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Executives

Alan F. Schultz - Chairman, President and Chief Executive Officer

Suzie Brown - Chief Marketing Officer

Robert L. Recchia - Executive Vice President and Chief Financial Officer

Analysts

Alexia S. Quadrani - J.P. Morgan Securities Inc.

Chuck Cerankosky - Northcoast Research

Dan Salmon - BMO Capital Markets

Edward Atorino - Benchmark

Jonathan Levine - Jefferies & Co.

Dan Leben - Robert W. Baird

Valassis Communications, Inc. (VCI) Q3 2009 Earnings Call October 29, 2009 11:00 AM ET

Operator

Good morning ladies and gentleman. Thank you for standing by. Welcome to the Valassis Communications Third Quarter 2009 Earnings Conference Call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

Please refer to the Safe Harbor language on the earnings documents released this morning. This conference will be governed by the language stated therein. As a reminder, this conference is being recorded today, Thursday, October 29 of 2009.

I will now like to turn the conference over to our host Mr. Alan Schultz, Chairman, President and CEO of Valassis. Please go ahead, sir.

Alan F. Schultz

Thank you, Val. I'd like to welcome to everyone for the call this morning. I have with me Bob Recchia, our Chief Financial Officer and also Suzie Brown is here today, who's our Chief Marketing Officer and the leader of our Field Sales Organization.

I will go through our prepared remarks and then Bob and I and Suzie look forward to answering any of your questions.

I'll be focusing the prepared remarks on three general areas. Number one, our revenue trends. Secondly, I'll talk about some highlights of our individual business segments. And finally, I'll talk a little bit about our decision to raise our full year 2009 adjusted EBITDA guidance.

We are clearly pleased with our performance this quarter. From a revenue perspective, we are seeing signs of revenue stability and continue to outperform most other media companies who are still reporting advertising revenue declines of 9 to 30%. While reported revenue declined for us by 3.5% this quarter, when you remove revenue from discontinued businesses from the prior year, revenue actually declined by 2.8% on a pro forma basis.

During our last earnings conference call, I indicated that I thought the worst of the quarterly revenue declines was behind us with the 8.6% revenue reduction that we experienced in the second quarter. This quarter results seem to indicate that we are bouncing along the bottom in terms of our revenue trends. At this point, I'm not sure how long it will be before we see revenue recovery, but I'm encouraged by this quarter's results.

Moving on to our segment review, I'd like to begin with our Shared Mail business, which is our largest business segment, both from a revenue and profit perspective. We are seeing positive trends from just about every metric we use to measure the health of the Shared Mail business. Rep sell-through percentage is up, pieces per package is up, revenue per package is up and unused postage is down. The only seemingly negative trend in the Shared Mail business was the revenue decline of 2.3% versus the prior year quarter. It is important to note however, we reduced package distribution by about 9% this quarter versus the third quarter of 2008.

There was $16 million in revenue associated with those packages last year. If you exclude this revenue, Shared Mail revenue for the third quarter of 2009 would have increased by 2.7% compared to the prior year quarter.

We are seeing signs of revenue stability in our Shared Mail business, especially when compared to the last two year-over-year quarterly declines. Shared Mail revenue declined 12.7% in the first quarter of this year and 10.5% in the second quarter. And of course, just 2.3% in the third quarter.

As you may know, our sales organization is divided into two sales teams, strategic sales, focused on larger clients and field sales, responsible for calling on regionally based small and mid-sized clients. These regional companies have been especially hard hit by the economy and have significantly reduced our overall marketing budgets this year. However our filed sales team grew Shared Mail revenue by 5% this quarter versus the third quarter of 2008. Field sales represents just under half of our total Shared Mail revenue.

As newspaper circulations continue to decline, marketers still need to reach the households no longer receiving newspapers. Shared Mail is a natural distribution alternative. Our small and medium-size clients appear to be the first embracing this change. This shift is currently being masked by reductions in overall marketing budgets, but it clearly appears to be happening.

In addition to revenue stability, our team continues to make impressive improvements on managing the cost side of the Shared Mail business. Most of the changes we have made are sustainable and we have fundamentally changed the cost structure of this business. In fact, in the midst of the greatest decline in advertising spending since the Great Depression, we are projecting 2009 to be the most profitable year in the history of the Shared Mail business.

