Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

American Greetings Corporation (NYSE:AM-OLD)

F4Q08 Earnings Call

April 17, 2008 9:00 am ET

Executives

Greg Steinberg – Treasurer, IR

Zev Weiss – CEO

Steve Smith – CFO

Analysts

Kathleen Reed – Stanford Financial

Jeff Stein – Soleil Securities

Dax Vlassis – Gates Capital Management

Mike Hughes – Delaware Investments

Operator

Good day and welcome to the American Greetings fourth quarter 2008 earnings conference call. (Operator instructions). I would now like to turn the conference over to Mr. Greg Steinberg, please go ahead sir.

Greg Steinberg

Thank you Katie, good morning everyone and welcome to our fourth quarter conference call. I’m Greg Steinberg the company’s treasurer and I help manage our investor relations. Joining me today on the call are Zev Weiss our CEO and Steve Smith or CFO. We released our earnings for the fourth quarter of fiscal 2008 this morning. If you do not yet have our fourth quarter press release you can find a copy within the investor’s section of the American Greetings website at invenstors.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 10Ks, 10Qs and annual report are available on the investor section of the American Greetings website. We will now proceed with comments from both our CEO and CFO followed by a question and answer session. Zev.

Zev Weiss

Thank you Greg and good morning everyone. Today we will be sharing with your our fiscal 2008 fourth quarter results. In summary, I am pleased that we were able to achieve full year earnings per share from continuing operations of $1.53 which was right in line with our guidance. We were able to deliver cash flow above our guidance and we continue to make investments in our business to better position the company for the future.

This morning I have three sections to my comments. First I will take a step back and look at some of the investments we have made over the past year including both our strategic card initiative and our photo strategy. Second I will share a few high level comments on our financial performance and capital deployment. Third, I will conclude by sharing our fiscal year 2009 outlook. Then Steve will walk you through the details of our fourth quarter performance.

Many of you know that two years ago we launched an initiative at our core card business known as our strategic card initiative. This initiative was designed around the findings from enhanced consumer research. The enhanced consumer research was used to improve both the consumer shopping experienced and the relevance of products for consumers. The strategic card initiative was also designed to reduce inventory in the field, enabling us to flow subsequent product changes more frequently and efficiently. The strategic card initiative has progressed well over the last two years. We have reset thousands of retailer’s doors with new product and fixtures and subsequently placed new cards in tens of thousands of retailer’s doors.

We have made adjustments to the strategic card initiative’s rollout as we have identified opportunities for improvements along the way. And I expect we will continue to learn and to adjust. Our original goal was to achieve a mid single digit improvement in sales in the doors we reset. I am pleased that our performance in the fourth quarter has been tracking near that level. In addition to improving the shopping experience and the product relevance, we have also converted a number of retail partners to the scanned based trading model.

We expect that the strategic card initiative and scan based trading conversions would require an investment of $100 million over two fiscal years beginning in fiscal 2007. In fiscal 2007 we invested $66 million in the strategic card initiative and scanned based trading. In fiscal 2008 we invested an additional $34 million into similar efforts. The combined total of $100 million over the last two years was right in line with our original forecast. During our fiscal 2008 third quarter conference call we mentioned that we could exceed our two year investment by $10-$15 million due to additional scanned based trading conversions. The additional scanned based trading conversions did not occur in fiscal 2008.

We now expect a scanned based trading impact of $10-$15 million will occur in fiscal 2009. But it is hard to predict because of the technical complexities involved in scanned based trading conversions for our retail partners. Looking forward, we will continue to rigorously focus on our core product line. You should expect investments in our card business to be different in the future. Our focus will be on investing in creating content, product freshness and merchandising. The goal for these investments is to continue to drive point of sale performance in the most cost effective way.

Scanned based trading conversions will continue in the future, are expected to occur at a reduced level from where they have been over the last couple of years. Shifting from our card strategy to our photo strategy, we have studied the photo space for a number of years. We have seen user generated content grow and we have identified an opportunity for us to establish a leadership position in this growing channel of the social expression industry. As a way to expand our current product offering of online social expressions into an adjacent area of online photo sharing and photo personalization product, we acquired both Webshots and Photo Works during fiscal 2008.

