Valassis Communications (VCI)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET


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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


Daniel Salmon - BMO Capital Markets U.S.

Daniel Leben - Robert W. Baird & Co. Incorporated

William Warmington - Raymond James & Associates, Inc.

Mark Zgutowicz - Piper Jaffray Companies

Mark Argento - Craig-Hallum Capital Group LLC

John Harloe - Barrow Hanley

Alexia Quadrani - JP Morgan Chase & Co

Edward Atorino - The Benchmark Company, LLC



Ladies and gentlemen, welcome to the Valassis Second Quarter 2011 Earnings Conference Call on the 28th of July, 2011. [Operator Instructions] I would like to remind you that the discussions during this conference call include forward-looking statements and 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 Form 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 on the homepage of the Investor section.

I will now hand the conference to Mr. Alan Schultz. Please go ahead, sir.

Alan Schultz

Thank you. I'd like to welcome everyone to the call this morning. Joining me today is Bob Recchia, our Chief Financial Officer. And after our prepared remarks, both Bob and I look forward to answering your questions.

I'd like to begin with sort of a midyear update with commentary on each business segment and some important initiatives, then I'll wrap up with some general remarks on the quarter before we take your questions.

Beginning with the Shared Mail business, the magic of this business continues to be its strong operating leverage. Our 3.3% increase in revenue drove the 17.5% improvement in segment profit. We continue to find new ways to operate this business more efficiently. We hit a new record low in unused postage of 13.8%, beating Q1's 14.9%, which was the previous record.

Both pieces per package and total packages distributed were up slightly compared to the prior year quarter. As you know, we had intentionally reduced package distribution as part of our optimization strategy during the last few years.

Long term, we anticipate package distribution growth to reflect U.S. household growth. We also continue to cycle through some of the lower-priced contracts during the first half. During the recession, Shared Mail prices have been declining in the mid-single-digit range, masking the unit volume growth in the business. In Q1, Shared Mail prices were down just 1% versus the prior year quarter, with Q2 down just 3/4 of 1% versus the prior year quarter.

We expect pricing to be a contributor to revenue and profit growth in Q3 or Q4 in the Shared Mail business. Lower price contracts will continue to expire as the year progresses. We are seeing some momentum in Shared Mail revenue, with a robust pipeline in the second half. We are expecting Shared Mail revenue growth in the back half of 2011 to be up in the mid-single-digit range.

In the last 30 days, however, we have seen some hesitancy from clients to move from planning programs to actually committing orders due to a number of macroeconomic reasons, which I'll get into later on in the call.

Moving on to the Neighborhood Targeted segment. As expected, we saw a significant decline in ROP revenue. This is not new news. During our last call, we discussed the ROP decline and estimated it would be down $60 million to $80 million for the year. This quarter, ROP revenue was down $20.8 million versus the prior year quarter. So it looks like the decline will be closer to the $80 million for the year.

In Q2 alone, the decline in ROP revenue represented a 3.6 percentage point decline in total company top line revenue versus Q2 in 2010. So actually, our non-ROP revenue was up slightly this quarter.

The change in ROP revenue is due mostly to reduced spending by 2 clients, one in the telecommunications category and the other in the energy sector. It is not surprising that Polybag and Sampling business was down in Q2 versus the prior year quarter. As our most cyclical product, it tends to follow economic news. We have seen some nice Polybag Sampling growth in Q1 when we were seeing signs of economic recovery. And as the economy slowed in Q2, so did Sampling revenue.

We are doing very well in Newspaper Insert volume. We have recently been targeting larger clients and although they may have lower margins at the Neighborhood Targeted segment, we managed these clients by looking at their overall spending and profitability and their overall profit potential across our entire product portfolio.

And with continued declines in newspaper circulation and coverage, this Newspaper Insert business we view as a great staging area for Shared Mail growth in the future. As we gain market share in Newspaper Insert spending, this business generates growth opportunity, not only for Shared Mail, but also for our Digital business.

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