Gail Kailing February 25, 2003 -- Valassis, (NYSE: VCI) the leading company in marketing services and Connective Media, offers a wide range of marketing services to consumer packaged goods manufacturers, retailers, technology companies and other customers. Valassis' Connective Media portfolio includes: newspaper advertising & inserts, sampling, direct mail, 1 to 1 marketing programs, and consulting and analytic services. Finances Reviewed The reported results for the fourth quarter and year ended December 31, 2002 were in line with Valassis’ published projections. Revenues for the quarter up 11.9%, at $230.6 million and revenues for the year were up slightly at $853.0 million. Valassis' year-end EPS was in the middle of their published range of $2.32 to $2.54, provided by the company in October 2001. Fourth quarter growth was fueled by growth in the co-op freestanding insert (FSI) industry and the broadening of the company’s product and customer base. These trends are anticipated to continue into 2003. While Valassis is under continuing market share pressure because of the competitive state of the FSI industry and despite the present economic environment, generation of free cash flow is projected to be between $105 million to $115 million in 2003. Acquisition of NCH Marketing Services, Inc. Valassis also announced the acquisition of NCH Marketing Services on February 13, 2003. The NCH acquisition: - Means new products for “closed loop” integrated services - Supports the existing customer base - Will bring in new customers - Expands analytic capabilities - Provides an experienced management team to support Valassis’ move into Western Europe - Could provide $200 million in additional revenue And now … Brian J. Husselbee, President/CEO, NCH Marketing Services NCH, now more than 40 years old, was the Nielson Clearning House for the Nielson Company. Nielson looked to grow all businesses overseas and NCH had revenues from the UK, Italy, Spain, France, Germany, and Mexico. After Dun and Bradstreet acquired Nielson, NCH was spun off as a private company. The core business is coupon redemption and analysis, with services for both retailers and manufacturers. - Services for retailers – large retailers collect thousands of manufacturer’s discount coupons every week. It is a complex management problem, and most large retailers outsource to service providers who sort and manage the coupons and distribute funds to return the value of the coupon to the retailer. - Services for manufacturers – manufacturers have thousands of retailers redeeming their coupons, and this too is a complex management problem. Outsourcing services sort the coupons, provide audits to make sure the retailer is valid and has properly redeemed the coupons, distribute funds to the retailer, and provide data analysis to determine the success of the promotion. NCH is the market leader in each country they serve, except in France where a different program is offered. NCH partners with retailers to build coupon programs in France. The value NCH brings to Valassis: - Blue-chip customers including large retailers and large manufacturers - A customer retention rate of more than 99% - Multi-year contracts - Online value-added analytics - Multi-national infrastructure Q&A with The Analysts: “What Have You Done Lately? 1. Contract negotiations: Contract activity begins in February, builds through the summer, and wraps up in September and October. There are four contracts are in negotiation now, none are completely finalized. Valassis is in place for a share of the business with those clients. All are clients that have done the bulk of their business with News America, and part of it comes to Valassis. Valassis can put together the appropriate proposal mix for the prospect: - Some clients want to make decisions late in the program – controlling the production process is an advantage - Valassis has products and services that the competitors don’t have - Valasis has a sophisticated newspaper database to provide zoning, targeting, demographics, and research capabilities 2. Market Share: Valassis’ market share is expected to be soft in the first half of 2003, and see improvement in the second half of the year. The average for the year is expected to be 43-45%. As market share grows into the upper 50% range, category exclusivity can cause category conflicts. These conflicts are a limiting factor on market share growth. To satisfy customer needs, the option is to add more programs on the same dates. The second program will have smaller pate counts, and thus lower margins. It’s not attractive to add additional programs. No effect from the acquisition of NCH was built into the market share projections. While Valassis strongly believes in the potential, no assumptions of synergy with either the revenue or cost side were put in the projections for 2004 or 2005. 3. Price Pressure: There is no real sign of improvement. News America is very aggressive, and pricing is always an issue. Valassis brings enough value to get premium prices. It is important to understand the client’s needs, each has a different set of priorities – service, flexibility, value-add, price, long-term strategic relationship. Valassis works hard to get a sense of competitive pricing. Clients favorable to Valassis see that the competitor’s pricing is available. 4. Paper Prices: Some grades are increasing; the market price for coated paper was up in October 2002, and again in January 2003. About 20% of Valassis’ overall total paper usage is coated paper used for Cluster Target products, where price increases can be passed on. Valassis doesn’t anticipate a supplier price increase in the near future. 85% of the Free Sanding Insert (FSI) tonnage is under long term contract, which limits adjustment on a quarterly and annual basis. The company is comfortable with paper prices - good timing on contracts and the right partners. 5. Integrated Services: Valassis is looking at putting NCH products into an integrated service offering. Lots of analysis and reporting from NCH can be used to improve front end of the process so the client will get better results. It’s a “win/win”, Valassis gets an ongoing consulting relationship with the client and NCH gets more volume. The company is looking for Midwest clients to start testing the integrated concept. The means to automate data sharing between NCH and Valassis is being worked out, because right now clients must provide data to both companies. The concept will be tested in 2003 and rolled out in 2004. 6. Business Group Results - FSI pages strong in fourth quarter 2002, the industry looks to be strong in first quarter 2003 - Most of the decline in FSI revenue driven by a decline in volume or market share shrinkage, not pricing pressure - 1-1 group is rolled into the direct mail operation – direct mail had a good quarter - up 100% and the year was up 100% - VRMS was strong - up 24%, PreVision down, CRM Consulting was hit hard - VRMS is still losing money, although showing nice revenue growth and expansion of customer base. By the end of 2003 VRMS will be close to break even 7. Margins: The drop in margin for the quarter was a result of a change in product mix, there were no other business causes. 8. Free Cash Flow/Stock Buy Back: Projected free cash flow is good and Valassis upped the target from $100-110 million to $105-115 million. The share buy back program still in place. Up to 75% of free cash was authorized for share repurchase. Valassis was out of market through NCH acquisition period and expects to go back in after March. 9. Growth projections: CPG (Consumer packaged goods) companies are starting to put in price increases. They then use more coupons to off set those increases in beginning and that tends to benefit Valassis. This year is off to a good start for inserts with a 10-15% growth projected in 2003. The higher growth quarter over quarter is expected in the first half of the year. Printing activity started to pick up in fourth quarter, and as printing starts to pick up, Valassis can get higher margins. That should help on both revenue and margins. 10. International Expansion: Valassis has been researching international entry for more than 2 years and has an interest in UK, Spain, Italy, Germany, France, China. Part of the attractiveness of NCH was their operations already in five of those countries, and their interest in China. Together the general managers of all international business operations determined a market potential of $232 million in Western Europe. Product launch plans will begin in the fall of 2003, complete with revenue and profit projections. Some cultural modifications and investments may need to be made, and the programs will be rolled out in 2004. 11. NCH and Valassis – Conflict of Interest? Even though Brian Husselbee served on the Valassis board of directors, he did not present any merger ideas to Valassis. Discussions between the two companies were held only after NCH and a potential buyer completed the due diligence process they were in when Alan Schultz, Chairman of the Board, President and CEO, Valassis, broached the subject. All discussions were held at arms length and Brian distanced himself from any decisions.