By Trevor Shackelford April 3, 2006 -- Valassis Communications Inc. (NYSE: VCI) recently announced their fourth quarter and fiscal 2005 results. The company reported revenues for the fourth quarter of $309.2 million, up 2.3% from $302.3 million reported for the same period in 2004. Net earnings for the quarter were $20.3 million, or $0.42 per share, down 24% (19% on a per share basis) from $26.8 million, or $0.52 per share reported for the same period in 2004. The company reported revenues for the full year of $1.131 billion, up 8.3% from $1.044 billion reported for fiscal 2004. Net earnings for the full year were $95.4 million, or $1.90 per share, compared to $100.7 million, or $1.93 per share reported for the fiscal 2004. Excluding the restructuring charge of $4.5 million (net of tax) taken in the fourth quarter, earnings for the year would have been $99.9 million, or $1.99 per share. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A * Quarter Highlights • The company sold 118 integrated solutions (campaigns utilizing three or more Valassis products) in 2005, compared to 65 in 2004 and 20 in 2003. • In addition to expanding the Coupons & Mehr product in Germany, the company began testing the new Vales y Mucho Mas product in Spain. • Cash and auction-rate securities at the end of the year were $136.4 million. • At the end of fiscal 2005, the company’s debt position, net of cash and auction-rate securities was $137.8 million. • Net interest expense was $1.7 million for the quarter and $7.4 million for the year. • SG&A expense was up 7.6% to $40.9 million for the fourth quarter and up 7.4% to $143.3 million for the year due to $6.9 million in restructuring charges related to the integration of its household targeted business segment. Excluding these restructuring charges, SG&A expenses would have been down 10.5% for the fourth quarter and up 2.2% for the year. • During the fourth quarter, the company repurchased 764,000 shares of its stock, bringing the total share repurchase for the year to 4,584,858 shares, compared to 1,870,517 shares for the full year of 2004. Segment Performance Market Delivered Free-standing Insert (FSI) Segment Co-op free-standing insert (FSI) revenue for the fourth quarter was $124.4 million, up 6.2% due to industry unit growth and an increase in market share. Co-op FSI pricing was up slightly during the quarter. FSI revenues for the year were $504.5 million, up 2.2%. Unit growth in the co-op FSI industry was in the mid-single digits for the year, offsetting the slight reduction in co-op FSI pricing. FSI cost of goods sold was up slightly for the fourth quarter and for the year on a cost per thousand basis due to increased paper costs. Market Delivered Run of Press (ROP) Segment ROP revenue, generated from the brokering of advertising space on behalf of newspapers, was down in the fourth quarter from $44 million to $35.3 million year-over-year. Revenue was up 7.3% for the year to $122.5 million. Segment profitability increased 16.2% over 2004, exceeding management’s expectations. Neighborhood Targeted Products (Cluster Targeted) Segment Segment revenues increased 12.4% for the quarter to $104.8 million, and ended the year up 23.2% at $339.0 million. The increase in revenues was primarily attributed to growth in preprints from the retail, food service and manufacturer customer verticals. Fourth quarter results from the neighborhood targeted product segment represent the sixth consecutive quarter of double-digit revenue growth. Household Targeted Products (1-to-1) Segment Segment revenues decreased 21.6% for the quarter to $14.9 million due to a decrease in direct-mail pieces distributed. Full year revenues were $63.2 million, up 2.3% from the prior year. International & Service Segment Sales from the segment are comprised of NCH Marketing Services (NCH), Valassis Canada and Promotion Watch. International & Services reported revenues of $29.9 million for the fourth quarter, up 2.7%. International & Services reported revenues for the year of $101.8 million, up 2.7%. Guidance For the full year 2006, the company expects earnings per share (EPS) to be between $1.95 and $2.15 after the expensing of stock options in accordance with SFAS 123R. Capital expenditures will be approximately $20 million in 2006. The company expects that Q1 2006 will be the weakest quarter, primarily due to fewer prime promotional Sundays in this quarter than in the last two years. The management provided the following EPS projections for 2006: Q1 2006, EPS in the range of $0.38 to $0.44 Q2 2006, EPS in the range of $0.49 to $0.55 Q3 2006, EPS in the range of $0.52 to $0.58 Q4 2006, EPS in the range of $0.54 to $0.60 Raine Radar It’s interesting how much the 1-to-1 segment suffered this quarter. This is the second consecutive quarter of declines for this business unit. Whether this is part of a larger downward trend for the company, or just a blip in the radar is unclear. Based purely on the experiences of Valassis, it would seem to indicate that targeting a neighborhood or cluster is actually more in demand than 1-to-1. Overall, the company had a decent quarter, but the projections for the first quarter and 2006 look fairly weak. Q & A 1. The company launched ZIP + 4, a targeting capability for direct mail at the end of 2005. The company expects sales for the capability to pick up in the second half of the year. 2. Valassis saved approximately $6 million in SG&A expenses from restructuring activities. 3. The company expects that in the neighborhood targeted segment, approximately 40% of its business will come up for renewal. The company said this is generally a slow period for corporate contracts and would expect the activity to pick up sometime between March and October. 4. There are two more publication dates scheduled in 2006 from 2005. 5. The paper freight increased approximately 12% in the fourth quarter, primarily due to fuel surcharges. 6. The company expects similar paper freight charges for fiscal 2006 as the company had in the fourth quarter. Cost of paper should remain stable in 2006. 7. In the ROP segment, the company was not focused on the top line growth, but it focused on the segment profit. 8. During the year, the company spent approximately $450 million with newspapers. 9. The company said that the historic tax rate was running around 36%. 10. The E-settlement product has been slow to sell and the company hopes it can build some momentum for the product in 2006. 11. The company believes its biggest measure of success is the number of clients returning to run integrated solutions. 12. The company hopes that more publication dates in the first quarter will help improve its revenue and profit for 2006.