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Executives

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

Robert L. Recchia - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Director and Member of Executive Committee

Robert A. Mason - Executive Vice President of Sales and Marketing and Director

Analysts

William A. Warmington - Raymond James & Associates, Inc., Research Division

Daniel Salmon - BMO Capital Markets U.S.

Charles Edward Cerankosky - Northcoast Research

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Leon G. Cooperman - Omega Advisors, Inc.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Valassis Communications (VCI) Q3 2011 Earnings Call October 26, 2011 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Valassis Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, October 26, 2011.

I would like to remind you that the discussions during this conference call include forward-looking statements and actual results could differ materially from those projected in the forward-looking statements. The factors that could cause the results to be materially different from those expressed or implied by such forward-looking statements are discussed in the risk factors and other sections of the 2010 Annual Report on Form 10-K and in the reports of Forms 10-Q and Form 8-K filed with the SEC.

Also, the discussions during this conference will include certain financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the earnings release furnished with the current report on Form 8-K dated today, which is also available on Valassis website at www.valassis.com on the homepage of the Investors section.

I would now like to turn the conference over to Mr. Alan Schultz, Chairman, President and Chief Executive Officer. Please go ahead.

Alan F. Schultz

Thank you, Douglas. I would like to welcome, everyone to the call here this morning. Joining me today are Rob Mason, our Executive Vice President of Sales and Marketing, and effective January 1, our company's next CEO; as well as Bob Recchia, our Chief Financial Officer. Rob and I have some prepared remarks, and then we, along with Bob Recchia, look forward to answering your questions.

I'd like to begin with our decision to revise our full year 2007 guidance detailed in our earnings release. We recognize the magnitude of our adjusted EBITDA takedown, and we'll focus much of our time providing a detailed explanation of 4 significant factors affecting our second half expected results and hence, our reduced full year guidance.

The first factor is U.S. advertising spend. Last December, when we announced our full year guidance for 2011, we shared a number of assumptions. One of the assumptions was a mid-single-digit increase in U.S. advertising spend for 2011. Our assumption was that ad budgets would steadily increase each quarter throughout the year in conjunction with a steadily recovering economy. As a result, we built a back half-loaded model for 2011. As the economic recovery became more uncertain and consumer confidence faltered, U.S. ad spending forecasts for 2011 continued to be revised downward.

The latest industry forecast have 2011 U.S. ad spending rising as little as 1.6% versus 2010, according to MAGNAGLOBAL. Our assumption of mid-single-digit growth in U.S. ad spend for 2011 was built on an estimated growth in the range of 3% in the first half of the year and a 7% range for the second half of the year. Experts now believe that ad spending growth will be less in the second half of 2011 than what we experienced in the first half of the year. In fact, globally, advertisers are spending just 0.73% of GDP on advertising, which is less than anytime since 1980, according to ZenithOptimedia.

The impact of this deceleration of ad spending can be seen most significantly in the less-than-anticipated growth in our Shared Mail segment. The Shared Mail business continues to demonstrate its superior operating leverage. With just 1.3% growth in Q3 2011 revenue, we drove a 17.6% increase into the segment's profit. However, the growth in Shared Mail was significantly lower than we had anticipated just 3 months ago. During the last 6 months, we discussed the robust Shared Mail pipeline of plan business. Converting this pipeline to contracts was essential to a strong second half in achieving our 2011 guidance.

During our last earnings call in July, we discussed an increased hesitancy among clients to convert pipeline program to committed orders. We began to see this hesitancy in June. We also discussed our 2011 adjusted EBITDA guidance was our most challenging 2011 metric and would be dependent on strong consumer promotion budgets and a successful conversion of our pipeline. Neither came to fruition. On a positive note. Pricing in Q3 was a contributor to revenue growth in Shared Mail for the first time since we acquired this business in March of 2007.

The second major factor negatively influencing our projected second half results is the spike in coupon redemptions and its impact on annual consumer promotion budgets for our consumer packaged goods or CPG client vertical. After 4 months of year-over-year declining redemption volumes to start the year, what we did not anticipate nor do we believe our clients budgeted for, was a midyear 18% spike in year-over-year coupon redemptions in May through September.

Before we get into these recent trends, it's important to understand the makeup of the annual consumer promotion budgets for our clients. For example, the average FSI coupon budget is broken down as follows: Approximately 30% is spent on printing and distribution of a coupon program, that's obviously what we do; the remaining 70% is primarily paid to consumers or shoppers in savings through the face value of the coupon, along with some modest expenses related to clearing and processing redeemed coupons. Hypothetically, if an FSI coupon program budgets was $750,000, roughly $225,000 is spent on print and distribution and $525,000 is spent on consumer or shopper savings and processing of that coupon.