Going forward, a significant portion of any revenue recovery and growth will flow through to the bottom-line.

Moving on to our Neighborhood Targeted segment, the good news is, our preprint business once again experienced revenue growth. Preprint revenue increased by approximately $9 million or 15% versus the prior year quarter. This is the third consecutive quarter of year-over-year quarterly revenue growth in preprints. This growth has occurred while newspapers themselves have announced double-digit revenue declines and in the face of newspaper circulation reductions.

This performance is the result of two factors. Number one, our success in cross-selling, as the number of our sales people selling preprints has nearly doubled this year versus last. And number two, leveraging our improved value proposition of offering both Shared Mail and newspaper distribution in a single optimized solution. Within this Neighborhood Targeting segment, we had a $15.5 million reduction in ROP and an 8.2 million reduction in polybag and sampling revenue.

Our ROP business was impacted by a decline in individual client spending, specifically in the wireless and financial sectors. Although we are not pleased with the decline in ROP business or its outlook, the silver lining may be that it is our lowest margin business. Polybags and sampling are by far our most cyclical products. And revenue declined as a result of fewer new retail store openings and a reduction in new CPG product introductions, which often include sampling programs as part of their new product launch.

Moving on to our Free-standing Insert business, the 1.3% increase in revenue was due entirely to the 3.4% growth in industry volume. FSIs remain a highly effective tool to reach the value oriented shopper. In August of this year, we increased FSI distribution within our Shared Mail package to 10 million circulations, once again offering marketers a viable and effective solution in dealing with declining newspaper circulations.

When we first shift to Shared Mail from newspapers, clients typically see increases in absolutely volume move, since we can better penetrate the market with Shared Mail. However at least initially, average redemption rates are lower. As shoppers become accustomed to finding their FSI, -- in their Shared Mail package, we see redemption rates increase to national newspaper averages. For example, we made the shift to Shared Mail FSI distribution in Providence, Rhode Island two years ago.

As consumer awareness has increased, so have redemption rates. In January of 2010, we expect to increase the distribution of FSIs through Shared Mail to 11.5 million circulations. It is also worth noting that the FSI segment profit and pricing remain 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.

In 2002, the annual segment profit for our FSI was a 195.2 million. This quarter, we are reporting just 2.3 billion in segment profit. On September 8, we announced that a trial bay has been set for the second of out three cases against News America, the Federal anti-trust cases scheduled to begin on February 2, 2010 and U.S. District Court in Michigan with the honorable judge, Arthur J. Tarnow presiding.

As you know, in July a Wayne County Michigan Circuit Court jury unanimously awarded Valassis $300 million for compensatory damages w tortuous interference. We are eager to move forward with this next case.

Moving on to our International Digital and Services segment we are pleased with the momentum of our RedPlum.com destination site and network. More consumers are finding RedPlum with 1.7 million unique visitors last month, the second highest monthly number since we launched the website in January of 2008. According to Compete September report, this volume was significant enough to once again land us in the top 1,000 websites in the world, just ahead of News America's website, smartsearch.com that was launched nearly 10 years ago.

We have a long way to go to build scale and be able to monetize our interactive business. But it remains a mission critical part of our long-term strategy. We will continue to invest in this important initiative.

The big story in this segment is the continued strong performance of NCH Marketing Services, our coupon processing and analytics subsidiary. NCH's strong results are driven significantly by continued increases in U.S. coupon redemption volume. Coupon redemption volume was up 33% this quarter, the fourth consecutive quarter of double-digit redemption volume growth. Year-to-date, U.S. coupon redemption volume is up 23% compared to the prior year.

CPG marketers continue to look towards coupons to help them narrow the price differential between their brands and increasingly popular private label brands and consumers are most definitely responding. Segment revenue for the third quarter was up 4.4% compared to the prior year quarter. When you eliminate revenue from discontinued operations and the impact of currency fluctuations segment revenue was actually up 18.6% compared to Q3, 2008. And of course segment profit improved by nearly $11 million this quarter as well.

