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Executives

Alan Schultz - CEO

Analysts

Alexia Quadrani - JPMorgan

Dan Leben - R.W. Baird

Dan Salmon - BMO Capital Markets

Jonathan Levine - Jefferies

Chuck Cerankosky - Northcoast Research

Victor Consoli - PW Partners

Andrew Finkelstein - Barclays Capital

Valassis Communications, Inc (VCI) Q2 2009 Earnings Call July 30, 2009 11:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Valassis Communication Second Quarter 2009 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

This conference is being recorded today Thursday, July 30, 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 your host, Mr. Alan Schultz, Chief Executive Officer. Please go ahead, sir.

Alan Schultz

I'd like to welcome everyone to the call today. I have with me Bob Recchia, our Chief Financial Officer, and I will go through our prepared remarks and then Bob and I look forward to answering your questions.

I'd like to begin to by commenting on last week's jury verdict in the first of three cases we have filed against News America that awarded us $300 million in compensatory damages. Interest is accruing from the date of filing our complaint. Any recovery will be treated as other income and taxed appropriately when received. Our claims in the case were for unfair competition and tortuous interference by News America. More specifically, we alleged and offered substantial evidence to support our claims that News America had engaged in tying, bundling and leveraging of their in-store business in which they have market dominance into FSI negotiations to unfairly gain FSI business during the last eight years with the intent of harming Valassis' FSI business for the ultimate objective of driving us out of that business.

Our evidence covered News American conduct with over 60 different FSI purchasers between 2001 and 2008. The eight member jury's unanimous verdict found News America liable on both counts. News America has stated, it intends to appeal the ruling. We will vigorously oppose their appeal and support the legitimacy of the jury's verdict and the fair handling of the case by Wayne County Circuit Court Judge Michael Sapala.

As a result of this decision, our shareholders have been inquiring about how the verdict may affect our FSI business going forward. We don't know but we assume any law abiding company would follow the law and stop any behavior that was found to be illegal in a court of law. In the meantime, clients maybe examining their existing News America contracts with an eye toward their enforceability.

News America's response to the verdict referenced items that were inadmissible during the trial. Their response is consistent with their overall strategy to divert attention from the testimony and facts of the case. The judge ruled all prior litigation was inadmissible including cases involving News America by Menasha, Theme Co-op Promotions, Insignia Systems, Robert Emmel and Floor Graphics

We have two additional lawsuits pending against News America, one in Federal Court asserting violations of the Sherman Act and another in the Supreme Court of the State of California raising claims under California's outright unfair competition and unfair practices acts.

These cases are yet to be scheduled for trial but we intend to aggressively pursue these claims. Any damage awards under the Sherman or Cartwright Acts would be tripled by law. Our most recent Form 10-Q has additional information on these pending cases. Due to the pending litigation on this matter, we will be limiting comments on the litigation to these prepared remarks, so we will not be answering questions on this topic.

Now moving forward to the primary purpose of this call, which is the discussion of our Q2 results, we will be discussing several areas with you today. Number one, we'd like to talk about our revenue results relative to other media companies. Secondly, we'd like to discuss highlights from our individual business segments. We'd also like to discuss our performance in managing the cost side of our business, as well as updating you on capital expenditures, liquidity and our covenant cushions. And finally, our outlook and our decision to raise our full year 2009 adjusted EBITDA guidance.

From a revenue perspective, although the economy has driven down client media spending, we continue to outperform most other media companies who are reporting advertising revenue declines in the 13 to 30% range. Our reported revenue for the quarter was down 8.6% versus prior year quarter. When you remove 9.8 million of revenue from divested and discontinued businesses and the 1.8 million impact of currency fluctuations from the prior year quarter, revenue declined 6.7% on a pro forma basis this quarter.

