Jun 29, 2011
Operator
Good day, ladies and gentlemen, and welcome to the American Greetings Corporation First Quarter Fiscal 2012 Earnings Conference Call. Today's conference is being recorded.
Now for opening remarks and introduction, I'll turn the call over to Mr. Gregory Steinberg.
Please go ahead, sir.
Gregory Steinberg
Good morning, everyone, and welcome to our first quarter conference call. I'm Greg Steinberg, the company's Treasurer and Director of Investor Relations.
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 2012 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 the forward-looking statements, please see our annual report or 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?
Zev Weiss
Thank you, Greg, and good morning, everyone. Despite the continuing erratic economic environment, we achieved a record level of earnings per share for our first quarter, driven by a combination of the changes we made to our portfolio of businesses in recent years, our growing market share in North America and a continuation of good expense management.
Now let me share a few comments on our product leadership initiative and our outlook for the balance of fiscal year 2012, and then I'll turn it over to Steve to walk through our financials for the quarter. Our focus on product leadership continues to be recognized in our industry.
This past May, during the 23rd Annual International Greeting Card Awards, American Greetings was honored with 6 awards. Of the awards we won, one was the highest given out at the event, the Card of the Year award.
This was the second consecutive year we have won this award. This year's award-winning card is part of our Yakety Yaks line of cards that turn everyday objects into characters with funny songs and entertaining faces.
The card is designed to look like a hamburger that, after the press of a button, moves and sings to deliver a birthday message. It is a great example of how we bring technology to greeting cards to create an innovative and unexpected consumer experience and an experience that industry critics recognize as the best the industry has to offer.
However, not all product innovation requires technology embedded in the cards. Based on our research over the last few years, we have developed a new greeting card line designed to help our younger consumers connect with each other in innovative ways.
We call this new line of cards justWink, which includes more than 200 designs of paper greeting cards that engage younger generations by connecting paper cards with the digital world. Consumers are able to download an app for their smartphones and scan the Quick Response, or QR code, that's included on the back of each paper greeting card.
This QR scan allows consumers to extend their greeting card experience into the digital world with additional content for them to enjoy and share with friends and family. We will continue to execute product innovations in a way that is designed to drive interest and excitement in the category as well as meet the changing needs of today's consumers in retail stores or online.
This strategy supports our retail partner strategies, strengthens our industry-leading portfolio of products and ultimately helps consumers connect with each other in a special and differentiated way. Last quarter, we shared our outlook for revenue and cash flows for fiscal year 2012, and our first quarter performance was in line with our own internal expectations.
At this time, we are still comfortable with those full year projections. We expect our revenues for fiscal year 2012 to increase about 5% compared to the prior year and our full year cash flow from operating activities less capital expenditures to be between $80 million and $100 million.
This cash flow estimate includes approximately $5 million to $15 million use of cash with a combination of working capital, deferred costs and taxes. We expect our capital expenditures will be between $45 million and $50 million.
I will now turn the call over to Steve to walk through our financials for the quarter. Steve?
Stephen Smith
Thanks, Zev. I have 3 components to my prepared remarks for today.
I will start with comments on a few larger items that impacted our consolidated financial results this quarter, then move to a review of our reported segments and, finally, a quick walk-through of a few key items of our financials. We will then open the line for questions.
Our consolidated revenue was up $6 million or 1.5% from last year's first quarter revenue of $396 million. Included in our $402 million of revenue was a benefit from foreign exchange of about $8 million versus the prior year's first quarter.
But as a result of scan-based trading conversions, revenue was reduced about $2 million. So holding aside the impact from both FX and SBT, revenue was essentially flat.
Our operating income was almost $57 million compared to $55 million in the prior year's first quarter. Last year included about $3 million of costs associated with integrations of Papyrus and Recycled Paper Greetings.
However, we had scan-based trading conversions that negatively affected this year's operating income by about $2 million. Holding aside the integration costs and the effect of scan-based trading conversions, our operating income was about flat, quarter-on-quarter.
Before I walk through our segment performance, I would like to discuss 2 minor changes we've made to the presentation of our segment report. We've modified our segment report in 2 ways compared to how it was presented in recent years.
