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Valassis Communications (NYSE:VCI)

Q4 2011 Earnings Call

February 16, 2012 11:00 am ET

Executives

Robert A. Mason - Chief Executive Officer, President and Director

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

Analysts

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Charles Edward Cerankosky - Northcoast Research

Townsend Buckles - JP Morgan Chase & Co, Research Division

Daniel Salmon - BMO Capital Markets U.S.

Mark Nicholas Argento - Craig-Hallum Capital Group LLC, Research Division

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

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

Thomas B. Jackson - Robert W. Baird & Co. Incorporated, Research Division

Unknown Analyst

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Valassis Fourth Quarter and Year-End 2011 Earnings Conference Call. [Operator Instructions] I'd like to remind you that the discussions during the conference call will include forward-looking statements and the 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 and are discussed in the risk factors and other sections of the 2010 Annual Report on Form 10-K and in the reports on Forms 10-Q and 8-K filed with the SEC.

Also, the discussions during this conference call 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 the Valassis website at www.valassis.com on the homepage of the Investors section.

I would now like to turn the conference over to President and CEO of Valassis Communications, Rob Mason. Please go ahead.

Robert A. Mason

Christine, thank you. Good morning, everyone, I'd like to thank you for joining us for our 2011 Q4 full-year earnings call. As usual, Bob Recchia, our Chief Financial Officer, is with me. And after some prepared remarks from Bob and myself, we look forward to answering your questions.

I'd like to begin with some highlights. As you know, back in October, during our Q3 earnings call, we revised financial guidance for the full-year 2011 based on our Q3 results and our outlook for Q4.

While we will never be satisfied with a year where we needed to lower expectations, we're very pleased to report we've exceeded our revised full-year 2011 diluted cash EPS and adjusted EBITDA in guidance due to the strong performance of Shared Mail and the MCA's coupon clearing and analytics business. In fact, our fourth-quarter adjusted EBITDA of $91.3 million is a single quarter record for our company.

In Q4, Shared Mail revenue grew 5.4% with corresponding segment profit growth of 23.4% compared to the prior-year quarter. A combination of increased volume and heavier piece weight contributed to this growth. The total number of packages distributed was flat, while average pieces per package were up 1.7%.

Increased revenue within the grocery retail vertical, which was up 6% from previous year, was a major contributor to Shared Mail's growth during the quarter.

Weekly content like grocery circulars are especially effective at growing and creating enhanced consumer engagement with the Shared Mail package. This high-quality content also helps our sales organization draw new clients into the Shared Mail package. It's what I call the velcro effect.

As I look back and reflect on our 2011 performance, there are some key takeaways that are important in understanding our results and are relevant to our business going forward.

We are very pleased with the overall revenue and segment profit growth in the Shared Mail business. Revenue grew 3.3% year-over-year, with segment profit up 22.4% due to the strong operating leverage of this business.

In 2012, Shared Mail growth rates will likely vary from quarter-to-quarter. But overall, we expect the year-over-year Shared Mail revenue to grow in the 3% range.

Our Neighborhood Targeted segment continue to be negatively impacted by previously discussed cycling issues, associated with 2 large ROP clients, which should end in Q2 of 2012.

We also experienced year-over-year decline in our newspaper insert product line, driven by the loss of 2 large retailers we've liquidated in Q1 of 2011, as well as overall softness in our telecommunications vertical.

Going forward, our sales organization will place greater emphasis on expanding our share of the newspaper insert market, while we also work to aggressively manage cost in this segment.

In 2011, we saw decreased revenue on our FSI segment due primarily to the loss of custom co-op business and the continued pullback in consumer packaged goods budgets in the second half of the year.

According to NCH, in 2011, consumers redeemed and saved an incremental $500 million by using more coupons than they did in 2010. Although this is great news for consumers, this spike in coupon redemptions has become a significant drag on budgets in the CPG industry. That is the primary client base in the FSI business. We expect these factors will continue to impact the FSI business into 2012.

The upside of this $500 million increase in coupon redemptions and a highlight of our 2011 results was the exceptional performance of our NCH coupon clearing and analytics subsidiary with inner IBMS segment. We do expect and have planned for a leveling-off of the growth rate in coupon redemption volume in 2012, as the pullback in CPG offers flows through the redemption life cycle.

In addition to NCH, our IDMS segment also includes our In-Store and Digital businesses, where we continue to invest more resources to drive growth. As I said before, we believe we have the right plan and the right people in place to increase our share of spend in both our In-Store and Digital businesses.