It is worth noting that second quarter 2008 was a decent quarter with revenues down just 2.8% as we didn't begin to feel the full impact of the economic downturn until September of last year. We are aware of at least three research studies that indicate the U.S. has experienced a permanent shift in shopper behavior, a shift that has been made seeking value number one in shoppers' minds.

One of the key reasons we continue to outperform most other media companies on a revenue basis, is our value-oriented product portfolio. Our read RedPlum products helped marketers reach increasingly value-minded consumers.

NCH Marketing Services our coupon processing and analytics subsidiary is reporting a 23% increase in coupon redemptions volume this quarter versus the prior year quarter, the third consecutive quarter of double digit redemption volume growth.

Q4 of 2008 was up, 17% and Q1 of 2009 was up 15%. CPG marketers continue to face fierce competition from growing private label brands. They turn to coupons and discounting to help keep their customers loyal by lowering the price differential between branded products and private label alternatives. Coupon distribution was also up again this quarter and that makes five consecutive quarters. We are enthusiastic about the future prospects of our NCH business.

Valassis also benefits from a relatively stable and diverse customer base. Our business is not depended on housing, construction or automotive advertise and does include grocery retailers and consumer packaged good manufacturers as our largest client verticals, who fair well regardless of economic conditions.

Moving on to segment highlights. The increase in newspaper preprints, our largest product within our neighborhood targeted segment, was the bright spot in our revenue story this quarter, with a 42.1% increase in newspaper preprint revenue versus the prior year quarter. Despite declining circulation trends in the newspaper industry, our preprint growth was driven by several factors. Number one, success in selling newspaper preprints to Shared Mail clients. Number two, organic growth in our exiting preprint clients. Number three, new client acquisition due to our ability to blend Shared Mail and newspaper distribution into a single, optimized buy. And finally, strength in specialty retail, grocery retail and communications client verticals.

Overall, revenue in our neighborhood targeted segment however, was driven down due to decreases in our ROP and sampling businesses. The ROP decline was due to significantly reduced spending by two major customers, one in the telecom vertical and the other in the financial services vertical.

Declines in our polybag and sampling business were not surprising, as polybags are typically used in store grand openings and sampling is used for new product introductions, both of which have declined in this economic climate. Polybags and sampling are by far our most cynical products.

The revenue decline in our Shared Mail segment was due to a reduction in mass merchandiser spending, continued grocery retailer light weight and the general competitive of the market place. On the plus side, we are pleased that Shared Mail margins continue to do well, which may seem counter intuitive considering the high operating leverage associated with this business.

As you saw in our release, revenue decline 10.5% but segment profit increased 2.6%. We continue to drive efficiency with package optimization efforts, newspaper alliances and overall improvement and expense management. We also made a small improvement of 1 percentage point in unused postage and a 3% increase in pieces for package versus last year.

Revenue in our FSI business is up 3.8% this quarter, due entirely to an approximately 8% growth in industry unit volume, driven by positive trends towards value oriented media which I mentioned earlier, along with the shift in pre-Easter revenue from the first quarter of last year to the second quarter of this year.

While the increase in FSI segment profit versus the prior quarter is noteworthy, the FSI segment profit remains dramatically depressed from historical levels due to the unfair competitive behavior of News America including their tying, leveraging and bundling of their in-store business into FSI negotiations and contracts. For example, in 2002 the annual segment profit for the FSI business was a $195.2 million compared to just $1.8 million in the last full calendar year of 2008.

While we don't have a crystal ball on the economy, we do believe that the worst of quarterly revenue declines is behind us. With an overall, 8.6% rate of decline in this quarter, for the last four quarters, the percentage revenue decline versus the prior year quarter is as follows. Q3, 2008 revenue was down 7.2%, Q4, 2008 down 5.3%, Q1, 2009, 7.7% and of course Q2, down 8.6%.

Moving on to the management of the cost side of the business, I'm often asked how we're doing with our integration of Shared Mail. The best example of integration achievement I can think of is how the team responded last September when everyone was asked to step up to drive down costs in response to the sudden economic downturn and its negative impact on our clients marketing budgets.