First, certain items that were previously considered corporate expenses and were included in the unallocated section of our segment earnings are now included in the North American Social Expression segment earnings. This change is the result of modifications to organizational structures and is intended to better align the segment financial results with the responsibilities of segment management and the way management evaluates the company's operations.
Second, historic as well as current period segment results are now only reported using actual foreign exchange rates for the periods presented. Previously, segment results were also reported at constant exchange rates to eliminate the impact of foreign currency fluctuation since the time of the prior period report.
As part of our 8-K filing this morning, we included prior period segment earnings reports under the new reporting methodology for consistency and ease of analysis. I'll now review those reported segments and how they differ from the prior year's results.
Our North American segment's revenues of $303 million were down about $5 million compared to the prior year's first quarter. About $2 million of the decrease was due to the effect of scan-based trading conversions.
The remainder of the decline was driven primarily by lower sales of gift packaging and other ancillary products. Our North American segment earnings of $60 million were down about $4 million versus the prior year.
Last year, we had about $3 million of expenses associated with the integration of Recycled Paper Greetings and Papyrus in the first quarter that did not repeat. This year, we had almost $3 million of higher costs due to increased activity within our part-time merchandiser group due to additional store rollouts, about $2 million of expense driven by the scan-based trading conversions, $2 million of additional bad debt expense and some additional spending on our information system's refresh project.
Switching now to our International segment. Revenues were about $70 million, which is an increase of $13 million versus the prior year.
The increase was driven by about $6 million of favorable foreign exchange and about $7 million of revenue from the recently acquired Watermark business. Segment earnings of $3 million was slightly up compared to the prior year.
The acquired business is performing in line with our expectations in the first quarter. Our AG Interactive segment's revenues of $17 million were almost $2 million lower than the prior year.
This was driven by lower advertising revenues and the effect of winding down our PhotoWorks website. Earnings for the segment were flat at $2 million versus the prior year's first quarter as the impact of lower sales was offset by reduced product management and marketing costs.
Let me shift from the segment analysis to briefly comment on the status of our licensing performance. Licensing revenue for the quarter, which is reported on our income statement as other revenue, was about $5.4 million, which is up $1 million compared to the prior year.
Licensing expenses were about $4 million, which is about flat compared to last year. So for the first quarter, the company's net licensing effort, or revenues less expenses, was about $1 million better than the prior year's first quarter.
Now let me move to the third part of my comments today, a review of several of our key components of our financial statements. The company's manufacturing, labor and other production costs were essentially flat compared to last year's first quarter on flat year-over-year sales with a combination of favorable product mix and savings associated through the RPG integration, offset by the impact of unfavorable foreign currency exchange movements.
Selling, distribution and marketing expenses were up about $6 million versus the prior year's first quarter. The increase was driven equally by foreign exchange and increased activity within our part-time merchandising group due to additional store rollout activities.
The administrative and general expenses were down less than $1 million versus the prior year's first quarter. While last year we had a few million dollars of expenses associated with the integration of Recycled Paper Greetings and Papyrus that did not repeat, this year, we had about $2 million of additional bad debt expense and some additional spending on our information systems refresh project.
The next item I will cover is taxes. Our effective tax rate for the quarter was 35.8%.
While this was slightly lower than the statutory rate, we expect our tax rate to be in the upper 30% range for the fiscal year. Let's now shift gears from a review of the income statement to a brief look at the balance sheet and cash flow statements.
On our balance sheet, accounts receivable were about $27 million higher than the prior year. The increase in the receivables balance was driven by about $8 million of foreign exchange and about $6 million of acquired receivables from the Watermark acquisition, while the balance was driven by the timing of collections across almost all of our businesses.
Inventories increased by $45 million compared to the prior year. About $18 million of the increase was driven by our need to build card and fixture inventory for expanded customer relationships, and about $8 million of the increase is related to a more normalized level of inventory across domestic product lines.
In addition, about $5 million of increase is the acquired inventory that was part of the Watermark transaction. There was about another $5 million driven by foreign exchange.
Moving to our debt position at the end of the quarter. Debt due within one year decreased $99 million compared to a year ago.
As you may recall, during last year's second quarter, we used cash on hand to repay the outstanding balance of our term loan. At the end of this year's first quarter, our total debt was $233 million with cash of about $211 million or net debt position of $22 million, which is a significant improvement compared to the year-ago quarter end.