Therefore, when redemption by shoppers spike up, the largest component of that coupon promotion budget, the amount paid to consumers in savings, is dramatically increased. The result is the premature exhausting of our clients' annual 2011 consumer promotion budgets. In essence, clients can achieve their volume targets with fewer programs due to the increased efficacy of our products.

As I mentioned, redemptions were actually down in the first 4 months of 2011, and then spiked up starting in May through September by nearly 18% in terms of the number of absolute coupons redeemed. As a result, clients began to cut back on the number of coupon-related programs in the second half in order to stay within their 2011 consumer promotions budgets. We estimate that CPG clients will pay over $420 million more in coupon redemption cost in 2011 versus 2010. This is on top of the additional $1 billion increase in redemption cost from 2009 and 2010 over 2008.

During the last earnings call, we were asked about the effect of Extreme Couponing publicity and its possible impact on redemption increases we were beginning to see in the May-June period. While over 78% of shoppers use coupons regularly, only a small fraction can be described as Extreme Coupon users, those who make coupons their full-time jobs. We believe the jump in redemptions is not attributed to Extreme Couponing. What we have come to recognize is that since 2008, there's a direct correlation between declining consumer confidence and increased redemption rates. We believe that increased coupon redemption across a much broader population is the direct result of declining consumer confidence.

Our CPG clients, just like us, were expecting steady economic improvement in 2011. What happened instead was economic uncertainty increased in the May-June time period. Consumer confidence fell and redemptions spiked up in the middle of our clients' calendar year budget cycle for 2011. Clients had no time to respond or adjust their 2011 consumer promotion budgets. As a result, overall revenue from our consumer packaged goods vertical across all our products, is down 16.7% in the third quarter of 2011 versus the prior year.

FSI industry pages were down double digits in Q3 versus the prior-year quarter. With the only meaningful change on the calendar or date scheduled being just 1 less custom co-update. We expect this trend to continue and likely to worsen in Q4 as consumer promotion budgets continue to be exhausted prior to year end. Historically, the CPG vertical is among our most stable client verticals. So to see this kind of variance without a meaningful change to the date schedule or a holiday shift on the calendar to explain it is highly unusual in my experience.

The example I've been discussing is within the FSI business. But the impact of prematurely exhausted 2011 consumer promotion budgets is also having an impact on our Neighborhood Targeted segment. Not surprisingly, our Sampling business is down significantly. We don't typically hear -- you don't typically hear us talk about the CPG vertical in connection with our Newspaper Insert business as it represents a relatively small percentage of our total and Newspaper Inserts revenue. Yet the decline in CPG spending was the primary driver in the decline in our Newspaper Inserts revenue for Q3 versus Q3 2010.

CPG spending in newspaper inserts has been -- had been up nearly $5 million through the first half of 2011. The third quarter spending decline within the CPG vertical and newspaper inserts and sampling exasperates the already-anticipated revenue decline in Neighborhood Targeted, driven by a substantial ROP revenue decline by clients in the telecommunications and energy sectors mentioned on our previous calls. It is ironic that a dramatic improvement in the efficacy of our coupon-related products but could actually result in a significant reduction in our revenue.

Whenever I've been asked if there is a pricing elasticity in the FSI business, I have always said that it is my belief that there is not. This quarter is an excellent example. As FSI pricing is still near historic lows and yet the industry has seen a double-digit decline in FSI pages. A silver lining of the increased redemption trends is the continued strong performance of NCH, our coupon analytics and processing subsidiary, who is having a record year. In fact if you eliminate the increased investment we made in innovation, segment profit in the IDMS segment would have increased significantly driven by NCH's results.

The third factor contributing to our change and expected results in the second half of the year is the reduced the rate of growth in our new initiatives. Specifically, investments in In-Store and digital. In-store was also affected by the CPG annual consumer promotion budget issue, with our in-store coupon programs down 44% this quarter versus the third quarter of 2010. On the digital front, while revenue grew 31.7% in Q3 2011 versus Q3 2010, the efforts of our sales organization produced lower-than-expected results.

With that said, Jim Parkinson, our new Chief Technology Officer of Digital Media and his team are doing some transformational development in our Digital portfolio that we expect will contribute to growth in revenue, improved efficiency and cost savings in the near future. We have also made some organizational and structural changes in the sales organization for both Digital and In-Store which should improve results.

And the fourth primary factor has to do with the timing of expected cost savings. In our last earnings call, we said we had a plan to achieve our annual guidance and included significant cost management efforts. We did an excellent job controlling discretionary cost such as a reduction in SG&A this quarter versus the prior-year quarter, and in areas we had control. There's a fair amount of variable compensation in our model, and we have scaled back these accruals to align with our revised guidance. Where savings relied upon external partners, we were unsuccessful in bringing these savings into 2011. While many of these cost-cutting initiatives will come to fruition in the long-term, they will not benefit us in 2011.

