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Valassis Communications (NYSE:VCI)

Q2 2012 Earnings Call

July 26, 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

James D. Parkinson - Chief Digital & Technology Officer and Executive Vice President

Analysts

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

William G. Bird - Lazard Capital Markets LLC, Research Division

Townsend Buckles - JP Morgan Chase & Co, Research Division

Charles Edward Cerankosky - Northcoast Research

Daniel Salmon - BMO Capital Markets U.S.

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

Bethany Caster

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Valassis Second Quarter 2012 Earnings Conference Call. I would like to remind you that the discussion during this conference call will include forward-looking statements and that Valassis' actual results could differ materially from those projected in the forward-looking statements.

The factors that could cause actual results to be materially different from those expressed or implied by such forward-looking statements are discussed in the risk factors and the other sections of the 2011 annual report on Form 10-K and the reports on Form 10-Q and Form 8-K filed or furnished with the SEC.

Also, the discussion 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 under the earnings releases and webcasts and presentations on Valassis' website at www.valassis.com in the Investors section. [Operator Instructions] This conference is being recorded today, Thursday, July 26 of 2012. And I would now like to turn the conference over to Rob Mason, President and Chief Executive Officer. Please go ahead, sir.

Robert A. Mason

Britney, thank you very much. Good morning, everyone. I'd like to thank you for joining us for our second quarter 2012 earnings call. With me this morning is Bob Recchia, our Chief Financial Officer. We're also joined by Jim Parkinson, our Chief Digital and Technology Officer. Jim has responsibility for the development and execution of our digital media strategies. And after some prepared remarks, Bob, Jim and I look forward to answering your questions.

So I look back at Q2, I believe it was a quarter defined by our leadership team's proactive steps to position our company for the future. Before I talk about our business segment performance for the quarter, I'd like to spend a few minutes talking about the actions we've taken in 3 very important areas.

First, we've increased our investment in our Digital business. The biggest news in this quarter was our $18 million acquisition of Brand.net. With this acquisition, we have taken advantage of a unique opportunity to acquire a talented team and a technology platform that will accelerate the growth of our Digital business.

This acquisition of Brand.net strengthens our ability to provide optimized media solutions across both print and digital channels by capturing a greater share of our clients' growing online budgets.

In the back half of 2012, we expect that Brand.net will represent around $12 million of incremental digital revenue, increasing our annual digital revenue target to approximately $42 million.

In an effort to fully leverage this asset and further accelerate the growth of our Digital business, we're investing in additional sales resources, product development and an experienced management team. Given this investment, we are projecting we will incur approximately $7 million in operating losses in the back half of 2012, resulting in an overall annual loss of approximately $14 million from digital operations.

Later on in the call, Jim will provide more insights into the acquisition, as well as our digital vision and strategies. As we continue to invest in digital and additional innovation, we also need to make sure we have the right resources focused on the right opportunities, which brings us to the second area of our plan. And that is the exit of 2 underperforming businesses that do not fit with our long-term strategic direction.

The rationale for our decision to exit the solo direct mail and newspaper polybag sampling businesses was clear cut and threefold: one, we have seen declining demand from our CPG client base, the primarily users of both of these products; two, both products were expensive to execute and are highest price products for these clients; and three, in the case of our sampling product, it faced secular decline based on its exclusive reliance on home delivered newspaper distribution.

In addition to the decision to exit these 2 businesses, we also executed a plan designed to rightsize our organization and focus resources and investment on our best opportunities to drive growth. We expect that exiting the solo direct mail and sampling businesses, combined with the efforts to rightsize our organization and reduce costs where appropriate will represent approximately $8.5 million in overall cost savings in the back half of 2012. Bob will be providing additional color on the financial impact associated with this initiative.

When you combine all 3 elements, increasing our investment in Digital, exiting the sampling and solo direct mail product lines, as well as our efforts to reduce costs and align resources against our best opportunities, you can see how second quarter was very much about positioning ourselves for our future.

Now I'd like to discuss some Q2 highlights on our individual business segments, beginning with our Shared Mail business. We are pleased with the 3.4% topline growth, which was driven by gains within our restaurant, grocery and telecom categories, which make up roughly 50% of our annual Shared Mail revenue. Based on current trends, we continue to be on-track to achieve 3% year-over-year growth for the Shared Mail segment. While we saw some of the projected sequential improvement in wrap sell-through in Q2, we still have some work to do in this area, which negatively influencing both revenue and flow-through. Shared Mail profit grew almost 10% versus the prior-year quarter.

