Valassis Communications Inc Q4 2007 Earnings Call Transcript

Feb.21.08 | About: Valassis Communications (VCI)

Valassis Communications Inc., (NYSE:VCI)

Q4 2007 Earnings Call

February 21, 2008 11:00 am ET

Executives

Alan Schultz - Chairman, President, and Chief Executive Officer

Bob Recchia - Chief Financial Officer

Analysts

Alexia Quadrani - Bear Stearns & Co

Mark Bacurin - Robert W. Baird & Co.

Matt Chesler - Deutsche Bank

Troy Mastin - William Blair & Co.

Edward Atorino - Benchmark Capital

Todd Morgan - Oppenheimer & Co.

Joe Roppard - Polygon

Rossi Savitz - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Valassis Communications fourth quarter and year end 2007 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). Please refer to the Safe Harbor language on the earnings documents released this morning. This call will be governed by the language stated there on. At this time, I would like to turn the conference over to our host, Alan Schultz, Chairman, President, and CEO. Please go ahead sir.

Alan Schultz

Thank you and good morning. I am here with Bob Recchia, our Chief Financial Officer, and Bob and I will cover some prepared remarks here first, and then the two of us look forward to answering your questions.

Obviously 2007 was an extraordinary year for our Company. It was a year which was greatly defined by our acquisition of the ADVO shared mail business and the integration of our two companies. As I look back, there are five primary drivers behind our decision to acquire ADVO. The first was it was an adjacent business to ours, in the growing direct marketing industry that we understand and certainly have expertise in.

The second issue was in the short-term we believe that there were significant opportunities to generate cost synergies associated with the integration of the two companies. The third driver behind the acquisition is, we believe that the shared mail business was an undermanaged asset and as such, had significant opportunity for improved earnings and cash flow. We also believe that ADVO’s national shared mail distribution network, really the only one in the United States, was part of the answer to decline in newspaper circulations, not only for Valassis, but most importantly for our clients. And finally, we believe that the combination of our businesses provided significant opportunity for a long-term profitable revenue growth, driven by cross-selling and new customer acquisition, as a result of our greatly enhanced customer value proposition.

Now it has been roughly a year since the acquisition, and I think it is time to step back and evaluate whether it was in fact a good decision. The primary contributors to the immediate success of this acquisition were cost synergies, and shared mail profitability improvement. From day one our plan was to focus on achieving cost synergies as quickly as possible. We were able to realize $26 million in cost synergies in 2007, exceeding our original expectation of $18 million. As savings were higher and achieved more quickly than anticipated, our entire company rallied to drive cash flow and adjusted EBITDA. And as the result, we were able to reduce debt by $104.4 million in the last 11 months, of which $100 million were voluntary payments. Improving profitability of the shared mail business was the major priority, and we worked to reduce over supply and deliver more profitable packages. As the result, gross margin from our shared mail business for the second half of 2007, the time period in which our management of the business took effect, was 24.5%, up from 20.5% in the second half of 2006. And there were a number of key drivers behind that improvement. Since, we increased the pieces per package by 2.6%.

Another that we talked about quite frequently was the sell-through percentage on the wrap. We increased the sell-through percentage on the wrap in the second half of the year to 86%, which was up from 77% in the second half of 2006. And we also were able to drive revenue per package up 2.5% compared to the same period a year ago. I have congratulated all of the associates who worked to accomplish this extraordinary result in the shared mail business. Overall the acquisition had an accretive effect on our 2007 earnings. We estimated what EPS would have been had we not done the acquisition and determined that the transaction improved 2007 EPS.

Over the last 18 months there have been many questions, criticisms, and opinions in this acquisition. The facts clearly indicate that the acquisition improved our earnings per share in 2007. I also believe our future was greatly enhanced with the addition of shared mail to our product portfolio, not to mention the talented team of associates we acquired, we expect we will continue to contribute mightily to our future success. To understand the value of the acquisition more long-term and gain further insight into our business going forward, I would like to provide more detailed explanations of five key aspects of our business.

The first thing I want to make sure is very clear is cost synergies on a going-forward basis. Our plan has always been to focus on cost synergies through mid 2008 and then transition our focus to revenue synergies. We expect that the 26 million cost synergies achieved in 2007 will accumulate to $38 million in 2008. If you annualize the 26 million achieved in 2007, they would generate approximately 34 million in synergies in 2008, meaning we need to generate an additional $4 million in new synergies in 2008 to achieve that cumulative $38 million for 2008. These new savings will come primarily through pursuing strategic newspaper alliances and arrangement where we share postal costs with the newspaper by combining our shared mail package with that of the newspaper in a given market. In addition, we expect paper costs to increase in 2008. We anticipate paper prices to reach the maximum allowed per our long-term paper contracts. This is likely to increase paper costs in the neighborhood of 10% compared to 2007. This will negatively impact the shared mail wrap and the FSI business, since we will not be able to pass along those increases to customers. Paper increases on our other products will be passed along to customers. Accordingly, we have not included paper synergies in our 2008 estimate of $38 million.

