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Valassis Communications Inc. (NYSE:VCI)

Q4 2008 Earnings Call

February 17, 2009 11:00 am ET

Executives

Alan Schultz - Chairman, President & Chief Executive Officer

Bob Recchia - Executive Vice President & Chief Financial Officer

Analysts

Townsend Buckles - J.P. Morgan

Chuck Cerankosky - FTN Equity Capital Markets

Daniel Leben - Robert W. Baird & Co., Inc.

Dan Salmon - BMO Capital Markets

Edward Atorino - Benchmark

Matt Chesler - Deutsche Bank

John Harlow - Barrow Hanley

Hal Holden - Barclays Capital

Jack Kranefuss - MetLife

Chip Burgess - Van Kampen Investments

Kevin Seagraves - Fort Washington

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Valassis Communications Fourth Quarter and Year-End 2008 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions).

This conference is being recorded today Tuesday, February 17th, 2009. Please refer to the Safe Harbor language on the earnings documents released this morning. This call will be governed by the language stated thereon.

I would now like to turn the conference over to Alan Schultz, Chairman, President and CEO. Please go ahead, sir.

Alan Schultz

Thank you, Brandy. I’d like to welcome everyone to the call today. I am here with Bob Recchia, our Chief Financial Officer, who also will be speaking later on in the call and participate in the question-and-answer process.

I would like to begin by comparing some numbers reported in our Q4 earnings release to the guidance that we gave you on November 6, 2008. At that time, we expected revenue would be down 6% to 7% in the fourth quarter versus the prior year driven by the deterioration in the economy and constricting client budgets.

Our reported revenue in Q4 was actually down 5.3% so a little bit better than we anticipated. When you remove revenue from our recently divested One-to-One direct mail services business and our French media business, revenue actually declined by about 4% in the fourth quarter. So again, bottom line revenue a little bit better than we had anticipated and probably better on a relative basis to our media peers.

This was due greatly to increased ROP business from ROP product. And I think one of the advantages that the ROP business has is it has very short lead times, which allow clients to respond quickly to changing market conditions. And so, I think because of those short lead times in the fourth quarter, the ROP business experienced a bit of benefit.

Our actual adjusted EBITDA for Q4 was $62.6 million this was down from our guidance of $65 million. And it was basically 3 areas that contribute to that, number one; we increased by $1 million our allowance for doubtful accounts and it’s our view in this economy that that’s certainly the appropriate thing to do. The second issue was, we had about $600,000 more in legal expenses than what we had anticipated at the time that we provided you with the guidance. And we also had a bit of product mix shift from our higher margin Shared Mail business towards the lower margin ROP business.

So Shared Mail was a little less than we had anticipated and ROP was more than we had anticipated in the fourth quarter. We did incur a $4.2 million severance related restructuring charge in Q4 versus the $4 million that we had expected, that we had provided you on the call. And basically what happened there is we went a little more extensively on staff reductions than we had originally assumed on November 6, 2008.

We also took a $4.8 million non-cash write-off related to our investment in China. Obviously, Valassis is among a growing number of companies taking goodwill impairment charges to comply with accounting rules.

As reported, we have taken $245.7 million pre-tax, non-cash, goodwill impairment charge this quarter associated with the ADVO and PreVision acquisitions. This charge is obviously not reflective of our business operations and without it, Q4 earnings would have been $1.4 million.

Obviously, I think when these accounting rules were developed; I’m not sure at the time that they had contemplated this sort once-in-a-century stock market melt down at the time these rules were developed.

We first began to feel the effects of the economic slowdown on our business in September of 2008 and Bob and I are really going to spend a good portion of the call today, recapping the steps for you that we have taken to quickly adapt to the changing environment. An environment where 77% of clients reported they are reducing media budgets in 2009 according to the Association of National Advertisers.

Well, we cannot control our clients declining marketing budgets, we remain focused on those things we can control. The results of these controllable efforts are substantial, although they are not always visible for the bottom line because of declining revenue and pricing.

We looked at every thing that goes into running our business on a day-to-day basis and really start to focus on three strategies to more efficiently run our business and the objective here was to run our business more efficiently than we ever have in the past.

The first area we looked at was we made decisions and changes quickly from a cost management stand-point. We have been on a path to caution containment since our Shared Mail acquisition in March of 2007. In fact, we did achieve the $38.4 million cost synergies in 2008 that we were targeting in fact; it’s a little bit better than we had anticipated. However, since September we have gone beyond integration cost synergies to rapidly rain in discretionary spending, reduce staffing and improve efficiency through out the company.

We designed and are in the process of implementing our Profit Maximization Plan and set a goal of $50 million to $60 million in cost savings in 2009. Bob Recchia shared some of the details of this plan with you on our last earnings call and he will take you through an update on our progress shortly.

In 2009, we reduced our associate benefit package to be consistent with what other companies are offering in the market place. Merit salary increases were also suspended. Since September, we have reduced our sales staff by just over 100. We were able to make these reductions without negatively affecting service or account coverage by substantially increasing the number of sales calls made per person and by investing in training and technology.

Post acquisition of ADVO, we did not downsize our sales organization. In fact, we continued to hire within the sales organization unlike the rest of the organization, where we obviously looked to reduce headcounts and find efficiencies.

We purposely left growth capacity in our sales force, as we planned for revenue growth to begin in the second half of 2008. Maintaining this additional capacity was not appropriate in today’s environment as a result of these changes, we believe we have significantly upgraded the caliber and efficiency of our sales organization.