I'm incredibly proud of how our team responded, a team with many divisions, many locations, producing diverse products and serving a variety of clients. One team with a common goal, drive down cost, while maintaining quality and service in order to maximize profits. We moved with speed as one company to lever our 2009 profit maximization plan and we are really hitting it out of the park. Each and every employee in the company has contributed.

Our original forecast for cost savings from our 2009 profit maximization plan was $57.5 million, to be accomplished through a combination of cost of goods sold and SG&A reductions and the elimination of unprofitable businesses or product lines. We now forecast cost savings of $20 million to $25 million over our original forecast of $57.5 million. The best way to model this impact moving forward would be to use a gross profit margin of about 24% and a quarterly SG&A run rate of approximately $88 million, which includes legal expenses.

Capital spending for the first six months of 2009 is at $8.6 million, in line with our guidance of $15 million to $20 million for the full year. Cash flow from operations during the quarter was $83.7 million, including a $50 million improvement in working capital, which allowed us to decrease our net debt to $952 million. We also paid off $23.1 million of our term loan B debt primarily through modified Dutch auctions at an average discount to par of 7.3%. As of June 30, 2009, our senior secured leverage ratio was 2.57:1, providing a covenant cushion of 31% and our interest coverage ratio was 2.59:1, providing a covenant cushion of 32%.

Given our belief, that we have hit the bottom from a rate of decline in revenue, along with our diligent cost management efforts and our profit maximization plan results and excluding any future negative economic surprises, we have decided to increase our full year 2009 adjusted EBITDA guidance by $30 million from $215 million to $245 million. Our forecast, both from a sales and cost side of the business perspective, points to this number. The recent verdict in our first case against News America is not a contributor to or consideration in our decision to raise guidance.

With that, I would like to open the call to your questions. As a reminder, we will not be answering questions regarding our litigation with News America. So, Christopher if you could open up the call, we'd appreciate it.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Alexia Quadrani with JPMorgan. Please go ahead.

Alexia Quadrani - JPMorgan

A couple of questions about what you're really seeing in the third quarter. First on the in the ADVO's Shared Mail side of the business, are you seeing any indications of a pick up in July, any indications that maybe there is a stronger back-to-school spending and then on the FSI side of the business, I know it's only been about a week, but are your sales people seeing any change in competitive behavior from news following the results of a lawsuit and do you think the industry wide volume growth that you saw in the second quarter is continuing to the third quarter?

Alan Schultz

Alexia, in terms of third quarter Shared Mail business, I would say in general, Shared Mail and kind of across the Board in terms of our product portfolio, I think we have seen a relatively strong back-to-school promotional time period. With that said right now, September is not crystal clear to us and from a overall revenue perspective, the way we look at it is, we still think we're going to experience a same revenue decline in Q3.

As I said earlier, we think the rate of decline in Q2, we think the worst is behind us now. That doesn't mean, we're back to revenue growth, we don't know exactly when revenue growth will return at this point in time but the answer to your question on back-to-school is yes, it does look to us as if the spending is pretty strong in that July-August time period. From an FSI side of the business it really only has been a week now, so from a competitive perspective, we really can't comment on anything we've seen there because we haven't really seen much at this point in time.

Alexia Quadrani - JPMorgan

Can you remind us where your market share stands right now in the FSI business and what is your pricing outlook for next year if you have one?

Alan Schultz

Yes, at this point of time, we're not commenting on the pricing. It isn't until we usually get into like the October-November time period that we really have a good handle on the pricing side. As far as market share goes, we are in the low 40s right now. 42% - 43% is kind of the market share. As always that includes the custom co-op programs that we do.

Operator

Thank you for standing by ladies and gentlemen, I've re-added Mr. Schultz on the line. Once again, we are in the question-and-answer session. (Operator Instructions). Mr. Schultz, please begin.