This raps up our individual segment discussion. Before I move on to discussing our decision to increase guidance I would like to address overall advertising spending trends and why we believe we continue to outperform most other media companies.

While advertising spending has continued to decline in the double digits this year marketing dollars do tend to follow consumer behavior. And today regardless of economic status it is chic to be a savvy shopper. It is cool to save money and get the most for your money. We believe our product portfolio is well positioned to help consumers do just that. And marketing dollars typically follow those consumer eyeballs.

We believe the research that tells us, the shift in consumer behavior towards value is permanent. Along with the improved performance of our field sales team and our successful efforts in managing the cost side of the business have led us to increase our full year 2009 adjusted EBITDA guidance for the second time this year.

In addition to the field sales team, I'd like to give a shout out to some of our other teams who are doing a phenomenal job, strategic sourcing, Shared Mail production facilities, client services and our planning divisions. Our accounting and finance team has also stepped up this year.

We began the year with full year 2009 adjusted EBITDA guidance of 215 million, and increased it by $30 million last quarter to 245 million. Today we are increasing full year 2009 adjusted EBITDA guidance to a range of 255 million to 265 million. We plan to complete our budgeting and forecasting process for 2010 and our Board of Directors meeting in December and expect to provide full year 2010 guidance shortly thereafter.

At this point now, we'd like to open the call up to questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And now, first question comes from the line of Alexia Quadrani with JPMorgan please go ahead.

Alexia Quadrani - J.P. Morgan Securities Inc.

Hi, thank you. And my first question is just on the FSI business. If you could give us some detail on how pricing and market share trend in the quarter and what your outlook is for market share in the fourth quarter.

Alan Schultz

From a pricing prospective we're continuing to see pricing pressure. We would definitely say pricing down, you look at the range of kind of what we originally said, kind a low to mid- single digit decline in terms of pricing and of course that was all set by the change that experienced in terms of unit volume.

From a market share perspective, market share has been relatively stable and perhaps up just a little bit. So I'd call it stable, but up just a little bit this quarter.

Alexia Quadrani - J.P. Morgan Securities Inc.

And it looked about the same for fourth quarter?

Alan Schultz

Fourth quarter, I think we're going to see pricing down, yeah, probably in that sort of mid single digit range, again. And from a market share perspective, I think you'll see our market share relatively stable once again.

Alexia Quadrani - J.P. Morgan Securities Inc.

And have you seen any -- I guess it sounds like you really haven't seen any change in the behavior of your largest competitor in this market.

Alan Schultz

I don't we've necessarily had seen a change in behavior from News America. Although, I think we have seen some change in behavior from customers, because clearly from the customer perspective, our law suit win, in Wayne County circuit court has put them at a position where I think they feel like they can question things that News America is doing, that perhaps, they were having a difficult time questioning before. So at this point time, I think the change in behavior is more customer related than it is competitor related.

Alexia Quadrani - J.P. Morgan Securities Inc.

Okay and could you just remind me what your distribution is right now for the FSI product and I guess any concern about the pretty horrendous newspaper volume drop with the audit numbers coming out on Monday?

Alan Schultz

Yeah, we're a little under 60 million circulation, Alexia. But, again I think from a newspaper distribution standpoint, the decline in circs really isn't particularly troubling to us. We will probably add-in a number of our smaller market newspapers to our market list that have been on our extended reach program in the past. And then of course you're going to see us continue to move circulation in the Shared Mail, particularly now that we see that the longer our FSI packages and the Shared Mail package you start to see redemption rates that rival that of newspapers and we are able to cover so many more household with Shared Mail then you can with the newspaper that we can provide both retailers and consumer package goods customers significantly more volume movement through Shared Mail.

So I would tell you the decline in newspaper search really hasn't concerned as much and of course in the preprint business we have continued to grow it in the phase of these circulation declines and if anything the decline in circulation is just making our value proposition to customer stronger because we are the only company that can really blend newspapers and Shared Mail into a single optimized solution. I think more and more clients everyday realize that they need to blend something else with newspapers to give them adequate market coverage and penetration. So I think we feel pretty good about the newspapers circ decline.

Alexia Quadrani - J.P. Morgan Securities Inc.

