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Edited Transcript of CSS earnings conference call or presentation 8-Feb-18 1:30pm GMT

Q3 2018 CSS Industries Inc Earnings Call

Philadelphia Mar 21, 2018 (Thomson StreetEvents) -- Edited Transcript of CSS Industries Inc earnings conference call or presentation Thursday, February 8, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Munyan

CSS Industries, Inc. - CEO, President & Director

* John M Roselli

CSS Industries, Inc. - CFO & Executive VP of Finance

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Conference Call Participants

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* John Butler Walthausen

Walthausen & Co., LLC - Portfolio Manager

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Judith, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSS Industries' Fiscal 2018 Third Quarter Conference Call. (Operator Instructions)

Chief Financial Officer, John Roselli, you may begin your conference.

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [2]

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Good morning, and thank you for joining our conference call to discuss CSS Industries' third quarter results for fiscal year of 2018 and our outlook for the balance of the year. With me today is our Chief Executive Officer and President, Chris Munyan.

During the course of this call, we will be providing certain forward-looking information. We ask you to look at yesterday's press release and read through the forward-looking cautionary statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to read through the sections of our press release that address the use of these items. The press release and related tables can be found on the Investor Relations portion of our website at cssindustries.com.

Now let me turn the call over to Chris for some opening comments.

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [3]

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Thanks, John. Good morning, everyone. Our third quarter results were mixed. Overall, we grew our net sales 11% year-over-year and our adjusted EBITDA 6%, driven by the acquisitions of McCall and Simplicity. Organically, our sales were down 6% year-over-year as our base business continues to face significant headwinds. As we discussed in our prior calls, our seasonal sales, which are known well in advance, were down year-over-year as expected. In addition, retail foot traffic remains low and our customers have been managing their inventory levels tightly. That said, we saw some improvement in orders in January, and we do expect stabilization in year-over-year trends in the fourth quarter after being down year-over-year for the first 3 quarters. At the midpoint of our revised guidance range, our base business would be up slightly in the fourth quarter compared to the prior year. As a result of the continued challenges we are facing in this retail environment, we're aggressively looking to reduce expenses, consolidate activities and accelerate acquisition synergies wherever we can. At the same time, we do not want to disrupt the business or cut our investments in key initiatives, such as information technology, e-commerce and supply chain. These investments are very critical to our long-term success.

While it has been a challenging year, there have been some highlights. The first is our cash flow generation. We typically consume cash through the first 9 months of our fiscal year, but this year our cash used for operations was $15 million lower than the prior year and this includes $3 million of incremental cash relating to acquisition cost. The improvement has been driven by working capital reductions, primarily inventory. At the end of December, inventory levels in our base business were down more than $10 million from the same period of last year, a 13% decline compared with a 7% year-to-date decline in sales. This is temporarily pressuring our gross margins, as we slow down our operations to burn off excess inventory generating fixed overhead variances. We also continue to push our vendors for better payment terms and we're seeing good progress there.

Second, we're very pleased with our new businesses: McCall and Simplicity. Integrations have been going well, and we remain excited about the new categories we now have access to and new opportunities we can explore with these brands.

The third highlight is tax reform. As a company with operations predominantly in U.S., the reduction in the U.S. federal corporate tax rate from 35% to 21% will have a meaningful impact on the economics of our business. In addition, we're able to repatriate our foreign cash and use it for strategic investment.

Lastly, as we noted in hour 10-Q filing, in December, our Berwick Offray subsidiary filed a petition with the U.S. Department of Commerce and with the U.S. International Trade Commission asking the United States to impose antidumping and countervailing duties on certain plastic decorative ribbons imported into the United States from the People's Republic of China. U.S. manufacturers of plastic decorative ribbons, including Berwick Offray, have been materially injured and are threatened with further material injury because imports from China are being sold into the U.S. at less-than-fair value. We believe that trade remedies, in the form of duties, are absolutely necessary to negate the effects of dumping from China and offset the unfair pricing advantage provided by improper governmental subsidies in China.