In-Store, much like the FSI business, is highly reliant on the consumer packaged goods client base, and couponing as a revenue source. As such, it was also negatively affected by the reduction in CPG spending in the second half of 2011. Given current market conditions, our In-Store and CPG sales teams are laser-focused on growing our share, our clients In-Store tactics and spend.

We are pleased with the momentum in our Digital business where we see significant year-over-year revenue growth, albeit on a relatively small base. Jim Parkinson and his Digital team have this business on the right track. And in 2012, we expect Digital to become an increasingly important contributor to both revenue and profit.

Regarding pricing, I am extremely proud of what has been a true organization-wide accomplishment in 2011. We continue to move from an environment where pricing was a drag on our business to one where it is a contributor to both revenue and profit, reflecting the increased value, performance and ROI of our products. Going forward, our approach to pricing will be more surgical, where we will use price to keep and win business, varying our strategies as clients, competitive and market dynamics dictate. We believe price will continue to be a positive contributor to our P&L in 2012.

We continue to do a great job with the overall financial management of our business, including our capital structure, our capital expenditures, as well as the cost out of the business. And I believe this is a real testament to the efforts of Bob Recchia and his finance team.

With that, I'd like to turn the call over to Bob now to provide some additional financial highlights.

Robert L. Recchia

Thanks, Rob. I want to provide some color on the fourth quarter charges taken in the aggregate amount of $14 million, as well as what it will mean to our go forward operations. I also like to explain some of the other variances during the quarter.

Additionally, our tax rate was significantly lower than normal for the quarter, while EBITDA modestly exceeded our revised guidance. Diluted cash EPS was up substantially from guidance given in December 2011.

The $14 million charge during the fourth quarter was a primarily associated with the restructuring of certain non-core businesses and the related cost including write-offs of impaired assets, as well as the early termination of leases and severance payments.

Of this $14 million, approximately $7.1 million are non-cash charges with the remainder being severance and lease payments paid out over time. We expect these charges will positively impact 2012's pretax net income by approximately $4 million and have been taken into consideration when giving our 2012 guidance.

In October, we revised our guidance to $315.1 million in adjusted EBITDA and diluted cash EPS of $3.56 per share. In December when we've provided 2012 guidance, we reiterated our adjusted EBITDA guidance and raised our diluted cash EPS guidance to $3.55 per share. There were several factors in the fourth quarter that improved diluted cash EPS from the anticipated $3.65 per share to the $3.80 per share reported for the year.

The breakdown is as follows: approximately $1.5 million additional adjusted EBITDA represents about $0.02; lower capital expenditures, about $0.03; the reduced tax rate made up $0.08; and the increased share buyback was worth $0.02, totaling $0.15.

As we look at these variances, I should point out that the lower capital expenditures were a result of projects that were delayed in the first quarter of 2012, which we anticipated including in 2011. Therefore, capital expenditures in the first quarter 2012 will be somewhat higher than normal. In addition, the tax rate was lower due to positive outcomes related to various state and federal tax issues. Although much of this benefit was one time in nature, we do expect a lowering of our go-forward tax rate to approximately 38.5%.

2011 was a year where we saw significant improvement in our capital structure, which will benefit us greatly as we go forward. We reduced our total debt by over $100 million in 2011, ending the year with a net leverage ratio of approximately 1.6x.

We also refinance substantially all of our outstanding debt in the first half of the year, and have reduced interest expense from $65 million in 2010 to approximately $30 million in 2012.

Our new capital structure provides us with increased flexibility to use our free cash flow to drive shareholder value and invest in our future growth.

In 2011, we also repurchased $8.9 million of our shares, representing approximately 17% of our beginning of the year fully-diluted share base for $215 million. We anticipate purchasing shares in 2012 and have assumed that we will purchase shares using approximately 50% of free cash flow ratably throughout the year, but are not obligated to do so.

We also reduced SG&A by approximately $23 million through a combination of continued cost management and reduced incentive-based compensation plan due to lower-than-budgeted earnings in 2011.

And Rob, I'll turn it back over to you at this time.

Robert A. Mason

Thanks, Bob. In summary, the highlights of 2011 were the strong performances in our Shared Mail and NCH coupon clearing and analytics businesses. We are reiterating our 2012 guidance, given our expectation, that Shared Mail will continue to be a major driver of 2012 earnings, backed up by the solid performance of NCH and growth from our new initiatives. While the results within our newspaper-delivered products are not where we want them to be, we are focused on taking the necessary steps to turn these trends around.