So In summary, the 4 primary factors that led to our revised guidance for 2011 include: number one, we had anticipated ad spending to increase as the year progressed and just the opposite this happened, negatively impacting expected growth in our Shared Mail segment; number two, the mid-year spike in coupon redemptions is prematurely exhausting 2011 CPG consumer promotion budgets, most significantly affecting our FSI and Neighborhood Targeted segments, but also our new In-Store business; three, our new initiatives, Digital In-Store are growing at a rate lower than we had anticipated in terms of both revenue and segment profit contribution; and four, expected cost savings involving external partners is not coming in as quickly as we had planned in order to improve 2011 results. Although I don't like it, those were the facts surrounding our 2011 guidance takedown.

Regarding 2012, as is customary, I know Rob and Bob expect to update you sometime in December our guidance plans for next year. And at this time, I'd like to turn the call over to our company's next CEO, Rob Mason to share some thoughts on the business going forward.

Robert A. Mason

Al, thank you. And yes, Bob and I do expect to discuss our 2012 annual guidance in December after meeting with our Board of Directors.

What I can tell this group right now is there are a number of compelling reasons that lead us to believe the impact of increased redemption cost on CPG annual consumer promotion budget is a short-term problem that is impacting the back half of 2011, and not, at this point, indicative of their 2012 planning. Everything that I'm hearing and have researched leads me to believe that CPG marketers will need to and plan to resume typical levels of consumer promotion in 2012 that should account for their increased coupon redemption levels.

There are 5 reasons that lead me to believe this is the case. One, we've seen them do it before. After a significant drop in consumer confidence and increase in redemptions in August and September of 2008, manufacturers pulled back on coupon distribution for the remainder of that year. They then expanded their budgets in 2009 by $800 million to accommodate increased redemption cost. On a relative basis, we had a very good year in 2009 compared to our marketing industry peers. If CPG marketers could recalibrate their budgets to accommodate an $800 million increase in redemption cost in 2009 over 2008, they should be able to respond accordingly in 2012. We believe they need time and refreshed budgets to respond.

Secondly, we surveyed our clients. As I touched on previously, based in our conversations with many of our top CPG customers, most of them plan to resume their typical levels of consumer promotion in 2012. Third, we are engaged in proactive management of redemption variables. With our sales and marketing team's assistance, CPG clients are working to proactively manage their redemption cost by controlling the variables that we know influence redemption rates, such as reducing face values, shortening coupon durations, instituting multiple purchase requirements and the integration of ad-only programs. In an effort to ensure savings are spread over more of their shoppers, retailers are also responding or revising coupon acceptance policies such as limiting the number of discounts consumers can use on a single item.

Fourth, we know our clients need to mitigate the risk of losing market share. In case study after case study, we know when CPG companies pull back on their consumer promotion in coupon, they lose market share. And in a declining to slow growth economy, clients cannot afford to lose up market share to competitors or retailer private label brand. We know that value-seeking shoppers will switch brands if they do not receive the appropriate incentives.

Lastly, there are the issues of rising inflation and prices. We expect clients will continue to look to pass along rising cost in commodities and other inflationary increases to their shoppers. Coupons are a great way to mitigate the impact of price increases on price-sensitive consumers and protect brands from share erosion to private label competitors. In summary, I believe the combination of these 5 reasons will result in expanded annual consumer promotion budget in calendar year 2012.

I'd like to touch on one final topic before we move on to questions. Regarding our plans for the use of cash, specifically share repurchase. During this quarter, we purchased $50 million or 2.1 million shares of our stock. Year-to-date, we have purchased at $155.8 million or 5.9 million shares of our common stock. We still have another 4.5 million shares of stock authorized for repurchase. However, as we have said before, any stock buyback is at our discretion. I know there's been speculation about the consideration of a dividend, but based on the current pricing of our stock, we believe share repurchase continues to be a better alternative than a dividend to create great value for our shareholders.

At this time, Al, Bob and myself are ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Lee Cooperman with Omega Advisors.

Leon G. Cooperman - Omega Advisors, Inc.