Now let me turn it over to John who will review the financials in detail.

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [4]

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Thanks, Chris. As usual, I will start by reviewing our sales performance by category and then move through the rest of the P&L to the balance sheet, cash flow and liquidity.

Net sales for the quarter were $130.6 million, which was an increase of 11% over the prior year. Sales from McCall, which we acquired in December 2016, contributed an incremental $6 million in the quarter and sales for Simplicity, acquired in November, were $14.9 million. Excluding these acquisitions, net sales declined 6% year-over-year, reflecting weakness in our seasonal and craft ribbon businesses.

Looking at our sales by category, seasonal net sales were $60.2 million in the quarter, down 9.1% from the prior year. The decline was primarily driven by lower Christmas and Valentine's Day sales. Lower Christmas sales were due to customer buy-downs and program losses in several product categories. The decline in Valentine sales was due to weaker customer demand to mass market retailers as well as the timing of shipments to a major customer where product normally shipped in the third quarter fell into January this year.

In our celebrations category, net sales were $34 million in the quarter, which was up slightly compared to the prior year quarter. Higher sales of all occasion greeting cards were partially offset by lower sales of packaging and wholesale products.

In the craft category, our net sales were $36.4 million in the quarter, an increase of 108% over the prior year. Excluding sales from McCall and Simplicity, our net sales in this category declined 12% compared to the prior year.

We continue to experience weaker-than-expected replenishment sales at a large customer due to, what we believe is inventory destocking of our ribbon and button products. End customer demand, based on customer point of sales data has stabilized, but our replenishment orders continue to lag POS.

Demand for our McCall sewing patterns products have been stable over the past 4 quarters since we acquired the business. We also have been pleased with the performance of the Simplicity business in our first 3 months of ownership.

Consolidated gross profit on a GAAP basis was $37.5 million in the third quarter compared to $37 million last year. Gross margin was 28.7% compared to 31.6% last year. As a reminder, our gross profit has been impacted by the accounting treatment of the sewing pattern inventory we acquired with the McCall acquisition, and this will continue, to a lesser extent, with the acquisition of Simplicity. GAAP rules required us to value this inventory at fair value, meaning the selling price to end customers less any discrete selling costs. This resulted in a $20 million increase in McCall inventory and a $10 million increase in Simplicity inventory. The inventory we acquired we'll sell-through with this stepped-up cost, resulting in little to no gross profit. This will reduce our profitability on a GAAP basis. To provide investors with a normalized view of profitability, we are adding back the step-up amount to our gross profit in our adjusted results to reflect the true profitability of these products.

Our adjusted gross profit was $42.7 million, an increase of $5.2 million from the prior year. Adjusted gross margin was 32.7% compared to the 31.9% in the prior year quarter. The higher gross margin reflects the improvement in our sales mix with the addition of McCall and Simplicity.

Selling, general and administrative expenses were $29.1 million on a GAAP basis in the quarter compared to $22.5 million in the prior year quarter. The increase of $6.6 million reflects the addition of McCall for a full quarter and 2 months of Simplicity, partially offset by a $1.3 million reduction in our base business.

Our GAAP operating income was $8.3 million compared to $14.5 million in the prior year. Adjusting for the McCall and Simplicity step-up amortization and integration-related expenses in both periods, our adjusted operating income was $16.6 million in the current quarter compared to $16.4 million in the prior year quarter.

Our effective tax rate in the quarter was 24.5% compared to 12.4% last year. The increase in the rate year-over-year was due to the $19.7 million nontaxable bargain purchase gain from the McCall acquisition, which lowered last year's effective tax rate.

Our current quarter rate was favorably impacted by the adoption of new tax legislation, which resulted in a net tax benefit of about $200,000. The net benefit consisted of a $3.1 million benefit from recalculating our deferred tax liabilities from 35% to the new rate of 21%. This was mostly offset by $2.7 million of tax expense related to the mandatory repatriation of unremitted foreign earnings and a reduction in state tax deductions. These were noncash adjustments in the quarter. The cash taxes related to the repatriation of foreign earnings will be paid over 8 years. On a full year basis, with the adoption of the new tax law, we expect our full year GAAP effective tax rate to be approximately 25% for fiscal 2018. Our tax rate on adjusted income is now expected to be 21%.