Our photo strategy is designed to bring together the strengths of both the Webshots and Photo Works websites and then leverage the users across all of our existing websites. In addition we hope to enhance our online advertising model by driving consumer traffic across all of our sites. To further this effort we are developing products to link our websites and our own brick and mortar retail stores. That is our current strategy. Now let me comment on the integration of these acquisitions. There was a tremendous amount of work in integrating these operations, including both the information systems technology and the products.

Our team has done a great job so far and we are both on time and on budget with the integration efforts. Moving on to my next topic, our financial performance and capital allocation, fiscal 2008 was a good year for us. During the year on a consolidated basis we achieved earnings per share from continuing operations of $1.53 which was in line with our guidance of $1.35-$1.55. We generated cash flow from operating activities minus capital expenditures of $187 million which was $62 million above our forecast of $125 million. We used this cash flow to make two acquisitions and to return value to shareholders through share repurchases and dividends.

During fiscal 2008 we spent about $70 million on the two acquisitions. In addition, we repurchased nearly 7 million shares for approximately $150 million under two share repurchase programs. Over the past three years, we have reduced our total share count by about 40%. We also paid a quarterly dividend of $0.10 per share during fiscal 2008. Many of you may have seen that just last month no fiscal 2009, we announced an increase to our quarterly dividend making it $0.12 per share.

My last topic is our outlook for fiscal 2009. Like many of you, we are concerned about the strength of the US economy and the ensuing impact it may have on our retail partners and our consumers. Depending on how our retail partners are impacted by weakness in the economy, including consumer foot traffic at retail and the consumer’s discretionary purchasing, we could see events like retailer consolidation and door closures. While these events are a real concern for us, we expect our revenues to be flat to slightly up. We see diluted earnings per share in the range of $1.60-$1.85 and about $60-$80 million of cash flow from operating activities less capital expenditures.

Before turning the call over to Steve I would like to take a moment to recognize and thank Steve Willensky, our former head of sales and marketing for his contributions to our organization over the past five years. We respect Steve for his decision to retire and at the same time we are sorry to see him leave. We wish all the best to him and his family in the future. As a result of Steve’s retirement, I am pleased that we’ve been able to attract John Beeder to fill the executive sales and marketing roll. John has a wealth of business experience, particularly in the greeting card industry. We look forward to John’s contribution. 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.

Steve Smith

Thanks Zev. Today I have three sections to my prepared remarks. First a few comments on our consolidated revenues. Second a brief review of our business segments and third a walk through some of the key components of our financials for the fourth fiscal quarter. We will then open up the phone lines for your questions. Our reported revenues for the fourth quarter were $493 million which is down $3 million from last year’s fourth quarter or one-half of one percent.

Revenues benefited from two factors and were reduced by one. I will explain all three factors, the net result as that consolidated revenues were off after considering these factors about 3%. Revenues benefitted from both foreign exchange and lower spending on our strategic card initiatives. Revenues were reduced due to the sale of our candle product lines during last year’s fourth quarter. The revenue benefit from foreign exchange was $11 million over the prior year’s fourth quarter. We also had a $6 million revenue benefit versus the prior year as our strategic card and scanned based trading initiatives had less activity than last year’s fourth quarter.

You may recall that in December we expected our card initiatives would be an incremental drag on revenues and earnings fourth quarter on fourth quarter. However the higher expenses for scanned based trading did not occur. As Zev mentioned, we believe that about $10-$15 million of the possible spending anticipated in fiscal 2008 might now carry over into fiscal 2009. So, revenues benefitted from both foreign exchange rates and scanned based trading patterns in the quarter. What was the third of the three factors I mentioned? It was the fact that we sold our candle product lines in the fourth quarter of fiscal 2007.

That divestiture reduced our quarter on quarter revenues about $5 million. In summary, our revenue line was affected by three factors: foreign exchange, card initiatives and asset sales which when netted together and compared to the prior period increased revenues by $12 million. Said differently, our revenues were down about $15 million compared to the prior year’s fourth quarter or about 3% if you consider the impact of currencies, investments and divestitures. The components of consolidated revenue performance are best explained at the segment level.

