Welcome to the American Greetings Corporation third quarter fiscal 2011 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gregory Steinberg.

Good morning everyone and welcome to our third quarter conference call. I am Greg Steinberg, the company's Treasurer and Director, Investor Relations. Joining me today on the call are Zev Weiss, our CEO; and Steve Smith, our CFO. We released our earnings for the second quarter of fiscal 2011 this morning. If you do not yet have our third 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'd 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'll cover three main topics. First, I will speak about our product leadership strategy, and show share some examples of our recent product introductions; second, I will give an update on the integration of Papyrus and Recycled Greetings. And finally, I'll speak about our outlook for the balance of fiscal year 2011. I am pleased with our overall performance here in the third fiscal quarter, while the pace of the economic recovery remains challenged. We have managed to maintain our level of revenue from our core business, due in part to introducing new and innovative products. The combination of relatively steady revenues along with good expense management has resulted in solid earnings for the quarter. Steve will provide additional detail about our financial results in a few moments. Our team continues to be focused on the product leadership strategy in our core business. We believe that product innovation is a key component of product leadership, as it will help to drive interest and excitement in the category, as well as meet the changing needs of today's consumers. Product innovation is executed in a way that full supports our retail partner strategies and ultimately helps consumers connect with each other in a special and differentiated way. As we have discussed in the past, product leadership also means getting four important variables correct, simultaneously the right card with the right presentation at the right time with the right price. Daily execution of this strategy in tens of thousands of retail stores is not easy. But that is our challenge and we believe that we are meeting that challenge. Let me give you a few examples of how we meet that challenge. My first example focused on our leadership role in using liquid crystal displays…

Thanks, Zev. I have three components to my prepared remarks today. I will start with comments on a few larger items that impacted our consolidated results this quarter. Then I will share a review of our reported segments. Finally a quick walk through of a few key components of our financials. We will then open the line for questions. Our consolidated revenues were down about $10 million or 2.3% from last years third quarter revenue of $440 million. Including this years $430 million of revenue, it was a benefit from foreign exchange of $1.7 million versus the prior year's third quarter. However, this year we did not benefit for about $9 million of revenue that occurred during last year's third fiscal quarter, because of our Party Goods transaction. So holding aside both the foreign exchange impact as well as the affect of the party good transaction, revenue was down about $3 million or less than 1%. Our operating income of about $56 million was up almost $14 million, compared to the operating income of about $42 million in the prior year's third quarter. Last year's operating income included $6 million of cost associated with the charges made in our Mexican operations as well as about $12 million of incremental variable compensation expense due to better than expected performance. Holding aside, both the changes made to our Mexican operations as well as the atypical verbal compensation expense last year. Our operating income was down approximately $4 million quarter-on-quarter, from a prior-year period of about $60 million to our current-year period of about $56 million. Let me now shift to a review of the reported segments and how they differ from the prior year's results. Our North American segments revenues were down about $17 million versus the prior year's third quarter. Approximately…

(Operator Instructions) Our first question will come from Jeff Stein with Soleil Securities.

A question first on your inventory levels. It looks like they were up about 7.5% year-on-year. I'm wondering if you could address that, because obviously that's a higher growth rate than you're kind of trending from the topline standpoint. Is there any increase in cost of goods and paper costs reflected in that? Maybe you could just explain why it's up so much.

Sure. It's really a reflection of several things. Cost of goods is a small piece of it, Jeff. We also have higher inventories due to the Recycled Paper Greetings integration, that's a new incremental carry, as well as some incremental gift packaging inventory at the end of the period.

And by the end of the year where would you expect your inventory levels to be relative to the prior year?

We generally don't forecast line items of our balance sheet or cash flow. We feel pretty comfortable about the inventory levels. We've driven down, as you know, over the last several years to what we believe to be a near-trough level. We wouldn't expect a whole lot of improvement from where we are.

Guys, in doing some channel checking, I have noticed that the RPG and Papyrus cards have been showing up, at least locally here in CVS stores. I'm wondering if you could just address the issue of potential growth in topline from those two businesses, because it seems that most of the discussion has been centered around cost takeout in terms of driving incremental earnings benefit from those two acquisitions, not topline. Are you seeing any new account penetration that you could discuss?

