year versus the four quarters of last year, where do you face the toughest hurdles?

Bruce G. Crain

I don’t think, if you look at our general mix of business, let me talk about the segments separately for a moment. As I mentioned, on our infant and juvenile side one of the great attributes that we see there is that it really isn’t seasonal. It’s quite spread out through the year. So that’s a nice aspect of infant and juvenile and I think that we’ll continue to see that trend. So the major area that goes on there is that in all of these businesses we simply continue to have nice growth rates, so that will continue to push more and more of the growth of infant and juvenile towards the back part of the year as we just continue to trend up growth-wise within those businesses.

In the gift business, however, it does continue to be a very seasonal business and I think there’s several dimensions in that that are important for us. Historically we had great diversification through lots and lots of smaller independent specialty accounts. You know, if you go back several years in the Russ Berrie world in North America we probably had upwards of 45,000 independent retailers and we’ve got a much smaller number there. What we’ve done to supplement that is we’ve got a very big business now with key accounts. So we’ve now got a mix of our key accounts activity, which increasingly is third and fourth quarter activity. We’ve also got all our independents, which again continue to push out a lot of decision making. Our June shows, for example, will be very important in the business. Again, a lot of that volume eventually coming in the fall. And now we also have another leg that I mentioned earlier which is on the B-to-B intellisales (sic) front, which is a little bit more diversified and spread out through the year. A little bit more oriented around immediate delivery.

So to your question, I think the challenge in the business is driven by macro factors on the outside which keep everybody a bit cautious these days and the seasonality which continues to push more and more volume in our gift business at least to Q3 and Q4. And decision making later and later with the key accounts.

David Liebowicz – Vernham

And what is the interest rate on the $175 million bank loan?

Bruce G. Crain

It’s basically a LIBOR plus 275 structure.

David Liebowicz – Vernham

And are there takedown fees or prepayment fees? Any other payments involved here?

Anthony P. Cappiello

No prepayment fees.

David Liebowicz – Vernham

What about maintenance fees?

Bruce G. Crain

Yeah. Maintenance and for some of the undrawn parts of the facility there’s some stuff. But very, very industry standards. A very, very normal industry standard numbers.

David Liebowicz – Vernham

And are there any penalty payments in the acquisitions if you don’t go forward with them?

Bruce G. Crain

No. I mean, we’ll draw the money down to fund. I think you’re going to see, we expect very, very shortly to be announcing these deals. We’ve got high confidence –

Anthony P. Cappiello

They’re tied. The funding and the acquisitions are tied together.

David Liebowicz – Vernham

Okay. Thank you very much.

Operator

Thank you. Our next question is coming from Arnold Brief of Goldsmith Harris.

Arnie Brief – Goldsmith & Harris

I apologize for being a little late here. I’ve had two phones go out on me today. Could you discuss a little bit the fourth quarter and the gift business from two aspects? As far as the sales go they were right in line with my expectations. The gross margin in the gift segment has not only dropped precipitously from the third quarter, it was actually below the year-end average and below some earlier quarters as well. I recognize there’s some volume considerations in fixed costs, but nowhere near the amount that would account for the drop to 38% of sales.

Secondly, on the SG&A side, if I take out all the non-recurring stuff and take out the advertising as well from the third and fourth quarter, your fourth quarter SG&A was actually higher than your third quarter SG&A despite a decline of $12 million in sales seasonally. Could you discuss that gross profit margin and the SG&A dollar level?

Anthony P. Cappiello

Well, the gross profit margin in the fourth quarter is somewhat affected by year end and year-end activity. We had some small write downs on the amortization of our website and related to Shining Stars and things of that nature, an adjustment of our reserves and inventory reserves and things of that nature. Some additional costs that hit margin in the fourth quarter. Although we’re very pleased with where our margin is on the gift business and the improvement year on year and things of that nature.

Arnie, I didn’t catch your issue on expenses. What was the exact question on expenses? The fourth quarter was higher than the third quarter?

Arnie Brief – Goldsmith & Harris

The fourth quarter SG&A taking out all the non-recurring stuff and taking out the advertising dollars.