We are very pleased with the rapid improvement in our balance sheet. Shifting to our cash flow statement.
One item I would like to mention is the accounts payable and other liabilities, which was $38 million less that were used compared to the prior year's first quarter. As we shared previously, we had accrued variable -- additional variable compensation 2 years ago in fiscal 2010 due to our better-than-anticipated performance that year.
The accrued variable compensation expense was paid during the first quarter of fiscal 2011. That pattern was not repeated the last 12 months.
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.
Debbie?
Operator
[Operator Instructions] And ladies and gentlemen, first, we'll go to Jeff Stein with Ticonderoga Securities.
Jeffery Stein
First off, I'm wondering if you could just elaborate a little bit on the revenue impact of the switch over to scan-based trading and the pretax impact. It seems that the 2 numbers are a little bit different, and I just want to try to understand that a little bit better.
Stephen Smith
Sure, Jeff. The revenue impact is approximately $2 million, just a touch under $2 million in our financials for the quarter, $1.9 million of net sales impact, and the pretax is an effect of negative $2.2 million, $2.3 million of a drain -- or a drag, the delta being some cost of implementation in the field.
Jeffery Stein
Got it, okay. So if we look at the -- now I think in the fourth quarter last year, you called out that there was going to be about $15 million of costs incurred this year with regard to adding new doors and IT refresh.
So in the first quarter, it looks to me like you incurred $3 million in the field, $2 million from the scan-based trading switch over, and then I think there was an unspecified -- unless I missed it, an unspecified cost on the IT refresh. And so can you kind of break out each of those 3 components?
I just want to make sure I have those correct.
Stephen Smith
Jeff, your math is correct. We aren't confirming the exact figures on systems refresh, but your math is very close.
And we are sticking with the cost for the rollout in the systems refresh in the aggregate being in the neighborhood of about $15 million of an increase fiscal '12 on fiscal '11.
Jeffery Stein
Got it, okay. So on the IT refresh, Steve, are those expenses going to come in kind of on a normalized basis, quarter-by-quarter, or is that going to be lumpy?
And I'm wondering how much of the $15 million would be the IT refresh.
Stephen Smith
So we haven't broken out the components of the $15 million because we don't want to get into the distinction between the rollout costs and the systems refresh, frankly. But it will be lumpy.
It will be a combination -- well, this -- in this number, we're talking about expense only, but there will be some cash spend also on the capital side associated with the systems refresh over time. And over time, to the extent that they're material, we'll share those with you.
Jeffery Stein
Okay. Now the revenue increase set in the first quarter was 1.2%, and you did have a negative impact from the scan-based trading.
So you're still guiding to 5% for the year, and I guess I'm wondering, what gives you the conviction that you're going to see an acceleration over the balance of the year?
Zev Weiss
Given what we see happening in the marketplace around some of the rollout of the new doors and the timing around that and what we see happening just from an overall POS perspective and the confidence that we have in the productivity of our existing space, we believe we can achieve that through the balance of the year.
Jeffery Stein
Okay. Can you give us any sense in terms of how many doors that you did add during the first quarter?
Zev Weiss
Jeff, we're not going to be releasing that kind of level of detail. But we're well into the implementation and -- but we're not going to get into the details of the numbers.
Jeffery Stein
Okay. Are the new doors providing the -- I guess, your targeted revenue -- meeting your targeted revenue expectations?
Zev Weiss
Just in general, when you look at the overall implementation, there's a lot of execution around it, and in addition to that is how the performance of the product works once it's at the door level. We've been very pleased with what we're executing and with what we're accomplishing at the door level.
Jeffery Stein
Okay. Can you talk a little bit about your North American greeting card sales during the first quarter?
And any comments at all with regard -- with the sell-through on Mother's Day and Father's Day seasonal programs?
Zev Weiss
Jeff, in general -- we'll just talk about cards versus some of the other product categories. And in general, with cards, we've been pretty pleased with what's been happening.
And there's still a little bit of softness in some of the other areas outside of cards, but it was a relatively good quarter for cards.
Jeffery Stein
Got it. And how about Mother's Day and Father's Day, any sense in terms of sell-through on those programs?
Zev Weiss
Yes, we're not going to get into the specifics around the holidays.
