Good day, and welcome to the American Greetings Corporation First Quarter Fiscal 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gregory Steinberg. Please go ahead, sir.

Thank you, Melanie. Good morning, everyone. As Melanie mentioned, welcome to our first quarter conference call. Joining me today on the call are Zev Weiss, our CEO; Jeff Weiss, our COO; and Steve Smith, our CFO. We released our earnings for the first quarter fiscal 2013 this morning. If you do not yet have our first quarter press release, you can find a copy within the Investors section of the American Greetings website at investors.americangreetings.com. As you may expect, some of our comments today include statements about projections for the future. Those projections involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We cannot guarantee the accuracy of any forecasts or estimates, and we do not plan to update any forward-looking statements. If you would like more information on our risks involved in forward-looking statements, please see our annual report or our SEC filings. Previous earnings releases as well as our 10-Qs, 10-Ks and annual report are available on the Investors section of the American Greetings website. We will now proceed with comments from both our CEO and CFO, followed by a question-and-answer session. Zev?

Thank you, Greg, and good morning, everyone. Today, I will cover 4 main topics. I will share a few brief thoughts on our first fiscal quarter results. Second, I will comment on our product leadership strategy. Third, a few comments about our online distribution of greeting cards through Cardstore.com. And lastly, a few comments on our acquisition of certain assets of the U.K. retailer, Clinton Cards. I am pleased with the overall performance of our core business in the first fiscal quarter. Holding aside the impact of Clinton Cards in the quarter, our operating margin was slightly ahead of our internal expectations, which was admittedly a margin target below our prior year. Versus our internal plan, we experienced a strong Mother's Day. Also during the quarter, we carefully managed expenses such that we were favorable to our internal expectations. Though due to both healthy sell-through of product at retail, as well as well-controlled costs in getting our market-leading product to retail, we had a good quarter in our core business. At the beginning of the year, we offered guidance for cash flow from operations minus capital expenditures, estimating that it would be approximately $45 million to $65 million for this fiscal year. Holding aside the impact of Clinton Cards, we seem to be on pace to achieve that level of cash flow. However, we recognize that this year's cash flow will be impacted by the Clinton Cards transaction. And as a result, we are not prepared to affirm or update our guidance at this time. Later during the year, we hope to provide additional context on our cash flow and how some of our larger projects may affect our cash flow including Clinton Cards as well as our systems refresh and headquarters projects. Now let me switch gears to our…

Thanks, Zev. I have 3 components to my prepared remarks today. I will start with comments on a few large items that impacted our consolidated results this quarter; then move to a review of our reported segments; and finally, a quick walk-through of a few key components of our financials. We will then open the line for questions. Our consolidated revenue was down about $11 million from last year's first quarter of $404 million compared to $393 million this year. Last year was negatively affected by about $2 million as a result of scan-based trading conversions. This year was also negatively affected by scan-based trading conversions by about $1 million. In addition, this year was negatively affected by about $3 million of foreign exchange compared to the prior year's first quarter. We also recognized noncash impairment of about $4 million related to our supply agreement with Birthdays subsidiary of Clinton Cards, which is reflected in total revenue. So holding aside the impact from scan-based trading conversions, FX and the contract impairment, revenue was down about $4 million or 1% quarter-on-quarter. The $4 million decline was primarily driven by $4 million of lower sales in our fixtures business. You'll see this revenue decline reflected in our non-reportable segment results. Our operating income was about $20 million compared to $57 million in the prior year's first quarter. Last year included the negative effect of scan-based trading conversions of about $2 million. This year included the negative effect of scan-based trading conversions of about $1 million. However, this year's operating income was also negatively impacted by about $23 million due to the Clinton Cards transactions. The $23 million reduction in operating income includes about $17 million for a bad debt impairment, a $4 million impairment for a deferred cost asset related to our…

[Operator Instructions] We'll go first to Jeff Stein with Northcoast Research.

A couple questions for you. First, starting with the North American Social Expressions business, if you look at the total revenue increase for the first quarter, it sounds like, anecdotally, you're telling us that the business was good but now revenue's only up 1.2%, so I'm wondering how you're measuring the success of that business. And also, I would think that perhaps maybe you would have seen a larger lift given the fact that a year ago, at this time, you had not fully rolled out the new doors from Dollar General. So maybe you could kind of talk us through what's going on in terms of retail takeaway, where are some of the strengths, where are some of the weaknesses.