Moving to the North American social expressions segment, segment revenues were $273 million which is down $12 million versus the prior year’s fourth quarter. Within the $12 million revenue decline, we had lower revenues of $5 million as a result of the candle product line divestiture last year and we had a $6 million revenue benefit versus the prior year as our strategic card scanned based trading initiatives had less activity than last year’s fourth quarter. If you hold these two items aside, revenues were down about $13 million on a comparable basis or about 4.5%.

The revenue decrease was driven almost exclusively by a change to our product line in Canada. In Canada, our products have historically been dual priced in both Canadian and US currencies. As many of you know, our prices are actually printed directly on the back of each card. With the strengthening of the Canadian dollar, dual priced cards created some challenges in the marketplace. To address these challenges, we created a new product line for Canada and the effect of implementing the new product line was a temporary reduction in revenues and a temporary increase in expense.

Shifting from revenues to earnings, our North American social expressions segment earnings were $14 million in the quarter which is up about $1 million versus the prior year. However, last year’s results included the $16 million pretax charge in the quarter associated with the sale of the candle product line. In addition, this year’s earnings benefitted from $6 million of lower spending associated with the strategic cards and scanned based trading initiatives versus the prior year’s fourth quarter. So taking into account the roughly $16 million charge in the prior year’s quarter and the $6 million earnings benefit from lower initiative spending this quarter, segment earnings were down more than $21 million on a comparable basis.

About one-half of the lower earnings were driven by the negative impact of the Canadian product line conversions I mentioned a moment ago. The other half of the decline was driven by unfavorable product mix associated with more technology cards imbedded in our product offering and various manufacturing and distribution costs. The bulk of the higher costs in manufacturing and distribution are likely to continue. However we do not anticipate incurring additional cost associated with the Canadian product line conversion beyond fiscal 2009.

Switching now to our international social expressions segment, revenues were $86 million which is up $15 million versus the prior year. This increase was driven by our European business. About one half of the revenue increase was the result of expanded distribution. A major factor within the other half of the revenue increase was the result of a comparison to a soft prior period. In the prior year’s fourth quarter, our European business executed some product resets that enabled new products to be brought to the shelf. Segment earnings improved $8 million quarter on quarter due to a combination of improved product mix and operating leverage on increase sales.

While our retail stores segment increased same store sales by 2.2% this quarter, total revenues for the segment were down almost $8 million as a result of fewer doors compared to a year ago. Our store door count is now down to 414 doors as we closed 22 stores during fiscal 2008. We will continue to evaluate our stores and close them when it makes economic sense. Based on our current forecast, we would expect to reduce our store count by about 25-30 stores during fiscal 2009 or roughly 6%.

Segment earnings were almost $11 million in the quarter which is an improvement of about $6 million versus last year’s fourth quarter. However, during last year’s fourth quarter we incurred store closing costs of $6.5 million as we exited several unprofitable stores early. If you hold these exit costs aside, our segment earnings were essentially flat quarter on quarter. Stepping back and looking at the full year for the retail segment, same store sales were up 3.6% while total revenues were down $17 million versus prior. The sales reduction for the year was driven by the reduced store count.

Segment earnings were a loss of $4 million this year compared to a loss of $16 million last fiscal year. About one-half of the $12 million improvement was related to the $6.5 million of store closing costs incurred during the fourth quarter last year with the balance of the improvement driven by improved product mix and lower administrative costs in the segment. As we have said in the past, our goal has been to get this segment’s earnings to break even. We have and will continue to work toward that goal. For the quarter, our AG interactive segment’s revenues were down $1 million versus the prior year. The decline in revenue is the result of exiting our mobile ring tone product lines last year.

The decline was partially offset by revenues from our new photo sharing websites. Segment earnings were down almost $3 million versus a year ago. While we realized some savings from exiting the ring tone business last year, these savings were offset by investments in the new photo sharing website. The photo acquisitions contributed approximately $4 million of revenue to the fourth quarter and were a drag on earnings of roughly $2 million also in the quarter. While we will not be reporting separate revenues and earnings for these businesses within the interactive segment during fiscal 2009, we expect the acquisitions to contribute about $25-$30 million in revenues. Earnings are harder to predict as we are still finalizing particular investments and expenditures for fiscal 2009.