Alan Schultz

Hello, this is Alan Schultz returning to the call. I Apologize. We had a power outage here at our office. So I'm on my mobile, hopefully it comes through clear. I was with Alexia's question at the time we broke off and Alexia's question was, what was our market share in the FSI business.

The answer to that is, we're in 42% - 43% range in terms of market share. As I have mentioned many times in the past, we do always include custom co-ops in our market share number, the reason for that is, is we don't want anyone to know what specific customers we're doing in the way of custom co-ops and what volume they are running. So that is part of what has been requested by clients to do custom co-ops. So, that's what our market share looks like.

Operator

Thank you. Sir, would you like to take the next question?

Alan Schultz

Yes, let's go to next question.

Operator

Excellent. Our next question is with Dan Leben with R.W. Baird. Please go ahead.

Dan Leben - R.W. Baird

Great, thanks, Alan, if you can help me out on the cost side, just in terms of the nice performance you guys have had, how much of that is due to some of the mix shift away from the ROP business versus just kind of core cutting out fixed cost in the business and lowering the overall cost base?

Alan Schultz

Well, I think we've done a pretty good job on cost of good sold side of the business also, but you are right. When you point out the fact that some of the revenue that we have lost are actually a pretty large percentage of the revenue we have lost has been lower margin business. So, you are correct to point that out. We had a pretty significant decline in excess of 50% decline in our ROP business. And as you know, ROP tends to be one of our lower margin businesses.

Dan Leben - R.W. Baird

Could you just going back to the guidance quickly, the increase in the guidance. Could you give us a sense of how much of that is baking in, the feeling that the sales line has stabilized versus what you have done in an advance of expectation on the cost side?

Alan Schultz

I would say probably in the neighborhood of two thirds of the increase in our adjusted EBITDA guidance is in the form of costs and the other third is in the way of the revenue looks like it's firmed up a little more than we had built in to our budget for the second half of the year. So, as I stated earlier, does it mean we have to see revenue growth in the second half of the year, but it looks as if revenue will be a little stronger than what we had anticipated in the second half of the year in terms of our modeling.

Dan Leben - R.W. Baird

Could you just give us a little bit more depth on some of the verticals in the spending habits you are seeing there, both in the quarter and also looking out to July and August what you've seen there in terms of back-to-school?

Alan Schultz

When you get into the different verticals, it looks to us as if in the neighborhood targeted segment, our preprint business continues to perform very well. It looks as if it's continues to be relatively strong. What we see from an FSI segment standpoint, I think, we have got the question earlier, do we see continued growth in the back half of the year in the FSI business. And the answer to that question is, yes, we do think this leaning towards value oriented media is going to continue to benefit the FSI business here in the back half for the year.

So we anticipate that we'll continue to see growth there and in terms of our international digital segment and services segment, we believe based on everything we've seen so far that these trends in terms of the U.S. coupon clearing volume are going to continue whether it will be plus 20% like we saw in the fourth quarter or the most recent quarter, in the second quarter is difficult to say. But we don't see any reason at this point in time why we wouldn't continue to see sort of double digit increases in coupon clearing volume.

So, I think that tends to be pretty solid. And from a Shared Mail perspective, again, we've seen some pretty good activity in terms of back-to-school but September is not crystal clear to us yet in terms of exactly what September is going to look like. So, September will have a pretty significant impact on the quarter for Shared Mail.

Dan Leben - R.W. Baird

I guess what I was actually looking for and that was great commentary, but just in terms of what you're seeing from CPG versus grocery, versus specialty retail, some of those different segments or industry verticals, what they are doing both in the quarter and then looking forward in the July and August what you're seeing in terms of trends?

Alan Schultz

From a client vertical standpoint, consumer package goods looks like its going to continue to be pretty strong in terms of spending. I would tell you in terms of specialty retail I think pretty stable, I think grocery pretty stable, I think mass merchandisers will continue to be down a little bit here. And the one area where we have seen some pick up is in the food service industry, causal dining etcetera. It appears to us as if, may have decided for whatever reason, they need to start increasing their spending.