And just last question on the advert side of the business, the general side of the business, can you give us a little bit of color in terms of how the vertical's different, you know the client customers bases really trended in the quarter and really where you are seeing signs of improvement?

Alan Schultz

Yeah, I think a lot of the areas that we saw that was pretty strong was the food service industry. And that's kind of interesting to me in the sense that, I don't think the food service industry is necessarily seeing a lot of robust growth themselves. And from historical perspective, they have always allocated a percentage of sales to their marketing budgets and I don't know whether they have decided to increase the percentage of sales that they spend on marketing or they are just reallocating dollars from other marketing spend to the Shared Mail product or not but we are clearly seeing improved activity from the food service industry.

And there is some variance within that segment by customer, but I think overall we can say that I think did that would probably be the strongest area that we saw growth than in Shared Mail in this quarter.

Alexia Quadrani - J.P. Morgan Securities Inc.

Thank you.

Operator

Thank you. And our next question comes from the line of Chuck Cerankosky with Northcoast Research please go ahead.

Alan Schultz

Chuck Cerankosky, yes Chuck.

Chuck Cerankosky - Northcoast Research

Thank you. You know how to pronounce it. Alan, when you're looking at that switch to 11.5 million in households getting the FSI through the Shared Mail in January. And you have newspaper circulation continuing to head down. Is there any chance over the course to see the first half of next year we see a pick-up in that number, whether it could maybe surprise you?

Alan Schultz

Well, I would tell you Chuck, probably we will do two more market list adjustments next year. So as I say, January will go to 11.5. You will probably see us two more times in 2010 increase the amount of Shared Mail distribution. So we're constantly monitoring newspaper circulations, looking at do we need to add in other newspapers that we do business with to offset those declines and at the same time, supplement with Shared Mail.

But I think we're kind of across the bridge in the sense that when we initially started testing Shared Mail with our CPG clients a couple of years ago, there were a lot of clients that were questioning it, that were challenging it, et cetera. Today I think most all of our clients say I understand why you are doing this. It makes sense. I am happy you're moving in this direction. Let's continue to measure results and performance and what we know from what we've seen is, is the longer room we're in that Shared Mail package, the better the performance becomes.

Chuck Cerankosky - Northcoast Research

How many -- just again looking at the FSI, how much interest, increased interest are you seeing from retailers themselves in being in the FSI?

Alan Schultz

No we're seeing a little bit of up-tick. We do kind of a retail connection program, where we tie-in individual CPG ads with specifically retailers and we're seeing a little bit of an uptick in that arena. But I wouldn't call it a substantial one at this point.

Chuck Cerankosky - Northcoast Research

I've seen, I think its only been in the News America book, but I've seen -- believe it was dollar (ph) general putting a spread in their, there's been some retailer specific couponing going on, I'm wondering if your answer included that as well?

Alan Schultz

What I know is that, and specific regarding related to that question, I know News America has actually done a better job of getting retailers into their package than we have. So when I talk about those retail connection type ads, they have significantly more of them than we do and that's one of the areas that we've talked about increasing some attention and focus on because we think there's clearly a growth potential there.

Chuck Cerankosky - Northcoast Research

Thanks a lot.

Operator

Thank you and our next question comes from the line of Dan Salmon with BMO Capital Markets. Please go ahead.

Dan Salmon - BMO Capital Markets

Morning guys.

Alan Schultz

Hi, Dan.

Dan Salmon - BMO Capital Markets

Let's see you mentioned Al, that when you're looking at moving distribution over from FSI to the Shared Mail package that are obviously look very closely newspaper circulation. What are the type of elements do you look at before making those decisions and evaluating what the best market places are for markets are to make those moves?

Alan Schultz

Yeah, while we look a variety of things, we look at the content in the package number one, and then the penetration of the market, the retail penetrations. So if we have a Shared Mail package that has a significant amount of content in it particularly grocery drug natural kind of content, which ties nicely with CPGs, then we know that's a real natural, right, because, from a consumers perspective they can now give the circulars for those mass drug and grocery retailers along with their coupons look at the feature prices in the coupon and together and make their decisions. We know from a consumer's perspective that's pretty important thing.