The second thing that I wanted to spend a little time talking about was future revenue growth. In the first half of 2008, we expect revenue to be flat to low single-digit on a pro forma basis. In the second half, we expect growth to be low to mid single-digit. I would like to address why we expect more revenue growth in the second half of the year compared to the first half of the year. Selling the entire Valassis portfolio to the former ADVO client base of 13,000 represents a significant cross-selling opportunity. Selling shared mail to the 2,000 existing Valassis clients is also a significant opportunity. To realize this cross-selling potential, we have integrated our sales structure, and implemented a new sales compensation plan effective in January of 2008. Before this cross-selling can happen on a scalable basis however, we need a new targeting system, to automate the process of blending our products into a single optimized media solution for our customers. A team of talented individuals have been devoted to this task since day one of the acquisition.

We expect to implement (inaudible) multimedia targeting system in the second quarter of 2008. This technology will use advanced models to analyze more variables than would be humanly possible. We expect this tool to be an important competitive advantage, and initial client feedback has been very positive. Since the acquisition we have created 98 blended media solutions for 75 different clients, in which we did the targeting and optimization work manually as a proof of concept. Training our sales organization is also crucial to realizing the potential of the cross-selling opportunity. While training began in August of 2007, clearly not all 600 plus members of our sales team are fully trained on all our products and services. Training will (inaudible) 2008, with a heavy emphasis in the first half of the year. Our shared mail optimization efforts while having a positive impact on profitability, do negatively affect top line revenue growth and comparisons. In addition, the elimination of the detached address label card in May of 2007 represents an annual reduction in revenue of $40 million to $45 million. We also reduced packages distributed by 2.5% in the third quarter of 2007, and by 3.4% in the fourth quarter of 2007. Obviously this creates a drag on revenue, so when you look at ADVO’s revenue growth is being flat; keep in mind its flat revenue with a reduction of 3.4% in packages.

We expect to continue to drive on profitable distribution network and expect by the second half of 2008 that the reduction in packages will be less than 1% compared to the previous year. When comparing our first half 2008 to 2007 comparables, these reductions will negatively affect growth comparisons. We plan to mitigate this effect going forward by securing 4,000 new local customers, driving more local value-oriented content into our shared mail package, and cross-selling our larger strategic accounts. As an example, here is how it might work. A large furniture retailer has a marketing budget of $8 million that they spend with us in shared mail. They also spend $20 million directly with individual newspapers. By cross-selling, we can target this $20 million to run solutions with us. This would increase client spending with us from $8 million to $28 million, assuming client budgets are flat. We expect this type of cross-selling opportunity to materialize in the second half of 2008. Another factor affecting revenue is the expected revenue loss associated with a low to mid-single digit decline in FSI pricing. We also expect FSI market share to be higher in the second half of 2008 versus the first half. The date schedule for some of our key client corporate events favors the second half. We also expect the new sales structure to negatively impact the first half FSI business. We transition to high percentage of our smaller consumer packaged goods accounts to our field sales organization in the first quarter of 2008, and it will take some time to settle, and the FSI product training to take hold.

The final comment I would like to make concerning the revenue picture for 2008 is to address the uncertain economy. Historically both shared mail and Valassis’s historical product portfolio have performed very well on a relative basis during times of economic slowdown. Delivering value-oriented content continues to make sense, as consumers always want a deal. So, our success in the future should not be dependent on the economy or growing client budgets, but our success in executing cross-selling at our strategic accounts, and our new customer acquisition plan. Our own executional success should dictate our results.

The fourth area I wanted to cover was the fact that historically we have provided growth by product segment, and we’re no longer doing that. Our strategy at this point is to provide blended media solutions to our customers. And therefore our focus is on growing overall client spending, like in the example I gave you with the furniture retailer. There is a migration from newspaper delivered media, associated with the decline in newspaper circulations. We would be pleased to see this migration skewed towards shared mail as it would improve our profit margins. We simply make more money on shared mail, and provide better blended solutions to our customers at the same time. When newspaper circulation declines by 50,000, clients still want to reach these consumers who no longer read the newspaper. This is where blended media solutions of newspaper and shared mail and interactive really makes sense. An example of how blended media solutions are working is the creation of our shared mail coupon insert. On January 6, 2008, we began delivering 5.7 million circulation of our FSI market list by shared mail. These shared mail coupon inserts have been well received by consumer packaged goods manufacturers and grocery retailers are thrilled that manufacturer coupon inserts are being delivered in the same package and in the same footprint as their retail circulars.