Anthony P. Cappiello

Are you talking on a gift basis or are you talking combined?

Arnie Brief – Goldsmith & Harris

It’s a gift business. It was actually higher than the third quarter despite the seasonal decline in sales.

Bruce G. Crain

Arnie, let us do a little work here while –

Anthony P. Cappiello

-- really comes what you’re asking me, Arnie. I’ll have to dig in a little bit and get back to you on that.

Arnie Brief – Goldsmith & Harris

I’m going to go back to the gross margin. I’m not sure of the numbers because I was playing with this late at night and it was, I was trying to get through as much as I could. Was there any increase in the inventory reserve of a couple million dollars in the fourth quarter?

Anthony P. Cappiello

No. No. Definitely not. It was as I said. There was additional charges to cost of the sales related to some amortization of the website with Shining Stars, as well as we revamped the website and did a little bit of a write down, as well as a catch up on some inventory reserves, but nothing in the tune of that nature. Nothing of that level of magnitude or materiality.

Arnie Brief – Goldsmith & Harris

Well then, again I’ll ask the question why did, I mean, even if you adjust up to, from 38 to 39 or 40 you’re still way below the third quarter, obviously, but you’re also below some earlier quarters where you had lesser volume. What happened in the fourth quarter to gross margins?

Bruce G. Crain

There’s a mix issue there, Tony, right?

Anthony P. Cappiello

Yeah.

Bruce G. Crain

Arnie, let’s move on to another question. I’ll get you a little bit of an answer here as we’re listening.

Arnie Brief – Goldsmith & Harris

Okay. On the, it wasn’t clear to me on the non-compete agreement on MAM, when it actually takes, when it actually lapses. Is it December 2009? December 2008? March 2009? December 2009?

Bruce G. Crain

I don’t want to get into too many details in the MAM agreement. There’s lots of disclosure in the K and what happens is for the balance of 2008 we continue to run the business. It’s a very good relationship with them. We continue on the basis per normal. And then there’s a one-year wind down period where we would not be able to compete directly in a couple categories of product with MAM. So that would be during basically the calendar year 2009.

Arnie Brief – Goldsmith & Harris

Okay. That’s what I was looking for. Could you elaborate a little bit on the categories that you can compete with in there?

Bruce G. Crain

Importantly, MAM is really in pacifiers and feeding related areas. Those would be the two. Pacifiers very specifically and a little bit more broadly feeding. And there are a couple other categories where they, where we’ve been working with them. I mean, obviously within our Sassy business we believe our brand over time can be very relevant there, but we’ve got many, many other categories that we expect to be able to then rebuild our Sassy volume up around. And it’s sort of nice to have a nine-month kind of runway to now do that building for the Sassy and use up our Sassy capacities and our selling organizations and all that stuff where we had been supporting MAM with that.

Arnie Brief – Goldsmith & Harris

Is there any, would you get us into a ball park or give us some feel for the operating income that would be lost when the agreement expires?

Bruce G. Crain

Well, as I mentioned earlier, I think the most important thing, and again I think if you go to the K you’ll find lots of disclosure around it. We talked about a number that’s a little bit north of $20 million of revenue dollars. But on the profitability I think the most important thing, Arnie, to keep in mind is that we’re almost down to no profit because of where the Euro is. Basically all of that product comes to us in Euros. We have a little protection here and there. And it’s sourced out of Europe and the contract is in Euros. So basically all the profitability due to the movement in the Euro has dissipated and it’s literally gone. It’s basically a break-even business for us. So that’s another reason that we don’t believe it really has any sort of detrimental impact, unless the Euro does some dramatic about face here relative to the dollar.

Arnie Brief – Goldsmith & Harris

If it does will you be sorry that you terminated the agreement.

Bruce G. Crain

I think you’ve got that crystal ball, but I certainly don’t, I hope and don’t expect the Euro to further escalate against the dollar, but who knows what goes on in that front. But we thought it was a really opportune window to move on from that and sort of set ourselves up strategically to be managing our own destiny and kind of getting out of being a distributor. I mean, distributor margin structures and business relationships are very challenging on a lot of dimensions and I think we see it in spades in this particular one.

