By Steven Schnoll August 4, 2004 -- Valassis Communications Inc. (NYSE: VCI) reported second quarter revenues increased 5.6% to $256.8 million from $243.1 million for the same period last year. The company reported that much of this improved revenue was attributed to a relatively new service offering, One-to-One products. Earnings per share in the second quarter slid 2.4% to $26.8 or $0.51 per share from $27.5 million or $0.53 per share in the corresponding quarter in 2003. Topics of the summary: Overall Performance Raine’s Radar Guidance Q & A Overall Performance The second quarter results illustrated that the competitive battle being waged in the mass FSI market between Valassis and News America Marketing continues to rage holding down profits. However, theses mass market products did show a second quarter revenue increase of 2.3% to $132.3 million. Chairman, President, and CEO, Alan F. Schultz proudly highlighted how the company’s drive to diversify itself in its product portfolio was starting to bear dividends. It’s One-to-One marketing products – PreVision Marketing, Valassis Relationship Marketing Systems and direct mail increased revenues by 76.9% to $16.1 million for the quarter. Schultz made special note during the call of the people responsible for this outstanding success. Recent actions taken to improve profits will be to change pricing trends in the FSI market. While most FSI contracts are for 30 months new floor pricing for new business will be quoted at $6.00 per full page and $3.90 per half page. This aggressive action will seek to win some new business from News America. Another action that positively impacted the results for the quarter was the debt restructuring. Valassis exchanged fixed debt with floating debt. This realized a decline in interest expense by 13.3% or $2.6 million for the quarter. While paper prices started to increase the company was able to offset that increase by the increase in printed pages and larger co-op FSI book sizes. Raine’s Radar As Valassis continues to slug it out with News America Marketing in the mass market FSI trenches a shining light is clearly illuminating a new profitable path – One-to-One. This concept has been in the marketplace for many years but has often been maligned, misused or poorly executed. It seems that Valassis not only understands the power of One-to-One marketing but has also mastered the nuances for its customer base. If they can stay focused on the power of this offering and not get too distracted with the slugfest with News America they may be a true winner. The future success of Valassis will not rest on its traditional market offerings but on its Cluster and One to One offerings and its new technology solutions. Guidance Valassis officials reaffirmed previous earnings guidance of $0.37 to $0.43 per share for the third quarter and $0.38 to $0.44 for the last quarter of 2004. The company also raised its guidance forecast for the full year from between $1.65-$1.85 to $1.73- $1.85. Q & A Some of the growth for FSI in Q2 was created by 11 issue dates. The company is comfortable with its current mid 40% market share in both 2004 and 2005. The demand for FSI product is currently strong and this should allow some improved pricing which should help in a return to previous floor pricing levels. It is anticipated News America Marketing will react quickly to Valassis’ pricing moves. The company can’t predict how or when but it occurs within a relatively short time It is anticipated that paper pricing will continue to increase in mid single digits, but capital expenditures for new more efficient equipment capable of producing FSI’s more economically have offset much of these increases. Since contracts for FSI’s run over a 30-month period only 30 to 40% renew every year. At that time it is hoped that Valassis will be able to negotiate new and higher pricing. The growth in One to One is due largely to new macro trends like the “Do Not Call List”, TIVo, consumer packaging companies committed to direct mail and integrated marketing spends. This trend will propel a positive ROI for FSI’s in general. Interest expense will decline 6.5% for balance of year