Obviously from a consumer perspective, having your store sales circular and our coupon booklet in the same package makes tremendous sense. It’s much more convenient. The shift of this circulation from newspapers to shared mail distribution (inaudible) the needs of the manufacturer, the grocery retailers, and the consumer in one simple package. The final area that I wanted to talk about was consumer branding. As many of you may be aware on January 3, 2008, for the first time in the history of our Company, we launched our consumer brand RedPlum. All of our products now feature this brand name and consumers will begin to recognize the single trusted source of value. As part of this initiative, we have also launched redplum.com, and we believe interactive will play an increasing role in the future. As newspaper circulations decline, this value-oriented content needs a home and while we believe shared mail will be the winner, short and midterm because of its scale, targetability and consumer acceptance, we expect interactive will play an increasing role long-term. For now redplum.com is focused on building content, and providing a great consumer experience.

Today the Internet does have some limitations in delivering large scale value oriented content. While the on-demand model works well for search, the strength of our media deliver value is its ability to generate large scale incremental measurable volume targeted around store locations. Aligning the needs of consumers, manufacturers, and retailers, will continue to be our opportunity for the future. And whatever the future is, when it comes to delivering value, whether in the newspaper, in the mailbox, or online, we are well positioned.

At this point I would like to turn the call over to Bob Recchia, who is going to add some additional color and clarity on the key financial metric.

Bob Recchia

Thanks, Al. Al asked me to provide some further detail and clarity on our reported SG&A expenses, tax rate, debt covenants, and financing. I will start with SG&A for the quarter. We reported $107.1 million, which included $7.6 million of expenses related to a restructuring in our European operations. These expenses include among other things severance, relocation, and legal expenses associated with the close down of our facility in the UK, and the relocation of the operation to Poland. In addition, we exited the fulfillment business in Spain, and incurred similar types of expenses to those incurred in the UK move. Q4 SG&A also reflected higher levels of incentive compensation, including stock-based compensation, and legal expenses associated with the News America Lawsuit. We are currently working on plans (inaudible) SG&A in 2008 to a level consistent with our third quarter performance.

Our tax rate for the year of 34.7% was substantially lower than our original forecast due to several factors. As you may recall, the 2006 tax rate for ADVO was approximately 37.5%, and the Valassis rate was 35% in 2006 prior to the merger. When we originally forecast the 2007 rate, we used 38%. Factors which have lowered that rate include, favorable settlements of previous assessments from state taxing authorities, additional deductions realized related to acquisition costs, a more positive effect than originally expected from our Section 199 Deduction for Manufacturers, and various other small tax planning initiatives which were accomplished during the year. On a going-forward basis, we expect our tax rate to be approximately 36%, and we will continue to look for ways to lower it in the future. As we look back at our debt financing in March of 2007, we realized how fortunate our timing actually was. We are obviously extremely pleased with our capital structure and interest rates on our bank and bond debt.

As we look forward, we expect that the convertible debt issued in May 2003, will be put to us on May 22nd of this year, and have arranged to do take down the delayed draw term loan B to pay off the debt. The delayed draw is fully committed, and priced the same as the remainder of term loan B at LIBOR + 175. We also have $100 million of our 6 and 5 bonds which will come due in January of 2009, and plan to use a combination of existing cash in our bank revolver to pay off this debt obligation. We will then use cash generated from operations to pay off the revolver, which is priced 50 basis points higher than the term loan B. Both the delayed draw in term loan and the revolver were part of our original financing arrangement entered into in March of 2007. As far as debt covenants are concerned, our senior secured debt to EBITDA covenant is set at not to exceed 4:1 as of 12/31/07. Our actual reported results have us at 3.1:1, a 22.6% cushion and our interest coverage test is set at a minimum of 1.6:1, with actual results coming in at 3.08:1, representing a 92% cushion. So, with that, I think we are going to turn it over to questions.

Alan Schultz

Val, I think you arrange the questions, we would appreciate it.

Question-and-Answer-Session

Operator

Thank you sir. (Operator Instructions) Our first question comes from the line of Alexia Quadrani with Bear Stearns. Please go ahead.

Alexia Quadrani - Bear Stearns & Co

Thank you. Just a couple of questions. First, I believe you reiterated your outlook for the FSI pricing down in the low single digits this year. With the bulk of our contracts being long-term, can we assume that there is, this is all pretty much locked up at this point, there is not a lot of risk to the assumption for ‘08, and then if there is any comments you have on pricing for ‘09?

Alexia Quadrani - Bear Stearns & Co

’09.

Alan Schultz

‘09 at this point in time I (inaudible) make any comments on ‘09. As you know, the bulk of the contract work on expiring contracts gets done in May through October of ‘08 for ‘09, so at this point in time we don't have a lot of visibility.

Alexia Quadrani - Bear, Stearns & Co

And then on in terms of the 10 to 15% that you mentioned just in the spot market, could you just give us some color how that is trending so far this year in terms of pricing, and how industry wide volume is also trending in Q1?

Alan Schultz

Yeah. The 10% to 15% is, you know it’s pretty consistent from our price standpoint. We don't necessarily see it trending down or trending up right now. It’s pretty consistent in terms of where we are at with corporate contracts, so we don't see a whole lot of impact there. As relates to pages in the FSI business, the first quarter overall volume we are anticipating is going to be relatively flat, and of course in 2007 page volume was also relatively flat in 2007, so we see the FSI industry, in terms of units being pretty flat currently.