Arnie Brief – Goldsmith & Harris

Okay. The price show is now well over a month ago. You should have pretty good feedback from it on your new product Sea Pals and Treatures (sp) and any possible comments you might make on some new accounts in the mass market?

Bruce G. Crain

I don’t think I’m, I’m not going to make any comments on the new accounts. We had a great toy show in New York. As Arnie mentions to some of you, there’s a new launch that we call Sea Pals which we think is a very, very creative new product that has a web component to it that we’ll be launching now over the summer. We also had our Shining Stars there. We had another product line called Treatures, which picks up on kind of a nature and tree planting notion. No comment specifically on them, Arnie, but we were very pleased with the results and we think in all cases we’ve really established ourselves not with a single product now but with kind of a pipeline of products in this viral and web space that compliment, I think, our strength in plush generally.

Arnie Brief – Goldsmith & Harris

Okay. The gross margin of the infant and juvenile declined in 2007 as expected, but you’re sort of back to operating profit levels adjusted for the non-recurring charges, non-operating charges the way you were two years ago and the gross margin in the fourth quarter in the infant and juvenile actually declined a little bit from the third quarter. Do you see some, I don’t expect the gross margins to go back to where they were, but is there anything in the new products and pricing and what have you that you see some stabilization at this level or continued erosion like you have from the third to the fourth quarter?

Bruce G. Crain

I think there’s several fronts where we’re pretty encouraged on the business. I think price increases are going to become a reality across this consumer space and we have successfully put in some price increases and I don’t want to make many more comments about that, but I think that’s a phenomenon that you’ll see more and more of in the industry and where we’ll play our part on that.

I also think that we’ve been working a lot on country diversification to have some more diversity of sources, which will help us and, as I mentioned, as it relates to LaJobi, for example, they’ve got a tremendous sourcing operation entirely in Vietnam and other places like that. So we think we’re going to get some extra help from that standpoint.

I think the other area is in the area of mix where we’ve chosen to pursue some interesting licenses and things like that that bring us some great volume, but some of that is reduced margins for two reasons. It’s a little bit more mass oriented and there are royalty streams with it. But we think that’s still great for our growth. What we’re really careful of on that front is while the margins might be a little bit lower, Arnie, we’re also looking very carefully at the working capital side of it and getting the turns out of the business and having very efficient working capital that compliments slightly lower margin structures.

So I think we’re very on top of all the parts of it and we’re doing a lot at the regular gross margin level, as I mentioned earlier, but we’re also looking at it across the financial statements to make sure that we’re being really efficient about the business.

Arnie Brief – Goldsmith & Harris

Am I reading too much into your response that you would look for gross margins to start to stabilize somewhere in this level?

Bruce G. Crain

Yeah. I think it’s a combination to have a lot of downward pressures that have been out there and all the things we’re doing to alleviate it. So yeah, I think between our scale that we’re growing, the efforts that we’re putting into new sources, I would expect to stabilize though I don’t want to make too many comments. Again, I’m not sure where the crystal ball takes us over the next year on price increase abilities and kind of what continues to happen on the cost front.

I was just back, you know, I was in China a couple months ago now. It is a real issue across the supplier base and it’s going to be interesting to see how that develops. One of the things that I think you’re going to find across consumer products companies, and we’re seeing some of it also, is while we’ve been able to hold back on a lot of cost increase things so far I think you’re going to find a lot of the supplier base in the orient is also now not doing year-long commitments to purchase orders. I mean, they now will honour purchase orders and they’ll want to revisit pricing two or three months down the road again. So we’re very active on that front. We’ve got a lot of teams over there, but we’re feeling pretty good where we are on it going forward.

The other thing, Arnie, just one other comment. A huge part of our strategy is new product and design-led stuff. So a lot of new product introduction also allows us to stabilize margins because we can bring new things in that don’t have comparisons. That really is true across all of our businesses and really is kind of a core reason that we continue to push on design and product-led and branded base strategies.