At this point, Christine, Bob and I are ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our next question comes from the line of Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

I'm curious, maybe if we could just look at the drivers of that growth. Given the numbers you gave us in terms of pieces and packages and price, some pretty strong pricing. And I'm curious, how much of that may be attributed to what had previously been discussed as sizable chunk of contract renewals in the quarter, or if that was less of an impact? And maybe you can talk about on a go-forward basis, what might carry forward into this calendar year.

Robert A. Mason

Mark, I don't want to get too specific with any product segment as it relates to pricing. I will reiterate what I said in the scripts and that is I'm extremely proud of what our company has done from the pricing effort across the board in 2011. As it relates to the Shared Mail growth, I think the primary drivers were incremental volume and then pieces carrying higher page counts as well. And there was some benefit too from a rate standpoint. If you look at verticals, grocery was a clear contributor of that growth. It was up 6% for the quarter. What you saw there was a combination of increased page counts and then some incremental activity during the holiday weeks that has historically not been there. And what we're finding is with the competitiveness right now within the grocery vertical, those grocery retailers are responding by increasing page counts and adding some incremental activity. And those really were the primary contributors. In addition, the other thing that I will call out is we did see some nice growth out of our Specialty Retail segment. And I think if you go back to Q3 when we saw some of the hesitancy in terms of spend, what we saw in Q4 is that Specialty Retail segment respond in a must-win timeframe on their calendars by increasing their activity to alleviate inventories and make their year-end numbers.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. So if I'm hearing you right, it sounds like a fair amount of that was seasonally driven, so not to get too far ahead of you guys in terms of thinking about sort of better than 3% growth heading into Q1 here in the first half of the year.

Robert A. Mason

I think that's the right way to look at it, Mark.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Fair enough. And then on -- by the way, can you just mention what pieces-per-package were in the quarter? What that number was?

Robert A. Mason

Pieces per package were up.

Robert L. Recchia

I got it. They were up 1.7 to 10 pieces.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

10 pieces. Okay, great. And then on just the CPG, away from sort of the challenges that the segments have been seeing on the redemptions, P&G and Unilever have obviously been a little vocal lately about moderating all traditional spend, not just direct mail, the TV, et cetera, in 2012. And as they put it in favor of cheaper digital alternatives. I'm just curious if this means that we could see an acceleration of the FSI rev declines that we saw coming out of Q4, at least into the first half before we see easier comps in the second half of the year?

Robert A. Mason

I don't want to get too far forward into '12, Mark. I think how I would characterize what we're seeing now is it will carry through into 2012 and it's that very mixed bag. We've got some clients who have responded to the spike in redemptions by trying to turn that into an opportunity to grab share by continuing the volume of promotional programs that they've done in the past and others have pulled back. But other than that, I think it's difficult to characterize the behavior right now because we're still in kind of an unprecedented situation. I think longer term, what we believe will hold true is what we've seen historically is that there is a clear share pressure within the CPG industry. And at some time, we believe the CPG clients will respond to returning to promotional media, especially given current consumer behavior in an effort to protect and grow their share, whether it's from other traditional CPG competitors or whether it's stable off competitive efforts from a grocery retailer private label.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

So you're not quite seeing that yet, but that is still a potential in the first half of the year where you see sort of maybe them coming back as it relates to the generic market share pressures, et cetera?

Robert A. Mason

Yes. I would -- based on what we can see today, I would not think on any measurable improvement in terms of FSI volume in the first half.

Operator

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

Charles Edward Cerankosky - Northcoast Research

We'll try this again. I wanted to talk for the first question out to you, Bob. Looking at that return on sales rate, the Insured Mail in the fourth quarter, that's the segment margins, is that indicative of a starting point for the current year?

Robert A. Mason

Yes. I don't see why it wouldn't be. I don't think there's anything -- as I look at the gross margin improved up about 50 basis points from a year ago. And quarter-to-quarter, you understand that the Shared Mail business is like everything else, the seasonal quarter in December is the biggest one. So as I look into 2012, when we talk about the business, keep in mind, it's a 12-month year, we're guiding to approximately 3% growth. It gets a little bit lumpy, but yes, I think it's a good starting point going into the year. I don't see that would derail that.

Charles Edward Cerankosky - Northcoast Research

Okay. How important was price in that equation in the fourth quarter, Bob?

Robert L. Recchia

I would tell you, pricing was pretty neutral in the fourth quarter.

Charles Edward Cerankosky - Northcoast Research

Rob, do you expect it to be neutral in Shared Mail in 2012?

Robert A. Mason

Chuck, again, I don't want to get real specific. I do think it will contribute positively to our Shared Mail growth throughout 2012.