Alexia Quadrani - Bear, Stearns & Co

And just one last question. You mentioned the resiliency of these businesses both FSI and the ADVO are shared mail product and sort of weaker economic times. Could you just give us some color on maybe specific verticals that are maybe picking up their spending and maybe others that are less aggressive?

Alan Schultz

Yeah. You know, we actually had a conversation about this yesterday, and I can't necessarily point to verticals that are increasing their spending in our types of products and services, so I don't think we are necessarily seeing a bunch of vertical pickup. I can point some verticals that are reducing their spending overall, not necessarily with us. The bottom line as we feel as if with 4,000 new customers and success in cross-selling our strategic accounts, you know we are comfortable with our estimates of kind of flat to s low single-digit growth in the first half, and low to mid-single digit in the second half.

Alexia Quadrani - Bear, Stearns & Co

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Bacurin with Robert W. Baird. Please go ahead.

Mark Bacurin - Robert W. Baird & Co

Good morning, guys.

Alan Schultz

Hello, Mark.

Mark Bacurin - Robert W. Baird & Co

A couple questions.

Alan Schultz

Mark Bacurin, for everybody’s clarification.

Mark Bacurin - Robert W. Baird & Co

I am used to the mispronunciation. On the ADVO side of the business, I know you talked about improvement in revenue per piece, but I was really surprised you are able to, even though there is a flat year-over-year revenue number given the loss of the detached address labeled, and it was an off retail environment, I was hoping you could delve in a little more about how you achieving increased revenue per piece, and then I think you also mentioned in the press release, a large retailer that you saw some increased spending, and I was hoping to get clarification of whether that was shared mail or solo mail?

Alan Schultz

The large retailer was shared mail. It would be what we would describe not necessarily as a circular, but typically a single promotional sheet, is what we would call it versus a circular, so that’s what we saw there. In terms of revenue per piece, obviously what we’ve done is we’ve cut back some of the unprofitable packages, and what happens when we do that, is those packages tend to be softer from a revenue per package perspective, which has a positive impact on the revenue per package, but it also has a positive impact on the pricing environment I think in general, and the reason I say that is as we pull out these unprofitable packages, and I want to say it was, you know to give you an idea of magnitude, it was probably a reduction in the second half of the year of maybe 45 million packages, and what that tends to do is it lowers supply, which has a positive impact on the pricing environment, and we have also seen from a competitive standpoint, we have also seen some of our competitors take some action to lower supply also, and so I think that’s the combination of those two. And then of course we also deal with our contracts, we have the ability to pass along postage increases to our customers, and we did have, you know postage increase this year and we anticipate another postage increase in May of 2008.

Mark Bacurin - Robert W. Baird & Co

Yeah, that’s helpful. And then you diluted to the new sales comp plan that went effective in January. Could you give us the major components of that new program, and kind of what the incentives are, and where you are trying to drive the sales force to focus?

Alan Schultz

Yeah. I think the major part of the plan is that the higher percentage of your quota you sell, the greater your commission rate is, so the way the plan is setup is literally day one when you make your first sale, you are going to earn commission on that and you are going to be able to calculate what your commission is going to be on that sale, and then as the year goes on, as you progress and get closer to your quota, you are going to get a higher commission rate. And the other thing we built into the plan was, is there certain product that we have which are more profitable than other products, and we have also built some incentives into that plan, that if you sell the more profitable products you get more credit towards your quota, so in that sense a dollar in sale would count towards maybe $1.20 or $1.30 in terms of achieving your quota. So I think the two major components of the compensation plan are those two. You know, with that said, when we compare that to some previous compensation plans that were in place, they were put in place where if people found themselves in a situation where it didn't look like they were going to achieve their quota for the year, there wasn't a lot of incentive for them to continue to sell, and we didn't think that was good. The other thing that in some of the previous plans, once you achieved your quota, there wasn't a whole lot of incentive for you to sell more than your quota, and what we wanted to make sure of is that every time a salesperson sold an order, they got a check, and if they hit their quota, not only was there an incentive to overachieve their quota, but there was an additional incentive to overachieve their quota, so those were kind of some of the changes that we made.

Mark Bacurin - Robert W. Baird & Co

Great. And then, I guess just finally looking at FSI barely in the black this quarter, realizing there was some softness because of the timing of one of the packages, but, you know with the mid-to single-digit decline in FSI, pricing going into next year, is that business even on slate to be profitable in ‘08, and if we get to the end of ‘08 and we are still not seeing success with the cross-sales, what are the kind of the long-term expectations for that business?

Bob Recchia

Mark, I will take that one. Yes, it is slated to be profitable in 2008. You have to look at the way the segment profit is derived. There is a lot of allocations, and the FSI business picks up a fairly big, fairly sizable amount of overhead allocation to it, so we take a look at that every year, make minor modifications to it. It would be modified again next year, but it is still a very viable business. It’s obviously under a lot of pressure from price, and paper has moved up in 2008, but we are going to take our print costs down. We are taking our media costs down substantially and, you know we are continuing to fight the fight on the pricing and market share battle, but you shouldn’t think of it in terms of not being a viable business.