I must say I'm somewhat upset about our capital management. And without taking too much time, let me say that when I first sat down with you folks about 5 months ago, I raised the issue as to why we're devoting 100% of our free cash flow to stock repurchase without regard to paying a dividend. And the response was that our stock is mispriced, okay. And at the time we had breakfast, it was about $28 a share. And then we create more value for our shoulders by buying back shares than by paying a dividend. And I think what was expressly evidence was that if we ever elected to enter into a private equity transaction, it will be a significant premium to the $28 where it was currently selling at. This is not like a laughing matter, stock is $16, it's over $10 a share, which is a significant percentage variation from the price you paid. And I'm just wondering, kind of how you view this. In other words, you've addressed your closing comments about we have 4.5 million authorization. When do you basically show the shareholders that this notion of private market value is a real notion as opposed to some kind of illusionary concept? And then if you thought you achieved a 26.5 where you spent -- the amount of money spent of $55.8 million, what do you intend to do at the present level? And before you give me an evasive answer, I'm not saying you would -- I'm not trying to be rude by the way. I'll hold that Warren Buffet as an example of a guy that gets it right. When he announces repurchase program he said, "In a sense, buying back stock is trading against your shareholders and I want my shareholders to know exactly what I got in mind." So he says, "I'm going to pay up to 110% of book value as long as the outlook for the business is favorable, and I'm not going to reduce my cash balances below $20 million -- $20 billion." So he kind of told exactly to the shareholders what he planned to do. So what I'm asking you know in an open forum, is this decision to channel 100% of your cash flow into stock repurchase the right decision? Is the business selling in a meaningful discount to what you think private market value is and now that the stock is $10 a share below what you paid for it, what do you intend to do with these lower prices? And great specificity will be appreciated.

Alan F. Schultz

Yes, Lee, this is Al. I think, first of all, when we instituted our share repurchase program, we obviously believed we're going to achieve our guidance and there are some issues that quite frankly we did not anticipate. In fact, in my 27 years with the company, I've never seen a situation like this where you get to sort of dramatic improvement in kind of the middle of a calendar budget cycle for our clients, the CPGs, that exhaust their budgets. And so you got a product that we offer that's performing better than it's ever performed before, but yet people are cutting back on their spending on that product because, in essence, they're achieving their volume goals by running less programs with us, because of the increased consumer response rate. We clearly kind of built the model around the fact that advertising spending was going to continue to go up as the year went on, and we're now seeing just the opposite. So at the time we started and embarked upon our share repurchase program, we were very optimistic. It's just here in the last couple of months it became real apparent that there were things going on that were going to negatively impact our results. So I guess the tunnel in hindsight in that regard is always well lit. As it relates to share repurchase on a going-forward basis, I think our objective is the same today as it has been in the past. And I think it's fair to argue that we haven't done a very good job over the last 9 months in terms of accomplishing this objective, but that is to buy back as many shares us inexpensively as we possibly can. And so our goal is to do just that. Obviously, we believe that these are short-term issues that we're dealing with. We believe that the company is going to get back on track in terms of growing top line and bottom line results. And as a result of that, whatever we're paying for the shares today is going to be a good value versus where we expect them to be long-term and in the future. And so I think the view among management and the Board of Directors is, is that we should be actively in the market and looking at share repurchase, particularly at these levels. And I don't think, as an organization, we're going to give any real clear-cut parameters as Warren buffet did because perhaps our objective is different than his objective. Our objective is to buy as many shares back as cheaply as possible. He had kind of a different objective in mind and so...

Leon G. Cooperman - Omega Advisors, Inc.

Well, why was his objective be different than yours? He just has a sense of ethical compass that he feels that since he's buying the shares from his shareholders, he wants his shareholders to know what he's thinking as opposed to trading against them. So I mean, the first question I asked you is, with the change in your bank arrangements, what would be approximate range of funds available for repurchase after the $190 million for this year is exhausted?

Alan F. Schultz

Yes, maybe I could turn that over to Bob on that particular front in terms of what our credit facilities allow from a borrowing perspective in that regard to kind of spell that out.

Robert L. Recchia

We have complete flexibility until we get at 2.25:1 debt to EBITDA. So we have plenty of flexibility as you go through the fourth quarter, cash balance was $91 million. We have a $50 million revolver, so there's enough firepower there to buy a lot of shares in the fourth quarter.

Leon G. Cooperman - Omega Advisors, Inc.

I guess the question that I'm trying to figure out, I think I know the answer, the encouraging thing is apparently your product works, right? Because people are cutting the coupons out and they're buying and they just bought too much. So in a sense, if somebody wanted validation that the product works and achieves its objectives, it worked too well, right? So that's good news.

Alan F. Schultz

I think that's about the best problem we can have, Lee.

Leon G. Cooperman - Omega Advisors, Inc.

Right. Okay, so now going back, when you bought the stock at $26.5, you bought it $26.5, because your business was worth much more than $26.5. Now the stock is $16.5, $10 or so under what you paid for it. Has the outlook for the company changed more materially than the stock price or less materially? Because what I'd to you from you, and I'm not trying to browbeat you but I'm just trying to get the facts and understand what you're thinking, but if the stock has declined materially more than the business prospects have declined and that the decline in business prospects is temporary, why should you not want to buy back twice as what you bought back $10 lower than what you bought the $10 higher? I'm not getting that sense. I'm getting a sense that it's uncertain and this and that. Maybe if you had to do it all over again, you wouldn't have bought the stock you bought, which I can appreciate given where it's trading. But I think it behooves you to be kind of open and honest with people. And if you're uncertain and you don't really know what your conduct is going to be, that's one thing. On the other hand, you guys are saying to yourself, "My God, the stock is $16, doesn't make any sense and we can't wait for the call to end. I'm 24 hours to pass in getting to the market and take advantage and miss the market." I'd like to kind of understand that, if that is your thought process. So I'm just trying to get insight -- not inside information, insight on a public forum.