Yes, Jeff. A couple of things. First of all, Mother's Day this year we were very pleased with and I think that drove some of what's making us feel good about the first quarter. Admittedly, some of that had to do with some of the timing around Mother's Day this year versus last year and the way Easter and Mother's Day fell out and so we had expected that it would be a good holiday, and it was definitely better than I expected. And so that caused us to be pleased. When you look at the overall takeaway in our card business from a revenue perspective, also continue to feel very good about the way consumers are responding to our product and then the performance we're seeing overall in retail. And so when you combine that with the fact that on the expense side, we -- I believe we managed things very tightly even though there was a significant amount of activity going on with the launching of justWink, getting that out into the marketplace and a number of other activities. Overall, I feel very good about it.

Okay. Let's talk for a moment about Cardstore.com. First of all, the increase in marketing spend for the quarter of $4 million, is that primarily related to Cardstore?

Yes, it is.

Okay. And can you talk at all about the level of revenues you're generating at this point from Cardstore?

No, we're not going to get into specifics around the revenue. At this point, given the size of the company, it's not significant enough that I think we will be disclosing it individually.

Okay. And you mentioned the fact that your P&L -- I want to make sure I understand the P&L impact of Clinton for the year. You mentioned a $10 million number. Now is that what you estimate the operating income, or should I say, the operating income loss to be from Clinton this year? Or is that an investment that you're making, for example, in severance costs, hiring of people and so forth? I just want to clarify that.

Yes. So the combined operating results, including all the transition costs that we have, so severance and other things, what we're saying is at this point, given where we estimate the revenue to be and I should share that, that right now it's very volatile because we're going through a period of time where their inventory was turned off by a number of suppliers and inventory's just getting turned back on. And so it's hard to estimate exactly where the revenue will level out. But based on everything that we see now, what we're saying is for all that, we believe, it will be less than $10 million of an operating loss.

Okay. And it sounds like you would expect also some operating loss the following fiscal year and then profitability the following year. So we're looking at profitability 2 years out?

We're saying 2 years out, we believe, it will be accretive.

Got it. Is the plan to continue to run this business indefinitely or would you rather fix the business, get it back on track and then perhaps try to sell it maybe to somebody like Schurman and let them run it and be back...

Right now, we have a -- I'm sorry, Jeff, I didn't mean to interrupt. Go ahead and finish.

No, no. That's okay. I think you kind of got the gist of the question. So it sounds to me like your plan is to run it?

Our singular focus right now is to turn around the business, and that's all we're focused on.

Got it. And with respect to the incremental revenues from Cardstore.com, $265 million, but you're going to be losing the benefit of the revenues that you were selling in on a wholesale basis. So net-net, are we looking at incremental revenues of something less than $265 million?

So for the Clinton stores, the $265 million was the net number.

Okay. And can you give us any assistance in terms of how you see Clinton affecting revenues in the second quarter and how the revenues would kind of lay out on a quarter-by-quarter basis?

No, we do not have that for this call at this time.

[Operator Instructions] We'll go next to William Reuter with Bank of America Merrill Lynch.

This is actually Spencer in for Bill. With the addition of Clinton Cards, can you guys talk about how that will affect your gross margins just kind of directionally?

Well, in the first year, Bill -- Spencer, sorry. In the first year, the expectation is it'll put pressure against our margins. Because of the operating loss, we'll incur expenses throughout the P&L for severance and for other costs of transition. And we haven't forecast publicly beyond that level.

Right. And then would you guys think that there would be opportunity there in 2014, and I guess, into 2015 as well?

Yes, that would be the hope. I mean if we're going to turn it into an accretive acquisition, we would need to be able to do that, yes.

Okay, great. And then one last one. Do you have any -- an update on the headquarter costs?

No, no update. We're still working through the architectural designs. And I would expect that, that would become -- those numbers would become a little bit more clear in the back half of the year.

Okay. And then I would assume it's kind of the same thing for the sale price of your current facility?

Yes, we have nothing new to update on that, yes.

And we'll go next to Michael Schechter with Mentor.

Do you have an estimate of how much revenue you lost on -- didn't occur because of the events at Clinton? I know you talked about the $4 million forecast there. Think about forgone revenue?

Yes, so I think what you're referring to is because when things were getting -- when they were getting challenging and we had turned the inventory off, is that the -- what you're referring to?

Yes. I mean if I just look at your revenue, it's down, but some of it's got to be because Clinton was in the can and then the revenue you were booking last year versus this year.

It was about $10 million in the quarter.

Okay. And if I heard all the numbers right, you put $56 million of cash into the asset. You've got $15 million of CapEx coming this year. You've got $10 million of losses on the P&L coming this year. That's $81 million. Another $15 million of CapEx. So all in, you'll have about $100 million?

Do it again, Michael. I think the correct figures are $56 million; the $15 million of CapEx, plus or minus $5 million; a loss of $10 million, which would be the total amount. I think you may have double counted one of the figures.

Well, then you said you're going to have to have CapEx over the 24 months so another $15 million after that.