Mark Bacurin - Robert W. Baird & Co

Great. I would like to add more. Could you just fill us in on the timing of these various trials or hearings that are set, related to the News America FSI Lawsuit and kind of what the next chronological dates are we should be thinking about?

Alan Schultz

Yeah. Just to be clear for everybody, we have three lawsuits that we have filed against News America on this pricing pressure that we have been experiencing, and we certainly anticipate being in front of a jury on one of those cases at some point in time during 2008. That would be our expectation at this point in time. I think we all know that the legal system tends to move pretty slowly.

Operator

Thank you. The next question comes from the line of Paul Ginocchio with Deutsche Bank. Please go ahead.

Matt Chesler - Deutsche Bank

Good morning, guys. It is Matt Chesler for Paul. Juts one question, as my others have been answered. As I look out to your ‘08 cost synergy target of $38 million, beyond the $4 million from the postage savings from the newspaper alliances, I don't see any other incremental synergies factored in there. Could you comment on your view of what is left to do, beyond what you already factored in there and sort of your comfort or discomfort with you are actually factoring that into your stated guidance at this point?

Alan Schultz

Yeah. We have basically factored this into our stated guidance. If you take the 26 million you annualize it, you are at $34 million, so we don’t really have to do a whole lot new to create synergies there. We just got to deliver that $4 million in new synergies related with the newspaper alliances to get to 38. There are other things that we’re doing in the way of shared mail optimization. We don’t count those as synergies. We really count those as shared mail optimization. There are other opportunities for synergy that we are continuing to look at and pursue, that we have not factored into that. Whether we are going to be able to recognize and achieve those synergies at this point in time is still up in the air. We don’t have tremendous certainty around that and therefore we did not bake those in.

Matt Chesler - Deutsche Bank

Okay. As I do have one followup about the retailer program that you called out earlier.

Alan Schultz

Yes.

Matt Chesler - Deutsche Bank

Is that a one time program or are you seeing any continuation of that program as we head into the first quarter from that retailer, or any other general uptick in promotional spending by your retail customers?

Alan Schultz

Yeah. I would say right now, you know we see spending from clients being relatively flat. We don't necessarily see upticks going on. Again our strategy is really built around cross-selling and new customers.

Matt Chesler - Deutsche Bank

How material was the fourth quarter retailer program that you called out?

Alan Schultz

I can’t see the problem I run into as I can’t give any kind of prospective information out on any particular customer, because I could potentially be giving their plans away, and if somebody is really astute, they could potentially identify what customer I was talking about in the fourth quarter, and then be able to make assumptions regarding their plans on going-forward basis and we juts, we can’t do anything that even comes close to giving away a client’s future plans.

Matt Chesler - Deutsche Bank

Can you talk about how material it was to your fourth quarter performance?

Alan Schultz

I think it was certainly a positive contributor. I mean, when you look at the shared mail business, there is a lot of operating leverage in it and any type of top line growth that you can get, a very large percentage that top line growth falls through to the bottom line, so it was certainly a positive contributor. As we talked about, when you reduce packages by 3.4%, get rid of the detached address label and still have flat revenue, in essence you have grown revenue over a base of a smaller number of packages, which means more pieces per pack, which means you are really taken advantage of that operating leverage. So, the answer is, it was certainly a significant contributor. As we look forward, we don't necessarily see business falling off the table in the shared mail business.

Matt Chesler - Deutsche Bank

All right. Very good. Thanks, Al.

Alan Schultz

Okay.

Operator

Thank you. Our next question comes from the line of Troy Mastin with William Blair & Company. Please go ahead.

Troy Mastin - William Blair & Co

Thanks. Good morning.

Alan Schultz

Good morning, Troy.

Troy Mastin - William Blair & Co

This retailer is getting a lot of attention but I want to ask you another question about it, hopefully you can answer. I am curious if you can give any insight you have if they shifted spending out of other media, maybe on a backward-looking basis, or if this is new spend, and if they did shift out of other media, was it the results in any way of your optimized media planning you have been doing the past couple of quarters?

Alan Schultz

I think the answer is yes, it was a shift in spending. I don't think this was a client that was necessarily increasing their overall budget, so it came from somewhere, where it came from I don’t necessarily know for sure. So, I can't tell you whether it came out of TV or radio or newspaper, or where it came out of, but it came from somewhere else for sure. In terms of the optimized media solution, the answer to that is no. This was not one of the clients that we were working on an optimized media solution for but this was a client who clearly liked the kind of targeting capability that we do have in shared mail and so this was a customer that identified three specific consumer profiles that they were looking to reach, and we identified the ADVO targeted zones that had the highest concentrations of those consumer profiles and they clearly viewed it as the best way to reach their target audience in the most efficient manner.

