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

Thank you, Cynthia. Good morning, everyone, and welcome to our second quarter conference call. Joining me today on the call is Steve Smith, our CFO. We released our earnings for the second quarter fiscal 2013 this morning. If you do not yet have our second quarter press release, you can find a copy within the Investors section of American Greetings' website at investors.americangreetings.com. As you may expect, some of our comments today may 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 SEC filings. Previous earnings releases as well as our 10-Qs, 10-Ks and our annual report are available on the Investors section of the American Greetings website. We will now proceed with comments from our CFO, followed by a question-and-answer session. Steve?

Thanks, Greg. In light of a purchase proposal that was announced on Wednesday, this conference call will have a slightly modified format. First, Zev Weiss, our CEO, will not be participating in today's call. Second, I will not be discussing the proposal that was announced Wednesday. Third, I will be restricting my remarks and the answers to questions during the question-and-answer period for the second quarter and first fiscal half, and we'll not be commenting on the balance of the fiscal year, either with regard to the company's performance or with regard to investments or uses of capital. I have 3 components to my prepared remarks today. I will start with comments on how the Clinton's transaction impacted our consolidated results this quarter, then move to a review of our reported segments, and finally, I will touch on a few key components of our financials. We will then open the line for questions, again, focusing on the year-to-date performance only. I would like to first start with comments on how the recent acquisition of certain assets of Clinton Cards is impacting our financial results. As you likely know, during the first fiscal quarter, we acquired the senior secured debt of Clinton Cards and incurred bad debt and other related expenses as Clinton Cards filed for administration. During the second fiscal quarter, we acquired certain assets from Clinton Cards for about $37 million, which included approximately 400 stores and related overhead as well as the Clinton Cards brand. If you cut through the financial noise associated with the Clinton's transaction, that is, if you put aside the Clinton's effect, within our core business, our revenue and operating margin are tracking slightly ahead of our internal expectations due to a combination of sales running ahead of internal plans as well as expenses,…

[Operator Instructions] We will take our first question from Carla Casella with JPMorgan.

This is Carla Casella from JPMorgan. I was wondering if you could just talk about the business environment, both in the U.S. and Europe, and whether you've seen any slowdown? We've heard a number of retailers and consumer product companies talk about a slowdown in Europe around the back to school timeframe. I'm wondering if you're seeing the same thing.

Well, Carla, the things that you're reading and seeing, we're seeing as well. The international environment is a bit difficult for us to parse, particularly in Europe because of the Clinton's transaction and the noise it's created in our financials. So not much more to add beyond what you've already read.

Okay, great. And then have you fleshed out any more of your timing or magnitude of your headquarters investment?

The project through the end of the fiscal quarter was running on time and on budget. We're not commenting beyond that at this time.

Okay. And then just one of the housekeeping. There's another $55 million of debt on the balance sheet. Is that all Clinton Cards? And where would that rank in terms of seniority and/or priority in the capital structure? Is that secured debt? Is it -- at an operating company level at Clinton?

Hi, Carla. It's Greg Steinberg. The incremental $55 million is actually borrowings under our senior secured revolver. And so, it's senior in the structure and it's under that particular facility. It's not specifically or directly related to the Clinton's business.

We'll take our next question from Andrew Brooke [ph] with Morgan Stanley.

So it appears that management team is very bullish on the long-term prospects for the company. With that said, what was the thought process you underwent as you weight the option of acquiring Clinton Cards, which is effectively the first foray you've made into retail versus investing further capital in Cardstore.com and your other e-commerce efforts?

The transaction with regard to Clinton's cards was driven by a long-term relationship that we've had with that group that is over -- is decades old. The environment that permitted the transaction was one where Clinton Cards needed a long-term capital to support a business model that had the brand that we believed in. And so we invested in that brand and those stores, and we hope that that's a good long-term investment.

[Operator Instructions] We will go next to Michael Schechter with Mentor Partners.

A couple of quick questions. What was the total systems refresh cost running through the balance sheet?

In the year-to-date period, $60 million was spent against the capital expenditures in the year-to-date period, Michael.

That's CapEx. But how much through the income statement?

We have that -- I think it was just over $3 million of systems refresh expense in the quarter. I don't know if we have it year-to-date with us, Michael, we'll look while we're sitting here.

Great. And same thing with the marketing cost for the -- extra marketing cost you've been building.

Greg, maybe you'll have that one?