Charles Edward Cerankosky - Northcoast Research

Focusing back on the CPGs and private label, it's very intriguing, you guys got some companies with some major brands touching on double-digit volume contraction. Are you able to go to these guys and say that your competitor who's a little more promotional with coupons is not seeing X amount volume decline and use that as a selling point to the other guy? Or these guys in general are running away from the practice?

Robert A. Mason

That's clearly part of our story, Chuck. It's that combined with the opportunity to optimize values in terms of the offers that the CPG's are using within their FSI programs. But clearly, there is pressure on many of the CPGs to protect and grow their share in this country, while we're seeing CPG's release and talk about growth internationally. We're not seeing a lot of gains domestically. And that's the case for change that the pitch we're taking it in is based on. Yes.

Charles Edward Cerankosky - Northcoast Research

And you have the data?

Robert A. Mason

Yes.

Operator

And your next question comes from the line of Alexia Quadrani with JPMorgan.

Townsend Buckles - JP Morgan Chase & Co, Research Division

It's Townsend Buckles for Alexia. Can you also hit on the Shared Mail performance? Any geographical differences that you saw in terms of strength in the quarter? And I think you touched on this a bit, but have you seen this elevated revenue strength continue into Q1?

Robert A. Mason

Sounds that nothing spiked in terms of market-specific or geographic-specific as far as we can see. And we look at that relatively closely. And as far as those volumes running into Q1, I think Bob characterized it very well earlier. We believe that Shared Mail through a combination of volume increases through postal though pricing is going to be in the 3% range during 2012. But if you're thinking about is 4 consecutive quarters is 3%, that's probably not going to hold true. There were some seasonal things that I touched on earlier in terms of grocery, in terms of retail that help drive the Q4 results. So I would not build any model based on a 5.5% growth factor on Shared Mail.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. So it's not that you're seeing sort of elevated growth as you think about the 3% for the year. You're seeing an elevated growth right now and you're sort of being conservative toward the back half of the year?

Robert A. Mason

Well, I don't know if I characterized it as being conservative, Townsend. History would show us that this is, for lack of a better term, a little bit of a lumpy business. And in one quarter, you're going to see 5, in the next quarter, you could very well see 1. But over the course of 2012, we will remain confident that Shared Mail would generate 3% year-over-year growth totals.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And on use of cash in 2012 and your current target is to spend roughly 50% on buybacks, what are some of the other potential uses we should keep in mind?

Robert L. Recchia

Honestly, we don't have anything else that's earmarked for the remainder of the cash. So what we've done in giving the guidance in the numbers, we assume that we take 50% of the free cash and buy back the shares. We can buy -- use 100%, if we choose that or use 0. So right now, I would tell you we've thrown 50% out there, if we do that, we could well build $85 million of cash on the balance sheet. There's always little tuck-in type acquisitions that we're presented with that if they made sense, we might look at those. But right now, it is share buyback and build cash.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And thinking about that sort of tuck-in the smaller acquisitions, would those be in the digital space or could those be in other part of your business?

Robert A. Mason

Townsend, we see a lot of different things that people bring us that we look at. I think any tuck-in, as you would characterize the acquisition, would be something that integrates well with our current product portfolio, could be in the digital space that's obviously where we're focusing a lot of our energy and effort today. As we look at that space, I think we have to be careful because everything in the Digital space seems to carry a pretty significant price tag right now. Significant multiple. And the other thing is, we're very interested in making money and whatever we would buy have to add value. So we see a lot of things, but there's nothing that's on the table right now.

Townsend Buckles - JP Morgan Chase & Co, Research Division

And finally, sorry if I missed this, Bob, but did you give FSI industry volumes in the quarter?

Robert L. Recchia

We did not. For the year, Rob.

Robert A. Mason

I have it here somewhere, Bob. For the industry, the quarter was down 2%, Townsend, and for the year, we're down 3.7%.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. So an improvement over the third quarter?

Robert A. Mason

Yes.

Operator

And our next question comes from the line of Dan Salmon from BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

Two quick questions. First, for Shared Mail, you mentioned, Rob, a few of the verticals that contributed. I'm wondering if you can update us on any traction you're getting early on with the new 4-color postcard product. And then secondly, you mentioned in your prepared remarks that the goal for 2012 would be gaining share of the newspaper insert business. If you could maybe just add little color around that? Does that suggest a little bit more aggressive pricing in certain areas and how much that depends on where your weight is in the Shared Mail package market-by-market?