Arnie Brief – Goldsmith & Harris

What will the impact on gross margins in the infant and juvenile be from the two acquisitions?

Bruce G. Crain

They are slightly different margin structures. I don’t think we’re projecting at this point forward kind of where we are with margins. We believe in both cases CoCaLo, for example, very design-led, we feel will have very attractive margins for us overall. The LaJobi business, it’s a different, it’s really a slightly different margin structure in that business. Again, we think it’s pretty darn attractive. And it has great working capital utilization.

Anthony P. Cappiello

The key is that they’re both to be expected to be accreted to the bottom line.

Bruce G. Crain

Yeah.

Arnie Brief – Goldsmith & Harris

Just to skip gears for a second. The gift business has an infrastructure capacity that would support substantially higher revenues and the incremental profit margin is very high. Shining Stars’ sales are expected to be down this year. I think the core business will be up. And you’ve got some new products. But you obviously could benefit substantially from anything, new products or acquisitions that will get your revenue stream higher. Is there any capacity – I’m not asking if you’re negotiating or if you’re going to acquire anybody. All I’m asking is if you have the financial capacity to do something in the gift business area.

Bruce G. Crain

Again, I don’t think we make, we’ve never in our history and we’re not going to make comments on future –

Arnie Brief – Goldsmith & Harris

No, I didn’t ask that. I’m just saying if you have the financial capacity to do it.

Bruce G. Crain

I think we absolutely would as Russ Berrie. Our specific lines of credit from that standpoint on the gift side today are asset-based lending driven and we’d need to convert that to some other kind of arrangement. I think we’ve got great relationships with our banks, as you can see with our infant and juvenile side, which is on both our gift side and our infant and juvenile side we’ve been working very closely with Banc of America, formerly Lasalle. They’ve been great partners. I think we’ve done a great job with them on both sides. So I believe we’ve got great relationships there should we find an attractive opportunity that needs capital.

Arnie Brief – Goldsmith & Harris

So you don’t feel that if you had the opportunity or needed capital you don’t feel financially restrained?

Bruce G. Crain

As a general statement I think our overall results as corporate wide are very strong and I think, again, this is on the infant and juvenile side, really demonstrates it which is, and they’re clearly a key part of Russ and roll.

Arnie Brief – Goldsmith & Harris

Okay. Let me get off and give somebody else an opportunity. Please don’t stop the conference call, however.

Bruce G. Crain

Thanks, Arnie. I know we owe you a bit of an answer here on gross margins in Q3/4. We’ll be back at you. Operator, next.

Operator

Thank you. Our next question is coming from Richard Stanley (sp) at Longpor (sp) Partners.

Richard Stanley – Longpor Partners

Good morning. Would you talk qualitatively about Shining Stars through the year? Did it meet expectations? If not, why? And just give some colour on what you hoped and then what you planned and then what happened?

Bruce G. Crain

I think as a general, I mean, I joined in early December so a lot of the success of Shining Stars and the initiation of that whole thing came long before I was here. As a generalization, Shining Stars was an extraordinary success. Almost one of the great successes of Russ history sort of going along. It was a great product relative to expectations and we had a great year on that front. I think several things happened during the year. So I think it clearly exceeded our expectations for the year. I think several things happened during the year, both in the industry and with us. I think it demonstrated we’ve got a great sort of product development group. I think it demonstrated we’ve got a great sourcing operation to be able to gear up and support the line. And we had great partnerships out there in the world to get the line broadly distributed.

I think the key thing in the macro environment, which again Tony mentioned earlier in his prepared comments, was that there are a tremendous number of competitive plays going on out there also. I’m not going to get into sort of the whose. I think anybody watching the industry knows that a tremendous amount of product flooded into the market towards the end of the year. So we enjoyed a lot of that success. There was a lot of retail or consumer pick up. But there’s a limit to how much you can digest in the marketplace. I think that’s the biggest issue.