Robert L. Recchia

Lee, this is Bob. I would tell you that you can do the math on EBITDA. It went down from a 355 to a 315 guidance. So that's $40 million, is probably 12%, 13%. I don't know where you picked the starting line for the stock based upon the 355, it's been as high as mid-30s. It's settled in, in the high-20s to $31. I don't know exactly, but clearly, the stock is not reacted the same way as EBITDA. So I want to move on off the subject after this. We will be buying the stock aggressively, exactly what that means, everybody will have to wait until the quarter is reported. We'll give you more color when we do the guidance call in December. But we will be buyers of the stock to the degree that we can be, with limitations that we have on it. But we need to move on and stay to the next question. I'll be happy to field individual questions on this if you want after the call.

Operator

Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

Charles Edward Cerankosky - Northcoast Research

When you're looking at the standard of spending on ads both for CPG and probably even more so retailers as it relates to Shared Mail, do you sense anything, because of consumer caution and shopping behavior was pulled out of the third quarter, and maybe these advertisers want to be a little more aggressive in what they're hoping is a seasonally strong fourth quarter?

Robert A. Mason

Chuck, it's Rob. I think that there continues to be significant uncertainty in the economy. We see this -- we saw a very market decline in consumer confidence that the conference board just reported yesterday. I do think that, especially within our retail segment, fourth quarter ends up being a make-it-or-break-it time for them. And as such, if there's going to be more aggressive spending, that's when we will see it. As we sit here today with where we are in guidance, I think Shared Mail looks like it will return to the kind of growth levels we saw in Q2. So I think based on commitments we have today from clients, you'll see some better performance, particularly in that product segment.

Robert L. Recchia

Chuck, I would just add that certainly based on what we see today, that, that's the way it looks, as Rob just described it. But even that, it's still a far cry from what we had originally anticipated, right? I mean we were, as opposed to kind of like 3% growth like we were anticipating in the first half of the year, we were expecting more like 7% in the second half of the year. Particularly, as Rob said, the fourth quarter is a critical one for our clients, so we know that they're going to spend money in the fourth quarter. So yes, I agree with obviously everything Rob said, but that it is still less than the original plan.

Alan F. Schultz

Yes, I think it's fair to say that, that aggressiveness will be tempered. When we built -- when I talked with investors on the Q1 call, we were looking at an environment where we still saw ad spending increasing. We saw a more stable economy. Both of those things I'll reference the change and projections in terms of ad spending. The economy's gotten certainly more uncertain, I think. And so those mid-single digit numbers that I talked about at the end of Q1 certainly would be tempered as we look at Q4.

Charles Edward Cerankosky - Northcoast Research

In my observation of what's going on in the Shared Mail, looks like smaller ads, fewer pages in the circular. Is that going on? And how do you feel about the addition of new advertisers, new clients even if they're starting out with a lighter weight or the smaller-sized ad that you would originally hope? Are you getting enough new names into the book, into the packs?

Alan F. Schultz

Chuck, from a lightweight-ing perspective, we're actually seeing less of that through the first 9 months of the year. So that would kind of talk to your thoughts on smaller lighter weight pieces. From a new client acquisition perspective, I'm very pleased that our prospecting activities and also the acquisition of new clients, particularly within our new account development group, and we have seen a continued migration of major retailers into the Shared Mail package, albeit certainly not as much as what we would have predicted back in the first half for what we'd like to see. But that migration is continuing to happen.

Operator

Our next question comes from the line of Dan Salmon with BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

I'll just queue a couple of detailed questions. First, Al, you mentioned that the operating profit in the Digital other than International segment was way down by an incremental investment. If you could maybe break that out a little bit more so we can understand the impact there specifically? And then second, Bob, any update on your paper contract and the potential renewal there for next year?

Alan F. Schultz

So the first part of your question, Dan, we probably have incremental investment to the tune of about $3.5 million this year versus last year for our new initiative. So as I say, if you pool that $3.5 million out, you'd probably have in the neighborhood of about 45%, 50% increase in segment profit there, really driven by NCH's performance.

Robert L. Recchia

And with regard to paper, we're working on that right now. So no real update. We will have some color on that obviously on the December call.

Operator

Our next question comes from the line of Bill Warmington with Raymond James.