In our Neighborhood Targeted segment, we have exited the polybag sampling business, leaving ROP and Newspaper Inserts as the 2 remaining product lines, and we continue to experience negative trends within Newspaper Inserts. The results are simply not where we want them to be or need them to be. To that end, we have taken the following steps to improve our performance: first, we have made changes in our sales leadership that I believe will improve our ability to gain share in this segment; second, we have completed a thorough segmentation analysis to refine our prospect list, focusing on advertisers who buy both print and media, and also place high value on our targeting capabilities. By focusing on our best prospects, we believe we can improve our win percentage, better serve our clients and increase our gross margins.

To further improve the profitability in this segment, we also did some additional infrastructure rightsizing to reduce our costs. As I have told you before, there is significant headroom to grow our Newspaper Insert business, and I see our current challenge as a sales execution issue, and I'm confident we are addressing it appropriately.

There's not much new to report in the FSI business segment. When comparing year-over-year results, revenue was negatively impacted by the absence of 3 custom co-op programs, which we will finish cycling through in third quarter of this year. In addition, the CPG industry continues to be challenged with rising commodity costs, currency fluctuations and balancing the impact of redemption liability on their marketing budgets.

You are likely reading the same report detailing the market share pressure that large CPG marketers are facing due in part to their steep cutbacks in consumer promotion. While we have not seen any material change in CPG promotional budgets, our current forecast indicates an improvement in our FSI business for the third quarter. We continue to believe that we will see a change in behavior as it relates to promotional spend, we know our products are effective at moving case volume, and our sales and marketing organization is continuing to work with our clients to create demand and optimize their offered strategies.

Moving on to our IDMS segment. I'll begin with an update on NCH, our coupon clearing and analytics business. While total coupon distribution was relatively flat in the quarter, we experienced a double-digit decline in coupon redemption volume, as the change in CPG promotional tactics caught up with the coupon redemption cycle. I believe what we are seeing is a combination of 2 factors at play: one, on overcorrection by the CPG industry, reducing the expiration dates and face values to intentionally curve consumer response; and two, a change in coupon distribution mix, with fewer high redeeming food coupons distributed and more from lower-redeeming nonfood categories. These 2 trends are negatively impacting volumes at NCH.

With that said, all of our data continues to suggest that consumer demand for deals remains very strong, and manufacturers will have to modify their current offer strategy, returning us to a more normalized redemption environment.

The IDMS segment also includes our Digital business. I opened today's call discussing our ongoing investment in digital media. Jim Parkinson will be on shortly to do a deeper dive into our Digital Media business and the Brand.net acquisition.

At this point, I'm happy to turn it over to Bob, to share some additional financial metrics, discuss the financial impact of our cost reductions, and provide an update on our use of capital. Bob?

Robert L. Recchia

Thanks, Rob. As promised in our first quarter call, we have taken a close look at all of our product offerings and examined our cost infrastructure. As a result of this review, as Rob mentioned, we've elected to exit both the sampling and the solo direct mail businesses. This action comes as a result of not only current performance levels for these products, but also negative trend lines that were showing no signs of improving.

As a result of exiting these products, we have taken a charge of approximately $11.6 million in the second quarter. This charge can be broken down as follows: lease exit costs of $2.2 million; severance and other miscellaneous costs of $1.6 million; and write off of goodwill and other fixed assets of $7.8 million. Therefore, only $3.8 million of the total is a cash charge. These 2 products represented approximately $12.8 million in revenue for the second half of 2011 and $6.2 million for the first half of 2012.

In addition, during the quarter, we reduced headcount and cut spending across all business segments. One-time costs associated with these moves, in addition to one-time costs associated with the acquisition of Brand.net, totaled $5.6 million during the quarter. In total, one-time charges totaled approximately $17.2 million, $10.7 million net of taxes, of which $3.7 million is in cost of goods solds -- sold, $5.9 million in SG&A and $7.6 million in goodwill write-downs for our sampling and solo direct mail products.

Headcount reductions outside of the sampling and solo direct mail businesses represent second half savings opportunities of approximately $5.4 million or $10.8 million annually. In addition, we plan to cut or reduce spending in other areas by approximately $3.1 million. Approximately half of these savings were annualized. Overall, this represents savings in 2012 of approximately $8.5 million and a projected full-year 2013 savings of approximately $13.9 million.

Capital spending during the first half of 2012 totaled $11.8 million, due primarily to the addition of a new press in the first quarter. We are reducing our capital spending forecast to $26 million for the year, resulting in an increase in our full-year diluted cash EPS guidance from $3.97 to $4.18 per share.