Great success for us, tremendous amount of product that now needs to work its way through the system, but I think this really is a permanent part of the industry today that you’re going to have whether it’s the toy industry or the plush industry. This has become a permanent part and a key component of most launches to have a viral web component and, again, I mentioned earlier and I mentioned to Arnie, if you see us at any of the gift shows or toy fairs we have a lot of stuff in our product pipeline now where we’re trying to leverage what we’ve learned from Shining Stars and bring even more enhanced product to some of our new offerings. Arnie mentioned something called Sea Pals and we’ve added several new dimensions to that product in terms of what the web experience is all about that we think are going to be really helpful to us as we launch new products there.

So great success, a lot of learning, a little bit saturation. But let me make one final comment. Shining Stars is still a very important part of our 2008. I mean, I think we’re saying a few cautionary statements here, but it’s still a very important part. It just has those second year syndromes that are going to follow on from the initial –

Richard Stanley – Longpor Partners

What were Shining Stars sales in 2007?

Bruce G. Crain

We don’t quote the specific line sales at all.

Richard Stanley – Longpor Partners

And the, are the inventories in the channel, you mentioned that the industry inventory levels were probably somewhat glutted because of the competitive entries. Is, what are Shining Stars’ inventories? Do you have too much probably relative to the industry competitive situation?

Bruce G. Crain

I can let Tony comment a little bit. I’ll make a couple comments. The amount of product that we have versus what our retailers have is important. For us we look at it channel by channel. Some of our independents, if you look at some of our competitor products last year that went on allocation and it was a lot of hype bought tremendous amounts of products. So they maybe have a tremendous amount of a competitive product. Not too much of ours. But in general, certain channels, especially the independents, I think have quite a bit of product out there in the marketplace that needs to work its way through. Some of our other partners on the math side have different enough levels and we have several mass accounts that we have great relationships with that we sold nothing into. And we expect some of those to provide some big opportunities for this year.

I think the other comment I’d make, and I’ll let Tony add some numbers to things maybe, but on the international front we also believe we’ve still got great opportunities with the product line and I think this whole idea of viral and web based product internationally has only begun. And as everybody on the call knows, we’ve got great relationships around the world with a lot of retailers.

Richard Stanley – Longpor Partners

Okay. Thank you.

Operator

Thank you. Our next question is coming from Gerrick Johnson of BMO Capital Markets.

Gerrick Johnson – BMO Capital Markets

Hi. Good morning, guys. I actually had a few questions on Shining Stars as well. Most have been answered, but I’ll follow up on the comment that it was great relative to your expectations or exceeded your expectations for the year. How about Shining Stars’ retail performance in the fourth quarter? Did that live up to your expectations? How did that perform in the quarter?

Bruce G. Crain

Again, I don’t think we’re going to break out by specific product lines. Generally again, let’s remember, we had, this was in every quarter last year we introduced the product, it more than exceeded our expectations. Clearly the momentum in the business during the beginning of the year and for those that have joined on earlier conference calls, we shared a lot of momentum that was going on in the business. Q4 relative, you know, if you take what were our expectations in Q3 when the momentum was sort of at its peak versus what ultimately happened with the consumer and retailers in Q4, I think it was a bit more cautionary going into the end of the year.

Gerrick Johnson – BMO Capital Markets

Okay. And about your distribution plans for the fall, particularly in MAM, how is that going to change relative to last year? I mean, last year you had Toys ‘R’ Us and this year you’ve got a few faces at Wal-Mart. For fall are there going to be any big shifts in your mass market distributions of Shining Stars?

Anthony P. Cappiello

We don’t expect any big shifts.

Bruce G. Crain

I think again you’re speaking domestically. We clearly have an international business where we continue to roll some things out that are fresher, but I don’t think there’s any big shift in either mix or facings. Again, I think our issue, we still have tremendous, I mean, we track this stuff on a daily basis. The number of registrations per day we’re really pleased with. As I mentioned, we had over a million registered users coming into this part of the year or the beginning of the year. So I think we’re still, if you look at any of the metrics out there on the competitive landscape I think we’re very, very pleased where we sit. We’re doing a lot of new things with the website and the product going forward also to continue to support in the onset.

Gerrick Johnson – BMO Capital Markets

You mentioned international. Just housekeeping. What was the percent of sales in the fourth quarter that came out of international markets?

