By Trevor Shackelford May 4, 2006 -- Valassis Communications Inc. (NYSE: VCI) recently announced their first quarter 2006 results. The company reported revenues of $247.6 million for the quarter, down 11.3% from the same period in 2005. Net earnings for the quarter were down 36.1% to $18.1 million, or $0.38 per share, from $28.2 million, or $0.55 per share reported in the first quarter of 2005. Although both a sequential and year-over-year decline, per share earnings were at the low end of the guidance published in February. Analysts were anticipating earnings of $0.41 per share. Chairman, President, and CEO Alan Schultz began the call with comments about the tough quarter, blaming a tough promotional calendar for the first quarter as well as price and margin pressures from the increased competition for fewer opportunities. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Gary Yost named to newly created position of President, International Media Properties, with the goal of accelerating international media product development and sales. • Shanghai office opened. • SG&A expense was down 3.5% to $32.9 million due to reduced headcount and bonus/profit sharing programs. • The company’s debt position, net of cash and auction-rate securities was $138.9 million. • Net interest expense was $2 million. • Cash and auction-rate securities at the end of the quarter were $135.4 million. • During the quarter, the company repurchased 137,300 shares. Segment Performance Market Delivered Free-standing Insert (FSI) Segment Co-op free-standing insert (FSI) revenue for the first quarter was $115.3 million, down 12.5% due to a decline in volumes and pricing. A shift of pre-Easter holiday advertising to the second quarter had an impact on Q1 volumes. Market Delivered Run of Press (ROP) Segment ROP revenue, generated from the brokering of advertising space on behalf of newspapers, was down in the first quarter 32.6% to $20.3 million year-over-year. The company cited consolidation in the telecommunications industry for the decline. Valassis also noted that one of its larger customers shifted business to later in 2006. Future revenues are expected to rise as previously lost business was won back and seven new clients were landed during the quarter. The segment earned $1.5 million in profit this quarter. Neighborhood Targeted Products (Cluster Targeted) Segment Segment revenues decreased 10% for the quarter to $66.9 million. The company attributed the decline to an overall decline in the promotional media industry, but was optimistic about the second quarter due to the shift in pre-Easter revenue. The customer that was won back during the Q1 should also improve revenues for this segment, but not until the third quarter of the year. Household Targeted Products (1 to 1) Segment Segment revenues decreased 4.2% for the quarter to $18.2 million due to a decrease in direct-mail pieces distributed as well as the discontinuing of its PreVision agency business. During the quarter, the company also announced that it has secured new programs with a major grocery retailer. The company also expects to bring on a large drug retailer in the next three months. Based on a 300% increase in requests for targeting direct mail campaigns, Valassis is anticipating an increase in business for this segment in approximately three to four months. International & Service Segment Sales from the segment are comprised of NCH Marketing Services (NCH), Valassis Canada and Promotion Watch. Revenues for the group were up 11.2% to $26.9 million during the first quarter. The growth was driven primarily by increased market share in the NCH coupon redemption business as well as higher revenue in the Canadian business. The German business saw revenue and profit growth during the first quarter. Profit for the segment was down due to severance costs in the UK, investment in new products, and continued poor performance in the French agency business. Guidance Despite coming in at the very low range of earnings for the first quarter, and seeing declining revenue across most of its business, Valassis is reaffirming its previously announced earnings guidance. For the full year, the company is anticipating EPS to be between $1.95 and $2.15. EPS by quarter for the rest of 2006 is as follows: • 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 The results for the quarter came in at the low end of Valassis’ guidance posted in February and beneath analyst expectations. The quarter was soft, based primarily on a weak promotional calendar for the first quarter. Most business segments saw a decline during the quarter. Management did indicate that the weak promotional cycle was short term and would be lifting during the second quarter which would bode well for the company achieving its projections. In fact, it appears that some of the reasons for the soft first quarter may serve to improve results in the second. Long term, management is still hopeful for a recovering of FSI prices, although there is no strong evidence that this will take place any time soon. Overall, management seems optimistic for the rest of 2006, pointing to a jump in direct mail requests as a leading indicator for the back half of the year. Q & A 1. There were 13 FSI publishing dates during the first quarter of 2006 versus 11 last year. The two additional dates were added in attempt to bolster a weak first quarter by volume. 2. Costs were relatively flat, although they were up slightly in FSI due to an increased number of publishing dates with reduced overall volume. 3. Valassis is focusing on rebuilding its cash position while it evaluates its various opportunities to increase shareholder value. Suggestions from shareholders have included cash dividends and acquisitions. 4. There have been inconsistencies in data concerning the future of FSI pricing, so the company was unwilling to speculate on what future pricing will look like, but management is hopeful that pricing will eventually recover. 5. The company is expecting FSI negotiations for 2007 to be similar to last year, picking up in May and extending through October. 6. Despite softness in newspaper circulation last year, Valassis has actually seen an increase in their FSI circulation of about 1 million. 7. President and CEO Alan Schultz described the first quarter as the “perfect storm” of negative promotional factors including the shift of dollars away from Valassis products for the Olympics as well as a poor calendar for holidays. 8. The increase in first quarter coupon clearing came from solid distribution during the fourth quarter of last year. The company is expecting weaker performance next quarter due to softer coupon distribution during the first quarter. 9. The PreVision business was worth approximately $17 million last year, although the company believes it will retain about $4 million. 10. SG&A was down 3.5% despite a $1 million dollar option expense. 11. There was a dramatic increase of requests for direct mail campaigns during March, a strong leading indicator for 2nd and 3rd quarter performance. 12. In the past there have been giant pushes for broadcast spending in the food service business, which according to Valassis were not as successful as planned, leading to an increase in spending for direct mail and other channels supported by Valassis. 13. Approximately 30 integrated solutions were sold during the quarter.