The second strategy that we’ve been working on is client retention. New client acquisition and cross-selling. Today’s marketing environment is more competitive than ever. As media companies look to more aggressively steal market share from competitors. As a result, we have significantly stepped up our focus on client retention.

Our 2009 retention goal is 88% of our 2008 revenue base. We plan to build upon this retained revenue with cross-selling and new accounts. We define cross-selling as selling additional products and services to existing clients. In 2008, we generated approximately $80 million in cross-selling revenue. New client acquisition was a priority for both our strategic and field sales teams in 2008 and we booked over $100 million in new client revenue in 2008. We set a goal to drive in excess of $100 million for each of these initiatives in 2009.

The third area that we focused on in terms of running our day-to-day operations better was Operational Efficiency. Again, we need to operate our business better than we have ever run it before. This environment requires that. We continue to challenge our teams to operate doing more with less.

Here are some examples from 2008. Our client services division reduced staffing by 160 people yet increased service levels. By reworking processes and work flow, they reduced the number of errors by nearly half in 2008 versus 2007. And also reduced client credits due to errors by $10 million in 2008 versus 2007.

Our targeting team increased the number of targeted media recommendations made to clients by 5% in 2008, despite a 29% reduction in staffing and working through the development and roll-out of our new proprietary targeting system IMO, Integrated Media Optimization.

We implemented a new traffic and transportation management system, which generated $3.1 million savings in 2008. We in-sourced our data center, previously under contract with an outside provider of data center services. We estimate this move will generate $4 million in annualized savings. Our Shared Mail production facilities improved production efficiency by 7% through improved labor efficiency while reducing workman’s compensation expenditures by 27%.

Throughout the company, our operational teams have stepped up to reduce waste and improve efficiency while maintaining high client service level. The examples I just mentioned are just a few.

We also pursued three strategies to strengthen our company financially and competitively during these extraordinary times. This included a focus on actions that would drive immediate short-term results.

First strategy, reducing debt; since the acquisition, we have repaid $246 million in net debt. As we announced on January 26, we amended our senior secured credit agreement to permit us to use up to $125 million to repurchase from tendering lenders, outstanding bank term loans at market rates through one or more modified Dutch auctions in 2009.

The second strategy, we’ve been working on in these extraordinary times was divesting of non-core and non-strategic assets. We have also taken swift action to divest of non-core assets including previously announced divestures of our One-to-One direct mail services in European media businesses, as well as our write-off related to our investment in China, all three of which were cash users. We are also seeking to further divest of other non-strategic assets.

The third strategy which is appropriate in today’s environment is to position ourselves for the future, the recovery. In 2009, associate management incentive awards and profit sharing retirement programs will be subject to the Valassis Broad of Directors discretion.

We believe that this additional over sight is appropriate in light of today’s economic environment. 100% of our Vice Presidents’ and above consented to this action. They did so voluntarily without compensation. Even if we hit designated targets and objectives, all of our incentives will be payable only at the discretion of the Board.

I believe this speaks to the commitment of our leadership team and their willingness to put the best interest of the company ahead of their own. We are fortunate to have a number of products in client verticals that are fairly recession resistant, such as the FSI business. Others are much more cyclical in natural, such as our sampling business.

And while these cyclical businesses are negatively affected by the current economic downturn, they remain important growth engines for the future when the economy does turn around.

We believe it’s an advantage to have businesses, which cross the spectrum from recessionary resistant to cyclical. And it’s important to have a well-diversified customer base. We continue to invest strategically in innovation for the future. We are laying the foundation for what we believe will be a new business model in the FSI industry.

We are working towards differentiating our FSI with Shared Mail distribution, as we believe it offers a viable alternative to declining news paper circulations. While, we are encouraged by favorable early research results, it is still very early in the process.

In addition, we continue to pursue opportunities in the in-store arena, but remain a very small player relative to our competition. We know that consumers continue to spend more time in the interactive world, seeking value. For this reason, we continue to invest in the interactive component of our RedPlum Portfolio, redplum.com.

In 2009, we are extending this initiative to a network approach versus a static destination site only. We know consumers want to find value in our leveraging interactive media to find the values when and where they want them. The network approach will help us reach consumers where they are on a contextual basis and we are pleased with the progress to-date. We have already exceeded 1 million page views for the first 16 days of February, compared to 770,000 page views for the whole month of January.

In addition, we have passed a significant milestone in secure coupon printing; 3 million. It took us 296 days to reach our first million, 72 days to reach our second million and just 38 days to hit our third million in secured coupon prints. This clearly demonstrates momentum is building.

At this time, I’d like to turn the call over to Bob Recchia, our Chief Financial Officer.

Robert Recchia

Thanks, Al. I would like to touch on two key financial objectives that were undertaken for 2009. The first is Profit Maximization Plan that we detailed during our third quarter 2008 call. As you may recall, we said that we expected year-on-year savings as a result of this plan of $57.5 million. The breakdown is $25 million in SG&A, $26 million in production cost savings and $6.5 million in underperforming businesses.

As of today, we have made significant progress against this objective. Headcount reductions across the entire organization in 2008 and the first quarter of 2009 will account for approximately $15 million of year-on-year savings in SG&A.

In addition, we expect a reduction of $9 million in information technology expenses as a result of the in-sourcing of the data center, reduced consulting spend and lower data and telephone rates.