Jeffery Stein
Okay. Any comments at all just generally about retail traffic trends and what you're seeing in the stores, perhaps as you came out of the fourth quarter and going into the first quarter?
There seems to be some uncertainty now in terms of -- just generally what's going on at retail.
Zev Weiss
Yes, I think we would agree with that. We're seeing some inconsistencies, and there are certain retailers where their traffic seems to be holding up very nicely.
And there are other segments where it's not as consistent, and they're a bit more challenged. And I don't think it's a whole lot different than what we saw going in when we last talked.
And I think it just depends on where they sit in the spectrum of things, and it's playing out in the first quarter very similar to what we saw at the end of the year last year.
Jeffery Stein
Got it. And your licensing business.
After several quarters of decline, if stuff -- I know it's not a huge quarter for licensing, but is there anything going on in that business that we should be considering as we kind of model the other quarters?
Zev Weiss
No, I think we're pleased with the direction in the first quarter. And as you said, it's not a significant thing in terms of the overall numbers.
But the group had a very good first quarter, and we're hoping that will continue into the year.
Jeffery Stein
Okay. And final question.
With regard to Papyrus and RPG, are you making any progress in terms of adding those lines to your current customer base?
Zev Weiss
The response from current customers and potential customers continues to be very strong, and we remain very pleased with what that group is doing and with what customers are seeing from that group.
Operator
We'll go next to Hugh Denison, Heartland Funds.
Hugh Denison
You alluded to the strength of your balance sheet, which is certainly correct. And I'm curious, I see the share count went up just slightly during the quarter.
I wonder if you have any comments this morning on potential repurchases or dividend increases or the use of the cash that you expect to be generating during the course of the year.
Zev Weiss
There's not a lot new to share. And I think it’s our philosophy around what we want to do from a use of cash perspective is consistent with where we've been in the past in that we want to maintain a flexible balance sheet and then -- and once we've accomplished that, look for growth opportunities.
And we first look inside at what we can do organically, but then we'll also look at acquisitions as well. And then to the extent there's opportunities to give cash back to shareholders in the form of buybacks and dividends, we remain very open to it.
So philosophically, very much in line with -- and very consistent with where we've been in the past.
Operator
[Operator Instructions] And we'll go now to Sean O'Malley with Wedge Capital.
Sean O'Malley
Thanks for taking my questions. I just have 2 quick ones.
First, the margins in your non-reportable segments were very, very strong in this quarter. Is that purely the result of the strong quarter for licensing, or was there something else going on there?
Stephen Smith
Yes. And the non-reportables also had some other business activities within that segment that are doing well, too.
So it's licensing, but it's also some other very small businesses performing well.
Sean O'Malley
Okay. And then with respect to your cash flow guidance for the year, is that -- does that exclude the cash spent on acquisitions in the first quarter?
Stephen Smith
Yes, Sean. The cash flow guidance is cash flow from operations minus CapEx only.
So that does -- that excludes the acquisition.
Operator
We'll take a follow-up now from Jeff Stein with Ticonderoga Securities.
Jeffery Stein
Steve, wondering if you could talk a little bit about the gross margin improvement. You alluded to the fact your mix improved, but in prior quarters, you did talk a bit about product development costs beginning to go up, and you didn't comment on yields.
So I'm wondering if you could address those 2 issues.
Stephen Smith
Sure. So I can start, and others may wish to comment too, Jeff.
The -- it is the product mix in the first quarter that is improving on the MLOPC line item as we have a better mix of cards as a percentage of total revenues that is helping us. As we look forward through to the year, as we talked about in the earlier set of questions, as we continue to incur rollout costs associated with new stores, that will impact elements of the income statement incrementally year-over-year.
So it'll depend on the pace of the rollout.
Zev Weiss
I agree. I think that's driving the numbers.
Jeff, you asked about yield, and I think that's been relatively stable.
Stephen Smith
It has been.
Zev Weiss
But we're looking to see what you said, Steve. I agree with that.
Operator
[Operator Instructions] Gentlemen, we have no other questions at this time.
Zev Weiss
Thank you, Debbie. That concludes the question-and-answer portion of today's conference call.
We look forward to speaking with you again in our fiscal year 2012 second quarter conference call in late September. Thank you for joining us this morning.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's conference.
Have a great day.