Valassis Communications (VCI)

Q1 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

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Robert Recchia - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Director and Member of Executive Committee

Alan Schultz - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Robert Mason - Executive Vice President of Sales and Marketing

Analysts

Daniel Salmon - BMO Capital Markets U.S.

Daniel Leben - Robert W. Baird & Co. Incorporated

Mark Argento - Craig-Hallum Capital Group LLC

Mark Zgutowicz - Piper Jaffray Companies

TheStreet Recommends

Alexia Quadrani - JP Morgan Chase & Co

Charles Cerankosky - Northcoast Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Valassis Third Quarter 2011 Earnings Conference. [Operator Instructions] I'd like to remind you that the discussions during this conference call will include forward-looking statements, and the actual results could differ materially from those projected in the forward-looking statements. The factors that could cause the results to be materially different from those expressed or implied by such forward-looking statements are discussed in the risk factors and other sections of the 2010 Annual Report on Form 10-K and in the reports of Forms 10-Q and Form 8-K filed with the SEC. Also, the discussions during this conference will include certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the earnings release furnished with the current report on Form 8-K dated today, which is also available on Valassis' website at www.valassis.com on the homepage Investor section.

I will now hand the conference over to Mr. Alan Schultz, the Chairman, President and Chief Executive Officer. Please go ahead, sir.

Alan Schultz

Thank you, Pamela. I'd like to welcome everyone to the call this morning. Joining me today is Bob Recchia, our Chief Financial Officer; Rob Mason, our Executive Vice President, Sales and Marketing. After our prepared remarks, we look forward to answering your questions.

Overall, Q1 2011 financial results were in line with our discussion during our last earning call. Diluted earnings per share was up 39%, when you exclude the negative effect of the cost related to the first quarter 2011 tender offer for our 2015 senior notes, and of course, the positive impact of litigation settlement proceeds from the first quarter of 2010. Revenue was relatively flat versus the prior year quarter, driven by the impact of Easter shift to Q2 and also due to a $20 million decline in ROP revenue in our Neighborhood Targeted segment. Based on the trends we see today, we are projecting ROP revenue being down more than $60 million in 2011 versus 2010, due to client spending cuts in the telecommunications category and the energy vertical, as well as an overall decline in ROP spending. As you know, there have been some announced consolidation in the telecommunications industry, and I believe this is clearly impacting telecommunications spending in ROP. This projected decline in ROP revenue in 2011 could represent as little as 2.5% or as much as 3.5 percentage points of our overall 2010 annual revenue base. This current projected ROP shortfall, in a year where our 2011 revenue plan included more moderate volume growth and a price improvement initiative, will make it difficult for us to get to our mid-single-digit revenue growth goal in 2011. Based on our projections, we also expect Q2 revenue to be relatively flat. Fortunately, Run-of-Press is our lowest margin business. Therefore the decline in ROP revenue will not significantly impact our bottom line results. Although this is what we see today, I should also mention that it is early in the year, and as quickly as the ROP switch can be turned off, it can be turned on again. It is our shortest lead time product. Typically, ROP is used by our clients for its mass reach and quick response to changing market conditions. With one phone call, we can place very large orders within 24 hours.

So when you look at our current year and long-term plan to drive sustainable, profitable growth, we obviously have some choices to make. In a number of our product segments, we are moving from an environment of declining rates to an environment where contracts are including appropriate rate escalation to reflect the value we provide and cover anticipated cost increases, especially rising paper and transportation costs. Understanding all of this, we are not willing to compromise our goal of long-term profitable growth to achieve a single year revenue objective.

Regarding our other full year 2011 financial guidance targets, our confidence in the strength of the Shared Mail business in the second half of the year leads us to believe we are well positioned to achieve our other full year 2011 annual profitability guidance targets for full year diluted earnings per share, diluted cash, earnings per share and adjusted EBITDA.

The Shared Mail business delivered a strong performance this quarter. With revenue up just 3.1%, we drove segment profit up 33.2% versus the same quarter last year. There are a number of factors which lead us to believe that the Shared Mail revenue will grow substantially in the second half of 2011. Rob Mason is our Executive Vice President, Sales and Marketing who I introduced earlier, and is responsible for the sales forecasting process. He recently completed a second half 2011 bottoms up forecast for the Shared Mail business, which shows significant revenue growth compared to the first half of 2011.

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