In the production cost area, we are seeing a lower paper prices and reduced BA cost for a regular co-op FSI business and reductions in consumables and staffing in the manufacturing area.

In addition, we continue our efforts in the area of Shared Mail optimization and will benefit from news paper alliances entered into in 2008; one is being negotiated for 2009. In terms of our under performing businesses, we have completed the sale of the One-to-One direct mail services business to the management of this business and discontinued the development of media businesses in both Europe and China.

In addition, we have reduced expenses and our accelerating revenues in our redplum.com interactive business, which will substantially reduce our operating loss versus a year ago.

We still have some work to do in the Profit Maximization Plan to hit our target, but we are confident in the overall savings number of $57.5 million in 2009. The second key objective relates to our balance sheet and debt reduction.

On January 22, 2009, we amended our senior secured credit facility allowing us to use up to $125 million of cash to purchase our outstanding term loans under this facility at prices below par using one or more modified Dutch auctions during 2009.

In conjunction with this amendment, we have agreed to reduce our availability under the revolving credit portion of our senior credit facility from $120 million to $100 million in exchange for the right to keep $20 million of revolving loans outstanding at the time we commence any modified Dutch auction. As of today, we have purchased $7.5 million of bank debt at an average price of 68.

On January 15, 2009, we paid off and canceled the remainder of our section 5(a) senior secured notes in accordance with their scheduled maturity. A combination of these two events has reduced our senior secured debt to $603.3 million as of today.

We are also managing our working capital closely and monitoring credit approval levels to minimize bad debt in this uncertain economy. Lastly, capital expenditures are being approved only for projects that have a very short term payback or projects that are critical to our operations. We expect capital expenditures to be near $15 million for the year.

The $245.7 million of impairment charge taken in the fourth quarter; represents an adjustment of $226.9 million to the carrying value of the intangible assets associated with the purchase of ADVO in 2007.

In addition, we have written off $18.8 million of goodwill associated with the purchase and subsequent sale of PreVision, our loyalty One-to-One marketing business purchased in 2000.

In summary, I think we are doing the right things in this environment to ensure we continue to meet our requirements under our bank covenants. We have acted quickly to take cost out of our operations and put a sales structure in place to drive the organization in this difficult time.

We have begun the repurchase of our senior secured debt below par through the modified Dutch auction process and we will continue to look for opportunities to improve our balance sheet and take further cost out as the year progresses. So with that, we will open things up to questions.

Alan Schultz

Brandy, if you would start up the questions, we would appreciate it.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). Our first question comes from Alexia Quadrani - J.P. Morgan.

Townsend Buckles – J.P. Morgan

This is Townsend Buckles for Alexia with a few questions. First, can you talk about how Q4 trended, particularly how December faired for ADVO?

Robert Recchia

I think the last couple of weeks in the Shared Mail business was soft. I think otherwise it was relatively as we had anticipated it. The last two weeks of the month were soft; we did get one cancellation from a grocery retailer that came in very late in the month of December. And then, one of the issues we have been dealing with is light weighting from grocery retailers, which basically means when they send their circulars in, there is less pages than we had anticipated. And we did see some light weighting in the quarter, but the light weighting in think was really relatively consistent throughout the quarter. I think it was more of the last two weeks of December.

Townsend Buckles – J.P. Morgan

Okay and can you give any color on Q1 so far. Did you see any follow through of the Q4, December trends in January?

Robert Recchia

I think we are looking at this from an overall perspective, and what exactly the product mix is going to look like is, it’s difficult to say at this point. Clearly, one of the things that we are hoping for is that Shared Mail business will be stronger, because that’s where our margins are better, but clearly mix is something that we need to continue to watch and monitor, but at this point in time, we don’t have any specifics to provide by product line in the first quarter.

Townsend Buckles – J.P. Morgan

Okay, and finally do you have a target for how much you hope to act on your amending credit agreement to buyback your bank debt and can you give us any update on your plans to maybe sell NCH?

Robert Recchia

We really don’t have any specific target that we are looking for in terms of the bank debt. What we are really looking for is kind of dislocations in the market, and to the extent we can buy on a favorable basis, we wanted to have the ability to do that, but we are not setting any specific targets. As it relates to NCH, obviously, it’s a business that we think is sellable particularly in this environment. Because it’s a business which has a lot of stability associated with it, it’s got a solid management team, it’s got very sort of consistent cash flows associated with it.

And I think we all know that consumers are more value conscious than they ever have been before. And as a result of that, there is probably some growth associated with the NCH business in the future as it relates to improving coupon redemptions. And so, I think even in this environment it makes it a pre-sellable asset that we have. So we are continuing to work on that.

Operator

Our next question comes from Chuck Cerankosky - FTN Equity Capital Markets.

Chuck Cerankosky - FTN Equity Capital Markets

Looking at the FSI business, a little improvement year-over-year. Any comments on where you think that might be headed, any thing positive hopefully to say about the trends there?

Alan Schultz

I think the FSI business has got two things going for it, one it is a business that tends to be fairly recession resistant. In fact, in the fourth quarter, the industry unit growth was actually up a little over 5% in the quarter. So, obviously we saw other media going backwards pretty quickly starting in the fourth quarter and the FSI kind of headed in the other direction.

So, it’s our belief that we will see some unit growth continuing in 2009 in the FSI business and of course the FSI is made up primarily of consumer package goods companies, which also tend to be fairly resistant to recession and typically continue to spend through the recession and the consumer package goods companies also these days appear to be pretty worried about private label incursion.

