Business News

Valassis Announces Financial Results for the Quarter Ended March 31, 2008

Thursday 01. May 2008 - Another Strong Quarter; Momentum Continues

Valassis (NYSE:VCI) today announced financial results for the first quarter ended March 31, 2008. We reported quarterly revenues of $597.1 million, up 65.3% compared to $361.3 million for the first quarter of 2007 (which excludes revenue for ADVO, Inc. for the period of Jan. 1, 2007 through March 1, 2007). Revenue increased 2.1% compared to pro forma revenue for the first quarter of 2007 of $584.8 million. This increase is due primarily to revenue growth in the Shared Mail segment. First quarter net earnings were $12.4 million, up 10.2% from $11.2 million in the first quarter of 2007. First quarter earnings per share (EPS) was $0.26, up from $0.23 in the first quarter of 2007. For the first quarter of 2008, adjusted EBITDA* was $63.2 million, up 47.0% from pro forma adjusted EBITDA* of $43.0 million for the first quarter of 2007.

“We are pleased with our performance, the third consecutive quarter of exceptional results in light of the difficult market conditions. This positive momentum is evidence of the strong strategic rationale behind our shared mail acquisition, our integration game plan and our outstanding execution of this plan. By focusing early on cost synergies and optimization of the shared mail business, we have significantly improved its cost structure and operating leverage. Our efforts in sales training and the launch of our new targeting system have set the stage for cross-selling and long- term profitable revenue growth starting in the second half of this year,” said Alan F. Schultz, Valassis Chairman, President and Chief Executive Officer.

Some additional highlights include:

Continued Momentum in Cost Management
— Business Optimization: We continue to make substantial improvements in
the management of the shared mail business. Our optimization
initiative, designed to reduce over-supply and deliver more profitable
packages, has increased the profitability of the shared mail business
and contributed significantly to our performance in the last three
consecutive quarters. This initiative resulted in the elimination of 46
million packages in the first quarter of 2008 versus the first quarter
of the prior year. The revenue associated with this reduction in
packages, combined with the revenue loss from the discontinuation of
the detached address label in May 2007, represents a 3.9% revenue drag
in the first quarter of 2008.
— Cost Synergies: Cost synergies are on track to meet our 2008 target of
$38 million.
— Integration: Integration is near completion in all major functions of
the company except IT systems, accounting and finance.


Driving Profitable Revenue Growth
— Cross-selling: We are pleased with our ability to offer optimized
solutions that blend shared mail and newspaper distribution. In
addition, we have secured planned incremental newspaper placement
contracts from shared mail clients. We expect to realize most of this
revenue beginning in the second half of 2008.
— New Clients: We are on track to meet our 2008 objective of 4,000 new
clients.
— Targeting System Launch: On April 1, 2008, we successfully launched and
are actively field testing our proprietary targeting system, Integrated
Media Optimization (IMO). IMO is designed to facilitate the cross-
selling of all our products.


Liquidity
— Delayed Draw Term Loan: In April 2008, we successfully closed on the
delayed draw term loan portion of our Senior Secured Credit Facility in
an aggregate principal amount of $160 million. Pricing on the delayed
draw term loan will be in line with the term loan B portion of our
Senior Secured Credit Facility at LIBOR plus 1.75%. As previously
disclosed, the proceeds of the delayed draw term loan will primarily be
used in connection with the anticipated exercise of put rights by the
holders of Valassis’ Senior Secured Convertible Notes due 2033 on May
22, 2008.
— 2009 Secured Notes: We expect to repay the 6 5/8% 2009 Secured Notes
which mature in January 2009 through a combination of cash, any excess
proceeds from the delayed draw term loan and borrowings on the
revolving portion of our Senior Secured Credit Facility which is
currently priced at LIBOR plus 2.25%. Based on certain ratio covenants
contained in our Senior Secured Credit Facility, we expect pricing to
ratchet down to LIBOR plus 2.00% in the next six to 12 months.




“Once the 2009 Notes are repaid, we will have no scheduled liquidity events until 2014, and we will strive to achieve investment grade status far before that time. We are comfortable with our current strong liquidity position including $93.5 million in cash and cash equivalents at quarter end, a $120 million revolver and expected adjusted cash flow* of approximately $103 million to $116 million in 2008,” said Robert L. Recchia, Executive Vice President and Chief Financial Officer.

Outlook

Management reiterates the financial guidance for 2008, expecting increased adjusted EBITDA* of between $260 and $280 million. Based on the first quarter results and the current outlook, Management noted that it expects results to lean toward the upper half of this range. We expect low-to mid-single digit revenue growth in the second half of 2008. Full-year 2007 pro forma revenue was $2,465.6 million, which includes January and February 2007 revenue from ADVO of $223.4 million. In 2008, we expect adjusted cash EPS* of between $2.14 and $2.39.

