By Trevor Shackelford October 31, 2005 -- Valassis Communications Inc. (NYSE: VCI) announced their third quarter results today. The company reported revenues of $266.1 million, up 7.4% from the same period last year. Net earnings for the quarter were $21.3 million, or $0.42 per share, down 2.3% from last year. Earnings met the company’s forecast; however warnings of increased price pressures dampened the mood of the call. Contents of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights In a move to help control the impact of high paper prices, the company reduced the width of the co-op free-standing insert. Added fourth high-speed MAN press to Durham, NC facility Approved new share repurchase program of up to 5 million shares of common stock Valassis secured a renewal of the Proctor and Gamble business, along with P&G’s newly acquired Gillette business. Segment Performance Mass Products This segment is composed of the FSI and Run on Press (ROP) business. Co-op FSI revenue during the third quarter was down 2.6% to $114 million. A decrease in direct response content and one less publishing date was cited as reasons for the decline from last year. ROP revenues, generated from brokering advertising space on behalf of newspapers, were up 38.0% from last year to $29.8 million. Continued growth in the telecommunications, retail, and consumer packaged goods verticals drove the increase. Cluster Targeted Products These products reach neighborhoods based on geographic and demographic characteristics. Sales during the third quarter increased 20.8% to $87.8 million from the same period last year. The company cited growth in preprints from the telecommunications, retail, food service, and manufacturer customer verticals for the increase. 1 to 1 Products This segment includes PreVision Marketing, Valassis Relationship Marketing Systems, and direct mail. Sales during the third quarter were down 13.7% from last year to $12.6 million. The decline came from a reduced distribution of direct mail pieces and the continued shift in the 1 to 1 product sales mix. International & Services Revenues were up slightly year-over-year to $21.9 million. Coupon redemption in the UK was down and the French market for consulting and field marketing services remained weak. Guidance Valassis maintains its EPS guidance for the full year 2005 of $1.96 - $2.08, although the company now believes that the product mix will be slightly different with greater than expected growth in its cluster targeted offerings offsetting decreases in 1 to 1 and international & services. The company projects fourth quarter 2005 EPS of $0.52 - $0.58. Valassis also anticipates growing pricing pressures in its FSI business will negatively impact the outlook for 2006 and 2007. For the full-year 2006, the company expects EPS of $1.95 - $2.15. Capital expenditures of approximately $20 million are planned for 2006. Raine Radar Valassis started their call by discussing research which the company believes benefits the company in the long term. According to the company, increased consumer practicality, and media spending trends indicate a shift towards printed promotions such as coupons. This may be true, but it also seems like companies are becoming more practical as well, with Valassis seeing sudden increases in pricing pressures for business in 2006, especially in their free standing insert (FSI) segment, which represents 43% of their Q3 sales. The company’s cluster targeted business performed above expectations this quarter, but it looks like business in 1-to-1 has slowed down somewhat. It is unclear at this point whether this is part of a broader direct mail trend, or if it is specific to Valassis. Q & A The pricing pressure that the company has started to experience in FSI is centered in the last 4% of FSI business for 2006 that is not yet covered by contract Valassis is investigating other distribution methods other than newspapers to combat dwindling newspaper circulation numbers. Direct response pages were down for Valassis, but up overall in the market. Proctor and Gamble has renewed its contract with Valassis, which represents approximately 10% of the company’s sales. 85% - 90% of pages run by Proctor and Gamble are in the custom co-op book, with the remaining pages in the regular co-op book. The company is not sure why the 1-to-1 business has experienced its recent slump. Trevor Shackelford is an Associate at Raine Media, Inc. and can be reached at [email protected]