Sure. In the quarter, it's about $3 million, bringing the year-to-date number to about $7 million for the marketing costs.

Okay, so that's, I guess, on a 12-month basis, about $22 million?

That's about right. Rounding both last year's figure and this year's figure.

So is this something that will continue?

Well, we haven't -- we have set the parameters where we won't comment about the future. And so I can't answer that question directly, Michael, I'm sorry.

Are you generating revenues from the prior marketing expenses?

We are generating revenues. As we've said last quarter in our conference call, the revenues are very small.

Okay. The fixture business, which you said was down, what's the -- what was going on there? How big was the delta year-over-year?

The -- we don't comment within segments, but the business is small to begin with. Some of their external customers are paring back their purchase of our wire fixtures for their stores. And it's hard to tell whether that's a continuing trend or not. It's only been during this particular quarter of first half.

Is it in -- if we look at your business in, like, 3 layers: the high end, the mid and sort of the dollar stores, is it one particular segment? Is it across-the-board? Is it one customer?

It's multiple customers within the fixtures business that are driving that deterioration.

Is it in one particular layer?

No.

Okay. And last, looking at the segment eliminations, is it fair to look at the revenue $15 million of revenue, $16 million of revenue, $7 million of -- or $14 million and $7 million, is that margin correct?

I guess, it would be correct for that inter-segment report, yes.

So if Clinton Cards were owned by a third-party or deconsolidated off the income statement, you'd be running a 50% margin on the sales to Clinton. Is that logical on a marginal sale basis?

So what you're seeing in our segment are just cost of goods, none of the other costs associated with doing business. So I think what you're concluding is a gross margin, not a full margin.

Okay. And is it fair to look at this and say -- and I know you can't talk going forward, but this would be sort of an annual run rate where this -- we'll see this elimination continually. And if we went backwards, you'd see a $28 million elimination?

Right. So it's hard to look forward, as we mentioned, this is a very seasonal business. I think there's 2 issues with answering your question that may make it complex in your question, Michael. First, we haven't resolved the full number of stores. And two, it's seasonal and we're still learning the seasonal pattern of this business.

Well I assume it's seasonal into Christmas and the spring holidays, which would make it even greater than $28 million on a trailing basis.

It could. We also have timing that relates to profits within the consolidated group because of moneys put into inventory. And so it's complex.

And you're still outsourcing some of the management to, I guess, Schurmann it was?

We are.

And just last on the headquarters, what's the spending been this year, to date, on a operating income basis and a CapEx basis?

Very small, less than a couple of million dollars, possibly less than a million. I don't have the figure in front of me.

So that really hasn't ramped up yet?

Correct.

We will take our next question from Jeff Stein with Northcoast Research.

Just one question relating to your share buyback. Wondering if the stock that you bought back during the quarter was under a 10b5-1 program? And if you could talk about the timing of when those purchases occurred.

Jeff, it's Greg. Generally, we don't get in the specifics on how we purchase shares and the timing of when we do it. So I prefer not to get into the real specifics. You've seen us over the past number of years use a variety of methods to repurchase shares. Some have been 10b5-1s. And so, I think, we should leave it at that for the historical share repurchases.

[Operator Instructions] We'll go next to Victor Anthony with Topeka Capital Markets.

I just have 2 questions, mainly on the on online components of your business. So in the licensing agreement with the Snapfish, help me understand how this does not compete with Cardstore? And if it does, what are you communicating about the Cardstore assets? And overall, can you just help us understand your overall commitments to the online social expressions space. That's the first one.

So, Victor, rather than having them be competitors, we see them as complementary. We look at using our intellectual property in multiple media, in multiple channels. This is yet -- Cardstore is yet another channel distribution of our intellectual property, including any character properties we would own or license from others.

Okay. So what's your overall commitment, I guess, to the overall social expressions space. Is that -- should we expect significant incremental investment there? Or given everything else you have going on, is it -- is it get pushed to the wayside?

Let me clarify. We are extremely committed to that social expressions space that is our business. If you're speaking directly to the electronic social expressions, we would hope over time to be the leader in that space as well.

Okay. So what are your plans for the holiday season in terms of promotion? And how do you see a similar -- or do see a similar or more intense competitive environment to last year?

Well, we're not commenting about the future. The competitive environment is intense.

Okay, all right. So my last question is really on comments you made on your last conference call, where you downplayed your long-term value of the bulk card business. We -- so you said, you're go-forward strategies to incorporate both the bulk and one-to-one. So I just wanted to get a sense of how big is the bulk card business today on Cardstore? And how big do you think it becomes in the future?