Other considerations for 2008 are as follows:

— Capital Expenditures: Capital expenditures during the first quarter
of 2008 were $9.0 million, on track with our 2008 guidance of $35
million or less.
— Paper: Management reiterated that paper pricing continues to have a
negative impact on the Shared Mail Wrap and the Free-standing Insert
(FSI) as we will not be able to pass along those increases to
clients.
— Macroeconomic Environment: While we do not expect economic factors to
impact our guidance, marketing budgets continue to be tight. However,
we are beginning to see a shift to value-oriented media such as ours.


Business Segment Discussion

— Shared Mail: Shared Mail revenues for the first quarter of 2008 were
$356.3 million, up $23.8 million or 7.2% compared to pro forma first
quarter of 2007. Growth from key national retailers, improved sell-
through of the RedPlum Wrap, new client acquisition, and reduced client
credits all contributed to the overall revenue growth for the quarter.
Segment profit for the quarter was $30.9 million, up $25.6 million from
the prior year first quarter which represented results beginning with
the acquisition date of March 2, 2007. In addition to revenue growth,
reductions in both variable and fixed expenses from our business
optimization efforts and realized cost synergies contributed to the
improvement in segment profit. Beginning on Jan. 1, 2008, the Canadian
business previously accounted for in this segment became part of the
new International, Digital Media and Services segment discussed below.
As a result, first quarter 2007 pro forma revenue of $3.1 million has
been reclassified from this segment to the new segment for comparison
purposes.

— Neighborhood Targeted Products: Revenues for the first quarter of 2008
were $100.2 million, flat compared to the prior year quarter. Segment
profit for the quarter was $11.1 million, up 0.9% from the first
quarter of 2007. Revenue was negatively affected as some of the
Neighborhood Targeted business migrated to the Shared Mail higher
margin business. This approximate 3% reduction is in line with average
newspaper circulation declines in the first quarter of 2008.

— Market Delivered Free-standing Inserts (FSI): Co-op FSI revenues for
the first quarter of 2008 were $98.6 million, down 10.0% from the first
quarter of 2007, due to the anticipated reduction in FSI pricing of
low- to mid-single digits and a decrease in market share. Management
expects that market share will improve in the second half of 2008. Unit
growth in the co-op FSI industry was up 2.5%. FSI cost of goods sold
was up for the quarter on a cost per thousand (CPM) basis. Segment
profit was $2.0 million, down 79.6% from the first quarter of 2007.
Management has also realigned this segment’s sales structure and has
appointed new FSI sales leadership.

— International, Digital Media & Services: Due to their sizes in
relation to other segments, we have combined the segments previously
known as International and Services and Household Targeted into one
segment – International, Digital Media & Services. This segment is the
aggregation of all other lines of business not included in the separate
reportable segments, including NCH, international, direct mail, VRMS,
security services, interactive and in-store. Total first quarter 2008
revenues for the newly combined segments were $42.0 million, flat
compared to the first quarter of 2007. This segment experienced a $1.8
million loss for the quarter primarily due to charges related to our
Interactive initiative and European restructuring. Without these
charges, segment profit would have been $0.2 million. Segment profit
for the first quarter of 2007 was $1.7 million.



Segment Results Summary

Quarter Ended March 31,
Revenue by Segment (in millions) 2008 2007 % Change

Shared Mail (1) $356.3 $332.5 7.2%
Neighborhood Targeted $100.2 $100.5 -0.3%
Free-standing Insert $98.6 $109.6 -10.0%
International, Digital Media &
Services (2) $42.0 $42.2 -0.5%
Total Segment Revenue $597.1 $584.8 2.1%


Quarter Ended March 31,
Segment Profit (in millions) 2008 2007 % Change

Shared Mail (1) $30.9 $5.3 483.0%
Neighborhood Targeted $11.1 $11.0 0.9%
Free-standing Insert $2.0 $9.8 -79.6%
International, Digital Media &
Services (2) ($1.8) $1.7 -205.9%
Total Segment Profit $42.2 $27.8 51.8%


(1) Valassis acquired ADVO on March 2, 2007. Prior year revenue includes
results from Jan. 1, 2007 and is given for comparison purposes only
and is not included in our reported results. Segment profit for 2007
represents only those results since the acquisition date of March 2,
2007.
(2) The segments previously known as International and Services and
Household Targeted have been aggregated into one segment,
International, Digital Media and Services, due to their
immateriality versus the remaining segments. Also as of Jan. 1, 2008,
the ADVO Canada business previously accounted for in the Shared Mail
segment was merged into Valassis Canada and is now included in
International, Digital Media and Services. Prior year pro forma
revenue has been reclassified here for comparison purposes.