Troy Mastin - William Blair & Co

Okay, good. And then the shared mail inserts sound like they are getting off to a pretty nice start. I am curious if you have plans to expand the circulation over the next several quarters, or if this is kind of an annual planning process? If you think out three to five years, where you sit today, what kind of impact do you think this might have on the insert business? Will you have a fairly similar circulation of newspapers in this? Should we think of this as an expansion area, or is this going to be more of a replacement or maybe a combination of the two?

Alan Schultz

I think reality is the shared mail will probably be a replacement to newspapers. We think the reality of the situation is that as newspapers lose circulation, the desire of our customers is still there to reach those consumers who are no longer reading newspapers, and we have to find a way to reach those consumers on behalf of our customers, and we think that shared mail is clearly going to be that short mid-term kind of beneficiary.

Troy Mastin - William Blair & Co

Okay. And then onto some of the Optimized media planning work you are doing, the success that you are finding so far, you mentioned the 98 solutions sold so far. I am curious if those are coming more from the legacy Valassis customers or the legacy ADVO customers and in terms of what the new targeting system might look like, has that changed much since you initially conceptualize that’s what you actually going to launch and if it has, what are key changes behind those?

Alan Schultz

Yeah. In terms of the client list, I looked through it actually just a little while ago, and I think the reality of it is, there is a good mix of past ADVO customers and past Valassis customers. I don't think its necessarily tilted one way or the other, and in light of the fact that we had similar numbers of what you would call strategic accounts and most of the work that has been done has been in the strategic accounts, I would expect the numbers to be pretty similar between both kind of historic organizations, so the answer to that is no it hasn’t been skewed one way or the other.

Bob Recchia

I am sorry, Troy, there was a second part to your question? What was it?

Troy Mastin - William Blair & Co

It has to do with the system that you would be rolling out.

Alan Schultz

From the systems standpoint, I would tell you I don’t think it has changed a lot. I think we had pretty clear definition very early on, the gentlemen that is leading up the conceptual development of this from a business perspective, Dan Shearer, is a gentleman who has tremendous expertise in this, in fact he, I think was the person that conceptualized the Claritas system that is used today as the base for most of these geo-demographic type targeting systems, and I actually had a conversation with him over the phone before we even closed the transaction and told him I wanted him to lead this effort, and literally within two weeks after the transaction, he and I were sitting together in the targeting area of our business, talking about what we wanted this new system to do, and I think reality is that really hasn’t changed a lot when we have gone through the process. There have been a couple of elements added to it, in terms of for our more for our own purposes than for our customers. One of the things that we wanted to do is understand the impact that the optimized solutions would have on our margins, doesn’t necessarily change what it is we were doing for customers to provide them with the best possible solution, to just help us understand from a margin standpoint what the impact was on us. That’s really about the only kind of addition to the system that took place since we originally conceptualized it.

Troy Mastin - William Blair & Co

Okay, good. And then one final one on the environment. It doesn’t sound like it’s having a negative effect on your business or outlook today, but I am curious in the event that the environment does show some signs of strain as it relates to your business, are you doing anything in terms of may be contingency planning in case something does happen?

Alan Schultz

Well, you know Bob mentioned, for instance, SG&A is something that we are working real hard on. I think our view is always been that you plan for the worst and hope for the best, so we are doing a number of things to try to keep our costs down, keep head count under control, control SG&A spending. We continue to work on all of those things. But with that said, you know right now things look pretty flattish in terms of overall spending on our products and again we think the opportunity there is in cross selling and in new customer acquisition. I should also probably mention that in the first seven weeks of 2008, we have secured over 500 new customers, so we are pretty much on-track to generate those 4,000 new customers. So, I think we are off to a good start there.

Troy Mastin - William Blair & Co

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Edward Atarino with Benchmark Capital. Please go ahead.

Edward Atorino - Benchmark Capital

Good Morning. A couple of things. One, you didn’t talk much about neighborhood and household targeted. They seemed to not do particularly well in the quarter. Talk about what is going on there, number one. Number two, Bob, on terms of projecting interest expense, 88 to 90 million, is that a good target for ‘08? Thirdly, could you talk about the publishing dates coming up by quarter for the FSI’s and any customs, and then lastly, your gross margin last couple of quarters has been around 24%. What’s your goal for gross margin going forward?

Alan Schultz

Ed, the neighborhood targeted business, you know was actually not really in too bad a shape in the fourth quarter. I mean the revenue growth was only a couple of percent, but I believe the profit growth was in the neighborhood of about 10%, about 10%, so you know our 10% growth in the profit or segment profit we thought was pretty good. When you look at the business for the year, it was up about 11%, and as you know, you have followed us a long time, and you know that that business has some peaks and valleys in it. It doesn't necessarily flow real smooth from quarter-to-quarter and what we have always tended to focus on is what’s the annual number and clearly, you know 11% growth is pretty much right where we had hoped it to be. The Household Targeted business we have struggled a bit with and I will tell you what I think the biggest issue is there is with the number of very big and significant opportunities we have to pursue in the organization post acquisition. We haven’t put near as much time and effort on the Household Targeted business.