The other thing we look at is, what is the overall newspaper penetration level of the market. And so, a great example of that is past year, we moved out of the Cleveland point dealer, which was if my memory serves me right and I could b of on some of this number so, please don't hold me to them was delivered about 350,000 circulations into the market place and we moved it up to over 800,000 circulation. So obviously 350,000, just was not adequately penetrating the market in Cleveland and a move to 800,000 adequately covers the marketplace.

So we really have to watch is markets that just don't provide our customers with the kind of scale they need through newspapers. And that's why we have to either blend in Shared Mail to give them the scale and penetration and reach of the households in the markets they need, or we need to completely replace the newspaper with Shared Mail to provide that scale and reach.

Dan Salmon - BMO Capital Markets

Okay and then just one follow-up, I know it's a very small business, an emerging business for you, is sort of mobile couponing and I'd just be interested to hear what you've been doing in that area, particularly it's sort of an upsell with some of your traditional products and how sort of the inter-relation between those two is taking its shape as we come into a recovery and perhaps in more clients start to look at some newer ways to get the value added content in there?

Alan Schultz

I think right now, Dan, I would tell you, here's the way our priority's set, what we're doing today obviously with RedPlum.com and the network that we've built, is a lot of printed coupons that we're doing. We think that the next evolution that we want to focus on is coupon to card where consumers can go online and then in essence, kind of theoretically, download those coupons right on to their prepaid shopper cards, that specific retailer.

And in light of the fact that we have that business, VRMS, where we connect in at the point of sales systems for 95% of the point of sales systems that are out there in the marketplace, we're kind of uniquely positioned ...positioned to help facilitate that coupon the card approach. So that we think is kind of number two in terms of where consumers are going to go next and then we think mobile is number three.

I would you tell you, we're working on all three simultaneously, but the bulk of the resources are going to print. The second area of focus where recourses are going it's coupon the card and the mobile is kind of the third priority right now unless resources are going there although, I would tell you it's some things that we talk about regularly and do work on. And we have executed a number of mobile programs for clients at this point also.

Dan Salmon - BMO Capital Markets

Okay, that's great very helpful color.

Alan Schultz

Okay.

Operator

Thank you, and our next question comes from the line of Edward Atorino with Benchmark. Please go ahead.

Edward Atorino - Benchmark

Hi good morning.

Alan Schultz

Good morning Ed Atorino how are you.

Edward Atorino - Benchmark

Okay two questions. I got a couple of questions I am going to pass alone to you. One, the big news on newspaper circulation speared a couple of enquires of how it affects Valassis, number one. And number two could you talk about pricing in the Shared Mail business.

Alan Schultz

Sure. I think as I kind of alluded too earlier declining newspaper circulations have not affected our newspaper preprint business. In fact it's up three consecutive quarters in a row. The reason for that I think it's pretty clear we have a lot of field sales reps that have exclusively sold Shared Mail in the past, that are now beginning to sell newspaper preprints. And our ability to blend together newspaper circulation which shared circulation gives us the totally unique value proposition in the marketplace. So we are clearly winning new clients as a result of that and were also at a position where we can either retain client spend or build our percentage of customer spend in that area.

You prior to the Shared Mail acquisition I would have been concerned about declining newspaper circulations in the long term in terms of its impact on our Free-standing Insert business. However as we move more and more of our circulation out of newspapers in to Shared Mail, I think it is a very, very natural alternative for clients to move content out of this paper in the Shared Mail. So I think were in a pretty good shape from that perspective.

So, I would tell you I think we all here are pretty comfortable with the fact that newspaper circulations are declining. There are going to continue to decline. And the other thing I guess I would point out is that, when we look at newspaper preprints, our margins are kind of in the mid-teens on those. If we're able to move that content in the Shared Mail, our margins are substantially better. And we also know in the Shared Mail business because of its fixed cost nature, if we're able to gain incremental volume in Shared Mail, we get a large percentage of that, that flows through to the bottom-line.

So not only do we feel like we are prepared to deal with the change and the transition and the impact on revenue, we think long-term, it should help us from a profitability perspective. I mentioned earlier that our revenue per package is up in the Shared Mail business.

