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Valassis Third Quarter EPS Up 13% On Revenue Gain Of 4%

Friday, October 26, 2001

Press release from the issuing company

LIVONIA, Mich., Oct. 25 -- Valassis, the leading company in marketing services and Connective Media (TM), reported third quarter ended September 30, 2001 earnings-per-share of 53 cents (before one- time charges and extraordinary items) up 12.8% versus the third quarter 2000. The company posted revenues of $198.4 million, up 3.8% from the year ago quarter. Management attributed the strong performance primarily to increased revenues in its highly efficient mass-distributed product lines, and to lower costs. Valassis Chairman, President and CEO, Alan F. Schultz said, "A company's strength is measured by its cash flow, particularly in difficult times. We're projecting over $120 million in cash flow for 2001, which will enable us to stay the course for our long-term growth plan.'' Schultz added, "At the same time, we're also reducing SG&A spending, lowering our debt, and creating a balance between high and low-risk investments.'' FINANCIAL HIGHLIGHTS (in millions, except per share data) Mass-Distributed Products -- Products which provide mass reach at low cost: Free-standing insert revenues were $141.0 million, up 4.8% from the year ago quarter. Run-of-Press sales were $9.4 million, up 109% from the year ago period. Management noted that ROP sales are largely dependent on individual orders, and do not track quarter to quarter. The large increase in ROP revenues was attributed to additional sales focus in this area, as the company has identified a market need for more last-minute ad placement capabilities. In addition, increased placement of ROP by Valassis improves its partnership and negotiation position with newspapers. Cluster-Targeted Products -- Products targeted around geographic and demographic clusters: Revenues for these products were $37.3 million, down 24% for the quarter. As previously reported, solo inserts have continued to experience heavy competition from commercial printers, and advertisers have traded down to simpler, less expensive print formats, as a result of the current economy. Additionally, this division experienced some delays and cancellations during the month of September. As predicted, growth in polybag sampling and advertising occurred in the first half of the year. One-to-One Products -- Products and Services that pinpoint individuals to build loyalty to a brand: Consolidated revenues, including PreVision Marketing, direct mail and consulting services, were $9.7 million, up from $2.7 million in the third quarter of 2000. Management reported that Valassis Relationship Marketing, a non-consolidated investment of Valassis, continued to experience difficulty in gaining significant sales in the current advertising environment. Costs: FSI costs (on a CPM basis) for the quarter were down 2.4% versus the year ago. Additionally, the company reported a significant decrease in interest expense for the quarter. Share Repurchase/Debt Position: During the third quarter, Valassis repurchased 507,200 shares of its stock. The company also continued to strengthen its balance sheet through the retirement of outstanding 9.55% bonds, lowering its overall cost of debt to near 5%. One-Time Charge and Extraordinary Item: The company took a $4.3 million charge, after taxes, during the quarter, relating to the closedown of Save.com and subsequent resulting reorganization costs. As a result of the close down, management now expects its total losses on investments to be less than $5 million for the year, versus its previous projection of $9-$11 million. In addition, the company reported an extraordinary item of $1.3 million, after taxes, for the retirement of its 9.55% bonds. Outlook: For the upcoming Fourth Quarter ending December 31, 2001, management expects the current environment to have a negative effect on revenues, projecting all of its product lines to experience decreases in sales versus the fourth quarter of 2000. However, paper costs are expected to continue to decrease, and SG&A expenses to be down, resulting in projected EPS growth of 6%-10%, at 50-54 cents. "Although we expect to see a fall-off in revenues in the fourth quarter, we also see fundamental strength in our business, and are expecting EPS growth in 2002,'' said Alan Schultz, "Again, Valassis is weathering the storm better than other media companies.'' For the Year 2002, the company projects EPS to be up 2%-12% versus 2001, on flat to slightly increased revenues. The following assumptions from management contributed to this projection: * Client marketing budgets are projected to be down slightly in 2002, and clients will likely reduce new product introductions due to the current economic environment. These tight budget conditions are also expected to result in heavy scrutiny of spending on new media vehicles. * FSI revenues and margins are projected to be down slightly, as custom co-ops (single- corporation co-op FSIs) are expected to increase during the year, beyond previous levels. As a result, the company will reduce its previous 2002 regular co-op date schedule from 44 to 43 dates, to more accurately reflect industry demand given additional custom co-op dates. FSI pricing, including direct response, is expected to be flat to down slightly, based on existing client contracts. The mix of full- page to half-page ads is expected to remain the same as in 2001, at approximately 68% full-page ads. FSI circulation will be 58.8 million, down from 60.1 million in 2001. The decrease is attributable to a trimming of ancillary circulation, specifically, direct mail supplemental distribution, which proved unpopular with clients. * ROP revenues are expected to be up to approximately $35 million, beyond previous levels, due to the shutdown of a competitor, industry trends for booking more last-minute business, and additional sales focus in this area. * Cluster targeted product revenues are expected to be up 10%-13%. Revenue growth rates and gross margins are projected to be lower than past levels, due to continued staunch competition, marketing cutbacks and the slow-down of new product introductions. * One-to-one revenues are expected to be up, due to multiple factors. PreVision Marketing is expected to increase revenues by 4%-6%, a slower growth rate than previous years, due to a slowed rate of new business wins in a tight economy. Internal direct mail/database marketing programs are expected to grow by 15%-20%, however. Non-consolidated investment, Valassis Relationship Marketing Systems, is expected to double sales in 2002, but has still not reached the levels required for critical mass. As a result, the company expects that this investment will not reach breakeven until 2003. * Costs and expenses are expected to again decrease year over year. Paper CPM is expected to be down 10%-15%, due to increased supply in super calendared plus grade paper, and less expensive coated groundwood. In addition, new press installations are expected to yield more efficient paper utilization. Other FSI costs are expected to be flat, as a result of stable page volume. SG&A expenses are projected to be flat, as the company continues to keep spending in check, and interest expense is expected to be down 20%. Losses on investments are projected to be flat versus 2001. * The company plans to continue to allocate 50% of free cash flow to share repurchase. Capital expenditures are planned at approximately $15 million, and cash flow is projected to be $120-$130 million. The company will provide 2002 quarterly guidance in February, when it announces fourth quarter 2001, or before.




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