LIVONIA, Mich., July 22 -- Valassis, the leading company in marketing services and Connective Media(TM), today announced financial results for the second quarter ended June 30, 2004. The company reported record quarterly revenues of $256.8 million, up 5.6% from the second quarter of 2003. Second-quarter net earnings were $26.8 million, or $0.51 in earnings per share (EPS), exceeding the company's second-quarter EPS guidance range of $0.44 to $0.50. "The benefits of our diversified product portfolio were very apparent this quarter," said Alan F. Schultz, Chairman, President and CEO. "We also experienced strong FSI industry unit growth and improved page volumes, exceeding our original expectations. We recognize this as an opportunity to refocus our efforts on a co-op FSI price improvement initiative. We will begin implementing what we believe to be a low-risk approach to improving the pricing environment, while protecting our existing business." A $2.5 million refinance charge, net of tax, was incurred in May of 2003 related to the partial buy-back of the convertible debt issued in 2001. Mass Products - Products that reach large markets at a low cost: Co-op free-standing insert (FSI) revenues for the second quarter were up 2.3% to $132.3 million. Management noted there was strong unit growth in the co-op FSI industry for the eighth consecutive quarter. This unit growth, combined with the company's increased market share, mitigated the effect of continued competitive pricing pressure in the co-op FSI. Run of press (ROP) revenues, generated from the brokering of advertising space on behalf of newspapers, were up 74.7% in the second quarter from $15.4 million to $26.9 million year over year. Cluster Targeted Products - Products that reach neighborhoods based on geographic and demographic characteristics: Cluster Targeted product revenues for the quarter were $56.4 million. Although revenues were down 12.3%, gross margin dollars were up 3.3% year over year, as a result of management's increased focus on improving the profitability of this business. Revenue growth guidance for this segment has been revised from 10%-15%, to less than 10% for 2004, with overall profitability expected to be on plan. Management noted that due to the variable timing of customer orders, this segment's quarterly revenue typically does not track year over year. Management also noted the demand for these products continues to be strong. 1 to 1 Products - Products and services that pinpoint individuals or households to build loyalty to a brand: The 1 to 1 product revenues are comprised of PreVision Marketing, Valassis Relationship Marketing Systems (VRMS) and direct mail. 1 to 1 revenues increased 76.9% to $16.1 million for the quarter, due to the company's enhanced retail relationships and growing direct-mail business. Management increased the 2004 revenue growth guidance for this segment from 20% - 25%, to greater than 25%. "Valassis has gained the leading position in the area of targeted direct mail for both retailers and consumer packaged goods (CPG) companies," said Lou Czanko, Vice President of Retail Sales. "Valassis enjoys a strong relationship with several leading retailers who are utilizing their frequent shopper card data to create direct-mail campaigns to communicate with top shoppers. At the same time, CPGs realize that database-driven activities are an important part of their overall marketing mix." International & Services - Marketing products and services available in the United States, Canada, France, Germany, Italy, Mexico, Spain and the United Kingdom: International & Services is comprised of NCH Marketing Services (NCH), Valassis Canada and Promotion Watch. International & Services revenues were flat for the second quarter at $25.1 million. Gross margins in this business continue to be strong. The company took another step forward in its European growth strategy by implementing tests of new media products and services in key European markets. Management is very encouraged by the customer interest in the company's new European promotional vehicles. Costs and Expenses FSI cost of goods sold was flat for the second quarter on a CPM basis. While FSI paper costs increased, printing/distribution and media costs declined on a CPM basis due to the increase in printed pages and larger co-op FSI book sizes. Net interest expense was down 13.3% to $2.6 million for the quarter. SG&A expense was up 5.9% to $32.9 million for the second quarter. Debt Position/Share Repurchase The company's debt position, net of cash, was $109.0 million at quarter- end. During the second quarter, the company repurchased 267,300 shares of its stock. The company ended the quarter with $164.4 million in cash. During the quarter, the company paid $38.7 million in cash to settle a portion of its zero-coupon convertible notes due 2021. The remaining debt balance related to this issue is approximately $13.6 million. Outlook In October of 2003, the company provided 2004 EPS guidance of $1.65 - $1.85. Management has updated this 2004 EPS guidance range to be between $1.73 - $1.85. Management reiterated the following quarterly projections provided in its fourth quarter 2003 earnings release on Feb. 19, 2004: Quarter Projected EPS Range Actual Results 1 $0.44 - $0.50 $0.47 2 $0.44 - $0.50 $0.51 3 $0.37 - $0.43 4 $0.38 - $0.44