William A. Warmington - Raymond James & Associates, Inc., Research Division

First question I want to ask was about the $350 million EBITDA guidance, because that would seem to imply, if I'm doing math right, about $90 million in EBITDA for the fourth quarter, which would seem like a significant pick-up quarter-to-quarter. And it sounds like you're going to see some improvement on the Shared Mail side, but it doesn't sound like you're going to get help from the FSI side or the Neighborhood Targeted side. So maybe you can help us -- maybe I guess the term would be to bridge it from how you're going to go from the EBITDA in the third quarter to the EBITDA implied in the fourth quarter?

Robert L. Recchia

Bill, this is Bob. I think I can bridge it better for you because third and fourth quarter are very different in terms of volumes, but I'll bridge it from last year when we did adjusted EBITDA, maybe 1.5. We took about $5.5 million charge in the fourth quarter for the Ultimate Electronics write-off. So really, apples-to-apples, last year, we did 87. So we're looking at roughly 89 versus 87. We would expect that the biggest driver of that would be in the Shared Mail. Its really the Shared Mail businesses that's up a little bit over what it is in the third quarter. Obviously, Neighborhood Targeted will be more than the third quarter and the comps in Neighborhood Targeted are easy because of the write-off last year. And then Al mentioned, we're still going to feel the effects in the FSI business in the fourth quarter. So we didn't look for any big turnaround there. And then similar performance I would say out of IDMS, it's bigger, it's better than the third quarter but you've got sustained components. You've got the clearing business doing extremely well, and the In-store and the Digital business not quite meeting expectations at this point. So that's your bridge. But it will come from Shared Mail, but don't forget about the write off. That's the piece that when you look at it quarter-versus-quarter, it's not all of a sudden we're bumping up 10% from last year. It's more 3% from last year.

Alan F. Schultz

And Bill, on the IDMS side, when we were talking about NCH, the numbers just came out, consumer confidence for October. And it's, I guess, as low as it has been since the third quarter of 2009, or actually the second quarter? Second quarter 2009.

Robert L. Recchia

March of '09.

Alan F. Schultz

Yes, March of '09. And so that would indicate, based on this correlation between declining consumer confidence and increasing redemption rate, that we're likely going to see redemption rates continue to be spiked up for the balance of the year, and that's clearly an assumption we've made.

William A. Warmington - Raymond James & Associates, Inc., Research Division

Yes. A question also on the use of free cash flow. I know you were talking earlier about the use of it for buybacks versus dividend. You have talked in the past about using some of your cash flow to do acquisitions. I want to know if that was still something that was on the table? And if so, what type of acquisitions would you consider in terms of what sector they would be in and what kind of pricing parameters you'd think about?

Robert A. Mason

Bill, it's Rob. Acquisitions are something that we are always looking at. We're always looking at them very carefully, particularly in a market like this. The digital space is something that we look at with interest. But again, as you look at acquisitions, in that space, I think you have to be very, very careful, particularly given the valuations that are apparent within that industry today. So are we looking? Yes. Are we looking with a very, very careful eye? Absolutely. And we make sure that anything that we acquire would add value and not detract from that.

William A. Warmington - Raymond James & Associates, Inc., Research Division

And then a couple of housekeeping questions, if I could. What was the share count? I know the average for the quarter was 47.8 million, but the share count actually exiting the quarter? And then can I ask for the Shared Mail metrics that you guys give the packages pieces average, piece of package, and so on.

Robert L. Recchia

Yes. They'd be at Shared Mail -- I'm sorry, the share's at 930 we're just over 47 million, call it 47.1 million, fully diluted. Basic is 45.1, that's about 2 million of dilution. Shared Mail metrics...

Robert A. Mason

I've got that, Bob. Bill, the standard metrics that we referenced, revenue per piece was up slightly, 2.6%, and I think that's indicative of the progress we've made from a pricing standpoint. This was, I think as Al referenced in his prepared remarks, the first quarter we've seen positive impact there. Correspondingly, revenue per package was up slightly at 0.6%. And then pieces per package was slightly down, 2% from 8 point -- or, I'm sorry, from 9.8 to 9.6. And then on a unused postage standpoint, we saw an improvement from Q3 2010. Where this quarter, unused postage was at 16.4% compared to 16.6% last year.

Operator

Our next question is from the line of Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Rob, you mentioned next year in '12, that you expect the consumer promotion spending to pick back up. And I'm just -- I mean, I know there aren't any definitives here, but is that based on just looking at there's likely no spending in this quarter and next and it has to go up? Or is that based on discussions that you've had, let's say, "we're just not spending in Q4, but we will spend..." Are those definitive sort of replies you're getting from clients or is that more conjecture here?