We purchased 3.2 million shares of stock during the second quarter for $64.5 million, bringing our total shares brought -- bought during the first half of 2012 to 3.3 million. Total diluted shares outstanding as of June 30 were approximately 41.1 million. We expect to continue our share repurchase program in the second half, and at this time, our plan is to spend a minimum of 50% of our free cash flow in 2012 on share buyback. Our digital acquisitions in the first half were done at a lower spend level than originally anticipated, thus bringing up more potential buyback dollars. That said, we still reserve the right to spend as little or as much on share buyback as we deem appropriate.

In summary, we have cut costs in order to rightsize our organization for the future and in an effort to remain on track toward our goal of a flattish EBITDA. However, as Rob mentioned, since we expect losses of approximately $7 million in the second half from the Brand.net -- from Brand.net, which has created a gap of $3 million to $4 million toward our EBITDA goal, we will continue to look for ways to reduce spending and create new revenue opportunities to make up this gap.

I want to highlight 2 important things regarding our 2012 numbers. First, the losses for Brand.net are not indicative of what we expect in 2013 and beyond. We bought a business facing challenges from the standpoint of executive leadership and sales resources. The technology and the people are first-class, and coupled with our investment and management, we are very excited about this acquisition. Secondly, given the operating condition and projected losses of Brand.net, we were able to purchase the company at a very attractive price. Most ad display networks have sold for approximately 2x revenue versus the less than 1x that we paid. Again, this has freed up more dollars for potential share repurchases in the back half of 2012.

And with that, I'll turn the call back to Rob.

Robert A. Mason

Thanks, Bob. I think you can see that we have taken the appropriate steps to rightsize the business to position ourselves for the future. What continues to be core to the value we bring to clients is our ability to reach and influence consumers throughout the rapidly changing path to purchase. With our strength in targeting analytics, we are able to reach consumers in the way they plan, shop and purchase. I believe the progress we have made within our Digital business will greatly enhance and extend that relevant reach which will create opportunities for growth across both our traditional and innovation businesses.

It's now my pleasure to turn over the call to Jim Parkinson, our Chief Digital and Technology Officer. Jim has a proven track record in the technology industry and in Silicon Valley, including leading the development of products like Sun Cloud and Java Development Tools at Sun Microsystems. In the 14 months that he has been with our company, he and his team have clearly demonstrated their ability to design, build and deliver products that have quickly engaged both clients and consumers. Jim?

James D. Parkinson

As Rob mentioned, before coming to Valassis I worked at Sun Microsystems in Silicon Valley. I left Oracle -- I left, excuse me, when Oracle purchased the company and spent a year working with small companies and startups as a CTO and advisor. I was familiar with Valassis and became intrigued with the idea of creating a digital platform for what is a very successful traditional media company. What I saw in Valassis were strong products, great consumer reach and a team of over 400 talented sales professionals with relationships with 15,000 local, regional and national clients. These clients scaled from the top 100 brands to the small- and medium-sized businesses. I met with several Valassis executives where I learned more about the company, and I quickly became convinced at the opportunity to combine the technology, which is my passion, with Valassis' assets to create the digital platform of the future.

The goal of that platform is to reach the largest number of consumers via the greatest number of channels and devices, maximizing reach and relevance of our clients' messages. This is why we're all about reimagining reach. Data is king, and at Valassis we're harnessing our data to help our customers get the best possible results with their media promotion. This utilization of data will increase our clients' reach to the right consumers.

In the last 14 months, we've already delivered a number of new products: secure offer [ph] printing, simplified coupon-to-card, new mobile applications, and next week, we'll release a new and exciting social media application into the Facebook environment. This is just the start of enabling our clients to reach new consumers. These products are designed and deployed as cloud services, which we can consume by Web, mobile and other devices anywhere consumers are.

To gain greater and faster consumer adoption, everything we build, we apply the "my mom" test to it. Our product teams know it's a requirement that everything we build must be easy enough for my mom to use it without instructions or we won't release it. And it does make a big difference. This focused our digital media efforts in 4 key product development areas that we believe complement and integrate with our off-line solutions: display advertising, digital offer, affiliate marketing and e-mail.

The affiliate business will launch early next year. Our digital offer business and email businesses are growing 50% year-over-year. In both of these areas, we have new innovations in development.

In addition to the organic growth fueled by the top-tier engineering team, we have added 2 new companies to our digital portfolio in the last 90 days, Circle Street and Brand.net. Brand.net gives us an agency-facing sales team that complements our existing client team. Brand.net technology enhances our ability to provide clients with premium and exchange-based display capabilities, as well as mobile and digital options. We have already achieved traction in the display business, however, by adding Brand.net and applying our GAO and audience targeting, we can further penetrate this market, which is projected to be worth $19 billion in 2013.

