LIVONIA, Mich., July 26 Valassis, the leading company in marketing services and Connective Media (TM), announced revenues of $217.3 million for the second quarter ended June 30, 2001, up 2.9% from the year ago quarter. Earnings per share were 62 cents; within the company's published range. Valassis will hold an investor call today, to discuss the second quarter results and highlight its cluster-targeted media products, at 11 a.m. (EST). The call-in number is 800/240-2134. The call will also be simulcast on the Valassis website, at www.valassis.com . FINANCIAL HIGHLIGHTS (in millions, except per share data) Three Months Ended Six Months Ended '01 '00 % Chg '01 '00* % Chg Total Revenues 217.3 211.1 +2.9% 445.1 423.6 +5.1% Net earnings 33.7 34.4 -2.0% 66.2 71.1 -6.9% Net EPS, diluted .62 .62 - 1.22 1.26 -3.2% * Excludes income from a $26.5 million lawsuit settlement ($16.7 million net of taxes) Alan F. Schultz, Chairman, President and CEO said, "Our business grew modestly in the second quarter despite a tough environment. Advertising industry revenues continue to shrink, and cuts have begun to hit some promotional media products, as well. Given the belt-tightening across our client segments, I'm pleased that we were less affected than others, and delivered earnings per share within our published range.'' Mass-Distributed Products - Products which provide mass reach at low cost: Free-standing insert revenue was down for the quarter, posting $147.6 million. Sales shortfalls were a result of two issues: the company's strategy to improve pricing in its direct response client segment by decreasing the available supply of pages, as well as the industry-wide loss of e-commerce advertising. Management estimates this revenue shortfall to be approximately $11 million for the second quarter, without which FSI sales would have been flat. Direct response pricing has increased and stabilized as a result of the stated strategy, and management plans to begin gradually increasing direct response pages in the second half, striking a balance between direct response page volume and acceptable pricing. The company has also completed approximately 75% of its FSI contract negotiations for 2002, improving its visibility into next year. Run-of-Press revenues were up 17.7% for the quarter, to $7.3 million, and are expected to achieve revenue levels of $20 -- $25 million for the year. * Cluster-Targeted Products -- Products targeted around geographic and * demographic clusters: * In April, the company combined its former Valassis Impact Promotions and Targeted Marketing Services divisions into a single group. The move was prompted by the similarities in growth and margin structures, product lines and clients, and has already created operational and sales efficiencies. Revenues for cluster-targeted products were $51.7 million for the second quarter, up 20.5% from the year ago, driven again by strong revenues in its sampling/advertising polybag programs. Solo inserts also posted healthy revenue gains, despite increased competition from commercial printers. For comparison purposes, the former VIP sales were $33.8 million for the second quarter 2001, versus $27.9 million in the year ago quarter. Former TMS sales were $17.9 million for the second quarter 2001, versus $15 million in the second quarter 2000. * One-to-one Products -- Products and services that pinpoint individuals to * build loyalty to a brand: * These products and services include the company's technology-based businesses and investments in customer relationship marketing and internet promotions. Total one-to-one revenues for the second quarter were $10.6 million. Consolidated revenues in the one-to-one segment include PreVision Marketing and Promotion Watch consulting services, both of which had strong revenues for the quarter, and are on track to achieve their full-year targets. Non-consolidated investments include Valassis Relationship Marketing Systems, Save.com, Coupons.com and Independent Delivery Services. Management said revenues have been slower-than-expected for these investments, as new budget dollars are more difficult to garner in an environment of marketing budget cuts. Losses on investments for the second quarter were $700,000, but are expected to increase in the second half of 2001, due to the costs associated with the increased store base and ramp-up of Valassis Relationship Marketing Systems. Losses on investments for the year, however, are expected to fall below the $9 - $11 million previously announced. Costs and Expenses: Savings in paper, the company's largest cost item, drove overall costs down for the quarter. The company is realizing paper savings, as it has increased the mix of a less expensive grade of paper into its total requirements. The company expects that it will continue to increase its use of this "super-calendared plus'' sheet, creating even better comparisons in the cost of paper in the second half of the year, particularly in the fourth quarter. The company's recent completion of its computer-to-plate initiative has created savings in the elimination of film and related materials, offsetting transportation surcharges associated with energy and fuel increases. During the quarter, Valassis also sold $150 million of convertible bonds at 3% interest, which will lower its overall interest expense. Share Repurchase/Debt Position: During the second quarter, Valassis repurchased 547,600 shares of its stock. As of the end of the first half, the company had purchased 3,498,000 shares under its current 5 million share repurchase authorization, and plans to continue to allocate approximately 50% of free cash flow for this use going forward. The company has also lowered its bank credit facility using proceeds raised through its convertible debt sale. Valassis ended the second quarter with net debt of $301 million. Outlook: The company published 2001 quarterly guidance in December, and projected earnings-per-share growth of 10% -- 15% for the year. Based on its results at the low end of the range for the first half, management expects to be at the low end of the range for the year. The FSI business continues to be impacted by the cuts in direct response pages designed to improve price, as well as the loss of e-commerce advertising. However, management expects FSI revenue growth in the third quarter. "Valassis is performing better than other media-related companies like broadcast, ad agencies, publishers and printers, and we continue to generate strong free cash flow, despite this virtual advertising recession. In light of the current economic environment, we are intensifying our sales efforts with incentive programs and increased sales call requirements. We are also emphasizing cost-cutting and efficiency measures,'' said Al Schultz. 2001 Quarter Projected EPS Range Actual EPS 1 $0.59 - $0.65 $0.60 2 $0.62 - $0.68 $0.62 3 $0.57 - $0.63 4 $0.60 - $0.66