Robert A. Mason

Mark, I think it's as definitive as the current environment lets our clients be. I mean, we're working through a very uncertain economy. But as I mentioned in my prepared remarks, we have, we're in the final stages of '12 planning. Our clients are as well and our sales organization has been very engaged in those discussions. And for the very, very most part, the feedback we are hearing from clients at this point, is they plan on replenishing those of budgets that have been prematurely exhausted given some of this unexpected spike up in coupon rate. So I am as confident as the economy and some of these unexpected spikes allow me to be, because we've had the conversations with clients. The other thing I referenced was history and what happened in 2008 and 2009. In 2008 the spike-up was, I think, even more significant. And what we saw in 2009 is our CPG clients did in fact increase in their promotional budget and resumed to a greater level of the promotional spend.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And obviously, I think there are some investors there who probably will wonder if there are some structural deficiencies here away from macro. I mean, clearly, the macro is the most obvious here. But when you talk about the pick-up next year, is the important question really what level of growth you may see? And do you have as equal confidence in the level of growth that you'd see in that pick up versus you're seeing a sequential pick-up?

Robert A. Mason

Well, Mark, as I referenced in the first part of my discussion, we intend in mid-December time frame to update our guidance, and I think we'll have a much better handle on 2012 at that time.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Fair enough. And then just on the In-Store side, the weakness there was -- how much of that was due to just the new business that you anticipated versus just macro-related?

Robert A. Mason

I think, Mark, a significant driver was that 44% of that business is related to offer-oriented content. And we think this redemption spike has clearly had a negative impact on the number of tactics that clients are deploying. The other thing I will tell you, from a structural standpoint, we are making some moves in terms of aligning our In-Store sales organization under our CPG sales leadership. And we think that will create more significant collaboration, better communication, and ultimately, better results. So I think we see it as predominantly driven by this promotional squeeze that's going on. There's some executional things that we plan on addressing and think those 2 things will put us in a much better position in that business.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay, great. And then just one last quick one, on the pieces per package. I'm just curious how you see that trend line just into next quarter? And then obviously, next year is a question mark, but at least into next quarter, how you see that number trending.

Robert A. Mason

I think -- and I don't have the historical number...

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

I think you said 9.8 last year or roughly?

Robert A. Mason

Yes, we're 9.8 in 2010. And I would tell you that based on our current forecast, we would be expecting some slight improvement in our pieces per package on a year-over-year basis in Q4.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Is 10 -- if we just take 10 as a number as a baseline, does that feel like there's much growth left out off of that number? I mean, I know in certain markets, you're on much higher levels than that. But as an average, is the growth off of 10 going to be much more, I guess, slower than you have seen in the past?

Alan F. Schultz

Mark, I want to reserve specifics in terms of growth sort to the guidance called that Bob and I will do, but I'll tell you that we think there is still untapped potential for growth within our Shared Mail business. We look at the newspaper industry today and some of the issues they're having and the fact there's $5 million of a preprint market out there. And we think that's headroom that we can take advantage of that would put us in a position to continue to deliver growth in terms of volume, in terms of top line and in terms of profitability within the Shared Mail business.

Operator

Our next question is from the line of Dan Leben with Robert W. Baird.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

First, if you could talk about the pacings of Shared Mail as you went through the quarter? Just kind of what the growth rate you saw July, August, September and if that helped give you any comfort in the acceleration you're expecting in the fourth quarter?

Alan F. Schultz

I don't -- the confidence we have in the fourth quarter is based on our current forecast, Dan. And as I said earlier, I think we are counting on some uptick there, but compared to where we were projecting that back-half growth back after Q1, for instance, given the macroeconomic climate, we don't see that kind of potential for growth in Q4.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just both coming from a historical perspective, Al, as well as what you're hearing from clients, when you look at that mix of the budget that's used for redemptions versus the cost for distribution, how has that trended over time? Has there been any change there? And how are clients thinking about that for next year? Does that mix need to change in this higher level of redemption-type environment?

Alan F. Schultz

Yes. So that mix has changed. More of it has gone to the consumer and less of it to us, primarily because prices in the FSI business were down for 8 or 9 years in a row there. And so that certainly took the percentage down. And then of course really starting in end of 2008 and into 2009, you've seen a spike-up in redemption rates, which then increased that percentage going to the shoppers. So yes, that, that number has been shifting and going more to the shopper and less to us over the last number of years.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

And what are clients saying about how they're thinking about that going forward?

Alan F. Schultz

Well, I think that, that kinds get into an issue that we really can't talk about, which is the pricing side of the equation at FSI. And as you know, we have long-term contracts in the FSI business. And really, 2012 was kind of our first opportunity to see some improvement in that regard, and we can't get take any of the specifics about that.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And then last one for me just going back to EBITDA bridge. A helpful comment looking at the $5.5 million from Ultimate Electronics in thinking about the Shared Mail. But I'm still struggling with the fact that we've got -- the guidance is for all-time high in EBITDA and still a year-over-year increase when the last 2 quarters we've been down year-over-year significantly, particularly in the third quarter and the trend within CPG remains. Are there some other pieces here in terms of cost savings? Or may be some reverses of accruals for incentive compensation that we should we be thinking about as we look forward to that fourth quarter number?