Bruce G. Crain

In the gift business?

Gerrick Johnson – BMO Capital Markets

Or just in general. Just for the business in general. Your total business.

Anthony P. Cappiello

We don’t normally report that level of information.

Gerrick Johnson – BMO Capital Markets

Oh, okay. I thought you did. I thought you had 26% of sales in 2006 were international. No?

Bruce G. Crain

We can go back and check.

Gerrick Johnson – BMO Capital Markets

I’ll find it one of your reports. That’s okay.

Bruce G. Crain

Just remember, in our gift business, Gerrick, our international presence is quite significant. We’ve got a great presence and we’ve been working those markets, whether it’s Canada, UK, Australia, our very developed markets for our UK business and I think it’s part of our Russ brand strength around the world that we’ve really built over the last couple decades in a sense. On our infant and juvenile front I think we’re much less mature or just beginning those operations and we now have small operations in Australia, UK, and with Sassy we distribute to many, many countries around the world but typically through distributors.

Gerrick Johnson – BMO Capital Markets

Okay.

Anthony P. Cappiello

Page 57 of our K would have the year on it for you as far as the break out by country.

Gerrick Johnson – BMO Capital Markets

Okay. I’ll check that out. That was filed this morning. Right.

Bruce G. Crain

Yeah, last night.

Gerrick Johnson – BMO Capital Markets

Okay. And finally, you touched on the I and J segment and that was my last question I wanted to ask you. Were there any particular areas of strength in that segment for you in the fourth quarter?

Bruce G. Crain

I think throughout, if you look at our Kids Line business, our Sassy business, I think where we continue to have a great reputation is our design-led stuff. I mean, we I believe continue to get new placements and our strength and our reputation with our retailers and consumers is really built around our design and our brands. We also, as I mentioned earlier or Tony mentioned earlier, one of our great new launches I think last year for Kids Line was a relationship with had with the Carter’s brand which is also a nice pick up in business last year for us in Kids Line.

Gerrick Johnson – BMO Capital Markets

Okay. All right. Well, thank you very much.

Operator

Thank you. Our next question is coming from Nelson Obis with Winfield Capital.

Nelson Obis – Winfield Capital

Hi, there. I’ve just been reading your press release.

Bruce G. Crain

There are two of them, Nelson. Which one are you talking about?

Nelson Obis – Winfield Capital

I’m talking about your earnings release. When you’re trying to account for the negative impacts on the infant and juvenile gross profit you list a number of factors which again you’ve repeated on the conference call. The MAM agreement, market price constraints, etcetera, shift in product mix. There is an accounting custom that when you put the public statements out that the element which has had the most impact is mentioned first and then in descending order the impacts are listed right down. In this case the last one was unfavourable foreign currency fluctuations. Does the press release reflect this custom or are these sort of factors listed randomly?

Anthony P. Cappiello

I would say that these are factors listed randomly because we did not write it that way.

Nelson Obis – Winfield Capital

Okay. Do you care to mention which –

Anthony P. Cappiello

Well, the MAM write off of $10 million is obviously the most compelling charge that we have.

Nelson Obis – Winfield Capital

That’s obvious, yes. When you get below that were any of these particularly important in the gross profit impacts in the fourth quarter?

Anthony P. Cappiello

The currency issue, I’m not doing this in order of importance, but generally from the standpoint of areas that are most important, the currency issue again related to MAM is one of the larger ones.

Bruce G. Crain

Overall I think we continue to have a mix shift that I think it’s important to note in our infant and juvenile business. As I mentioned, Carter’s is a very important part of our Kids Line business. Again with Carter’s, it’s a great success for us but that does have slightly lower margin structures where we sell that product and it does have royalty components to it. So that mix is something we’re choosing to do as opposed to macro factors that are not in our control.

As I mentioned earlier, I think it was to Arnie, we’re very careful in those businesses to really work on the working capital side of it also. So while we might have slightly lower margin structures we’re very careful on the inventory front and obviously on the receivables front that maps into those changes and mix that we choose to do.

Nelson Obis – Winfield Capital

So your return on assets would be better there.

