Valassis Communications (VCI)
Q2 2012 Earnings Call
July 26, 2012 11:00 am ET
Robert A. Mason - Chief Executive Officer, President and Director
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Robert L. Recchia - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Director and Member of Executive Committee
James D. Parkinson - Chief Digital & Technology Officer and Executive Vice President
Mark J. Zgutowicz - Piper Jaffray Companies, Research Division
William G. Bird - Lazard Capital Markets LLC, Research Division
Townsend Buckles - JP Morgan Chase & Co, Research Division
Charles Edward Cerankosky - Northcoast Research
Daniel Salmon - BMO Capital Markets U.S.
Edward J. Atorino - The Benchmark Company, LLC, Research Division
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Valassis Second Quarter 2012 Earnings Conference Call. I would like to remind you that the discussion during this conference call will include forward-looking statements and that Valassis' actual results could differ materially from those projected in the forward-looking statements.
The factors that could cause actual results to be materially different from those expressed or implied by such forward-looking statements are discussed in the risk factors and the other sections of the 2011 annual report on Form 10-K and the reports on Form 10-Q and Form 8-K filed or furnished with the SEC.
Also, the discussion during this conference call 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 under the earnings releases and webcasts and presentations on Valassis' website at www.valassis.com in the Investors section. [Operator Instructions] This conference is being recorded today, Thursday, July 26 of 2012. And I would now like to turn the conference over to Rob Mason, President and Chief Executive Officer. Please go ahead, sir.
Robert A. Mason
Britney, thank you very much. Good morning, everyone. I'd like to thank you for joining us for our second quarter 2012 earnings call. With me this morning is Bob Recchia, our Chief Financial Officer. We're also joined by Jim Parkinson, our Chief Digital and Technology Officer. Jim has responsibility for the development and execution of our digital media strategies. And after some prepared remarks, Bob, Jim and I look forward to answering your questions.
So I look back at Q2, I believe it was a quarter defined by our leadership team's proactive steps to position our company for the future. Before I talk about our business segment performance for the quarter, I'd like to spend a few minutes talking about the actions we've taken in 3 very important areas.
First, we've increased our investment in our Digital business. The biggest news in this quarter was our $18 million acquisition of Brand.net. With this acquisition, we have taken advantage of a unique opportunity to acquire a talented team and a technology platform that will accelerate the growth of our Digital business.
This acquisition of Brand.net strengthens our ability to provide optimized media solutions across both print and digital channels by capturing a greater share of our clients' growing online budgets.
In the back half of 2012, we expect that Brand.net will represent around $12 million of incremental digital revenue, increasing our annual digital revenue target to approximately $42 million.
In an effort to fully leverage this asset and further accelerate the growth of our Digital business, we're investing in additional sales resources, product development and an experienced management team. Given this investment, we are projecting we will incur approximately $7 million in operating losses in the back half of 2012, resulting in an overall annual loss of approximately $14 million from digital operations.
Later on in the call, Jim will provide more insights into that acquisition, as well as our digital vision and strategies. As we continue to invest in digital and additional innovation, we also need to make sure we have the right resources focused on the right opportunities, which brings us to the second area of our plan. And that is the exit of 2 underperforming businesses that do not fit with our long-term strategic direction.
The rationale for our decision to exit the solo direct mail and newspaper polybag sampling businesses was clear cut and threefold. One, we have seen declining demand from our CPG client base, the primarily users of both of these products; two, both products were expensive to execute and are highest price products for these clients; and three, in the case of our sampling product, it takes secular decline based on its exclusive reliance on home delivered newspaper distribution.
In addition to the decision to exit these 2 businesses, we also executed a plan designed to right size our organization and focus resources and investment on our best opportunities to drive growth. We expect that exiting the solo direct mail and sampling businesses, combined with the efforts to right size our organization and reduce costs, were appropriate, will represent approximately $8.5 million in overall cost savings in the back half of 2012. Bob will be providing additional color on the financial impact associated with this initiative.
When you combine all 3 elements, increasing our investment in digital, exiting the sampling and solo direct mail product lines, as well as our efforts to reduce costs and align resources against our best opportunities, you can see how the second quarter was very much about positioning ourselves for our future.
Now I'd like to discuss some Q2 highlights on our individual business segments. Beginning with our Shared Mail business, we are pleased with the 3.4% topline growth, which was driven by gains within our restaurant, grocery and telecom categories, which make up roughly 50% of our annual Shared Mail revenue. Based on current trends, we continue to be on-track to achieve 3% year-over-year growth for the Shared Mail segment. While we saw some of the projected sequential improvement in Wrap sell-through in Q2, we still have some work to do in this area, which negatively influencing both revenue and flow-through. Shared Mail profit grew almost 10% versus the prior-year quarter.