Well, beyond. Beyond the first year. Very good.

Yes. So about $100 million of capital into this?

I mean I think we don't know the numbers yet beyond where we're at. I think the numbers that we're looking at right now are lower than that and then it will remain to be seen how the next couple of years play out.

And I noticed that you were buying back a lot of stock. What's left on the buyback and have you thought about a few authorization?

Well, at the end of the quarter, there was about $5 million left in the authorization, Michael. And I'll let Jeff comment on future thoughts.

Yes. I think in terms of moving forward, we're going to continue to look at it the way we've looked at it in the past. And we're going to look at the balance sheet, look at the growth opportunities that we have and that we're investing in and try to identify where we think there's some excess capital in the event we think giving money back to shareholders is the right thing to do. You're right, the past year -- in the past 12 months, the -- we've given a significant amount of money back to shareholders, somewhere in the neighborhood of $140 million. And we continue to believe that our stock is a value and that's going to be a consideration as we look at it going forward.

[Operator Instructions] We'll go next to Carla Casella with JPMorgan.

One question on Clinton. Pre this acquisition and bankruptcy, what percentage of your sales were to Clinton? And how much would you say that has changed through the bankruptcy process and how much do you think you can probably get back as you take over the stores?

We -- they were not a reporting unit, meaning we did not have to disclose them as being more than 10% in our consolidated sales. Just to be directional, they were in the neighborhood of 5% of the total consolidated group's sales. And we won't know how much our continuing sales will be until we know the number of doors that will remain open through administration. We're targeting $400 million. We're in the process of aggressively negotiating, Carla, the rents on those stores. And depending on how landlords react, that will determine the number of doors that remain open going forward with us.

Okay, great. And then Mother's Day you mentioned was strong and partly that was the timing of it. Is it also -- is it any indication of any general trend in terms of maybe your amount of space in the stores? And did you see the same kind of a trend through graduation or Father's Day?

I'd like to tell you that, in general, in the first quarter, we're just -- we continue to be pleased not just with the seasonal card performance but with our everyday performance as well. And I think Mother's Day had -- a lot of it was on our own doing from a product perspective. There was some benefit from a timing perspective. But when you look at overall, whether it's the spring holidays or our everyday card business, I'm very pleased with what I saw in the first quarter.

Okay, great. And does that also go for the, I guess, the margin on cards that you're seeing, is it that people are buying, what are higher-margin cards for you?

I think in general, not a lot has changed from a trend perspective around margins when we look at the first quarter. I think it's very similar to what we've seen in the past number of years.

We'll go next to Sean O'Malley with Wedge Capital Management.

A couple questions. First off, looking at the segment-level reporting. The fees affiliated with the Clinton transaction and the mark on the senior debt for a total of, I guess, about $9.8 million, is it safe to assume that those costs were booked into your unallocated segment?

Correct, Sean.

Okay. So then the bad debt expense went against your International Social Expression segment, correct?

It did, as well as the asset impairment, too, up in sales in International.

Right. The $4 million plus the $17 million. Got it.

Yes.

And I'm not sure if I heard the answer to the question correctly when Michael asked about revenue impacts in International, above and beyond the $4 million. But did you say it was an additional $10 million you estimate?

It was around that. That's correct.

So without the problems at Clinton, International would have had about $14 million in revenues for the quarter -- $14 million in additional revenues for the quarter?

Yes, that's right.

Okay, good. And then given the resources, both capital and human, that Clinton has absorbed so far and looks like it will be absorbing and looking at your CapEx for the first quarter x Clinton, it looks like the -- given your earlier guidance, CapEx is a little -- the pace is a little lower for this quarter than I would have expected. Have you -- are you adjusting plans outside of Clinton now as far as CapEx goes to reflect the additional resources that Clinton is going to require?

Well, the big driver for that is the work we're doing through what we're referring to as 1 AG [ph], our implementation around SAP. And because there's so much effort going on, we're sort of in the middle of the implementation, it would be a very difficult thing for us to turn down. Other more discretionary things we're obviously going to take a look at. Because between what's going on at Clinton's and the IT implementation, it's consuming a lot of people time as well as capital time. And so, we are scrutinizing some of the, what I’d call now more discretionary capital items given those 2 things.

And would you put the headquarters project into that category at least as far as timing goes?

Yes. What I would say there is we're scrutinizing those costs as well. And as we would be doing, it's obviously a much longer-term time frame.

[Operator Instructions] That will conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Steinberg for any additional or closing remarks.

Thank you, Melanie. That does conclude the question-and-answer portion of today's call. And we look forward to speaking with you again at our second quarter conference call in late September. We thank you for joining us this morning.

That concludes today's conference. We thank you for your participation.