The bulk card business is small relative with the overall consolidated group as well as to the segment, the North American segment, which it fits. So we haven't broken out the level of revenue for you historically. We expect, because of its sheer size as an nascent business, to take some time before it becomes reportable. So the best I can answer is it's growing. We're investing in it. And without speaking to the future, we've been investing in it relatively aggressively in the recent past.

We'll go next to Kevin Vice [ph] with PrinceRidge.

A question on -- I think, you said that your gross margins were down because of mix. Is that within the wholesale business, or because of the mix to retail?

Our mix and our business is affected in multiple ways. We were speaking to the MLOPC element of our financial statement, the mix we were speaking to was a combination of types of units sold and the cost of those units sold.

Okay, so that would be within the wholesale card -- or wholesale card business?

Yes, it would be within the wholesale, the North American business, yes.

Okay. So is that trade down, do you think, from end customers? Or is there some other element to it that your selling more expensive cards that you're maybe not getting the pricing for?

I think it's yes and yes. We're seeing demand pull that is of higher quality cards. And we're seeing also demand pull of some units that are value.

Okay. Do you think over time you can -- you'll be able to get the pricing on those higher item or higher cost items?

We have historically not spoken to pricing strategy. We believe our customer pull is appropriate across all of the different levels of competition.

Okay. On the retail stores, can you say what percentage of the store you're providing product for? And maybe what your long-term target would be?

We haven't historically commented and we don't wish to today. Just sure of that mix percentage that we supply into the retail store operations.

Okay. Could you say maybe just directionally, do you think it will be going up over time?

Hard to say at this point. As we mentioned in our prepared remarks, that we're looking at the merchandising mix within the stores, and that it hasn't yet stabilized.

Okay. I was thinking about the elimination. And obviously that, that would go away once the product sold through, unless you're planning on selling more product internally.

Well, we would hope that, that channel would grow. And we will continue to grow with it.

Okay, great. And then can you say on a trailing basis what your consolidated cash flow is as defined by the Indenture, the bond Indenture?

We don't have that with us today.

Could I follow-up on that then?

Possibly, we'll have to check with others to see whether that's appropriate off-line or not.

Okay. And then, lastly, I was just wondering if you're in a position to say, to sort of update from the year-end percentage of voting shares that's owned by the family?

I don't have anything beyond which was filed in the 13B filing recently.

[Operator Instructions] And we will take a follow-up question from Carla Casella with JPMorgan.

I have one follow-up on just gross margins. I think you had talked a while back about some movement in gross margins, across business cards specific and looking at the different channels. I think you said there's not much difference in gross margin by distribution channel, meaning, whether it's sold through specialty store versus a dollar store, versus a drugstore. But can you tell us what you're seeing in terms of margin trends? Are consumers changing the card purchases into cards that either a lower or higher? And how are some of your initiatives working to improve the gross margin on the paper card business?

I can help, Carla, I can't answer the entire question. We don't typically speak to margin within the segment. We are seeing growth in the higher priced product. Look, the innovative product that we're introducing commands a greater price than average. And we're seeing consumers enjoy that product and pull-through at a greater rate than historically.

Okay, that's great. And I think you had talked also about doing some more private label or less product that needed to be licensed. Is there still any opportunity there?

Our licensing business, it goes through peaks and troughs, and we hope it will continue to grow. It's a cycle that's multi-year, not within a given year.

Okay, great. And then just looking at some of the add backs for EBITDA, I'm still a little bit confused in terms of what from the Clinton will be ongoing versus what is truly one-time.

So let's speak to what happened rather than what might be the future. In the quarter, as we shared in the transcript and if you look at the segment results, we would speak to the inter-segment and retail operations, both $7 million of operating drag associated within inter-segment items as well as the operating loss of $5 million in the quarter. That type of performance will continue to the extent that business continues. The items that are transaction-related relate to $4 million of transaction expense in this quarter. And Greg, do you have the year-to-date of transaction expense, please?

Sure. That's about $6 million on a year-to-date basis.

Okay. That will go away?

I would not typically repeat.

[Operator Instructions] And gentlemen, it does appear we have no further questions. Mr. Steinberg, I'll turn the conference back over to you for any closing comments.

Thank you, Cynthia. That concludes today's question-and-answer session as well as today's conference call. We do thank you for joining us this morning.

Once again, ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.