With that said, we do not expect the acquisitions to contribute to earnings in fiscal 2009. While we generally don’t spend much time commenting on our non-reportable segment during our conference calls, let me at least mention that the revenues in this segment were down about $7 million quarter on quarter with the decline driven primarily by lower third party sales in our fixtures business. Let me pause here and explain the status of our licensing performance. Licensing revenue for the quarter which is reported as other revenue was just over $21 million which is down about $2 million versus the prior year.

Licensing expenses were about $20 million which is up almost $4 million versus last year. So for the fourth quarter, the company’s net licensing effort, revenues less expenses, was about $1 million which is down almost $6 million from the prior year’s fourth quarter. The change was principally driven by higher production costs for the development of animated productions. Now let me move to the third of my three topics this morning, a review of key financial statement items. The company’s manufacturing labor and other production costs or MLOPC were essentially flat with the prior year’s fourth quarter.

However within this flat performance we actually had favorable product mix in our international segment and our retail segment which was offset by a negative mix in our North American segment and the higher entertainment development costs supporting our licensing efforts. Selling, distribution and marketing costs or SD&M were also flat versus the prior year. Within SD&M, last year we incurred about $6.5 million of expenses associated with the accelerated closure of 60 of our retail stores. However this year we incurred higher order filling merchandising and distribution costs particularly in the North American business versus the prior year’s fourth quarter.

Administrative and general expenses were down almost $1 million quarter on quarter due to a continuing effort to lower corporate overhead costs. The corporate overhead savings were partially offset by higher information technology expenses within the quarter. Other operating income improved $16 million versus the prior year. Last year’s results included a $16 million loss associated with the sale of our candle product lines. Holding aside this loss from last year’s performance, other operating income was flat. Continuing down the income statement, interest expense was $2 million lower than last year. This decrease is the result of both lower debt levels during the quarter and lower amortization of deferred financing costs.

Moving on to taxes, our quarterly tax rate was a negative 22% while our full year tax rate ended at approximately 33%. The fourth quarter rate of negative 22% was primarily the result of two factors. First, we restructured and consolidated several of our foreign entities and this lowered our future tax liabilities. And second we recognized additional interest income on our net tax positions. I am pleased that the full year rate was below our original forecast of the high 30’s. For fiscal 2009 I would expect our annual effective tax rate to be in the mid to upper 30’s. Let me now shift gears from a review of the income statement to a few other major items found in our financial statements. We had an exceptional year in our accounts receivable and we reach a 20 year low in absolute dollars on the balance sheet.

We brought receivables down $62 million which is $42 million lower than last year’s $104 million yearend balance. This was driven by both ongoing conversions of customers to scanned based trading and continued strong performance by our collections team. As we’ve discussed in the past, when we move retailers to scanned based trading, one of the results we often see is an improvement in payment terms. Looking forward it is unlikely we will continue to see much improvement in our accounts receivable. Also on our balance sheet you will see that our net deferred costs ended at $338 million or down about $25 million compared to the prior sequential quarter and down $52 million from the prior year end.

I note that at $338 million, this account is now less than one-half of the $725 peak they achieved in the first quarter of fiscal 2004. Said differently, this account has reduced by nearly $400 million during the last five years. Looking forward we don’t see that rate of improvement continuing. The four line items and deferred costs in our balance sheet at the end of the year’s fourth quarter were, one prepaid expenses of $119 million, two, other assets of $338 million, three, other current liabilities of $68 million and four, other liabilities of $51 million. On our cash flow statement, let us look at capital expenditures for a moment.

The company spent $57 million this year which is right in line with our estimate of $50-$70 million. Next year we again see our capital expenditures between $50-$70 million. As we have mentioned at the beginning of last year, we have a wider band for capital expenditures principally due to the investments we are making to refresh our information technology systems. Let me move to my last topic, share count. Zev mentioned that during the fourth fiscal quarter the company purchased approximately 4.7 million shares of its common stock for about $97 million.