I think when we first did the acquisitions, we talked about the fact that we felt like the product lines had opportunities to grow within some of our retailers and with some new retailers. The response that we're getting for both of those lines has been very strong. And existing customers as well as new customers have been working with us and looking for opportunities. In some cases, we've been implementing some rollouts. And in some cases, we've been implementing some tests where we're evaluating what the performance could be and then figuring out how deep we can go with those product lines. But the demand for them has been every bit as good if not better than what we'd thought when we bought them.

If you could just talk a little bit about your free cash flow guidance for the year. You did indicate some upside. You talked about lower capital spending. I'm wondering if you could clarify what do you mean by balance sheet improvement, how that would affect your cash flow. And then do you see possibly any upsides on the operating income side from perhaps a better environment or cost reductions or any other factors?

So, Jeff, why don't we break it in three pieces? I'll speak to the CapEx and let Jeff or Greg speak to the other pieces of balance sheet improvement and maybe have Zev speak to the third piece of your question. On CapEx, we do anticipate coming in below by about 20% of our initial target forecast of about $40 million for this fiscal year.

With respect to other improvements on the balance sheet, Jeff, as you know, we're always working hard on receivables inventory, deferred costs and taxes. And one of the things you've seen a little bit more recently is some benefits by having our cash taxes lower than our P&L taxes. And I think there is an opportunity to continue that pattern throughout the rest of the year. And so that's where you'd see potentially a pickup on the balance sheet through possibly cash taxes.

On the operating side, there is two components to it. There is everyday and seasonal. On seasonal, looking at the back quarter, you've got Christmas and Valentine's Day, and we're hopeful that they're going to be positive just given the types of things that we're seeing in retail from a foot traffic perspective. I know at this time it's always hard to believe that. The last three days mean as much as they do for Christmas. And Valentine's Day remains to be seen. But there is so much business left to be done still for Christmas that it's too early to say where the seasonal of that is going to go. Valentine's, you'll see this year, given which day it's on, we're hopeful that it will be a positive year for us. But it's way too early to know that one. On the everyday side, the things that we're seeing in the back half of the year both from an overall comp store performance outside of our category, there are signs that things are better. Some channels are seeing bigger improvement than other channels. From that perspective as well as whether there is expansive opportunities, whether it's in the Papyrus and the Recycled area or in other parts of our business, gives us reasons to be hopeful. But I think it's too early now to say that that's something that you could depend on for the fourth quarter and the next year.

Zev, can you talk a little bit about the trends within channels, which channels seem to be gaining or losing or showing the best momentum right now? That would be relative to drugstore, mass, supermarkets and specialty.

I think if you look at the public information that's out there in terms of where there either is comp store sales increases or people reporting traffic increases, it seems like in two of the areas, almost in the extremes of the market whether it's on the higher side of the market from a specialty perspective, even with mass, or on the more value side of things, there seems to be strength. Some of the areas in the middle are better than where they were last year, but not as strong as maybe where those two extremes are in the marketplace.

(Operator Instructions) We'll go next to Gregg Hillman with First Wilshire Securities Management.

Those three new products that you mentioned sound pretty neat. Do you know what the price is for those products, typical prices for those three that you mentioned, Flipbook, Illuminotes and the LED-1?

There are different price points, and they range from $5 to up to $20. There are different degrees of technology in those. But they are generally higher-priced than our typical cards.

And have they been fully rolled out, those three products you mentioned?

Yes, they have.

Okay. And then just in terms of technology products in general, are they material to your sales at this point?

So I don't know how to define material. What I can tell you is, in terms of our overall offering, when you walk into our departments, the impact on the consumer varies in different doors depending on what the size of the department is, or the sales that are generated in that department. But when you combine those three examples, and there are many others as well, we do believe that it has a significant impact on the consumer when they come into the store. And at the end of the day that's probably the thing that we care about most.

What do you mean an impact? Do you mean they are drawn more towards the aisle and they might just look at the card because it would be interesting to look at and that would cause them to buy another card? Is that what you mean?