In fact, we were working with one grocery retailer that did a basket analysis and they found out that 14% of the shoppers had a private label product in their basket that they hadn’t been buying private label previous, they had been buying the branded product. So, in this environment, the consumer package goods companies are very interested in lowering that differential between the branded product price and the private label price and couponing is a way to do that.

So that’s the good news in the FSI business in this environment. The bad news is, News America continues to aggressively price and aggressively pursue market share in this environment and so from a competitive standpoint, we really haven’t seen any change in their activity.

Chuck Cerankosky - FTN Equity Capital Markets

Al back to the private label which is interesting, because we have seen a lot of increased sales penetration at various retailers and private label. Are the retailers themselves becoming better clients as they try to communicate private label value to their patrons?

Alan Schultz

I would tell you that we see private label activity, but Chuck, I don’t know that we have necessarily seen more marketing from them in terms of marketing their private label products. I think the answer to that is no, I don’t think we have at least not that I have been able to measure. With that said, I think it’s a function of the environment and consumers and consumers are looking for deals and consumers are looking for value and there is a pretty substantial difference in most cases between the branded product and the private label product and of course when you look often times that the ingredients there is not a lot of difference. And so, that becomes pretty compelling for consumers in this environment.

Chuck Cerankosky - FTN Equity Capital Markets

Any update on the use of the Shared Mail to carry the FSI. We have seen a little bit here in Cleveland?

Alan Schultz

Yes. I guess, in terms of an update, we continue to move in that direction. Obviously, we do it on a market-by-market basis and as newspaper circs decline in markets, if we see a situation where newspapers are having a difficult time getting the kind of penetration that level of the market place that our clients are looking for, then we think Shared Mail is a great alternative.

For instance, in Cleveland, the market you mentioned, we distribute I think almost twice as many FSI booklets in the Shared Mail packages, we were able to do in terms of the newspaper circulation, because the newspaper penetration level is relatively low in the market place compared to what our customers are looking for. So, that’s an example of a market that it works and there are others, it’s our belief that we will do a market list change here in the middle of this year and we will probably move up from around $6.5 million in terms of Shared Mail distribution to near $10 million in terms of Shared Mail distribution.

It’s not to say that’s without challenges, because there are challenges associated with it. For the most part, the results we’ve seen are fairly positive in terms of the impact on retailers and consumer package goods companies. But in Cleveland as an example, I think the newspaper and one of its affiliates is trying to rally consumers to encourage us to move back into the Cleveland plain dealer newspaper.

And so, we are hearing some consumer grumbling, although again, at the end of the day there is going to be nearly a doubling of the number of consumers receiving the values. So, we think it’s the right thing to do.

Operator

Our next question comes from Dan Leben - Robert.W Baird.

Daniel Leben - Robert W. Baird & Co., Inc.

Could you talk a little bit about the increase we are seeing in coupon activity in the volumes on the FSI business coming up? But with pricing going the other way, could you talk about the impacts on the profitability of that business?

Alan Schultz

I think, right now we would anticipate that the volume increases that we anticipate that we will receive in 2009, offset by a decline in price with perhaps a small up tick in terms of market share and a declining cost structure, we think as Bob had mentioned, we will, for our regular Co-op FSI, which is on kind of a big grade super calendar paper. We think that prices will probably go down on that grade of paper in 2009.

So, the cost structure will kind of slowly trickle down as the year goes on and then of course, as we move more circ on newspapers in the Shared Mail that typically gives us a distribution cost advantage to lowering the cost. So, when you roll that altogether, I think we might see a slight improvement in segment profit in 2009. At this point, obviously that’s subject to change based on what actually happened.

Daniel Leben - Robert W. Baird & Co., Inc.

Now, if you could just a talk a little bit about what you are seeing from the different vertical end markets and specifically to the extent you are seeing customer bankruptcy particularly in some of the retail areas and so forth, any impact that’s had?

Alan Schultz

Yes. We talked about consumer package goods being one of the positive categories we’ve been negatively affected with match mass merchandisers spending less money. And specialty retail is a category that’s been relatively soft also and there have been a number of situations there in specialty retail where we are concerned about potential bankruptcy situations in which case, we are trying to make sure that we limit the amount of credit that we offer and typically will limit that one drop-date, so we might have a retailer that’s doing 20 programs with us in the course of the year.

We are trying to make sure, we have no more than exposure to one drop-date at a time and make sure we get paid for the previous ones, before we do another drop and so, our specialty retail is that we are concerned about.

The other think we are concerned about with specialty retailers is store closures. So it’s not just the risk of bankruptcy that’s kind of a separate challenge for our accounting folks, but there is also a challenge for our sales organization in the sense that, if a retailer closes 20% of their stores, then chances are, we are going to see a reduction of 20% in terms of their marketing spend with us.

And so, that’s a challenge on that side. So, I would think that specialty retail category is probably the category that we are watching the closest. Of course, in addition to that particularly in our Shared Mail product, we have got a lot of local pipe retailers and the local advertisers have really been hit very hard.

So, we are watching them very carefully. Now the good news there is from a credit perspective, those small local clients typically pay by cash or by credit card in advance of running the program. So the bad debt expense isn’t the risk, but clearly we are anticipating that there is going to be a fall-off in revenue from some of those local customers. And so, we have kind of baked that into our plans.

Daniel Leben - Robert W. Baird & Co., Inc.