Going forward, we expect our combined effective tax rate to be in the range of 22% to 24%, which reflects our expected mix of income globally, and the inclusion of state taxes. GAAP net income for the quarter was $6 million compared to $30 million in the prior year. The large reduction was due to the $19.7 million bargain purchase gain in last year's third quarter as well as Simplicity acquisition-related expenses in this year's third quarter.

Adjusted net income was $14 million compared to $11.5 million last year. GAAP diluted earnings per share were $0.65 compared to $3.29 last year. Adjusted diluted earnings per share were $1.52 compared to $1.26 a year ago.

Turning now to the balance sheet and cash flow. We ended the quarter with $30.3 million of cash, which was essentially even with the prior year quarter. Inventory was $111 million at quarter-end, up from $106 million a year ago. The increase was due to the addition of Simplicity inventory, partially offset by lower McCall and base business inventories. McCall inventory has declined substantially year-over-year as we work through the stepped-up inventory from the opening balance sheet. As Chris mentioned, our base business inventory levels declined at a faster rate than sales, as we continue to focus on reducing our working capital investment. Receivables in our base business were flat with the prior year quarter despite a decline in sales. This was largely due to the customer mix and the timing of seasonal collections. We collected some larger receivables in the early part of January. Our past dues are in good shape, down $4 million from the same period a year ago. As of 12/31, we had $48 million of short-term borrowings, which reflects the amount drawn on our credit facility to finance the Simplicity acquisition. Last week, we executed a 5-year interest rate swap with a $40 million notional value to lock the interest rate on the majority of these borrowings at about 3.5%. Cash used for operating activities through 9 months was $10.4 million, an improvement of $15 million over the prior year, primarily due to reduced working capital that Chris had mentioned earlier.

Capital expenditures were $4 million through 9 months, even with the prior year. Year-to-date, we have returned $5.5 million of cash to our shareholders through our normal quarterly dividend.

Now let me turn it back to Chris.

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [5]

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Thanks, John. Let's turn to our outlook for the balance of this fiscal year. We're now expecting full year net sales to be in the range of $356 million to $362 million, which is an increase of 10% to 12% over the prior year. This is down from our previous range of $367 million to $379 million. Excluding acquisitions of both periods, we expect our base business to be down 5% to 7% versus the prior year. We're now forecasting a net loss of $9 million to $11 million on a GAAP basis due to the combined purchase accounting and transaction integration costs associated with Simplicity and McCall acquisitions. We expect adjusted EBITDA in the range of $23 million to $26 million, which is down from our prior guidance of $28 million to $32 million. The Incremental EBITDA contributions from Simplicity and McCall will be more than offset by lower earnings in the base business, resulting from the lower sales volumes and an unfavorable sales mix.

In closing, the overall retail environment remains challenging and this is again reflected in our revised guidance. We're working hard to stabilize our base business through product innovations and an increased focus on selling our products online. Our cash flow generation remains strong and our balance sheet is in great shape. Our plan is to continue making strategic acquisitions once we've successfully integrated Simplicity.

Operator, let's open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) You have a question from the line of Linda Bolton-Weiser with D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [2]

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So just in terms of the quarterly results. I mean, we had heard from other retail -- from other consumer product companies that there were some big mass retailers that reduced inventory. That there was inventory destock in the December quarter. So did you find that as well? And did you find it more among the mass retailers or among the specialty retailers that you deal with?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [3]

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Linda, this is Chris Munyan. Thank you for your question. We really saw that mostly in mass retailers. And we saw that so normally our products also get stocked heavily because there is a seasonal nature of them, in terms of, as they get used prior to Christmas and in most years, they would stock up during that seasonal period of time, and we saw that stocking did not occur.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [4]