Circle Street is a really great product, and I'm really excited about what we can do with it. It increases our ability to reach for clients whose focus is local trade areas with a national brand message, which needs to be delivered just in time based on some type of an event. The best way to understand the Circle Street product, I use the following example: if I'm a franchise owner of a national pizza brand store and for some reason I have too many calzones in inventory, I need to move those quickly. Cicle Street would enable me to get an offer to my trade area that day to attract the lunch crowd for my calzone special. Our sales teams can now offer our clients a complete solution with a compelling local display option. The local display market is expected to be $4.9 billion by 2016. Circle Street, Brand.net and our 400-person sales team position us to play a major role in that market.

Based on the growth trajectory of the online display market, our ability to offer traditional video and mobile display platforms, we believe display can be the foundation of a profitable Digital business that I believe could deliver $100 million in revenue by 2013. However, as Rob referenced, this growth will not come without continued investment. I'm confident by combining state of the art technology, a large talented sales team, our clients and our data assets, this will net positive for our clients and for Valassis. I'm proud of the fact that this year we were growing our Digital business over 40%, and now with the addition of Brand.net, we expect to see triple-digit growth.

There is a bright future for our company by bringing new ideas, technologies, insights and solutions to our clients. We really are reimagining reach in a way that will increase our clients' relevant reach to their consumers no matter where they are in the path to purchase. Rob?

Robert A. Mason

Jim, thanks for that update, and everything you and your team are doing to drive our Digital business now and into the future. With that, Britney, I think we're ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Just on Shared Mail, obviously some great growth there in the quarter. The question always becomes is sort of sustainable growth there, so I'm wondering if you can maybe talk about what you're seeing in Q3 in terms of share growth indications? And if you could also talk about, just separately, what wrap sell-through was and pieces per package?

Robert L. Recchia

Sure, Mark. Talking about Q3, I don't want to get into a situation where we're giving quarter-to-quarter guidance. But I talked about in our prepared remarks that I feel like we're still on track to deliver 3% year-over-year growth for the year. At this time, I think we're going to have to ramp up our year-over-year growth from the back half, but with what we see forecasted today, I'm still confident we can deliver that 3% growth. From a pieces-per-package standpoint, we were at 9.8 pieces per package, which is basically flat with last year. We saw some sequential improvement in terms of wrap sell-through. I'm going to get that number for you in 1 second -- about 74% which compares to 69% that we reported for last quarter.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay, so that was sequential improvement, but I think you indicated still seeing some -- maybe some profitability challenges as it relates to wrap? Or can you maybe talk about, sort of the improvement or opportunities to improve profitability in Shared Mail?

Robert L. Recchia

Yes there's -- that still creates a drag. We're down where we were in terms of wrap sell-through from last year. So we want a -- we got room to improve it. I would tell you that there was a low single-digit drag in terms of revenue and flow-through that the shortage or the softness in wrap sell-through contributed in this quarter.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And then shifting to Neighborhood Targeted and FSI. Specifically in Neighborhood Targeted, absent the businesses that you're exiting, I guess we were expecting to see more baseline growth there given easier comps, yet you're continuing to see a decelerating trend. I know you talked about sales execution versus secular, and how -- I guess the question is how long has this sort of sales execution been a piece of the challenges that you're seeing there, and how much continues to just be secular that you can't really control?

Robert A. Mason

I don't think the secular part of newspaper usage is a compelling part of this equation. I think we've got an opportunity to recognize what still is significant headroom. All of our research continues to indicate that there's $6 billion to $8 billion worth of newspaper insert activity in the marketplace today. I can go back and reference a specific point in time that we became aware of the sales execution issue, that as we worked through the segmentation and as we looked at the prospects that are still using newspapers and continue to be loyal and run their business on the distribution of circulars, we think there's a real opportunity there. And I am confident that we have done the right things in terms of sales leadership and segmentation, and we're going to see that situation improve in the near term.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay, great. And then I just had one question for Jim. You talked about a lot of interesting digital initiatives. I guess I'm curious, if you look at all the digital opportunities that you have, or at least the initiatives that you're putting in place here, how many of these are, sort of, greenfield opportunities for you versus you displacing somebody else that your clients are using today or beginning to use in Digital?