Operator

Our next question is from Dan Salmon with BMO Capital Markets. Please go ahead.

Dan Salmon - BMO Capital Markets

I want to maybe dial in a little bit more on uses of free cash flow from here on out. Obviously you've got some bank debt and some notes out there also Digital remains a priority to invest in that area. So, maybe I don't know if you feel comfortable with this, but maybe frame how you are looking at using your free cash flow, where you stand today and then perhaps if ultimately the News America litigation settles where it looks like it is today with considerable amount of cash coming to you.

Alan Schultz

You know you brought up one area Digital and what I would tell you is in our profit maximization plan literally, every area in profit maximization is exceeding our expectations with the exception of Digital. Digital is actually losing more money than we had anticipated losing. Now, with that said, although I tend to and Bob Recchia tends to be a real stickler for people meeting and achieving their budgets. Its an area that we feel like we're making significant progress and its an area that we feel like we need to continue to invest in, so we've actually been spending a fair amount of time on that lately and we agreed on the fact that since our performance has improved and its beyond what our original expectations are, that we would continue to invest more money in the Digital area.

As I said, we have been making some excellent progress. I think we are now of the 235 million websites that are out there. I think RedPlum has now cracked up into the top 600 websites in terms of activity in the world and we've also now reached Google's page one in terms of coupon search. So, I think we are making great progress there, we're seeing great progress and we're going to continue to invest in that area.

The way of seeing this today is, is that our first priority continues to be debt reduction and I think that will continue. As far as proceeds from the litigation with News America go, obviously we're talking about very substantial dollars there and I think that would require us to reconsider exactly what we do with any of those proceeds and that ultimately would be a board decision and its something that we have had some conversation about, but its not something that we've made any firm decisions on at this point.

Operator

Our next question is from Trent Porter with [Arc Glow Capital]. Please go ahead.

Unidentified Analyst

I think you took care of most of my questions. Maybe I'll just ask this one. It's sort of at the risk of sounding optimistic. When you did the deal in 2007, as I recall your pro-forma EBITDA was in the 270 neighborhood and now in what's been described as the worst advertising recession in history, if you made regarding, you'll do a solid 240. So the question is, is there a way to quantify the permanent fixed cost savings that you've achieved relative to what you would based into that $270 million pro-forma number and also, quantify any sort of market share gains that you've accomplished as a result of the cross selling synergies and so on and so forth any then maybe bridge that, is there any structural change to the negative for example, the lower profitability of FSI relative to what you baked into that 270 number.

Alan Schultz

Just one part of your question was, from a market share perspective, has the cross selling yielded anything for us and the answer to that is yes, there is something that we have been measuring and one of the things we looked at is, if you looked at the entire universe of what every client is spending on products and services that we offer, our goal has been to increase our share of that and I believe we're up about 1 percentage point in that particular area, well its a pretty big number in terms of overall spending on products and services that we offer.

So, that is clearly an area we've made some progress and from market share perspective, when you look at the cost side of the equation, I don't think I can specifically tell you exactly what is the kind of permanent cost changes, but we definitely feel as if the majority of the cost changes that we made on the SG&A side of the equation do have a pretty permanent nature associated with them.

Even on the cost to good sold side, we've done some things from a contractual standpoint to lock in these costs well into next year. So, I think we've done some good work in that regard and referencing back to the original 270, one of the things I recently did is, I went back and looked at our original forecast for the Shared Mail Business for 2009, what we have projected in kind of like a first effort. And actually, the Shared Mail business even with the decline in revenue that we've experienced is outperforming what we had built in our original model from a EBITDA perspective.