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So you mentioned that you had some improved orders in January. So do you see that the destocking is over with? Or do you think there will be still some in the March quarter? And also, can you comment on, how your sell-through looks? Like, are you -- are the declines you're seeing in sell-through at retail mid-single digit, low-single digit, flat? Do you have any sense of what the trend is there?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [5]

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Again, sell-through for us, Linda, really -- it's Chris again, really related to seasonal categories where there is ship in and then it sells out and it comes off the shelf. Our Christmas sell-throughs, we can't provide specific data, but generally we're pretty positive and the retailers were happy with the results. And I think, some of the larger retail chains in some of our categories, specifically ribbons and bows for Christmas, did a little bit better than last year. To answer your question relating to kind of the first quarter destocking, at this stage, right now, order levels are kind of usually lower than they are historically than kind of in the fourth quarter for some of our craft products. But we don't really see kind of, right now, any additional destocking going on in this fourth quarter of ours.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [6]

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Okay. So I guess with regard to the guidance range for sales, I guess you said at the midpoint, it is kind of flat to up, but it is a wide range. I mean, the organic growth guidance range for the fourth quarter is negative 8 to positive 2, according to my calculation. So I guess the negative 8 would pertain to if more destocking activity started up. Is that why you would be so negative on the low end of the range? What accounts to the negativity on the low?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [7]

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I think that would really be -- I think it will be more tied to destocking or deferred orders that really could flop into April. And that's kind of really -- and that sometime happens in March where we expect certain orders and those orders get delayed to an April or May placement. And this is all replenishment orders. Seasonal orders that we get and our seasons of Valentine and Easter behind us. We know specific ship dates relating to seasonal orders, but sometimes there is variation on all occasions where retail will defer or push out an order. That was kind of -- that's kind of answers your question, it's really -- it kind of comes down to, March can be -- can have some variations for us. So we're just trying to be cautious in terms of what could flip into an April.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [8]

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Right. Got you. And then just on the EBITDA performance. You actually came pretty close to my EBITDA estimate. But I'm curious, you must have expected much higher EBITDA in the quarter. How close were you to your plan? And is the reduction for the year more related to the miss versus plan in the third quarter or more the reduction of fourth quarter expectations on EBITDA?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [9]

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Linda, this is John. Yes, we were very pretty close to our expectations for the third quarter. The issue is, we did have some -- due to lower volumes, we were right on sales in the third quarter relative to our thinking and some of the variances created from our manufacturing will flip into the fourth quarter that get capitalized and run through the P&L in the fourth quarter. So you've that effect plus additional softness relative to our prior sales guidance in the fourth quarter, which is leading up to the reduction in the overall guidance. So I mean, at the end of the day, it is really volume-driven, whether it's pure fall-through on the missing sales or some of the manufacturing issues under absorption that were created in the third quarter that we'll pay for in the fourth.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [10]

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Okay. But we still should see maybe gross margin therefore versus my model needs to be a little lower in the fourth quarter. But because of the mix effect of including Simplicity, we would still expect an adjusted gross margin that's up year-over-year on an adjusted basis. Is that correct for the fourth quarter?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [11]

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Yes, absolutely. Yes.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [12]

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Okay. And then just going go forward, I know you don't want to get into giving guidance for next year, but I'm just trying to think ahead to FY '19. And do you expect that you can actually stabilize the EBITDA in your base business such that the incremental EBITDA from Simplicity would just be -- would represent the EBITDA growth for the year? Is that the right way to think about it? And I am thinking the Simplicity is about $10 million of EBITDA, so you would have at least $5 million of incremental EBITDA growth in FY '19. Is my logic correct?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [13]

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Linda, this is Chris. I mean, one, our goal is to try to stabilize the business, and we're in the process of completing forecasts and budgets for this next coming year. But we're really not prepared to provide guidance at this stage. I know that's what you'd like, but we're really not prepared to do that. Our goal and belief is we can stabilize the business as long as there is not continual destocking going on. And we have innovative products and new products being launched and that's our goal, but we're just not prepared to guide on that yet.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [14]