Robert A. Mason

Sure, Dan. Let me address the postcard first. That was a product that we really first began selling in the back half of 2011. We've been very pleased with the initial traction with that product. And I think as we move forward, we look for it to be a contributor to the Shared Mail growth we've called out for 2012. We're seeing some adoption across some new categories, and within categories we're calling on today. So right now, we're very pleased with where we are with that product. On your question about newspaper inserts, I'll just going to go back to my comments on pricing. We will use pricing to win business where we think it makes sense for us. We still see there being a significant amount of headroom, somewhere between $6 billion and $8 billion of newspaper inserts that we think are fertile ground for migrating into the Shared Mail package.

And I think today, if I characterized their sales organization as being very, very focused on turning some of that headroom into business for us, I would be -- I'd be, if anything, understating a fact.

Daniel Salmon - BMO Capital Markets U.S.

Okay. And just as a follow up, I know often times, when you're looking at Shared Mail, like I said, it's on a market-by-market basis depending on where your weight is and whatnot. Is that a similar type of strategy for -- I assume that the inserts go hand-in-hand with that, that each market is a little bit different?

Robert A. Mason

Not necessarily. And just from a competitive standpoint, Dan, I don't want to get into too much detail in terms of our pricing philosophy as it relates to local markets. But we are very focused on the $6 billion to $8 billion of headroom, and now we can to make that business ours and then migrate it into our Shared Mail package.

Operator

And our next question comes from the line of Mark Argento with Craig-Hallum Capital Group LLC.

Mark Nicholas Argento - Craig-Hallum Capital Group LLC, Research Division

Two questions for you. One on the Digital side. I know that you had been using somebody else's or been licensing platform technology. I wanted to see -- I think at one point in time, you talked about developing your own platform, I wanted to see where you are with that. And then second question, I know there had been some talk in regards of the Post Office and potentially limiting Saturday deliveries or maybe cutting out Saturday deliveries. Is there any kind of take rate differential from when you deliver a package on a Saturday versus some time during the week and any thoughts around how that might impact your business?

Robert A. Mason

I'll handle the postal side of that first, Mark. The amount of distribution that we distribute on Saturdays is somewhere, I think, in the 2% to 3% range. If there is a change in terms of the current 6-day delivery, we would simply move that distribution into Friday. So I don't see that measurably impacting our business and there is no difference in terms of the rate, in terms of day of week of distribution. As it relates to new technology, we -- has been, in fact, using a competitor's technology from a print driver standpoint to support our distribution of digital offers and securely print those offers. One of the things that Jim Parkinson and his team has done that really defines the talent and the skill of that group is in a very short timeframe, designed and delivered our own secure print technology to market. And we believe it's proprietary difference for us. We think it's a differentiator in the marketplace. Jim and his team completed that process in roughly 3.5 months. And we have successfully executed the cutover from that competitor's technology to using our own. And he's operating exactly how Jim and his team told us it would, and we are now going about the process of recognizing that differential in the marketplace and making all effort to drive incremental content that we can leverage in our secured print technology.

Mark Nicholas Argento - Craig-Hallum Capital Group LLC, Research Division

That's helpful. And when I look at your CapEx budget for the year, are you spending -- is that fairly, evenly distributed throughout the business? Are you spending a disproportionate amount on the growth of your parts of the business on Digital in particular?

Robert L. Recchia

I would say the bulk of it typically is technology-related, whether it is the infrastructure for the whole organization, which is a big number, or it's related to the technology businesses. I will tell you that since Jim has come on board, our technology spend is much reduced. He has a different approach to it that you won't see us spending large amounts of money on the Digital front. We build most of the stuff fairly quickly and inexpensively at this point. And then we've got some money in the first part of this year that is more manufacturing driven.

Mark Nicholas Argento - Craig-Hallum Capital Group LLC, Research Division

Last question. In terms of Digital, do you any new product offerings that you anticipate launching this year? Anything that can really move the needle? I know it's still a small part of your business, but clearly, an area that has a tremendous amount of opportunity.

Robert A. Mason

Jim and his team have a number of things in the upper market. I don't want to get too far out in front of ourselves and hence as any of those things for competitive reasons. But I think you will continue to see new offerings come from Jim and his group. And you know what, if you're looking at our Digital business and I referenced to earlier becoming a more significant part of our revenue generation efforts, Digital made up about $6 million in fourth quarter revenue for us. And if you want to think about it for 2012, I think you can look at that as a business that generates somewhere around $30 million.

Operator

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

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

A couple of follow-up questions on the metrics. Just wanted to see if we could get the actual number of packages and pieces and the unused postage.