Then, if you could comment quickly on the ROP business in terms of, where you were seeing the movements there in terms of customer end markets?

Bob Recchia

Yes, the financial and insurance were big players for us in the ROP business and again I think, so to speak, the beauty of the ROP business is if you want to reach $50 million households in 24 hours, you can do that in the ROP business. And so, it provides customers with tremendous flexibility to kind of look at the market place, look at their business, see what’s going on in their business, look at their competitions, see what their competitors are doing and then do something on a very short time period with very restricted lead times.

And so we have seen some benefit there, we saw it particularly in the fourth quarter and it seems like that product attribute will be beneficial for us on a going forward basis for that specific product also. In addition to financial and insurance, we also saw in the fourth quarter some pickup from telecom costumers also.

Daniel Leben - Robert W. Baird & Co., Inc.

And then just last question. Looking at the buyback discussions, could you comment a little bit on the Dutch auction to the extent that it was $7.5 million and $0.68 was the kind of mitigating factor for the size of that not being larger than that, the fact that you guys only wanted to do that much or was there some hesitancy of the debt holders to tender at those levels?

Bob Recchia

It had more to do I think with the debt holders than it did us. Again, our objective is to kind of take advantage of some dislocation there and if they are willing to tender on terms that look reasonable to us, then we are interested in buying on the other hand, if the price goes up significantly then we may elect not to play. So, we’ll play that out depending on how the bank debt is trading.

Operator

Our next question comes from Dan Salmon - BMO Capital Markets.

Dan Salmon – BMO Capital Markets

Did you maintain guidance for 2009 in the press release, does that still assume flat revenues in the second half?

Bob Recchia

We have actually flat to slightly down revenues in the second half. So kind of what we are anticipating is it’s the first half of ‘09 will kind of look like the second half of ‘08 where we kind of look at it at mid-single-digit declines, we saw my figure was 6.7% in the third quarter of ‘08. Now, we saw little over 5% in the fourth quarter of ‘08. So we’re assuming we are going to be somewhere in that mid-single-digit decline range in 2009 in the first half.

And when you get to the second half, we might be looking it down 1% down to 1.5% somewhere in that neighborhood. But we’re definitely making the assumption that the market isn’t really going to improve in 2009. The reason we’ve lowered the percentage decline in 2009 in the second half is, we are really comparing to the second half of 2008, where we have already taken a bit of a hit. So that, so from the comps get easier when we get in to the second half of 2009.

Dan Salmon – BMO Capital Markets

And then just a little bit of a follow-on from the last question on the ROP business. It sounds as if financial insurance, telecom players were all helping the boost there those aren’t exactly what I consider holiday blow out type of customers. Is that fair to think of that sort of higher-than-expected rate of revenue there as an ongoing type of benefit or was there a bit of a fourth quarter seasonal bonus in there as well?

Bob Recchia

I think again there is a unique product attribute there that really doesn’t exist any where else. Even when you think about even the Internet, which people view as being a realtime scenario, if you tell me you want to reach 50 million households within the next 24 hours, it’s pretty hard to do that even on the Internet. ROP is one of the only products that you can really do that with and then another example that is in the first quarter you heard about a lot of problems related to peanuts and peanut butter and those kind of thing and that generated a fair amount of business in the ROP business and you say, well why. Well, if you’re looking to get a message out to consumers really fast, ROP is better than anything else it’s available today.

And so, there is a unique attribute there that as long as we continue in an environment where companies literally are managing their business on a day-to-day basis and looking at their revenues, and looking at their cash flows, looking at their earnings and then making marketing decisions based on that information as well as, what their competitors are doing, it’s a good product in that environment. We have always said that’s why people do ROP is they want very short lead times.

Operator

Our next question comes from Edward Atorino - Benchmark.

Edward Atorino - Benchmark

Hi, two questions. If you take out charges your SG&A looks like it’s around 91 or so million. Without any further charges, could you talk about what that might be going forward and secondly, could you sort of repeat what you said at the outset was there a shift in this migration of any ADVO product that the neighborhood targeting that contributed to the increase there, or was it all ROP stuff?

Alan Schultz

Ed, I’ll answer your last question first, which is in the neighborhood targeted area what really drove the improvement in revenue there was the ROP business. Yes, just to be clear about that, there are other products in there. Sampling is included in there which is I said, we proceed to be a very cyclical business and has taken a pretty good hit in this environment. We would expect it will continue to be hit it’s very depended upon new product introductions. And we are not seeing a lot of new product introductions in the environment that we’re in today. So, it was all that the neighborhood target, it was really all about the ROP business in Q4. In terms of your SG&A question, Bob will handle that.

Bob Recchia

Ed, if look at the full year number and you take off some of one time stuff, I think we are right around 380 or so. So, if you back the $25 million after that, they will give you an idea of where the plan. That is still has some room in it. If we can continue to find cost to cut, but in the 355 range is probably a good estimate of where we are headed.

Edward Atorino - Benchmark

And on that, I hate to have you repeat. But you talked about the ADVO decline it looked like an 11 but it really turns out be less, isn’t that right?

Bob Recchia

No, not really yet. We have moved some business from our pre-plan area in to our Shared Mail business, which benefits the Shared Mail business but even with that movement Shared Mail was down about 11%.

Edward Atorino - Benchmark

Well, okay. I misheard. Okay.