It's that and more. And I think when you go into the department we sign these cards in a way where they create a lot of impact. They are often fully faced, so we give them a lot of space in the display. And our hope is that in addition to buying that one card, then they continue to browse and buy other cards as well.

Just the other thing about character development at your company. I know in the past you developed that Strawberry Shortcake character and it went on to become a children's TV show that's still running. Is that an area that you would like to emphasize, to produce more characters that people love and are, in effect, eventually licensable?

That's an area that we have invested in the past. On TV right now there are a number of characters in the marketplace, beyond just Kibbers and Strawberry Shortcake. Obviously those two are some of our biggest ones. But where we have invested, we have characters out in the marketplace today and you will continue to see us do that into the future. So it is a very profitable and exciting part of our business and an important part of our business and I would expect to see that into the future.

Okay. I want to ask you about licensing, too, your attitude towards licensing intellectual property from other companies. I think Hallmark is licensing Peanuts and some Walt Disney characters. How do you make the decision to license? And should you be doing more licensing of other characters for your aisles, or other, if you get my drift?

Yes, we do a significant amount of licensing, both in the juvenile market where we do that quite extensively, and also content in the general market that's outside of characters. And our feeling is, wherever we can get the best content to present the best greeting card offering in the marketplace, we are going to get that content whether that's inside our company or if there are people that we can go to on the outside who can do some unique and exciting things for us, we will do that as well. So we have quite a few partnerships on both sides of that part of the market. And I would expect that to continue in the future.

So you're not biased against outside licensing?

Again, I think our focus is, let's put the best greeting card offering in the marketplace in front of our consumers. And wherever we can get that content, we will do it.

Our next question comes from Philip Lee with First Investors.

A few questions. One, can I infer from your Christmas comments that maybe things are positive so far into the Christmas season, although it's early? And then secondly, I heard Dollar General is going to be bringing your cards into half their stores. Could that be a meaningful benefit next year, maybe 3% or 4% of revenues for you?

I'll touch on the first one. As it relates to Christmas, the last three or four days are still important to us. But it's impossible to know how we are going to end up until we get through the last three or four days. And particularly with the way the timing works with a Saturday Christmas and how the weekend plays into it, it's just too early to know how we are going to end up. And I don't think it would be wise for us to share anything until we know how that all concludes. On the Dollar General side, there have been some announcements that have been shared on their side about opportunities that we've picked up. Having said that, we don't comment on specific customers and accounts. And that's normal practice and we've got to continue that into the future. So there's nothing that we can share on that.

And can you say at least in general within Dollar stores or even your typical channels, what percent of sales is greeting cards?

What I can say is that they have made some announcements and that obviously within their right to do that. But we are going to leave it at that at this point. If there are announcements that they have made that's fine, but we are going to stay away from sharing anything specific about the channel or specific customers.

(Operator Instructions) Our next question comes from Ron Gibbs with Platte River Capital.

Could you discuss AG Interactive in terms of the size of the business, its growth rates, and how profitable it is? And then also what initiatives you're taking in terms of social networking and such to grow that business?

So the overall business is less than $100 million in sales. It is a very profitable business. Overall sales have been steady, and within that steadiness there are some areas that are up and there are some areas that are down. There are a lot of changes as you'd expect that are going on in that business. And we think about that business not just from a revenue perspective but from an engagement, an overall consumer usage perspective. And social networking is an area that right now there is quite a bit of engagement happening. There is not really a business model around that. So we're not necessarily generating a significant amount of revenue yet. But we're very pleased with the progress that we're making from a social networking perspective in terms of getting customers engaged in our product and engaged with our company. And then, down the road, we hope to be able to translate that into opportunities to grow revenue, hopefully within our stores but also within the AG Interactive division.

(Operator Instructions) And it appears we have no further questions at this time. Mr. Steinberg, I'll turn the call back to you.

That concludes the question-and-answer portion of today's conference call. We look forward to speaking with you again at our fiscal year 2011 fourth quarter conference call in April. We thank you for joining us this morning and wish everyone a very happy holiday season. Thank you.

That does conclude today's conference. We thank you all for your participation.