Approximately one-half of the repurchases were completed under the $100 million share repurchase program we launched in April of last year with the remainder made under the new $100 million share repurchase program we launched in January of this year. We are assuming we will complete the $100 million share repurchase program we launched this year during fiscal 2009 and I would expect that our full year average shares outstanding will be around 48 million shares. So 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. Katy.

Question-and-Answer Session

Operator

(Operator instructions). And we will take our first question from Kathleen Reed with Stanford Financial.

Kathleen Reed – Stanford Financial

Hi, good morning everybody. I guess first question, just a little more clarity on your tax rate, so by my calculation a 33% rate for the full year versus an assumption you know previously in the high 30% range for the year is like a $0.15 swing in earnings, so even using $1.53 minus $0.15 you still get more towards the low end of your full year guidance and I just wondered if something came in a little bit less or lower than you had expected, if there was a swing factor? Was it really the Canada situation which I have a follow up question on as well or was there some other issue that was a little bit then worse to offset the $0.15 incremental benefit?

Steve Smith

Sure Kathy, actually I’ll widen out your question to hit two pieces, one that you may ask again later or ask later regarding the scanned based trading performance as well. So if you look both at the tax rate, which you’re correct, was around $0.15 and then the under spending if you will against scanned based trading which is worth roughly $0.10, it’s about a $0.25 difference from our expectations in December.

There were really three items that impacted us in the fourth quarter that would address that $0.25. The first item was the costs or were the costs associated with the implementation of the new product line in Canada, that account for about 50% of the delta. Second of all we had some additional film production costs which were higher than anticipated, that was about 25% of the delta. And third our retail store operations did not perform as strongly as expected either at Christmas or at Valentine’s Day and that was the bulk of the remainder. So those three items, the Canadian line, the film production costs and the retail store performance really address your question.

Kathleen Reed – Stanford Financial

Okay and I guess just to elaborate on the Canadian, the changes that you made to Canada, can you just explain that a little bit more, you know dual prices, that you’ve had I guess for a really long time, so now you’re moving to one price and so is it that you had to take the inventory back and put new cards out or can you just give us a little more information there?

Zev Weiss

Yeah, there’s a couple components to it. I’ll just share on two of them. Two of those components are, one of them was what you describe which is there’s a lot of physical changing going on at retail in order that there is some kind of a cleaner transition than this product turning over very slowly. And the second has to do with ramping up production in order to make that happen in a relatively short period of time. And there are others as well but those are two very big components.

Kathleen Reed – Stanford Financial

In your prepared remarks somebody mentioned something about technical cards and then manufacturing costs. So like the manufacturing costs I guess would continue because you’re still doing that but what is it, did I misunderstand that technical cards?

Zev Weiss

Yeah so those are cards that have either lights or music or lenticular or a combination of all three and I think that’s correct, I would expect that to continue.

Kathleen Reed – Stanford Financial

Okay. Steve can you actually give us the card actual charges not the delta year over year but the actual dollars spent on the card program and scanned based trading and what line items they were in the fourth quarter and then for the year.

Steve Smith

So here you’re looking for the effect of scanned based trading and the card initiative, sure so for the fourth quarter the revenue effect of the two of them, we can get offline into the details if you’d like but the revenue effect of the two of them was around $16 million. And the EBIT impact of the two of them was around, a little bit lower but $15.5 million, $15 million. So for the year Kathy the revenue impact of the two card initiatives was $31 and the EBIT impact for the fiscal year was $34.

Kathleen Reed – Stanford Financial

Okay and can you, in your guidance, my last question I guess for fiscal 09, can you give us what you’re assuming for you know is it $10-$15 for the card program and scanned based trading or was that just the minimum amount and if you can quantify the amount of spending on your IT program and your integration charges because I’m assuming your new guidance includes all of the spending for all of that.

Steve Smith

Sure, why don’t I maybe hit the beginning of that conversation about SBT and maybe let Zev address the IT component. On the SBT portion of your question, for next year we anticipate at least $10-$15 million which is the carryover from prior but not a whole lot more beyond that at this time. The challenge that we have is always anticipating when these particular negotiations close. There’s a lot of technical complexity in executing the scanned based trading arrangements and it’s really a dynamic where both parties have to be in lock step in order to launch the initiative. And maybe Zev wants to talk a minute or two about the IT.