Bob Recchia

Yes, I think when you look at again when you look at that spectrum, you’ve got the FSI on the left side let’s say being relatively recession resistant. You’ve got the sampling business on the right side being very cyclical. The Shared Mail business is somewhere in between those two. I think there is a cyclical nature to that business; it’s very depended upon retail advertisers. And obviously, we are actually seeing retail advertising decline kind of right around that range of what we saw in the fourth quarter.

Operator

Thank you. (Operator Instructions). And our next question comes from Matt Chesler - Deutsche Bank.

Matt Chesler – Deutsche Bank

Just wanted to follow up real quickly. In the past, did you quantify that the preprint benefits to the other division. Could you do that again for us this quarter?

Alan Schultz

Matt, we will have to get back to you on that. I don’t actually have that number with me this morning. I don’t know if Bob has it or not.

Bob Recchia

I don’t have. I know is the number I just coming into the meeting I just didn’t have it.

Matt Chesler – Deutsche Bank

All right, so you called out in your release that part of the softness in Shared Mail was due to softness in the wrap. So, I think probably [working] here sort of you can describe the dynamics that you are seeing in that important part of the business and what do you think you need to do in 2009 to prevent the wrap from call out again for the full year.

Bob Recchia

Yes. The wrap business as, what we have done in the past is we have had a couple of big categories in there. We had satellite, we had lot of franchise food retailers and we didn’t have a lot of local customers. So our goal in the past year here has been to get local customers more active in terms of picking up the slack in the wrap. Well, obviously the problem, we ran into in the fourth quarter, is local customers pulled back significantly in terms of their spending, which meant that they weren’t really filling in those holes on the wrap anymore.

And so, we think the wrap is probably going to be continued to be a challenge for us on a going forward basis. The key is to continue to diversify the customers that make up the wrap. And so, what we are really trying to do is limit certain customer verticals in terms of the percentage of the wrap that they make up and expand the customer base that’s participating in the wrap.

That’s really what the focus is today, I would tell you I think it’s going to continue to be a challenge in the first quarter and hopefully we’ll make progress from the sales perspective expanding the customer participants in the wrap then we will start to see some benefit of that in the second quarter.

Matt Chesler – Deutsche Bank

There have been some changes in the postal structure including rates? Can you just kind of comment on what you are expecting for postal rate increases and as well as how do you think that any potential move to a five day postal delivery would effect your business to understand that some of the industry groups through, opposed to discontinuing continuing things like Saturdays and Mondays, which would suggest that a mid week days almost likely to start with I think when you distribute the Shared Mail product?

Alan Schultz

Yes, first of all it looks like the rate for our class of mail is going to go up by 2.23%. So, it will be less than the inflationary increase. Since about half of the price we charge customers is related to postage. Our agreements will allow for us to pass on about 1.2% increase to our customers to cover that postage increase here which will come into affect on May of 2009.

The other thing that was beneficial in the postal rate case which is something that we were looking for was we wanted an incentive, if we wanted to grow the number of packages that we distribute in a market. And the way it works today is if you want to add circulation to a market, you get the exact same rate structure and what that means is you got to get enough critical mass in that package to get the break-even.

So, you will lose a substantial amount of money in your startup time period, what the postal service is proposing now is about a 30% piece rate discount if you open new circulation in an existing market provided you have been a participant in that market and have had at least six drops in the previous year.

So it’s really not designed to encourage new competitors to come into a market. It’s really designed to get existing users such as ourselves to increase circulation thereby benefiting the postal service with more volume and to mitigate that startup cost before you reach critical mass. So that’s kind of a beneficial situation in the rate case. The other thing that is somewhat beneficial in the rate case is the differential between the saturation mail rates, which is a classification that we would fall into and like newspaper TMC rates which would be classified as high density. The differential between those two rates has increased.

So we would have more of a relative cost advantage and I think the postal service recognizes our class of mail as a greater growth potential for them and therefore is trying to put incentives in the right place to encourage that growth. And so that’s another thing that’s in the postal rate case.

As far as the five day a week distribution versus six day a week, I would make a couple of statements. Number one; I wouldn’t expect any changes in that within the next year, I think there is a lot of opposition to that, in a lot of different places right now. And so, I think it’s going to take a while for that play through, if we reach the point where the postal service does decide to go in that direction then we’ll have to see how they propose to do that and then we could comment more specifically on that plan once the plan is developed, but our understanding is right now is there has been no plan developed there is not likely to be a plan developed or implemented any time within the next year. So I guess we’ll have to wait and see on that one.

Matt Chesler – Deutsche Bank

Where are you guys, remind me please on your on-going efforts to improve the efficiency of the distribution you were being more selective in the markets where you were distributing and some packages have been going down. If I look out for 2009, if you consider the effects of those efforts to net extent if they are continuing and the migration from the newspaper deliver products to Shared Mail. Should we expect that your overall package volume will be higher or lower this year?

Alan Schultz

I would tell you that we do have optimization programs that we put in place in 2008, that will be annualized in 2009 that will result in fewer packages. So optimization will be working against us, in terms of packages delivered that would be negative. In terms of the migration of FSIs in the Shared Mail packages, that really doesn’t have a much of an impact on the number of packages that we’re delivering. So, that really isn’t a factor obviously with this postal incentive in place there are markets where we may decide to increase our frequency or go into some additional profile or around those markets, which would encourage us to increase a bit. But I would say, overall and I would have to look at the plan and I don’t have the plan in front of me right now. I think you are probably going to be very close to flat in terms of packages versus the previous year. I mean, it could be up a 0.5%, it could be down 0.5%. It’s going to be pretty close to flat.