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Okay. And then are you able to give any updates on synergies. McCall was acquired a couple of quarters ago. Are you realizing any synergies there? And when will the synergies regarding the Simplicity start kicking in?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [15]

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So Linda, Chris again. We've realized -- absolutely we've realized some synergies relating to McCall. Further synergies are going to be realized early next year as we integrate systems. So that's an open issue relating to McCall. And then Simplicity Creative, we indicated that we're going to have for $4 million to $5 million of synergies by kind of the end of year 3. But we're, certainly, going to achieve synergies into next year as we come off the TSA, and we integrate systems. But we can't indicate at this stage what that exact number is to be next year. But next year, we're definitely going to achieve synergies both in McCall and Simplicity.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [16]

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Okay. And then my understanding, John, was that the tax rate I should kind of put in my model on a normalized basis. In the fourth quarter is 21% for the fourth quarter, is that correct?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [17]

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Yes. So on an adjusted basis, that's the run rate that we're at, yes.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [18]

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And then maybe a little bit higher as you said for FY '19 going forward, 22% to 24%, right. Okay.

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [19]

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Right, correct.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [20]

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And then just in terms of your -- do you plan on -- it sounds like you plan on maintaining the debt balance as is, and not repaying it in the fourth fiscal quarter with your cash. Is that correct?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [21]

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That's right. But on a net basis, we should be pretty close to net debt 0, even a bit positive. But the debt will stay there with a swap against it to lock in the rate. Just recall -- remember, when you get into the early part of fiscal '19, we run into our seasonal working capital investment period anyway. So we'd be borrowing later on, or we could just maintain the borrowings we have to lock in the rate, take advantage of low rate environment that we're in.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [22]

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Okay. That make sense. And then just for my modeling in the fourth fiscal quarter, Simplicity, I guess, I was thinking around $20 million to $22 million of revenue just based on the run rate. Is that kind of okay for the fourth quarter?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [23]

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We're -- I mean, we're not guiding at that level. I think we -- did we provide -- I think we provided guidance on for the full year of $32 million to $36 million, if I recall. So yes, if you back into what we did in the third quarter I guess, you're in that zone.

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Operator [24]

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(Operator Instructions) Your next question comes from John Walthausen with Walthausen & Company.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [25]

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First of all, I want to say, we really appreciate the more detailed quarterly press releases you're putting out now. So it's a very good change that you've made there, so we appreciate that. Second thing, on the questioning about your debt structure now. Am I to understand that you would expect that debt to stay in place for 5 years? Or is it there pay down over that?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [26]

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No. It's drawn on our credit facility, so there are no -- it's not a term loan with forced amortization. Given that the amount of borrowings is relatively low, we still got lots of capacity on our credit facility. We can just carry that between $40 million and $50 million with that swap to lock in the interest rate for the foreseeable future. And the thinking there is that acquisitions will continue to be a part of our strategy, and we'll be in a borrowing position going forward anyway. Maybe this was an opportunity to take advantage of the rate environment that we're in.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [27]

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So to the question of acquisitions, you certainly seem to have executed well on the sewing patterns business. But there's probably not another opportunity out there. Can you talk about what the strategy in terms of acquisitions is at this point?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [28]

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Sure. John, it's Chris. I mean, our strategy, as we've outlined in some of our releases, is to grow within kind of 3 categories, craft, celebrations, which is kind of equivalent to the gift market, and the seasonal market. But our recent focus has been in the craft market. We believe the craft market is highly fragmented market with lots of players similar to the gift market is highly fragmented. And that there's lots of businesses that are family-owned or privately owned. And there's not a lot of strategic buyers and so our goal is to look for where we can identify true synergies. So where we've go-to-market synergies, product development synergies, operational synergies, reverse synergies like e-commerce. So these are the type of things that we're being very careful about. But that we're going to be a very strong value-based synergistic acquirer.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [29]