So, that's as a result of a tremendous amount of work on the management side of that business, cost management side of that business and what I can tell you that I really like about that is the changes that we are making in that business are very much of a permanent nature in terms of the cost structure of that business. And so, if we can't start to see revenue growth in that business, you're going to see a very, very large percentage of that revenue growth fall rate through to the bottom-line.

Unidentified Analyst

I'm dying to ask about your litigation, but I won't. But are you allowed to say, at what rate the interest is it accrued on?

Alan Schultz

Yes. I don't know. I don't recall exactly what it is, but it seems it's in the neighborhood of 4.5% to 5% to somewhere around there and its 1% over some particular benchmark. I don't recall exactly what that benchmark is, but it seems like it's in that. Let's call it to be safe in the 4% to 5% range.

Unidentified Analyst

Okay, and is that on the 300 million or the net of [tax] amount?

Alan Schultz

No, that would be only gross amount.

Unidentified Analyst

And then final question follow-on to sort of Dan's question, if you are proud and happy and if that reduction was not the priority, what do you feel like you need to do. What would you do that you feel like you may be constrained in doing today in terms of investment in the digital phase. Do you feel like you have catching up to do or do you feel like strategically, what you've done with RedPlum and what you are doing is appropriate for the changes that are happening in the industry?

Alan Schultz

Yeah, I think we feel as if we do have catch up to do. I mean we do feel like we're playing some catch up in the Digital arena. As you know, we were very early on and in back in 1999, so we got kind of an early start on it, really too early an idea before its time and now when we re-launched here in January of 2008, we found ourselves playing catch up.

So, with that said, I think the progress that we made has been pretty substantial. And as I said before, we are alone to invest in that area. In terms of what other kind of areas we might invest in, again, that's a board decision. If you look at it from a historical basis, certainly share repurchase has been an area that the board has been interested in in the past.

We've had a long-term strategy to grow our product portfolio, when we've had a long-term strategy to diversify our customer base. And I don't think that has really changed in the last 10 or 11 years, so I think we would continue to look at those opportunities too.

Operator

Our next question is with Jonathan Levine with Jefferies. Please go ahead.

Jonathan Levine - Jefferies

Yes, I just wanted to follow-up just on a couple of other questions asked earlier. First, can you provide us some color in terms of the monthly trends in Shared Mail during the second quarter?

Alan Schultz

Jonathan, I don't have a whole lot in terms of monthly trends in Shared Mail in the second quarter. I can go by memory and my memory tells me that it was really pretty stable throughout the quarter. I don't think it was necessarily improving as the quarter went on. I don't think it was declining as the quarter went on. I think it was pretty stable month against month.

Now, with that said you did have Easter move from the first quarter in 2008 to the second quarter here in 2009 and so that kind of pre-Easter week would have moved and so April was a little bit better than the year before, but it had more to do with that reason than anything else. So, if you factor that out, I would say pretty consistent, pretty flat.

Jonathan Levine - Jefferies

Then just following up on the question on the free cash flow in terms of repurchasing debt. Do you have kind of preference between bank debt and notes and then if you could provide a little bit of color in terms of where your RP basket is in terms of what the availability is right now?

Alan Schultz

Yes, our preference would obviously be our notes versus the bank debt but, we looked at our debt agreements and we've made a decision that although it's sort of a grey area in terms of what we could do, in terms of buying back notes, we've decided that we are going to focus on the bank debt side.

So our focus is really there. In terms of basket amounts in terms of what we can do with baskets. Our basket kind of changes over time based on the results of the company and I have not looked at the basket here for the recent quarter, but that's something that we could look into.

Operator

(Operator Instructions). Our next question is from Chuck Cerankosky with Northcoast Research. Please go ahead.

Chuck Cerankosky - Northcoast Research

Question, Al, teeing off of what somebody else asked. If you're looking at your current verticals and customers and companies do any of them feel a sudden urge that they need to re-position their value image and that they are now looking at Shared Mail or the FSI product is a way to do that, whereas in the past they may have shunned it. Alternatively are some of them I've got to move from Shared Mail to the FSI or vice versa.