Matt Chesler – Deutsche Bank

In terms of the operating metric, Bob can you tell us what pieces per package metric was for the quarter?

Bob Recchia

No, I can this time. So I brought it with me. The pieces per package were 7.6 pieces down from a year ago, which was 7.8. Packages were down about 4% from a year ago.

Matt Chesler – Deutsche Bank

Total package volume?

Bob Recchia

Total package volumes, so those are been two numbers.

Matt Chesler – Deutsche Bank

Okay. What about revenue for 1000 pieces?

Bob Recchia

Down 2% Revenue per piece, down 2%.

Operator

Your next question comes from John Harlow - Barrow Hanley.

John Harlow - Barrow Hanley

It looks like only your line of business that you are operating profit segment, profit reported includes the legal and severance expense, is that correct?

Alan Schultz

Yes.

John Harlow - Barrow Hanley

What would the numbers look like if you exclude those two items?

Alan Schultz

Yes, definitely we’d have to go through the process of spreading that in terms of percentages among the different segments, John.

John Harlow - Barrow Hanley

Let me do it offline.

Alan Schultz

Okay.

John Harlow - Barrow Hanley

Is that what you prefer to do

Alan Schultz

Yes, that would be great.

Operator

Our next follow-up question from Chuck Cerankosky.

Chuck Cerankosky - FTN Equity Capital Markets

I got a couple of questions for you around repurchasing the debt. When you report the amounts that you repurchased, is that the money spent on the repurchase or is that the carrying amount that comes off the balance sheet?

Bob Recchia

The 7.5 would be the face value at $0.68 on the dollar versus the purchase price.

Chuck Cerankosky - FTN Equity Capital Markets

Okay. Now, you are going to book gains on that?

Bob Recchia

Yes.

Chuck Cerankosky - FTN Equity Capital Markets

All right. So, you will be breaking those out?

Bob Recchia

Yes. Somewhere along the way, we’ll let now where they fallen through?

Alan Schultz

Yes. Just to be clear Chuck, it’s a place here in the first quarter of 2009. So, obviously we haven’t reported yet. We didn’t deal any modified Dutch auctions in 2008.

Chuck Cerankosky - FTN Equity Capital Markets

I understand, just thinking ahead here. Now Bob, is there a learning curve in this process on both sides, both you guys in the bank, it strikes me that debt repurchases aren’t usually done in this fashion and often it’s more in the public markets than the bank to the lender for the borrower?

Bob Recchia

Well, it’s definitely a learning curve on my side. I think the bankers have pretty good sense for how these things work and if you look at what’s been done in the market so far and other companies that have done these MTAs, there isn’t a mad rush to sell the bank debt back especially early in the process. So it’s going to take a little bit of time, we have got to find a price that works for us and works for bank holders and it’s a little bit of a guessing game. The bankers have been through a number these I think we are getting good advice. I think it’s going to take some time.

Chuck Cerankosky - FTN Equity Capital Markets

All right, well, good luck with it. I like the idea.

Bob Recchia

Thanks, Chuck.

Operator

Our next question comes from Hal Holden - Barclays Capital.

Hal Holden – Barclays Capital

I just had two quick on housekeeping. Can you give us the current cash balance as whatever the most recent data is? And if you could break out the EBITDA from the NCH division may be for 2008 that would be helpful?

Bob Recchia

Yeah, the cash question we can’t answer for you. The NCH off the top of my head, I think it is about between $15 million in EBITDA.

Hal Holden – Barclays Capital

I heard, I guess the only reason we are looking for cash is it helps in getting a sense of what’s your capacity as to these sub-par buybacks.

Alan Schultz

Yes. We obviously have the December 31, cash balance that we reported in the balance sheet. We spent about $52 million after that to pay off the 2009, [it’s in] 5.8s and another 7.5 actually 5 million roughly on the MDA. So everything else from now just is just as a result of operations, we don’t give the interim cash balances out. We do have some cash available for an MDA, if we chose to do another one.

Operator

Our next question comes from Jack Kranefuss - MetLife. Please go ahead.

Jack Kranefuss - MetLife

You had mentioned that for ‘09 your retention is expected to be 88% of the ‘08, clients. What is your historical retention level?

Bob Recchia

It was a little bit over 88% last year. It was 88 and some change in 2008. So, the 88% number that I gave you for 2009 is just a little bit less than what we believe we did in 2008.

Jack Kranefuss - MetLife

Do you have an average of what it spent historically?

Bob Recchia

No, I do not.

Operator

Our next question comes from Chip Burgess - Van Kampen Investments.

Chip Burgess - Van Kampen Investments

I just wondered, if you could talk about from the standpoint of your advertiser. What the advantages might be to migrating off of FSI and into neighborhood targeted in respect to redemption rates on the coupons and costs to the advertisers?

Bob Recchia

As we move our regular Co-op FSI on out of newspaper and into shared mail. What we have seen so far is that the overall product movement is good or better than what clients were experiencing in newspapers. So, from a client perspective, I think it looks like a relatively neutral experience in terms of product move. Now, there is a benefit that clients get, which is now the benefit is that the Grocery circular as an example is aligned with the FSI distributions. So, often times what is happening is a Grocery circular might be distributed on a Wednesday and in the FSI doesn’t come out until the following Sunday. In often times, the circular will call attention to the upcoming coupons that’s kind like a message to consumers to hurry up and wait.