Robert A. Mason

Packages were flat, Bill. Unused postage improved from -- Bob, you got that number?

Robert L. Recchia

Yes. Unused postage came in at 14.5 for the quarter. And what was the other piece?

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

The pieces or average number of pieces per package.

Robert L. Recchia

Pieces per package was up 1.7%, up to 10 pieces per package.

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

All right. You gave that one right. The other sort of housekeeping question, how many was the diluted share count exiting the quarter?

Robert L. Recchia

I have that here somewhere. The fully diluted end-of-the-year share count. So this is the end-of-the-year base, not the average.

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

Yes. Not the average. Right.

Robert L. Recchia

That's under $144 million. Our dilution actually came down a little bit from where we had been running. So basic share is about $42.3 million, fully diluted, just under $44 million.

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

Okay. And I wanted to ask a question about Digital, and you talked about it being a contributor in 2012. Just wanted to ask, where is the Digital business now in terms of revenue and how do you think about it growing through 2012. Or if that's too short a timeframe, how do you think about it growing out 2 to 3 years?

Robert A. Mason

Bill, I referenced just a minute ago, we generated about $6 million from our Digital efforts in Q4 of '11. And based on organic growth, kind of from the products and solutions we're taking to the market today, we see that as about a $30 million business in 2012 and ramp it from there.

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

Got you. Okay. I need to talk a little bit about how the pipeline is looking for the In-Store business.

Robert A. Mason

You know what, I don't want to get into a lot of details on pipeline. What I would tell you is this business, as I referenced in the script, has been significantly impacted by the CPG pullback, with approximately -- as we look at that business, approximately 60% of it is driven by some kind of offer or coupon. And its CPGs has reacted to this increased redemption that business has been impacted by that. What we're trying to do in that space is, A, continue to expand our retailer footprint. There are no significant retailer contracts coming up for renewal or negotiation in 2012. But we are looking to expand the footprint. And then the other key activity within the sales organization is how do we increase our share of the tactics that the CPGs and retailers are employing in the aisles within the store.

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

Last question then would be, as you look at the 3% growth for Shared Mail, how many basis points do you anticipate coming out of the actual higher postage being passed through given the timing and the magnitude that you expect?

Robert A. Mason

When you look at our business, I think about it in thirds. I think you look at as a third volume, a third postal and a third price. And if you still like to go that way, I like to -- it's a pretty accurate characterization.

Operator

And our next question comes from the line of Ed Atorino with Benchmark.

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

Got a couple. I do a little calculation on the FSI business. It looks like the revenue per program, that's my own calculation, it was down about 20% with the loss of the custom co-op. Is that a type of impact the loss of custom co-op would have been on the set of revenue base?

Robert L. Recchia

No. Actually, the revenue per program was up because we lost the custom co-op business, but there were multiple programs in the fourth quarter of last year. So our date schedule for 2010 versus '11 when you add it all together with the basic and custom co-ops, went from 14 down to 9. So our book size went up and margin was helped by that.

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

And what's the mailings and the publishing dates of 2012?

Robert A. Mason

I think what we published is we're going to move from 42 dates in '11 to 41 dates in '12, Ed.

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

Okay. No big deal.

Robert A. Mason

And by quarter, it's 12, 10, 11 and 8.

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

If you look at the base of the other business, and you put the other - the Digital, et cetera. Since it's running roughly $50 million business for the past couple of quarters, when does it start to turn back up? Second half?

Robert A. Mason

I'm sorry, which business are you referencing to?

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

If you look at the other categories, the International, et cetera, et cetera, in last 3 quarters, just the 48, 52, sort of in that range, is that going to stay in that range for a while before it turns up, the International Digital Services?

Robert A. Mason

The idea of that segment is you can look for some moderate growth there. The predominant contributor to IDMS is our NCH coupon clearing and analytics business, Ed. We have built in to our model a leveling off of coupon volumes and redemption volumes in 2012. So you won't see the kind of growth there. But you will see contributions from both In-Store and Digital as I referenced before.

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

It's going to be back -- back half loaded, I guess, in terms of growth?

Robert L. Recchia

It probably is, Ed, but the other mitigating factor areas in the -- as we talked about some of the restructuring we're doing and repositioning of certain downsizing, if you will, of certain products, a little bit of that falls into the IDMS segment, so there'd be a little bit of drag there as well. Remember we talked about some of that revenue going away. So we got one thing working against us that is being offset by some other growth that we're seeing from the businesses that we're doing well there. But if it's up, it will be up modestly. Don't look for a big growth out of here yet.

