By Ann Levine February 26, 2004 – Valassis Communications, Inc. (NYSE: VCI) reported fourth quarter revenues of $238.3 million, a 2.8% increase over fourth quarter 2002 revenues. Net earnings were $23.5 million or $0.45 in EPS. For the full year of 2003, Valassis reported revenues of $916.5 million and net earnings of $103.7 million or $1.98 in EPS. Topics of this summary: Segment Performance Business Initiatives Outlook Q & A Segment Performance Cluster Targeted Product Segment – Valassis reported that revenues in this segment increased 10.7% during the fourth quarter to $79.6 million, up 26.3% for the year. The increase was due to increases in the polybag advertising and sampling markets. Growth was reported at 100% organic with new customers in the specialty and retail markets. In 2004, the company expects continued growth with new product introductions and 10-15% revenue growth. Although 10-15% growth was cited, Valassis indicated the growth would be in the lower end of the range due to 2003 comparatives. 1:1 Segment – Revenues in the 1:1 segment increased 40% in the fourth quarter at $11.2 million. Driving growth during the fourth quarter were PreVision margins, continued concentration on the sales organization of PreVision and the national “Do Not Call” list, and the realization of revenues from the relationship with Kroger. The company's 2004 expectations are for 20-25% revenue growth due to investments in direct mail technology and equipment, the impact of the “Do Not Call” list, Valassis' leadership in the marketplace with regard to shopper data, and the recently announced exclusive third party direct mail relationship with Safeway grocery stores. International & Services Segment – Revenues were $24.1 million during the fourth quarter due mainly to the acquisition of NCH. Canadian revenues increase 30% for the fourth quarter and 20% for the year. In 2004 Valassis expects growth in this sector in the mid to high single digits Mass Products Segment - In the co-op FSI business, revenues were down 20% for the quarter and 14% for 2003. Also in 2003 Valassis saw 44% market share with 46-48% expected for 2004. In 2004, Valassis expects to show revenue increases of 80% in the Mass Products Segment as the company shifts from client contracts on a fee for service basis to a margin basis. Co-op FSI Segment – Revenues for the fourth quarter were down 20% and 14% for the year. Market share was 44% for 2003. Expectations are for market share growth to 46-48% in 2004 and revenues down slightly due to pricing. Business Initiatives Upcoming initiatives stated during today's call include a continued focus on the FSI operations. CEO Alan Schultz stated FSI is the cornerstone of the entire organization and it remains one of the most efficient and effective advertising vehicles in the marketplace and is the “last true national media in America.” Schultz stated the company will work to regain market share with FSI. News America's earnings are expected decline and declines will accelerate as pricing improves. Pricing pressures applied against Valassis will begin to weigh down News America's earnings. Valassis' Integrated Solutions is another company initiative as 20 integrated products were sold in 2003 with an average order size in excess $1 million. Outlook Outlook for 2004 is for revenue to be increase in the mid to single digits with EPS at $165-$1.85. First quarter expectations are for EPS in the $0.44 - $0.50 range. Editor's Note: As in previous earnings calls, CEO Schultz singled out News America's Paul Carlucci. Valassis officials seemed to count on a change in strategy at News America with the promotion of Chris Nixon. As the change clearly hasn't come to pass as expected, indications were that Carlucci would lead any change. A substantial number of comments were targeted on News America's pricing in the marketplace and its expected upcoming revenue decline that will positively impact Valassis. Q & A Valassis continues to expect market share growth to reach the 50% range in 2005 based on current conditions. Valassis cited Catalina's current promotional activities in response to an analyst's question on unusual competitive developments in the industry. Specific Catalina flaws included length of promotion, multiple consumer purchases and purchases cycles. CEO Schultz suggested Catalina drop the project prior to its start even though it is targeted against FSI. News America has increased circulation to 4.3 million to the market place with many smaller newspapers. Valassis' opinion was that the decision wasn't good for clients, will impact redemption rates and is not good for FSI products. Specific examples include inflating circulation rates, claiming newspaper coverage beyond 50% in certain market areas and the addition of newspapers that were unaudited or free standing. Schultz stated that News America, knowing about its 2004 earnings declines, thought if it could force clients to buy additional circulation they could offset declines. From a margin by segment point of view Valassis' FSI segment has increased 200-300 basis points, Cluster segment 100-150 basis points 1:1 segment had flat margins and International was up, although there was no baseline with the acquisition of NCH. Although Valassis reported itself in the position for share repurchase due to its cash position at the end of 2003, no comment will be made on repurchase until the first quarter earnings call. FSI mix in remnants and full price consumables were 20/80 in 2003. Average contract length remains the same at 27 months. Custom co-ops will number 11 in 2004 in addition to 40 regular co-ops. Valassis reported no significant change in strategy with regard to checkout coupons. The space the company is interested in is grocery stores, mass products, and POS. There is no long-term strategy to move into aisles. Current integration rate with current POS systems is 95%. From a financial standpoint, the acquisition of NCH has resulted in a return on investment in a large multiple. With the recent Safeway announcement, Valassis reported the opportunity is about 1/3 rd of the current Kroger engagement. Also, Kroger has a UK interest involved, increasing the reach and breadth of the project. The Safeway program will begin impacting the company's revenues in the second quarter. When working with competing companies such as Safeway and Kroger, Valassis ensures clients are protected. The grocery strike has primarily affected business in Southern California, although Valassis has seen impact on Kroger employees serving double duty from the Cincinnati office on assignment in California. Costs should prove more favorable for the business in 2004 due to lower paper costs, use of company printing presses and internal production capabilities. Valassis has traditionally had a more profitable first half than second half as evidenced by the 2004 outlook figures.