Your question is specifically I think related to revenue per piece, or selling price per piece and I would tell you it's relatively flat. And of course from a pricing perspective, we heard some pretty good news from Jack Potter, who's the Postmaster General, in terms of his view on postal increases next year. And basically what he said is, as we begin a new fiscal year and as many customers are preparing their 2010 operating budgets, we want to end all the speculation, the postal service will not increase prices for market dominant products in calendar year 2010.

And I've met with Jack a number of times now and I have found him to be a very, very straight shooter, very transparent, very forthcoming and very believable. And so, if he says that I'll take him at his word because I -- based on my past experience I would have no reason to question him.

Edward Atorino - Benchmark

Another question following up on the Alexia's questions. Anything you can talk about regarding 2010 bookings and pricing volume as -- imagine you are the in spring, up maybe beyond spring.

Alan Schultz

Yeah, we are, Ed, we're still looking at all that and we plan on continuing to work on it right on through the board meeting where we finalize our plan for 2010. And so at this point in time we're not offering any guidance. Obviously one of the areas that will be a spirited discussion is just what's going on from an economy standpoint, when is the economy going to recover and the impact that, that will have on revenue.

I will tell you from a cost perspective though, we're feeling very good about the cost side of the business and feel like we have it really nailed down. But before we can really kind of finalize the model, we need to get a better sense to the future and a better handle on revenue. There are some different opinions on that right now.

Edward Atorino - Benchmark

Thanks so much.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of Jonathan Levine with Jefferies. Please go ahead.

Jonathan Levine - Jefferies & Co.

Yeah, thank you. I wanted to just, I guess follow-up a little bit on the Shared Mail. If you could talk a little bit in terms of the new customers and a little more in terms of description (ph) or color in terms of size of the companies that are now looking at Shared Mail as well as what segments they are in.

Alan Schultz

Yeah I think we are fortunate to have Suzie Brown who leads our field sales team. And I think Suzie's is got a pretty good handle on that and of course our fuel sales teams actually grew revenue in Shared Mail 5% this quarter. So I think she will be good one to answer that question. So I'll let Suzie handle that.

Suzie Brown

Jonathan, I think your question was really the type of clients that are coming into the Shared Mail package and what categories they would fall into. And I think -- my answer to that question is that it would be across categories. I mean our strategy is to penetrate all of the categories we participate in as deeply as we possibly can from a small business medium size business I think Shared Mail is a great alternative to any other type of advertising that we're doing.

My experience, I've seen customers is that Shared Mail works great in terms of driving traffic and results for those business. And so we see an increase in new business development from the smallest client in the local and regional basis all the way up to some big national clients.

I think our value proposition right now for advertisers is very strong, particularly in light of the fact that we can blend both newspaper and Shared Mail together and that value proposition has brought real relevance with some clients and given us stability to acquire new clients where we haven't been able to before. So I know it's a general answer, but I think the results of Shared Mail and the ability to track and measure those results has really increased our effectiveness in terms of acquiring new clients.

Jonathan Levine - Jefferies & Co.

I guess, can you talk to any particularly large clients that you picked up recently? I've heard some retailers who have spoken about the fact that they're looking for a new avenue to kind of get into the home, as opposed to newspapers or I'm just looking to see if we're beginning to see a shift and if you're seeing some of those retailers actually at this point?

Suzie Brown

I think building on Al's answer previously; we've seen some good success in food service. We've seen some very good success in our retail, specialty retail categories. And we've also seen some really good success with local service providers as well. So we typically don't disclose big large client wins, but those categories, specialty retail, food service and services in general have been very productive for this year.

Alan Schultz

And to Suzie's point, I know that many of you track agencies and agencies will talk about specific client names when they have wins. We've never done that. We don't feel like from a competitive standpoint it's a good idea for us to talk about specific clients that we have won. That just of kind of brings everybody out of the woodwork and we are not interested in doing that.

Jonathan Levine - Jefferies & Co.

Okay thank you.

Operator

Thank you. And our next question comes from the line is a follow-up question from the line of Chuck Cerankosky with Northcoast Research. Please go ahead.

