LIVONIA, Mich., July 21 -- Valassis, the leading company in marketing services and Connective Media(TM), today announced financial results for the second quarter ended June 30, 2005. The company reported quarterly revenues of $276.4 million, up 7.7% from the second quarter of 2004. Second-quarter net earnings were $25.5 million, or $0.50 in earnings per share (EPS), at the high end of the company's EPS guidance range for the quarter of $0.45 to $0.51. EPS for the first six months of 2005 was up 7.1% from $0.98 to $1.05. The company raised the full-year 2005 EPS guidance range to be between $1.96 and $2.08.
"We are pleased with our first half performance and the positive trends in our business which have contributed to the raising of our EPS guidance for 2005," said Alan F. Schultz, Chairman, President and CEO of Valassis. "Our strategies to diversify our product portfolio and expand our customer base have positioned us well to deliver effective marketing solutions for our customers, while providing value to consumers in a non-intrusive way. We are excited about our success with integrated solutions and our position in the marketplace, a position we plan to further enhance."
The company has included more details on the raising of 2005 EPS guidance in the "Outlook" section of this release.
* Sold 71 integrated solutions, campaigns utilizing three or more Valassis products synergistically, in 2005. The company anticipates delivering 100 integrated solutions in 2005, compared to 65 in 2004 and 20 in 2003.
* Named to IndustryWeek's "50 Best Manufacturing Companies" list for the second consecutive year. Valassis was distinguished for its outstanding manufacturing and financial performance.
* Hired John Lieblang for the newly created role of Vice President, Chief Technology Officer to increase company focus on Valassis' technology initiatives and business process reengineering, as well as expand the potential for technology-based products and services.
* Continued to test products internationally. In June, the fourth drop of Coupons & Mehr was distributed to 1,000,000 households across Berlin, Hamburg and Frankfurt, Germany.
* Installed loyalty card solution with leading convenience store retailer, Speedway SuperAmerica LLC. Using VRMS' MarketEXPERT XR and TargetEXPERT XR applications, Speedway successfully launched its Speedy Rewards loyalty program in April, featuring real-time rewards in a variety of club and points programs.
* Announced increase in co-op free-standing insert market list from 58.7 million to 59.7 million in circulation. This change will be effective Oct. 2, 2005.
* Quarterly revenues were up 7.7% driven by revenue growth in all business segments.
* Net interest expense was down 26.9% to $1.9 million for the quarter.
* SG&A expense was up 5.9% to $34.8 million for the second quarter due to increases in performance-based incentive plans, investments being made in future growth opportunities and the consolidation of the acquired Direct Marketing Services division of Catalina Marketing in September of 2004.
* Cash and auction-rate securities at the end of the quarter were $179.8 million.
* The company's debt position, net of cash and auction-rate securities, was $94.1 million at quarter-end.
* Capital expenditures through the first six months of 2005 were $15.8 million in comparison to $6.0 million for the first six months of 2004 due to the purchase of a new operations building in Livonia, Mich.
* The company repurchased 692,177 shares of its stock during the second quarter of 2005, bringing the total for the first six months to 1,563,358 shares, compared to 1,870,517 shares for the full year of 2004. The company currently plans to use 75% of free cash flow from operations in 2005 for share repurchase.
Business Segment Discussion
* Market Delivered Free-standing Insert (FSI): Co-op FSI revenues for the second quarter were $134.4 million, up 1.6%. This increase was due to continued industry unit growth and an additional publishing date in the second quarter compared to the prior year, offsetting a slight reduction in co-op FSI pricing. Management also noted the company is maintaining its co-op FSI market share. FSI cost of goods sold (CGS) was up mid-single digits for the quarter on a cost per thousand (CPM) basis due to increases in the cost of paper and media on a CPM basis.
* Market Delivered Run of Press (ROP): ROP revenues, generated from the brokering of advertising space on behalf of newspapers, were up 1.5% in the second quarter to $27.3 million. Segment profitability increased 25% over the second quarter of 2004.
* Neighborhood Targeted Products (Cluster Targeted): Neighborhood Targeted product revenues increased 28.0% for the quarter to $72.2 million. Overall, this business segment performed well due to continued strong growth from existing customer verticals, expansion into new customer verticals and the movement of dollars from traditional to promotional media. The increase in revenue was primarily attributed to growth in preprints from the telecommunications, retail and food service customer verticals. Management noted that this revenue growth was accompanied by an improved gross margin, consistent with the company's guidance.
* Household Targeted Products (1 to 1): Household Targeted product revenues are comprised of PreVision Marketing, Valassis Relationship Marketing Systems (VRMS) and direct mail. Household Targeted product revenues increased 3.1% to $16.6 million for the quarter. Direct mail and VRMS revenues were up 17.6% for the quarter, partially offset by a decline in PreVision revenues of 26.4%.
* International & Services: International & Services revenues are comprised of NCH Marketing Services, Valassis Canada and Promotion Watch. International & Services reported revenues of $25.9 million for the second quarter, up 3.2%. Management noted a decline in profitability due to the softness in the company's operations in France and the United Kingdom, as well as an increase in new business development spending in the United States and Europe.
In its Oct. 21, 2004 third-quarter earnings release, the company provided the full-year 2005 EPS guidance range of $1.80 to $2.00. Management has increased the 2005 EPS guidance range to be between $1.96 and $2.08 due to a strong first half, continued strength in the Neighborhood Targeted business segment, an increase in co-op FSI circulation and reductions in FSI paper costs resulting from a decrease in the width of the FSI book. The changes in FSI circulation and the width of the FSI book are both effective in October 2005. Due to the impact this change in book size has on the FSI cost structure, the company noted it improved its FSI CGS guidance for the year to be flat to up by a percentage in the low-single digits on a CPM basis.
In addition, the company raised its 2005 FSI revenue guidance to flat from down by a percentage in the low-single digits. Management also revised its revenue guidance for the Household Targeted business segment to be up by 15% to 20%, in comparison to the 20% to 25% growth in the original guidance for 2005. Management included the following revised quarterly EPS projections for 2005:
Quarter Projected EPS Range Actual Results
1 $0.50 - $0.56 $0.55
2 $0.45 - $0.51 $0.50
3 $0.39 - $0.45
4 $0.52 - $0.58
Management also provided the following comments regarding co-op FSI pricing. The current co-op FSI pricing environment can best be described as having no discernable pattern. However, based on FSI contracts completed to date for 2006 and 2007, the company calculates a bottoming out of pricing in 2006 and a price recovery in 2007. The anticipated decline in pricing for 2006 will be slight and similar to the decline experienced in 2005. This pricing trend for 2006 and 2007 could change based on the price at which the remaining uncontracted business is sold.
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