Bruce G. Crain

That’s exactly right. So we don’t want to look just at the margin structure.

Nelson Obis – Winfield Capital

Obviously there’s a relationship between higher raw material costs and pricing constraints. You did mention on the conference call that these pricing constraints could likely be moderated a tad going forward and a lot of times there’s simply a lag factor and the constraints do melt across the board. Is that kind of what you implied in your narrative earlier on this conference call that we could, on a lagging basis, begin to pass on some of these raw material costs as the year goes forward?

Bruce G. Crain

A couple comments. With our infant and juvenile business clearly most of our customer mix is with the larger national accounts. In those worlds, as most people would know, you don’t show up with a price increase and it’s not instantly implemented. There are lots of ways that you have to position it and they need to work it into their pricing structure and how that works. So we’ve been very active with conversations going back many, many months, if not a year ago now. They’re starting to see some of the fruits of that. So you’re absolutely right, there is a delay factor that goes on in that front. Again, I don’t want to get into specifics, but I think we’re feeling pretty good that we have successfully got some price increases through.

Let me repeat a point I made earlier though. Again, because we do such a large amount of new product introduction, again which h as a lag factor that when you get new lines in and new facings in and new placements, through that new product introduction process we feel we also can successfully get the kind of margin structures that we at least think are fair, that we need to work with our retailers on by showing them new design and basically re-engineer product. As opposed to trying to push pricing up. Because, I mean, at the end of the day we need to have good relationships with our vendor base and they’ve got to make their amount of profits over there also. So I don’t know if that answers, but yeah, I think there are certainly delays that come from a couple different angles. But we’re starting to see some of the fruits of that and/or our business model just lets us keep up with that.

Nelson Obis – Winfield Capital

Would it be fair to say that in the I and J arena that if you look at the sales dollars of products that you have created within the last three years that that number should be in excess of 50% of any annual revenue on an ongoing basis?

Bruce G. Crain

You’re talking about gross margins?

Nelson Obis – Winfield Capital

I’m talking about revenues. I’m talking about –

Anthony P. Cappiello

-- within the last three years. I think that’s a little high. I think that, I don’t know the exact the number, but I would say that percentage is a little high. It’s something less than that.

Bruce G. Crain

I mean, one of the things we try to do within that business is we have some very successful designs that we absolutely are going to keep in the marketplace because both starting with the consumer, but our retailers want us to keep that in place. So we constantly are changing out stuff that is either not performing or needs to be freshened up or picks up on current trend. But there’s a lot of stuff that stays in place because I think we’ve got some good leadership on the design front. That would be both in the Sassy business, the Kids Line business, and I think as everybody gets to know our CoCaLo and LaJobi acquisitions here and their business mix, there’s a lot of similar stuff going on there.

Nelson Obis – Winfield Capital

Okay. Thank you.

Operator

Thank you. Our next question is a follow up from David Liebowicz with Vernham.

David Liebowicz – Vernham

Briefly, was your markdown money greater in 2007 than it was in 2006?

Anthony P. Cappiello

On a percentage of sales basis I would say no.

David Liebowicz – Vernham

I’m not sure I understood that answer. I apologize.

Anthony P. Cappiello

Well, our sales volume was up in 2007 over 2006, so in dollar terms our markdown money might be a little higher, but as a percent of sales directionally we’re on 2006.

Bruce G. Crain

David, is your question in our infant and juvenile side or our gift side of the business or just overall?

David Liebowicz – Vernham

Why don’t we take infant and juvenile. I mean, the gift side, excuse me.

Anthony P. Cappiello

The answer’s the same for both. Generally our markdown money or whatever has been running on as a percent of sales 2006/2005.

Bruce G. Crain

I do think the one area, Tony, you can comment within our gift segment we continue to have again a mixed change of channel where we’re increasingly working with larger accounts and there’s more markdown money that goes on with them versus some of the independent areas.

Anthony P. Cappiello

Yeah, but in total as a percent of sales we do track it and it has been, you know –

Bruce G. Crain

Pretty constant.