Chuck Cerankosky - Northcoast Research

Yeah this might be directed for Bob, if he is there. When you do move the FSI circ out of the newspaper and the Shared Mail should we be aware of any inter segment accounting matters that you have to think about when you do that.

Robert Recchia

Not really Chuck. We still record all the revenue as FSI revenue. And then we have cross charge between Shared Mail and FSI which is consistent with actually consistent with Argo (ph) us to charge us when we started testing the product. We actually used that as a cross charge. So it doesn't impact anything. You will see the cost all falls still within the FSI business that are related to them.

Jonathan Levine - Jefferies & Co.

Sorry, could the cross savings from putting in the Shared Mail versus the newspaper would benefit the margins of FSI segment.

Robert Recchia

Of course it benefits the FSI segment before it does flow into Shared Mail, because this cross charge is equal to the market value that Argo used to charge us when they initially brought us in as a customer and it was a low rate but if was still a rate above there's still some savings in this. So that savings we it was a $1 million savings and I would think probably equally split, part of it shows up in Shared Mail, part of it shows up in FSI.

Jonathan Levine - Jefferies & Co.

All right. Thank you.

Operator

Thank you. And our next question comes from the line of Mick Dobray with Robert W. Baird. Please go ahead.

Dan Leben - Robert W. Baird

Hi, this is actually Dan Leben, though. I had to jump on the call late. I apologize if I missed these, but first on the follow-up from the News America verdict. Were you able to get any sort of cease-and-desist orders or anything coming out of the Court or around any of the practices or is it still kind of open season?

Alan Schultz

Yeah, we have elected at this point in time not to pursue any cease-and-desist type orders. It's something that is being talked about and considered.

Dan Leben - Robert W. Baird

And what has been the actual pricing environments you've experienced. Have you seen any change in their competitor behavior?

Alan Schultz

No, not really. We've said this year, we thought we'd be looking at low to kind of mid-single digit declines in revenue or pricing that's what we continue to see. What I mentioned earlier, Dan was just we haven't seen a lot of change in News America behavior but if there has been a change it's more in client behavior, because customers now realize that what News America was doing has some legal complexity associated with it, which opens up the door for them to challenge and consider things that perhaps they acquiesced to in the past.

Dan Leben - Robert W. Baird

Okay and then looking forward to fourth quarter to help us understand the seasonality, historically that's been a very strong quarter seasonally. But kind of largely in the Neighborhood Targeted and you have a very difficult comparison coming up. How should I think about specifically that business or just the overall business in terms what the typical seasonality would look like in the fourth quarter?

Alan Schultz

Yeah I mean the fourth quarter tends to be a pretty strong quarter for us. The only place I'd caution you on is that what we saw last year, was a situation where in the fourth quarter we saw cancellations, right? We saw clients cutting back on spending. If you went back the year before that in the fourth quarter, what we saw is clients putting additional money in last minute. So we had last minute business coming in. So when you look at our guidance of 255 to 265, it was pretty wide to be this late in the game, but really what we're trying to do is we're trying to accommodate either a situation where we maybe get some cancellations, that we didn't anticipate or we get some last minute business activity that we didn't anticipate. So I think we've accommodated either scenario in our guidance.

Dan Leben - Robert W. Baird

Okay, fair enough. And then finally what are you hearing from clients as they are looking out to try to set budgets for 2010? Are you hearing anything directionally about what they are looking at for 2010, kind of overall marketing budgets?

Alan Schultz

Yeah, I know I think the worst of the kind of cuts are behind us. And you hear some talk about kind of more stability in marketing budgets next year. As we look at some kind of economic indicators one could be may argue that in the second half of the year we might see some recovery. My understanding is that P&G and Kellogg announce their earnings today. I believe P&G specifically said that they would put more money in to promotion which was obviously what most of what we are offer in terms of our product portfolio in media. Whether that means their overall marketing spend will increase result or they will just reallocate money to promotion is kind of a question.

And Kellogg's said I think specifically that they would increase their marketing or adverting budgets this year. But what I would tell you is I think what has happened is we transition from a period of time where literally everybody was cutting their marketing budgets. To now we are seeing individual variability within segments. So a specific segment is going to have some clients that are going up, some clients that are going down and some clients that are the same.