Edward Atorino - Benchmark Capital

Not a lot of dollars?

Alan Schultz

As we need to. It is a $45 million business for us.

Edward Atorino - Benchmark Capital

Yeah.

Alan Schultz

And it is actually one we are just now within the next few weeks we’ve got some meetings scheduled to dig in and better understand what is going on in that business. Obviously we have had some cost increases from the Postal Service that have really negatively affected the particular class of mail that we are delivering there, so there are some challenges there, but we have had a few meetings in the past on it. We have some meetings coming up in the next couple weeks, and I think we are going to more clearly define our strategy in household targeted.

Edward Atorino - Benchmark Capital

It is a small business. Do you have to be in that business?

Alan Schultz

Well, I think that’s one of the things that we are certainly going to look at as part of this evaluation process; we are going to check it out. It is, you know it was a profitable business for us, just not as profitable as we would have liked it to be. From a gross margin standpoint, I am going to let Bob talk about gross margin, and then I will come back to the date schedule for 2008.

Edward Atorino - Benchmark Capital

And can you touch on interest costs projection?

Bob Recchia

The interest numbers I would state at the low end of the numbers you just gave me in the 88 range, and then our gross margin seems to have settled in here around 24% for the quarter. If you look at the ADVO business, which is the biggest driver, I think we had targeted trying to return back to that 24% number. We probably got there a little bit quicker than we had anticipated but going forward, I think you won't see the kinds of gains that you saw this year, but we will continue to try to push that up a little bit. That is probably a good number to work with.

Edward Atorino - Benchmark Capital

Okay.

Alan Schultz

In terms of the date schedule, Ed, the regular FSI dates are 12 in the first quarter, 11 in the second quarter, 10 in the third quarter, and 8 in the fourth quarter, for a total of 41. And we can’t talk a whole lot about custom coop dates. We expect them to be relatively flat versus the previous year, though.

Edward Atorino - Benchmark Capital

And are they pretty even by quarter?

Alan Schultz

Yeah, we really can’t talk about that, Ed. That relates primarily to one specific client. We are back to that same issue, but we can’t give away information on one client.

Edward Atorino - Benchmark Capital

Got you. Thanks a lot.

Alan Schultz

Okay. Thanks, Ed.

Operator

Thank you. Our next question comes from the line of Todd Morgan with Oppenheimer & Co. Please go ahead.

Todd Morgan - Oppenheimer & Co

Thank you. Good morning. Thanks for the detailed answers. I kind of had two questions. I guess the easy one first is cash taxes in the fourth quarter and can you give us a sense of how we should think about that going forward? Is it basically the book tax rate? And I guess the second question, it sounds like a big part of your 2008 plans are for successful cross-selling in the second half of the year and I notice the recent strength that you had the last couple of quarters on the ROP side. How does cross-selling affect this especially if you’re trying to move, I am assuming trying to move some of the customers ROP business into other product areas and I guess along with that I think a lot of mid size and larger companies have existing media planning arrangements, either in-house or through ad agencies, and again it sounds like through the cross-selling activity you are basically trying to plant some of that function. How easy will it be for you to do that? Thanks.

Alan Schultz

The 2008, we talked about the ROP business. I think the, really the benefit to the ROP business is in cross-selling and new customers both, clearly a number of these new customers are customers that are going to buy ROP from us and then clearly there is a lot of, lot of, lot of clients that we have particularly on the ADVO side of the house, those 13,000 customers that are buying ROP today but they are not buying it through us, so that certainly becomes an opportunity for us. As far as dollars moving into shared mail, certainly some of that could come from the ROP business, some of that could come from the neighborhood targeted business with newspaper preprints as those circulations decline. As far as media planning goes, you are right. There are a number of agencies that are involved in the media planning business. I think reality is though, most of those agencies do planning as it relates to television, radio, and magazines. That is pretty much what’s in their wheel house. We are really the only company that will have the ability to blend the 120,000 different newspaper zones, with 40,000 ADVO targeted zones into a single Optimized media solution. Nobody else really has that capability to do that for our type of value-oriented content, so I think that puts us in a pretty unique position. The other thing I would tell you is, is that I don't know what the exact percentages are today in the combined organization, but probably half of our business for argumentative sake comes from agencies, and half of it from clients direct. Clearly for the half that comes directly from clients the ability for us to provide these, this media planning service and targeting makes tremendous sense, particularly for our types of products and services. As it relates to the part that comes from agencies there is often times the relationship we have with the agency as we act as the back room that does this type of targeting for our type of value oriented content, so we already have relationships with them, that we are providing that back room service for them. So, I don’t necessarily view that as a, you know a problem for us and the agencies that we do business with. I don't necessarily view that as a big problem for them and this is just an area of expertise that we have that not many agencies have.

Todd Morgan - Oppenheimer & Co

Okay. Yeah, that’s helpful.