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You've talked a number of times about new product innovations, which is an attractive idea but it seems like a challenge in categories that are not growing to be -- I guess, to be optimistic about them. Can you talk about some of the things that you've done in the past year on new product innovation and whether you are increasing your spending on that or not moving forward?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [30]

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I think, John, relative to our spend, I think we're trying to do our best to shift our spend versus increase our spend and to shift it out of some of the categories that are tougher in decline and shift to categories whether it's in party-related or craft-related products. But as an example, we have products that are, sounds like a little category but, pet party, which is a big social media type of issue, and we'll get our products launching on Amazon very soon. So some of our new products we're going to be launching online different than in the past where we were launching only through brick-and-mortar. So I think that another opportunity for us is that our -- we're selling a lot more brick-and-mortar than we are selling online. So we're shifting some resources internally to focus on direct-to-consumer where we have definite brands, we can sell more direct-to-consumer as well as where we know, we're underrepresented on key places like jet.com as well as amazon.com.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [31]

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Can you talk a little bit about your strategy for online selling because that seems to have been a nemesis of a number of consumer companies because of the cost associated with acquiring customers and fulfilling orders.

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [32]

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Yes, sure, John. So I mean, we're kind of internally looking at it as an omni strategy. Our omni strategy is going to be continuing to focus on driving share in new placement of brick-and-mortar chains, two, focusing on places like amazon.com or other chains like that, but actually take stock positions. And we're actually gearing up staff in those areas to focus on that. And then three is identifying whether there is wide space opportunities for us to be selling into direct-to-consumer. And right now, with our recent acquisition in patterns, even though the patterns are great category, really what we also required was a fabulous amount of content. So we have tens of thousands of content relating to apparel and apparel design and apparel inspiration, which could create opportunities down the road for us. So we're really -- and we do have self site to sell direct-to-consumer now, offray.com, [urika.com], crgibson.com, []but we're looking for further opportunities to take advantage of kind of -- more likely the craft space.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [33]

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Okay. And then on the pattern business. Obviously, we don't -- we can see from the long-term that it's been a business in decline. Do we expect that to continue and what are the demographics of the actual consumers at this point?

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [34]

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John, this is Chris again. For one, based on what we are seeing and we don't publicize dollars of patterns, we're not seeing pattern sales in decline. Our pattern sales, since we've acquired McCall in U.S., are completely stable, flattish year-over-year. And so our opportunities going forward is to digitize patterns. So today we sell physical patterns, in the future going, not far into the future, we're going to be selling physical patterns and a huge comprehensive list of digitized patterns where a home sewer can take and print that on another printer, tile it out and do the same thing they could do with a physical tissue pattern. So the buyers of patterns, I think, are core sewers for some of our higher-end brands like McCall and Vogue, but then some of are also pushing more towards easier, simpler patterns for people who are entering into the sewing market today, which aren't looking for complex pattern as well as looking for the digital downloadable pattern. We think patterns, John, are really a very stable category.

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John Butler Walthausen, Walthausen & Co., LLC - Portfolio Manager [35]

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Okay, good. And finally on the McCall, the write-up of the inventory with the acquisition, I'm thinking that was a 1-year amortization. Now that we've passed the 1 year is that complete, or is there more to be amortized?

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [36]

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Well, so the shelf like of a pattern is a little bit longer than the year. It's between 15 and 18 months. So McCall was -- we're getting nearing the end of the McCall amortization, but now we've got Simplicity amortization that will run for another 15 months or so.

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Operator [37]

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There are no further questions at this time. I'll turn the call back over to the presenters.

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John M Roselli, CSS Industries, Inc. - CFO & Executive VP of Finance [38]

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Okay, well, thank you for joining our call. If there are any follow-up questions, please contact me. This is John speaking. My number is on the press release. And I will be available all day. So thanks for joining us. And have a nice day.

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Christopher J. Munyan, CSS Industries, Inc. - CEO, President & Director [39]

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Thank you.

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Operator [40]

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This concludes today's conference call. You may now disconnect.