So it use to be we would say all right, well all the furniture retailers are cutting their spending. Now you may see some increasing, some decreasing. CPG's have been relatively stable through this. Now we seen a couple of announcements here today of some CPG's that are increasing their spending but that doesn't mean every CPG is going to increase their spending. It really is very client specific and I don't think you can look at it on a client vertical basis any more.

Dan Leben - Robert W. Baird

Okay great thanks.

Operator

Thank you. And our next question is a follow up question from the line of Jonathan Levine with Jefferies. Please go ahead.

Alan Schultz

Jonathan, yeah.

Operator

Mr. Levine, if you are on mute, please unmute.

Jonathan Levine - Jefferies & Co.

Sorry about that. I see you guys bought back (ph) about 40 million of bank debt during the quarters. You still have 110 plus million in cash on the balance sheet. And looks like you're well positioned to generate some strong free cash flow during the fourth quarter and beyond. Can you talk a little bit about what your plans are for your cash and whether to intent here to continue to go out to the market to repurchase debt.

Alan Schultz

Bob probably would like me to say nothing at all. But I guess what I can say is that we continue to believe that the best use of cash is debt reduction and we're going to be looking to reduce that in the most effective way we possibly can.

Jonathan Levine - Jefferies & Co.

And I guess on the model side debt options, how much more capacity do you have in order to kind adapt onto that?

Alan Schultz

I believe number is real close to $40 million, maybe just a little over $40 million.

Jonathan Levine - Jefferies & Co.

Okay and ...

Alan Schultz

And we have until year-end I believe to do that.

Jonathan Levine - Jefferies & Co.

Okay.

Alan Schultz

That's probably your next question.

Jonathan Levine - Jefferies & Co.

And if you were to kind of complete that, would you look at the bond next?

Alan Schultz

The bonds are something that we've looked at a number of times now. And you know its kind of a grey area in terms of our credit agreements. At this point in time we've elected not to go after the bonds. But it's something we do look at. I think the bonds have traded up also into the low and moving up in the mid 90s.

Jonathan Levine - Jefferies & Co.

Right up there. I see them at 93 right now.

Alan Schultz

Yeah.

Jonathan Levine - Jefferies & Co.

Okay. All right. Thank you.

Alan Schultz

All right. Thank you.

Operator

.Thank you. And I'm showing there's no further questions in queue. I'm going to turn back over to management for any closing comments.

Alan Schultz

Thank you, Val. I guess in terms of closing, I just kind of four highlights that I'd like to hit on. Number one, although the future is still very difficult to predict, we are seeing signs of revenues stability today. And we are seeing some early indicators of recovery, although it's too early for us to determine exactly when the recovery will begin.

The second thing is we're very encouraged by the changes in shopper buying behavior towards value oriented media, the media that we deliver. And this trend looks to be a long term trend that should greatly benefit us for many years to come.

The third area is we are seeing newspaper content migrate to Shared Mail. As newspaper circulations continue to decline our ability to blend newspaper circulation with Shared Mail distribution is a substantial competitive advantage. And is allowing us to build our share of clients' marketing expense.

And finally our new cost structure really should allow us to get a sizeable portion of any future revenue recovery to flow through the bottom line.

And there is one other thing I would like to mention and that is we heard from PR news wire that when they file the release they left a digit off and if you look in the reconciliation of adjusted EBITDA to net earnings and cash flow from operating activities for the nine months ended September 30, under income taxes it's my understanding that they had left off a two. So it should yes it says 25,90 it should be 25,902 and I would really love it if we only had to pay $2.590 million in income taxes. But I think based on where the government is today, they're going to sure they get the full 25.900 million out of us. So I just want to mention that correction.

And with that said, thank you all for attending the call today and I hope you have a wonderful day. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude today's Valassis Communication's third quarter 2009 earnings conference call.

If you would like to listen to a replay of today's call, please dial 303-590-3030 or 1800-406-7325, enter the pass code 4148870. Once again, those numbers are 303-590-3030 or 1800-406-7325, enter the pass code 4148870.

Thank you for your participation using AT&T Conferencing. You may now disconnect.

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