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Valassis Financial Results for Q3 '07; Revenues up 144%

Press release from the issuing company

LIVONIA, Mich., Nov. 6 2007 -- Valassis today announced financial results for the third quarter ended Sept. 30, 2007. The Company reported quarterly revenues of $607.2 million, up 144.0% from the third quarter of 2006, due primarily to the acquisition of ADVO, Inc. (ADVO) that closed on March 2, 2007. Third-quarter net earnings were $16.4 million, or $0.34 in earnings per share (EPS) up from $6.6 million, or $0.14 EPS, for the third quarter of 2006. For the third quarter, operating income was $49.0 million and adjusted EBITDA* was $71.5 million, up 41.3% from pro forma adjusted EBITDA* of $50.6 million for the third quarter of 2006. Adjusted free cash flow* was $30.8 million for the quarter.
"Our strong results for the quarter were driven by the success of our integration efforts of the ADVO business," said Alan F. Schultz, Valassis Chairman, President and CEO. "During 2007, we have made substantial progress to improve ADVO's cost structure and optimize this business. These efforts drove an outstanding $24.9 million improvement in ADVO's segment profit, as compared to the third quarter of 2006. Our Neighborhood Targeted segment also delivered a strong performance for the quarter and continues to outperform the industry.
"We expect to continue to take costs out of the shared mail business in the fourth quarter, with 100% of the wrap being printed internally for the first time during this period. We have also accelerated our sales integration plan and revised sales compensation incentives that we expect will set the stage for profitable revenue growth in the second half of 2008."
Some additional integration and financial highlights include:
- Cost Synergies:  Our primary focus for 2007 has been identifying and delivering cost synergies.  We are on plan to exceed our $20 million cost synergy target for this year.
- Business Optimization:  Efforts to optimize our shared mail business are ahead of schedule.  Our package optimization initiative, designed to reduce over-supply and deliver more profitable packages, is driving increased profits.  This quarter reflects optimization results in Los Angeles and the partial effect of eliminating the second in-home date in Las Vegas.  Reviews of package distribution profitability continue on a market-by-market basis.
- Sales & Marketing Integration:  The complete integration of our sales structure has been announced and will be effective Dec. 4, 2007.  A new sales compensation plan, designed to focus the sales organization on our most profitable revenue opportunities, will be effective January 2008. Cross selling is currently being done on a select basis and serves as "proof of concept" for our integrated customer value proposition.
- Debt Repayment:  In November 2007 we made the third voluntary $25.0 million payment on the Senior Secured Credit Facilities Term Loan B. In the eight months since the closing of the ADVO acquisition, we have made $78.0 million in debt repayments.
- Reduction of Capital Expenditures:  We are reducing expected capital expenditures for 2007 to $40 million or less from the previous guidance of $50 million or less.
Management expects to meet or exceed 2007 adjusted EBITDA* guidance of $241.0 million, as outlined in our second quarter 2007 earnings release.
Looking forward, the Company expects to announce 2008 annual guidance in December, after the Valassis Board of Directors has reviewed and approved the Company's budget for the coming year. As previously reported, the Company expects cost synergies of $36 million in 2008 and $40 million in 2009.
Management believes sustainable, profitable revenue growth will occur in the second half of 2008 upon the completion of the following four initiatives: 1) a new, integrated sales structure designed to redeploy duplicate coverage, which is completed and will take effect Dec. 4, 2007; 2) a new sales compensation plan which is completed and will take effect January 2008; 3) the development and implementation of a company-wide targeting system to provide customers with optimized media plans, which is on plan to be completed in the second quarter of 2008; and 4) cross-training of the sales organization, which began in August 2007, and will continue in 2008. In addition, Valassis is enthusiastic about its upcoming launch of a consumer-facing brand and interactive site, both expected to be launched in the first quarter of 2008. As a recognized leader in providing value-oriented content to consumers, Valassis plans to deliver this value, repurposed from its current media, in an interactive environment. We believe our ability to drive consumer traffic with our rich source of relevant, local and national content and existing media differentiates Valassis' entry into this space.
Business Segment Discussion
- ADVO:  ADVO revenues for the third quarter were $348.9 million.  This performance was achieved despite the elimination of the Detached Address Label and a reduction in package distribution due to optimization efforts.  Management expected these two factors to have reduced revenue by 4.1%.  Revenue growth in the quarter was driven by a substantial improvement in the ShopWise(R) Wrap sell-through percentage, new client wins, increased activity by a major national retailer, reduced client credits, and higher revenue per piece. Segment profit for the quarter was $23.7 million compared to a loss of $1.2 million (operating loss of $5.7 million adjusted to exclude $4.5 million of merger and litigation costs) reported by ADVO in the third calendar quarter of 2006.  Although the third quarter of 2006 included some one-time adjustments and other charges, the majority of the improvement was the result of wrap product line performance, improved utilization of our distribution network and successful fixed and variable costs reductions.
 "The extraordinary performance of the ADVO business is the result of dedication, sacrifice and collaboration by associates across our organization," said Robert A. Mason, ADVO President.  "We have done a great job managing down costs over the past several months and now that our sales organization is playing offense and creating some real wins, we're seeing a significant impact to our bottom line."
- Neighborhood Targeted Products: Since Jan. 1, 2007, the Neighborhood Targeted segment has included the Run of Press (ROP) business, previously reported as a separate business segment. Segment revenues for the third quarter were $117.4 million, up 13.3% from the prior year quarter. Segment profits were up 57.1% to $19.8 million for the quarter. "The growth is due to increases in ROP and preprints primarily in the retail, telecommunications, casual dining, consumer packaged goods, and financial services client verticals," said Larry Berg, Senior Vice President of Retail and Services Sales.
- Market Delivered Free-standing Insert (FSI): Co-op FSI revenues for the third quarter were $102.6 million, down 3.1% from the third quarter of 2006.  These results were due to an expected reduction in FSI pricing offset by increased page growth, driven by an increased industry date schedule.  FSI cost of goods sold was down slightly for the quarter on a cost per thousand (CPM) basis. Segment profit for the quarter was $3.7 million.
- International & Services: International & Services revenues are comprised of NCH Marketing Services, Inc., Valassis Canada, Promotion Watch and In-store. International & Services reported revenues of $28.0 million for the third quarter of 2007, up 4.5% from the third quarter of 2006, due to higher coupon clearing volumes in the United States and the United Kingdom and improved sales in Valassis Canada. Segment profits for the quarter were $2.9 million after a charge of $0.3 million related to the planned relocation of the United Kingdom production facility.
- Household Targeted Products: Household Targeted product revenues for the third quarter were $10.3 million, down 18.3% from the third quarter of 2006, due to continued softness in solo direct mail programs. This segment lost $1.1 million for the quarter after incurring $0.9 million in expenses associated with the Company's investment in its new interactive initiative which is expected to launch in the first quarter of 2008.