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

This is year -- on a year-to-year, not from the fourth quarter.

Robert L. Recchia

Digital piece is still too small, as Rob mentioned. It was $6 million during the fourth quarter. About $30 million we're expecting for 2012. So it's not enough yet to really drive growth. So really this segment is more about driving profitability out of it and cleaning up the businesses that were not doing well.

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

And could you explain the neighborhood target that you cycle through the loss of the big customer? And as that start to show up in the early 2012 or a little later?

Robert A. Mason

Yes. That was a phenomena, Ed, that we saw throughout 2011. There were 2 clients that contributed significantly that made up the vast majority of that headwind, and we see that cycling coming to an end beginning with 2012 second quarter.

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

Okay. Great. One last thing. With the change in revenue mix and other things, SG&A is still been running 14%, 15% of sales. That's going to stay the same or will that change?

Robert L. Recchia

I think we gave you a number for SG&A for the next year and guidance, did we not? It's going to be up 2.5% to 3%. So use that. Now all that is dependent upon how the year unfolds. If the year unfolds better, a lot of our incentive plans are self-regulating, so if we don't do as well, they come down. If we do better, it goes up.

Operator

And our next question comes from the line of Dan Leben with Robert W. Baird.

Thomas B. Jackson - Robert W. Baird & Co. Incorporated, Research Division

This is Tom Jackson filling in for Dan. I just had a quick question here. In the press release, you mentioned that print revenue was a driver to Shared Mail performance. And I was just hoping you could help me understand what that entails and then how much it contributed to overall Shared Mail growth?

Robert L. Recchia

What it entails is really the print that's associated with the distribution that makes up the primary revenue source for Shared Mail. As it relates to the amount of impacts within the quarter, I want to say we saw somewhere around -- I have that number here somewhere. Hang on one second. Hang on one second. I see, incremental impact to Q4 was somewhere in the neighborhood of $8 million of incremental print. And that comes from the result of our sales organization, going out and soliciting with our clients to take on the print component of what our clients are doing from a distribution standpoint. And so that component of a new business as well.

Thomas B. Jackson - Robert W. Baird & Co. Incorporated, Research Division

Sure. Okay. And then what are the margins like for this portion of the business?

Robert A. Mason

We typically don't -- we don't break down to that level of granularity.

Thomas B. Jackson - Robert W. Baird & Co. Incorporated, Research Division

Okay. Sure. And then just switching over to margins here for a second with Shared Mail. Sequentially, Shared Mail performance, it showed about a 30% incremental margin from the third quarter. And I was hoping you can help me understand, this a little bit lower than what you've talked about in the past. Where there one-time factors there or how should we think about that?

Robert A. Mason

Tom is here, Bob, but I think basically, what we saw, the impact of the increased volume we had -- because of those volumes we have less benefit from underweight markets, one, and then two, I called out that incremental print. While I don't want to give any specifics in terms of the margin, the margins on that print component do not tend to match what we see in terms of flow-through from distribution and Shared Mail.

Robert A. Mason

But in terms of quarter-on-quarter, I'm not sure exactly what you're measuring because our business was up, and pretty much every measure where we look at. So the number we tend to look at is gross profit, and that was up about 50 basis points sequentially from quarter end to September 30.

Thomas B. Jackson - Robert W. Baird & Co. Incorporated, Research Division

Okay. I was just looking at $30 million increase in revenue and then operating profit from -- was about a little over $9 million increase.

Robert L. Recchia

Yes. That can't be the mix issue that Rob is talking about. It also could be affected by segment allocations. The business, the better number to really look at is what's happening with gross because that's really what's happening with the business as far as we look at it.

Operator

[Operator Instructions] And our next question comes from the line of Matt Hevlic [ph] with [indiscernible].

Unknown Analyst

Just a couple of additional questions. As I think about free cash flow for fiscal '12, you guys provided a cash EPS number, which works to roughly $170 million. In terms of your internal thinking, how would that differ with from a free cash flow number? I guess you're assuming -- I guess, one assume neutral working capital?

Robert L. Recchia

Yes, we assume neutral working capital. It will bounce around a lot from quarter to quarter. But pretty much, we'll manage it to even for the year. So basically you take that number and that's your cash flow.

Unknown Analyst

Okay. And then again, sort of devil's advocate, what you sort of explicitly discuss your view of acquisitions. I think you have $15 million of short-term debt, so I would presume you will pay this year, and your debt-to-EBITDA, obviously, nicely under 2x. I understand how you model, but is there any intellectual reason why you wouldn't use more than 50% to buy back the stock assuming the price was anywhere close to where it is now since -- it's pretty close to your average price on last year.