So what we’ve seen is, is we’ve seen the redemptions spike up earlier in the process. Because, we now have alignment between the retail circular and the FSI coupon booklet which clients like that part of it. So from a client perspective, we think it makes a lot of sense. The other thing that clients are interested in is, we now have a number of markets across the country where the major market newspaper might only be covering 30% of the households in that market.

Most of the clients that participate in the FSI product are really looking into cover 60%, 65% of the households in the market. So, clients generally have a perception today that newspapers circulations are declining and are likely to continue to decline. Therefore, they realize that we need to seek alternatives and clearly this Shared Mail distribution seems like the most viable alternative available, particularly since it aligns with the retailer that they are really tying in with.

Alan Schultz

That makes sense?

Chip Burgess - Van Kampen Investments

Yes. So, on a redemption basis, sort of neutral on a coverage basis, probably a positive, what about on the costs to the advertisers, is it higher to go through the mails and through FSI?

Bob Recchia

No, we are basically charging the same rates through the newspaper or through Shared Mail and I have actually seen some internal documentation from clients where they are surprised that they can run in a mail environment for the same amount of money they could run in the newspaper environment and they have talked about that as positive.

Chip Burgess - Van Kampen Investments

And this would be more profitable for you, is that correct?

Bob Recchia

Typically yes, because the cost structure that we get in Shared Mail participating in our own package is less than what newspapers are charging us now. We have been working with the newspaper community particularly where they can give us the coverage levels that we are looking for. We have been working with them to get the distribution rates down similar to Shared Mail distribution rates and a number of newspapers have been cooperative in that regard and Bob did reference that earlier as part of our production cost savings that we have been seeing a number of newspapers get their cost structure inline.

Chip Burgess - Van Kampen Investments

And, just one another question. At the beginning of the call you mentioned that based on some source 77% of advertisers will decrease marketing budgets in 2009, could you sight that those source once again and say by how much?

Bob Recchia

If the ANA, Association of National Advertisers and I don’t believe they gave the percentage anywhere in that study about what the percentage decline was on average among the participants in the survey just at 77% of those advertisers, we are going to reduce their media budgets in 2009 versus 2008 you can pull the study, I am sure the ANA has it on their website and it was reproduced and published in advertising aids recently and you can get your hands on it there are a number of other statistics in the study other than of what I quoted.

Operator

Our last question comes from Kevin Seagraves - Fort Washington.

Kevin Seagraves - Fort Washington

I was just wondering if you could with the SG&A cost and the savings from since the business shutdown and sales and even from the production give us a sense for how much of that is already kind of done at this point and then how much of it is to come in 2009 for some of the further actions that you need to take?

Alan Schultz

I would tell you the bulk of it is down there still some headcount reduction that is going on in the first quarter. We still got a little ways to go especially on the paper number to get to where you want to go we are running ahead in a couple of other places. So the best way to put it you is, I am confident we will get to the 57.5 it probably won’t come in exactly the way we detailed it out, and it never does. But we have seen enough activity, enough opportunities so we are pretty confident we will get that number.

Kevin Seagraves - Fort Washington

And you have estimate for interest expense cash interest rate 2009 at this point?

Alan Schultz

I do, I don’t know if it is in front of anybody here though, 89 net.

Kevin Seagraves - Fort Washington

89 okay, great. And then lastly, can you give you give just bit of an update may be on the legal situation, I guess timing and then also you have, is there any risk I guess to the SG&A budget from additional legal costs at this point or do you feel like you have that kind of budgeted correctly or?

Alan Schultz

Yeah, we think we have it budgeted correctly. There is actually a meeting down in the chambers of the judge as we speak right now to talk about the March court date. News Corp or News America has been trying to delay these trials as long as they can and push them off as long as they can. So, my understanding is there is a motion being heard by the judge right now where they are trying to delay the March trial date, because they’ve got another trial that overlaps with FLOORgraphics who has a case against them. So, we’ll have to see how the judge rules on that today, but that meeting is taking place simultaneously with this one.

Operator

Thank you. And at this time, there are no further questions. I’ll turn the call back over to management for any closing comments.

Alan Schultz

Well, thank you all for participating on the call today. We really appreciate your questions. To wrap-up, I guess what I would like to leave you with this, there is no stone being left unturned here at this company. We are looking at it from the perspective of not only, what do we need to do to run our business better on a just day-to-day basis, better than we have ever run it in the past. But then we are also looking at it and saying, we are living through very extraordinary times. And those extraordinary times forces us to consider strategies that might not otherwise be considered. And so, I can assure you every possible option is being looked at, every possible contingencies being considered and we are going to continue to work together to take action and take action on a timely basis and really focus on things that are going to provide immediate short-term results, while we keep a watchful eye on making sure we properly positioned ourselves in our product portfolio for the future, when the economy begins to recover. So, I can assure you everything that is being, that could possibly be looked at is being looked at.

So, once again thanks for your participation on the call and we’ll stay in touch.

Operator

Thank you ladies and gentlemen. This concludes the Valassis Communications and year-end 2008 earnings results call. If you would like to listen to a replay of today’s conference, please dial 303-590-3000 or 1-800-405-2236. Those phone numbers again are 303-590-3000 or 1-800-405-2236 followed by pass code 11123117. ACT would like to thank you for your participation. You may now disconnect.

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Source: Valassis Communications Inc. Q4 2008 Earnings Call Transcript
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