Zev Weiss

Yeah, we’re, as we announced, we’ve begun by picking a software vendor for us and that was a move that we made towards the end of last year and something that obviously is ramping up for this year. This year will be much more around getting ready for, starting some serious implementations that will happen starting this year and then it will probably ramp up I’d say in FY10 and beyond. So you’ll see this beginning in this year, both in terms of preparing as well as probably the first couple of, I call them the early implementation moves that we’re looking to make with SAP.

Kathleen Reed – Stanford Financial

Can you quantify that at all?

Steve Smith

Sure, we’re not going to give a specific figure this year but the primary reason that cap ex is up year on year, we expect will be related to IT spending. So we do have some IT in our capital budget for fiscal year 2009 as well as in our income statement but we haven’t quantified the specific amount Kathy.

Kathleen Reed – Stanford Financial

Okay and the last piece is just any integration charges for Webshots or the other one that you can quantify?

Steve Smith

We don’t have any integration charges beyond what’s already been absorbed in our fourth fiscal quarter which was a couple million dollar drag on earnings.

Kathleen Reed – Stanford Financial

Okay, great, thank you very much.

Operator

And we will take our next question from Jeff Stein with Soleil Securities.

Jeff Stein – Soleil Securities

Morning guys. A couple questions, wondering if you could just talk about the biggest pieces that would account for your forecast of lower free cash flow this year?

Steve Smith

Well the biggest reason for the delta would be the fact that we’ve already harvested from the balance sheet both the accounts receivable and deferred cost assets. Those have been significant contributors as add backs to cash flow over the last few years, not just fiscal 2008 and we’re not expecting as much if any add back in fiscal 2009 Jeff.

Jeff Stein – Soleil Securities

And would that, could you isolate the deferred cost piece of that Steve?

Steve Smith

Yeah, no we haven’t as we’ve done historically Jeff, we haven’t broken out deferred costs separately from the working capital in the fiscal year. So we prefer not to.

Jeff Stein – Soleil Securities

Okay and just form a very high level can you just talk a little bit about how you see higher earnings per share on relatively flat revenues, I assume there’s some benefit from share buybacks but is there anything else?

Steve Smith

Yes, it’s a combination of several factors. You know you mentioned share count, we will expect to have less interest expense, the combination of those two Jeff should be worth somewhere in the neighborhood of $0.15 earnings per share. We should also probably benefit from lower scanned based trading spending that would be worth in the neighborhood of $0.10. You know I think those are the major drivers.

Jeff Stein – Soleil Securities

Okay and inventory increase, can you explain that pieces that accounted for the 18% inventory increase year on year?

Steve Smith

Sure, let me give you a couple of the major ones. So you noted there’s been a $34 million increase, the majority of which are the increased content for these technology cards which have a higher cost that Zev mentioned a few moments ago with Kathy, that’s one. And two, the inventory associated with the Canadian product line. In addition there was a little bit more, a small amount for the scanned based trading relationships since we carry those at wholesale and lastly a little bit of FX in our balance sheet.

Jeff Stein – Soleil Securities

Can you talk about the growth in technology cards, what percent of your mix does that account for today versus LY and would that continue to consume working capital on a go forward basis?

Zev Weiss

I wouldn’t call it a large percent Jeff, I don’t know if I can give you the exact number, it’s not a large percent, it’s possible that you’ll see that growing. It’s very hard to predict you know how big it will get and how long lasting it will be because we’re always trying to make sure we understand where the marketplace is and how consumers are responding and then we try to make sure that the product is there to reflect that. So not an easy one for us to predict. But it’s not a large percentage of the total offering.

Jeff Stein – Soleil Securities

Okay and final question, can you talk about the number of doors that you have reset with new product over the past two years and this would exclude Wal-Mart and Target and how many doors you would guesstimate you will reset this year?

Zev Weiss

In terms of new product including our full customer base, including Wal-Mart and Target I mean we had shared in the script tens of thousands and I don’t have the exact number but we’re talking about from a product perspective, a major part of our door base. In terms of reset activities, it’s very much in line with the resets that we had originally anticipated you know which is not 100% of that door base but a pretty significant percentage.