Bob Recchia

And your question, I don't have the cash taxes number with me at this point, but generally speaking the booked taxes and cash taxes should follow fairly closely overall for the year. There could be some movement quarter to quarter. With the exception of in 2008 when we refinanced the converts that will trigger a recapture tax of about $15 million that we have told people about that we plan for in our cash flow for 2008.

Todd Morgan - Oppenheimer & Co

Right. Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Joe Roppard with Polygon. Please go ahead.

Joe Roppard - Polygon

Hi, thanks for taking the question. On revenues, clearly optimistic for the second half of 2008, more so than the first half. Does the same apply for EBITDA? I mean you are currently at about 8.5 million quarterly synergies, which clearly helped Q4 and at least for early 2008, should comp for zero for the same period 2007.

Alan Schultz

Yeah. I guess what I would tell you on the EBITDA side is the way the business exists today, it’s a little more heavily loaded towards the back half of the year, so the answer is yes, we would expect EBITDA to be stronger in the second half of the year than in the first half of the year. I think that’s just the nature of the business. The fourth quarter in particular tends to be a pretty strong quarter, and you may remember I mentioned the fact that in the fourth quarter of 2006, that was a pretty strong quarter for ADVO, so I had mentioned to you that the comps would be much more challenging in the fourth quarter of 2007, than what we experienced in the third quarter of 2007. With that said, we were still able to make some pretty nice improvements in the ADVO business in the fourth quarter, even though the comp was an extremely difficult one.

Joe Roppard - Polygon

I guess the question is why shouldn't we expect some sort of stellar Q1? I think that the EBITDA comp for last year is 40 or 48 with the ADVO stuff for a 8.5 million quarterly synergies, shouldn’t we blow that number out of the water?

Alan Schultz

Well, I think clearly as we look forward into the next year coming up, clearly the first quarter comp is going to be an easier comp for us than the EBITDA comps when we get into the third and the fourth quarter, because obviously we were able to have some positive impact on EBITDA particularly in the shared mail business in the third and the fourth quarter, so we have created more difficult comps for ourselves, but to answer your question is yes, the first quarter comp should be an easier comp than the second half.

Joe Roppard - Polygon

Great. And with regard to the pass through of higher paper costs, can you give us a sense of the revenue impact?

Alan Schultz

You know I don’t know that we have necessarily calculated the revenue impact. We don't necessarily have that number, but you are right, that is a positive impact on top line growth is increasing paper costs do positively impact top line growth in the categories that we do pass along to clients, which would be many of the shared mail pieces that we produce, and the neighborhood targeted preprints that we produce.

Joe Roppard - Polygon

All right. Thank you.

Operator

Thank you. We have time for one more question. The last question comes from the line of Rossi Savitz with Credit Suisse. Please go ahead.

Rossi Savitz - Credit Suisse

Hi, good morning.

Bob Recchia

Good morning.

Rossi Savitz - Credit Suisse

Congratulations on the quarter. You had touched upon some of the new customer additions this year. Can you also talk about pricing increases this year in the shared mail business and could you touch upon any sort of customer attrition just in the first couple months of the year?

Alan Schultz

Right. Yeah, from in terms of price increases in shared mail, you know clearly I think right now the postal case has been filed or publicized at least and it shows a May increase I want to say in the neighborhood of 2.6% in terms of the postage rate. And so the proportion of postage which typically is in the neighborhood of 50% of the total revenue, so let's say half of that increase, our contracts would give us the ability to pass along to customers, so it would be our plan to pass that increase along effective with that May date where the postal increase takes effect. I am sorry, there is another part of your question, was there?

Rossi Savitz - Credit Suisse

Yeah, just in terms of customer attrition in the next couple months, and if you could touch upon the typical nature of the contracts in the shared mail business, the length of the contracts?

Alan Schultz

Right. Yeah, the contracts in the shared mail business are typically a year to two years. As far as customer attrition goes, I can't think of any significant lost customers here in the first half of the year. I mean, there is clearly, I think we can do, we will do a better job servicing customers later in the year, than we will in the first quarter of the year, particularly for those smaller consumer packaged goods companies because we did transition a number of those out to the field, and so I think there is work to be done there, but for most of our strategic accounts, our larger accounts, there was not a whole lot of change in terms of sales representation and we haven’t seen a whole lot of change for our attrition in that regard either.

Rossi Savitz - Credit Suisse

Thank you.

Operator

Thank you. And that does conclude our Q&A for today. I will turn it back over to management for any closing remarks.

Alan Schultz

Yeah well, again I would like to thank everyone for attending the call and you know from our perspective 2007 was certainly an incredible year. We are extremely proud of the results we accomplished as a single unified team as we integrated the organizations together, and I would really like to thank all of the Valassis associates who worked tirelessly this past year to achieve very impressive results. I would like to thank our long time associates who embraced our new shared mail business quickly and also our new shared mail associates who have worked tirelessly and shared their ideas and their know how to help build our vision of the future. So once again, I would like to thank you all for attending today, and have a wonderful day.

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