Anthony P. Cappiello

-- pretty constant year on year.

David Liebowicz – Vernham

And do you do this on a quarterly rolling basis or do you put together your reserve at the beginning of the year and then you take it as used in each of the four quarters?

Anthony P. Cappiello

Yes. We do both. We do both on an accrual based on sales going out and applied as it’s being given or done.

Bruce G. Crain

It’s part of our budgeting process to anticipate all that as we build the budgets from scratch every year.

David Liebowicz – Vernham

Okay. And as a follow up to Arnold’s question then, are you saying that in the fourth quarter you did not have to throw some more dollars in because you hadn’t reserved enough?

Anthony P. Cappiello

I’m sorry. (Inaudible).

David Liebowicz – Vernham

In the fourth quarter did you put out more markdown money than you had reserved for?

Anthony P. Cappiello

Again, you know, on a quarter-by-quarter basis I’m not 100% positive. On a total year basis percentage sales wise we were in line. Whether we gave a little bit more in the fourth quarter or not I’d have to go back and do a calculation for you. I really don’t know.

David Liebowicz – Vernham

All right. The reason for the question is that would also account for some of the margin shrinkage.

Anthony P. Cappiello

Understand. Understand.

David Liebowicz – Vernham

Thank you very much.

Operator

Thank you. Our next question is also a follow up coming from Arnold Brief of Goldsmith Harris.

Arnie Brief – Goldsmith & Harris

A couple of things. First, I hate to do housekeeping on a conference call like this and take up other people’s times. But I have two phones that are down already for battery reason or whatever. So if Tony’s going to call me back it has to be on 973-313-0619. And that call back would be in relation to that gross margin of the gift business for the fourth quarter, but also for the SG&A number for the fourth quarter.

A question I have is on the two acquisitions. You’ve given us some information in the K that indicates that you’ve got costs of $63 million with another potential $20 million of an Earnout. You have indicated that it would be accretive on an earnings basis. I’m not sure, but I think in the K you said something about one of the acquisitions being bought at less than one-time sales. Is there any other information you can give us in terms of the costs versus sales or EBIDTA? In the lack of it I’m sort of assuming that you paid about seven times EBIDTA, but I don’t really know.

Bruce G. Crain

Arnie, I don’t think we made a comment. I think it was somebody else on the call making a comment of the relationship between the consideration for the business and its sales and which will be in both cases those numbers are disclosed. And the CoCaLo side of the business, you know, we’re not required to and we’re choosing not to.

In the case of LaJobi, we will be filing a lot more information because of the size of the deal somewhere here in the next three months, 75 days or something. So there will be a lot more data out on LaJobi in particular. And CoCaLo will get a relatively smaller deal.

Arnie Brief – Goldsmith & Harris

Okay.

Bruce G. Crain

Again, relative to the margin structure, I mean, as the custom here and as we’ve done with other businesses, we’re really not inclined to be breaking out that kind of stuff for competitive reasons and other reason, to not be breaking that out by individual business unit.

Arnie Brief – Goldsmith & Harris

Well, I was trying to get a multiple of the EBIDTA for the two companies put together. I’m not looking to break them out. I just gotta get some idea of the cost of the acquisitions relative to the cash flow.

Bruce G. Crain

I mean, as we said, it’s an accretive acquisition. We’re very comfortable with them. We think we bought them very fairly. I think again the LaJobi numbers I think we’ll reveal a little more data within 75 days to you.

Arnie Brief – Goldsmith & Harris

Okay. Thank you.

Operator

Thank you. There are no further questions. Please continue with any closing comments.

Bruce G. Crain

Well, look, everybody, first of all, thank you as the new guy on the block here. I hope today’s overview gives you a little insight on our strategies for 2008 and some more clarity on 2007. In particular I want to welcome our LaJobi and CoCaLo management teams and employees and everything to the Russ family. Added to that we’ve had some very collaborative lending partners as part of these deals and I want to thank them for that also. I look forward to communicating regularly with all of you throughout 2008. Thank you very much.

Operator

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.

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Source: Russ Berrie & Company Q4 2007 Earnings Call Transcript
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