Alan Schultz

I would tell you, Chuck I know specifically in the grocery retail arena there were some grocery retailers that went very quickly with more of a value-oriented approach kind of moving towards everyday low price approach. And they seem to have been more successful then others.

There have been some other companies that have been slow to make that transition and I think they haven't fared as well. So, it's seems like they are now moving more in that direction of value-oriented media in conveying value to consumers.

So, I would say the answer to your question is, yes, there are some differences. I don't want to name specific grocery retailers, but I know you follow them very closely, you probably know exactly who they are.

I think the answer to your question is yes, I think we'll see more activity from those who are kind of late followers on this trend.

Chuck Cerankosky - Northcoast Research

Well how about other segments of retailing or other types of consumer companies that are looking at FSI for the first time or Shared Mail? Are you seeing any of that because the consumer is extremely valued conscious right now. It seems to be reacting to promotions.

Alan Schultz

Yes, I would tell you the other one is one that I mentioned earlier which is this whole food service arena, franchise type restaurants. We are certainly seeing more activity and more spending out of them also as of late. It kind of surprises me a little bit in the sense, I don't think they are doing particularly well in the current environment.

They have been struggling a bit, those particular customers and historically they've spent a percentage of revenue on advertising and promotion. It looks to us right now as if they made a decision to increase that percentage because the revenue isn't necessarily there right now, but it looks as if they have been and are going to be spending more.

Operator

Our next question is from Victor Consoli with PW Partners. Please go ahead.

Victor Consoli - PW Partners

Hi, this is Victor Consoli. I know you can't talk too much, but just some facts and clarification on the litigation. One, any settlement you receive, how was that taxed? Is there a difference between a jury award or a damage settlement.

Could you just give us the calendar as you know it, so we can keep track on this on our own for the likely appeal date from the News Corp. entity and the trial date is coming up in the Michigan Federal Court and the California State, Supreme Court, so we start marking our calendars please?

Alan Schultz

The answer relates in terms of the treatment of money received, it would be other income. There is a variety of different issues as it relates to tax and what's appropriate from a tax standpoint and we're currently researching those and so the answer to that question is not perfectly clear to us at this point. So, that's something that we're doing some more research on. So

Victor Consoli - PW Partners

So, it is taxable?

Alan Schultz

A portion of it is definitely taxable. Whether it's entirely taxable and whether its taxable as ordinary income or exactly how it works is again being researched at this point.

Victor Consoli - PW Partners

And you get a credit for your legal expenses I'm sure?

Alan Schultz

Well, the legal expenses are in our SG&A costs. So, that's already been taken into consideration. And in terms of the calendar on appeal, I don't want to say exactly what that looks like, because I really don't know. My understanding is there is a period of time that you have to request an appeal and then there is a period of time after that you have to actually file the appeal and so, that's up to the court.

Victor Consoli - PW Partners

You got to put a $300 million bond to do that too?

Alan Schultz

Well there's issues around that also in terms of the bond. Again I don't have answers to all those questions right now. And then in terms of the calendar for the other cases, as I said, we're aggressively looking to get those scheduled as quickly as we possibly can, but we don't have a firm calendar date for those other two cases.

Victor Consoli - PW Partners

That's what I was leading to, does the appeal process put the other two cases on hold. So the appeal have to be heard first and then the Michigan District Court case and then the California case get heard after that. I don't understand the process, that's why I'm asking.

Alan Schultz

I don't believe that is the case, but that's not what we believe to be true but I think I should probably back off any other questions at this point that's related to the case.

Operator

Thank you. Our next question is from Andrew Finkelstein with Barclays Capital. Please go ahead.