Jeff Stein – Soleil Securities

Okay, thank you.

Operator

And we’ll take our next question from Dax Vlassis with Gates Capital Management.

Dax Vlassis – Gates Capital Management

Hey, how’s it going, I’m just wondering if you would explain a little bit more what’s going on with the royalty business, why the expenses were so high and you know you said you were making investments and could you just give us a little bit more details on what’s going on in that segment.

Steve Smith

Sure, I’ll start and maybe Zev will have some additional comments. On the expense side Dax we had some higher production costs for entertainment development in the quarter. That’s the primary reason for the degradation in the EBIT line, what we call revenues less expense. And maybe Zev would care…

Zev Weiss

Yeah you know if you look at the business it’s composed of a couple of very strong classic properties in Care Bears and Strawberry Shortcake and we’re developing a number of new properties that are in their very early stages and so part of what you’re seeing is the costs associated with the development of those properties.

Dax Vlassis – Gates Capital Management

Okay and what about as far as acquisitions sort of direction the company is going to take, it seems like you made a couple in this sort of digital photographs and photo sharing sort of space, I mean do you have enough of a base there or where would your strategic, where would your strategically be looking for acquisitions if any?

Zev Weiss

It’s a difficult one to predict in terms of, not in terms of where we’re looking but in terms of what we could actually get closed just because of the way the marketplace works around acquisitions. I think what you’ll see is we’re going to be focused in continuing to grow our core business and if there are acquisitions that make sense for that in terms of overall social expressions, we’ll be interested.

And the other one is in the interactive area, we’ll look at opportunities to broaden our social expressions presence in the interactive world whether that’s in photo, cards or other areas. So we’re always looking in those two areas and it’s hard for me to say whether you could anticipate that there’ll be something happening, it’s just too hard to tell that. Those are the areas that we’re looking.

Dax Vlassis – Gates Capital Management

And one last question, you said something about break even in retail, do you expect to reach that this year or what timeframe are you kind of looking at that?

Zev Weiss

Yeah we are hoping to reach that this year, so it’s an immediate timeframe.

Dax Vlassis – Gates Capital Management

Okay, thank you.

Operator

We will take our next question from Mike Hughes with Delaware Investments.

Mike Hughes – Delaware Investments

Good morning, a couple of questions, just kind of an accounting question first, on the current assets deferred and refundable income on the current side declined by about $60 million year over year and then on the long term side there was an increase of about $80 million, what’s going on there?

Steve Smith

Sure Mike what you’re seeing are just some changes within the tax accounts but if you take off four of them, the deferred refundable short term, deferred and refundable long term, income taxes and then deferred income taxes and you add them all up, compare them to the prior period, you’ll see there’s less than a $5 million swing. It’s just some re-class due to if you’re interested FIN 48 and some other accounting, FAS 158, that’s occurring within our balance sheet.

Mike Hughes – Delaware Investments

Okay and then what’s your assumption as far as raw material cost increased for fiscal 09?

Zev Weiss

We’re seeing what everybody else is seeing and it varies depending on the commodity. In some cases we’ve got longer term contracts in place that could either eliminate the increase in the short term or soften the increase but in many cases we’re dealing with spot markets and dealing with the same increases everybody else is seeing.

Mike Hughes – Delaware Investments

So what have you assumed as far as a dollar amount increase 09 versus 08?

Zev Weiss

I’d prefer not to get into that.

Mike Hughes – Delaware Investments

But is it safe to assume you’ve baked in a fairly good cushion, sizable increase?

Zev Weiss

Well you know again we’re doing the best we can looking at the market, I don’t think we’re necessarily the best predictors of commodity prices but we kind of look at where we are today and make what we think is the most accurate prediction for the year.

Mike Hughes – Delaware Investments

Okay and then last question, any reason you’re not disclosing the costs related to the upgraded IT systems?

Zev Weiss

I think the reason is because our anticipation is this is going to be an ongoing investment over a pretty long period of time and it’s part of our day to day operations.

Mike Hughes – Delaware Investments

Okay, thank you.

Operator

We will take a follow up question from Kathleen Reed with Stanford Financial.