Robert L. Recchia

Yes, but it sort of reminds me of the discussion we had all throughout last year, and I think we used 125% last year.

Unknown Analyst

Yes.

Robert L. Recchia

We'll do what we think is in everybody's best interest here at the end of the day. So we just put 50% out there for math purposes, okay? We could put this thing in the EPS calculation rather than say nothing, but we're all about driving value with the cash flow.

Unknown Analyst

It was certainly better than last year's EPS guidance for the year. I think you assumed no share buyback in the numbers. So obviously, I guess, you're a little more realistic on that. And one question, I think a discussion of SG&A. So the SG&A that's in your guidance, I assume means at least sort of average amount of incentive comp is earned this coming year, is that right? I mean, presumably, these are numbers the people would earn decent incentive comp if you hit, is that correct?

Robert A. Mason

That's a correct assessment. I mean, we basically reset the comp plans.

Robert L. Recchia

We're going to reach 100% of target.

Unknown Analyst

Okay. And again, I mean I think everyone on the call would be thrilled if you exceed -- if you paid that and then some.

Robert A. Mason

Everyone on the call.

Unknown Analyst

Yes. I know where that year-on-year decline, and I think pretty much on the listeners' side as well. Although I guess there's a decent short interest. But the rest would be very pleased to see it. And on Digital, obviously you guys are providing more detail, any chance you'll break it out as a full-line item or is that maybe an end of '12 decision?

Robert A. Mason

I think it's a little premature for that matter. I think we'll readdress that in '12. But I don't want to give some visibility into what that business is designed to throw off in 2012.

Unknown Analyst

Okay. And one last question. I mean, I took the Shared Mail numbers and are pretty impressive and nice to see some pricing, and obviously getting some volume in selected markets and package count. Can you talk about what's the reception you're getting from the advertisers? Do you have any material sense of change as newspapers continue to struggle and presumably you continue to be able to demonstrate effectiveness?

Robert A. Mason

Yes. I think, Matt, that 3% growth assumes that we will continue to track new users to the package based on some of the weaknesses that we think are secular within the newspaper industry. And that's part of our assumption and that's part of the reason why we are so focused right now in terms of new client acquisition to go out and use that newspaper insert headroom as a means to bring new users into the package we've got. We're very happy with the participation of both shared -- specialty retail and grocery retailers in Q4. We think that's a good foundation for growth and we want to leverage that moving forward.

Unknown Analyst

Okay. And I guess, I misspoke on the last question. As I think about putting, at least, my model together for this year, I think one of the things that strikes me as kind of favorable is all the sort of -- I don't see a whole lot of tough compares. I mean, I recognize lumpiness and seasonality, but a lot of the things are up against. In fact, you weren't particularly attractive last year. And so that's probably more intended to do better this year, but it also, at least, to optically make sure comparisons are pretty good. I mean, are there any specific issues though from a comparison point of view that we may want to bear in mind as we think about this year that's still going to make some things look tough. Obviously ROP, I think, wasn't really favorable last year. And I think you're saying essentially the end of the first quarter, all your sort of special programs are kind of out of the numbers in terms of comparison. Is there anything else you might want to think about?

Robert A. Mason

Yes. I believe when we gave '12 guidance, we called out $70 million of cycling headwind that ultimately we built into that model. And we continue to see that as a headwind and something we got to work against, and that's a primary contributor as we built the model for 2012.

Unknown Analyst

Okay. But that's in the model and that's why it's wide open?

Robert A. Mason

Yes.

Operator

I'm showing no further questions at this time. I'll now turn the call back over to management for any closing remarks you may have.

Robert A. Mason

Thanks, Christine. Briefly in closing, as the new CEO and with the new leadership team, we recognize it's a very important for us to execute our 2012 plan and create a foundation that will enhance shareholder value and drive future revenue and profit growth. We will get there by delivering a plan with 3 primary components: First, we will continue to enhance what is an award-winning culture to attract the best and brightest talent available; second, we're going to focus on closely managing the cost side of our business; and finally, we will aggressively grow our new initiatives, while placing equal emphasis on enhancing the performance of existing products that provide a clear and positive return on our invested resources and efforts. I'm confident that we've got the right strategies, and most importantly, the right people to deliver our plan. Thanks for joining us today. We're looking forward to talking with you all soon.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We'd like to thank all of you for your participation. And you may now disconnect.

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