Robert L. Recchia

Yes, Dan. If you just look at the other piece is down significantly, it's going to be SG&A. If you look at the big moves from last year to this year in Q4, one is the write-off and the other is going to be a significant reduction in SG&A. If you look at the run rate in Q3 versus a year ago, and if you can see it.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just help us understand, of the initiatives you've taken, kind of how should we think about that in terms of annualized run rate of expenses you've been able to take out of the business with the actions you took this quarter. And also if you can give us some perspective on the longer-term levels that you're going to be able to take out?

Alan F. Schultz

I think an interesting statistic, Dan, is if you went back to the time of the Shared Mail acquisition, you obviously had SG&A at Valassis and SG&A at what was known as ADVO at the time. Today, we are basically running on the SG&A of ADVO. In essence, through this integration process, we completely eliminated all SG&A from Valassis.

Robert A. Mason

And in terms of going forward, Dan, once again, not trying to be evasive, we gave you guys some numbers for the back half of the year in SG&A run rates, I think we hit that. We said $81 million or something like $81 million, $82 million. We're just under $81 million this quarter. We'll give you some color for next year. We're looking at all that right now. Obviously we're going to look at the cost side of the business critically as we go forward. And if there's opportunities there to create some savings, we'll do that.

Operator

Our next question comes from the line of Edward Atorino with The Benchmark Company.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

I've got 2 questions. First, the quickie. Was there some kind of nonrecurring item in the other category there? You had other income as a loss of $3 million. Is something in there that's sort of onetime item?

Robert L. Recchia

That's actually a gain, Ed. That's actually a gain. It's all the various partnerships and investments.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

What was it, mostly the whole thing?

Robert L. Recchia

All of that's a gain. It's all partnership and investment.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Got you. Secondly, regarding the ad shift, if the dollars aren't going to the coupons, are they going back to budgets or are they shifting to TV maybe? Are they going to other medium, other media rather than to the coupons?

Alan F. Schultz

I think there's a couple of things going on. One, I think it's important that what we've called out here is there are dollars going to redemption budgets that would otherwise go to promotions, particularly within the CPG vertical. And that's really the primary driver of our year-over-year deficit there. In terms of other migration of dollars, we know and are aware that there are -- there's a migration of dollars into Digital. What we're seeing is, is consumers are changing their behaviors based on technology development and spending more time online. And what this business has always taught us is that there's more -- as consumer eyeballs go to a particular medium, the client dollars will follow. And I think that's behind our continued investment in our digital strategy in business.

Robert L. Recchia

But Ed, we really what you're seeing is just a shift within the consumer promotion budget from consumer promotion media into sharper redemption cost, right? It's basically what you're seeing. And we did even look, did a little bit of a deep dive on the kind of the digital and said, "Are we seeing some kind of a shift to digital that is of any significance here?" And the answer to that is, it's really insignificant. There's $420 million more that are going to spent here as it relates to consumer redemption cost. And very, very little of that is going to be from digital coupons. It's going to be from your traditional paper coupons. The reality is digital coupons are still less than 1%.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

So they're basically covering their costs?

Robert L. Recchia

Yes, it's the redemption costs. Not media costs, it's redemption costs.

Robert A. Mason

Pull it out of media and put it into redemption cost, but that's just not leaving dollars for media.

Operator

Ladies and gentlemen, that is all the time that we have for questions. I'd like to turn the call back over to management for closing remarks.

Alan F. Schultz

Thank you, Douglas. I'd like to thank everyone for being on the call this morning. As this is my last official earnings call as the company's CEO, I have a few thoughts I'd like to share. Back in early April when we began the dialogue of moving forward with the succession plan, I couldn't have imagined that my last 53 earnings calls would be one where we were taking down guidance. I certainly would not have planned it that way.

With that said, I look back at last 53 earnings calls, and we raised guidance, earnings guidance 7x. We lowered earnings guidance 6x. And we made no changes to earnings guidance, 40x. So I think, based on that track record, I think it's apparent that we really endeavored to provide you with the most really realistic information we had available at that time, whether it was a good news or bad news.

It's truly been my privilege working with you in representing this great company to the investment community as Chairman and CEO over the last 13 years through all the growth, challenges and successes. It's really been the journey of a lifetime for me. And I also look forward to my role as Chairman and supporting Rob and his team in what will be the next exciting chapter for Valassis. I know the company is in really good hands with Rob and his senior leadership team.

It is that confidence that I have in him and the team that allows me to move forward in my semi-retired chapter of my life, where I hope to work on my bucket list and spend more time with my wife, Eva, sons and grandsons. So I really want to thank you all for your professionalism and your support and your suggestions for so many years. Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude our conference for today. I'd like to thank you for your participation. You may now disconnect.

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