Kathleen Reed – Stanford Financial

Hi, I think when you were giving your segment revenue results, the international sales were up over 20% year over year in local currency and I think you had said part of that was due to Europe new distribution and I just wondered, you know it seems like the UK and Europe has been a really negative region for you for a long time just as some changes in the way people are shopping and if you could elaborate on if you’re seeing any improvement in that or was this growth like on all [studis] and new accounts and therefore that business should continue until we anniversary it?

Zev Weiss

I actually think that the market environment continues to be as challenging as its been over the last number of years and a lot of the forces that we were seeing in the last number of years continue today. I think that group has worked extremely hard at adjusting the operations to accommodate that.

So they’re getting some benefit from increased distribution and some of it is just continuing to work at the efficiency of the business and we’re seeing some of that improvement because of that. So we hope that it’s something we would consider to be steady.

Kathleen Reed – Stanford Financial

But that, like that 20% increase, was that some new accounts you signed on, so again we should, that’s new business that won’t anniversary until the fourth quarter of 09?

Zev Weiss

There were two components to it, one of them had to do with the new distribution the other piece had to do with some of the, they had some operating costs that were in their top line and in their bottom line in the previous year that they didn’t lap. So you know the hope is is that that would continue as well. We wouldn’t take on more of those operating costs.

Kathleen Reed – Stanford Financial

Okay and then also just on your fixtures business, I know that’s not a very exciting piece to talk about but is that business eventually going away or is that just third party suppliers of fixtures that you sell to other, you know either other card companies or other companies that use your fixtures, is that a business that will eventually go away?

Zev Weiss

No, it’s not, it’s a business that, it’s an important strategically important business to us because it supplies our greeting card business for fixtures and obviously that’s an important thing for us.

That business has from time to time excess distribution depending on how many fixtures they’re shipping to American Greetings and they contract out that excess distribution to other people who want merchandising vehicles, most of the time outside of the greeting card business. And depending on their excess capacity year to year, they’ll sell different amounts out. And so that’s why you’ll see that fluctuation from time to time.

Kathleen Reed – Stanford Financial

So with the results down does it mean you bought more of their fixtures or does it mean that somebody else, I mean I think it means the other demands from the other product categories were down.

Zev Weiss

It could be either one and in this case it was probably more likely the latter.

Kathleen Reed – Stanford Financial

Okay and then can you just, your overall view for the economy for 09 I think you said it remains challenging, I mean are you seeing any changes with retailers or consumer shopping patterns? I mean you have a lot of retailers on scanned based trading so that obviously helps your inventory levels and their inventory levels of cards but is there any other tell you can give us on what you’re seeing for some of your products? I think the perception is a lot of your product line is pretty discretionary.

Zev Weiss

I don’t think we have any insights into what’s happening to the economy or to retail that you wouldn’t pick up from others. We’re seeing the same thing that you would see reflecting in our partner’s announcements about their own numbers. So yeah it’s the same thing that you’re reading about and seeing you know the same thing that is, what we’re seeing and what’s guiding our perception about next year.

Kathleen Reed – Stanford Financial

And then the last question, share repurchase I think you said you bout 4.7 million shares, half was through the $100 million program from April and half was through the $100 million program that you announced this January, can you just talk about if you bought any then in the first quarter of 09 or if you could just give us how much you have remaining?

Steve Smith

Sure, we aren’t going to comment about purchases within the quarter, so I’m limited to what we’ve said about through the fourth quarter Kathy which you’ve just restated.

Kathleen Reed – Stanford Financial

So, for the $100 million program I could just take half of 4.7 and then subtract that from $100?

Steve Smith

Correct.

Kathleen Reed – Stanford Financial

Thanks.

Operator

Thank you and with no additional questions in the queue I’d like to turn the conference back over to Mr. Greg Steinberg.

Greg Steinberg

Thank you Katy. That concludes the question and answer portion of our conference call today. We look forward to speaking to you again at our first quarter earnings release which is anticipated to occur in later June. We thank you for joining us this morning.

Operator

Thank you that does conclude our conference call today, we appreciate your participation, you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Greetings Corporation F4Q08 (Qtr End 02/29/08) Earnings Call Transcript
This Transcript
All Transcripts