Andrew Finkelstein - Barclays Capital

Just a couple of quick questions. Just wanted to follow up on Shared Mail in your prepared remarks. I think you mentioned competitiveness as one of the issues still hurting revenue trends. I was wondering if you could give us a little more color on what you are referring to and then just to come back to the COGS again. You mentioned mix and I just want to know how much of that improvement there is attributable to mix and if there are not any other major factors driving that lower?

Alan Schultz

What was the first part of your question again?

Andrew Finkelstein - Barclays Capital

I think in your prepared remarks you discussed competitiveness in the Shared Mail Business. I was wondering specifically you had meant there?

Alan Schultz

Basically what I am referring to in terms of competitiveness in Shared Mail, it's a market place where everyone that we're competing with is living through the same economic downturn that we are living through and everyone is being very competitive from a price perspective in order to secure business. So, basically what I'm referring to there is just the overall competitiveness of living through a market that's like this market.

I was a little confused in your question in terms of mix because I wasn't sure whether you were talking about mix in terms of revenue and gross profit margins on different businesses or whether you were specifically talking about the issue of COGS?

Andrew Finkelstein - Barclays Capital

I guess its both. You had mentioned the drop in the ROP business was lower margin business. So I'm sort of tying the revenue into that change in the mix in the business, is that main driver of the improvement on the COGS side? Are there other structural changes in the COGS structure?

Alan Schultz

No, really what was I referring to when I was talking about ROP was gross margins on ROP tend to be one of the lowest in our company. So as we seen a decline in ROP revenue, it hasn't had big impact in terms of overall margins of the company. As far as on the COGS side, no the answer is we have had a reductions in terms of COGS, in just about every product line that we have.

Andrew Finkelstein - Barclays Capital

There were some articles today on the postal service, maybe facing some more difficulties given the environment. Any concern looking out on postage?

Alan Schultz

I would say, yes, postal service is struggling a bit from a financial perspective and part of that has to do with some of the required payments that they need to make for healthcare was just kind of catch up from the past.

And I think if you took that out of the mix, the postal service isn't in a bad shape as it actually looks like because of these payments that they need to make for past healthcare cost. So that is something that we're concerned about obviously. What we try to do is blend newspaper and Shared Mail and digital into an optimized solution for customers and so if postal cost go up, then we could see ourselves shifting business into other media.

Operator

Mr. Schultz, at this time there are no further questions, sir.

Alan Schultz

I apologize for the interruption in our call there when our power went out. I'm glad we were able to finish the call. I guess what I would say is we're obviously pleased with our results and that our products are well aligned with what we believe is a permanent shift in consumer behavior towards value-oriented media.

Our experience tells us that typically marketing dollars follow the consumers, so as the consumer moves to and spends more time with value-oriented media, advertising dollar should follow that. So, at this point, we don't know exactly when those dollars are going to arrive and when marketing budgets are going to start to increase again, but we certainly think that that will be the case at some point in the future.

In addition, with the cost structure that we put in place, if we do get some revenue growth, we should see a substantial flow through to the bottom line. And as I mentioned earlier in the call, I think the best example of that is the Shared Mail business. If we see revenue growth in Shared Mail, a very large percentage of that growth will fall through to bottom line, and finally I would say that I'm extremely proud of our entire team here.

I'm really proud of their diligence and resolve to deliver these results. I'm really proud of the fact that we just recovered our 149th missing children as a result of the products and services that we put in the marketplace, as part of our America's Looking forward its Missing Children program.

I'm also proud of our associates and employees for their achievement related to our profit maximization plan. And I'm really exceptionally proud of them for their efforts in competing in the FSI business in a market place that has been unfair on an uneven playing field in this FSI business for nearly a decade now. They've really done an outstanding job when you consider what they are up again. So, thank you all very much for attending the call and we appreciate your time and attention. Good bye.

Operator

Thank you. Ladies and gentlemen that concludes the Valassis Communication Second Quarter 2009 Earnings Conference Call. Once again we would like to thank you for your participation. You may now disconnect.

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