James D. Parkinson

I would say in the -- it's really brings -- it's the technology and the reach we bring that opens the new doors for our clients. The display market, they -- a lot of people use a lot of different techniques, but it's how you apply them, how you apply to data and then how you're able to customize those to what they're trying to accomplish and make their message more and more relevant. So we'll be -- we'll move into some greenfield areas, I think, in mobile and definitely in social. But for the most part, a lot of it is fine-tuning our technology to what our clients need to do.

Robert A. Mason

Yes. Another thing that I would build onto Jim's comments, Mark -- because I think the technology and what he and his team are able to deliver to market will be a compelling advantage to us. But I think the other opportunity that we have is, with our 15,000 client base, there is a bunch of greenfield in terms of an underserved market in what I would call our Tier 2 and Tier 3 clients. The top 100 brands, if you will, that you could think of as Tier 1 have pretty developed presences in the digital space today. But as you step down into those Tier 2 and Tier 3 clients, you combine that with the reach of our 400-person sales organization, the established relationships we have there, I think that's a big chunk of greenfield that we can exploit and other competitors just can't.

Operator

Our next question comes from the line of William Bird with Lazard Capital Markets.

William G. Bird - Lazard Capital Markets LLC, Research Division

Was wondering if you could elaborate a little bit more on the FSI business. It sounded like, from your comments, that you saw some things indicating the business was improving in the third quarter. Then I have a follow on.

Robert A. Mason

Yes, Bill, I think those comments are based on the visibility we have via our forecast, and really our [indiscernible] at this point. We got visibility into -- a fair amount of visibility into Q3 right now. And based on that, I feel pretty confident we're going to see an uptick there. I think CPG environment is still one that I would call relatively volatile. I'm not saying this is the beginning of a significant trend, but the other thing, I think, that you can look toward is beginning in Q4, we will cycle through the lost of the custom co-op business, and that will also give us some tailwinds there to, I think, improve our performance on a year-over-year basis certainly.

William G. Bird - Lazard Capital Markets LLC, Research Division

And when you say the business looks better, do you mean it's less bad, it's just down less?

Robert A. Mason

I think -- you know what, I don't want to get in, again, to quarterly guidance. What I would tell you is, is there's marked improvement in the business in Q3. And that we still got some pretty clear signs that many of the large CPG marketers have constricted their budgets. They're trying to optimize their offers. So I'm not going to tell you that there is a dramatic turnaround. But I think what you're going to see, especially in the short-term is, is that CPG have got to figure out a way to improve their topline and bottom line performance, particularly domestically. And we've got a proven vehicle to allow them to do that.

William G. Bird - Lazard Capital Markets LLC, Research Division

And just a follow on for Jim. Jim, obviously, you came from the tech world. There must have been many factors drawing you to Valassis including location. Could you talk a bit about, just broadly, what you think the market is missing regarding your prospects for making the transition to digital successfully?

James D. Parkinson

I think the market -- this market seems to not move as fast as I'm used to yet. I plan to change that. You need to be able to move with great speed. I kind of introduced the concept here that we need to build things that we're not afraid to change very, very quickly and move very quickly. So I think the big difference will just be speed of execution and speed of deployment will be the places where we'll really focus the most. Because I think that's what our clients are looking for, as things are changing so fast. And then you couple that with our ability to then integrate our data into that, and I think we can build a really compelling solution. And I think the technology, quite frankly, will be able to keep up, plus push the market along a little bit.

Operator

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

Townsend Buckles - JP Morgan Chase & Co, Research Division

It's Townsend for Alexia. On the FSI business, can you talk a bit more about what you're seeing among your CPG advertisers? Are any taking advantage of their peers, pulling back to try to gain some market share? And are any, in general, coming back to the channel that had pulled out?

Robert A. Mason

You know what, Townsend, I -- this has been a 3 quarter story now, and I keep looking for a new term, but the best one I have to describe it is it's a mixed bag. There's nothing that's indicative of a trend. We do have some examples of CPG marketers trying to take advantage of a pullback in promotional spending, but there's nothing there that's going to change that description of a mixed bag.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay, can you give a sense of the revenue performance excluding the custom business from last year, as well as your face volume and market share stats?

Robert A. Mason

What I would tell you is, is that in Q2, the custom co-op revenue is about 90% of the variance between 2012, 2011 revenue.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And then just finally, any update on your PRC case for your retail mailer initiative? And can you maybe talk a bit more about the opportunity there?

Robert A. Mason

Yes. I think where we sit there is the PRC opened up a second round of discussions where they took appeals from mostly people representing the newspaper industry. They are in a period of consideration, and we expect to hear back from them with a final ruling sometime within the next 15 to 30 days. And once we get that word, if they blast the NSA, which we hope they obviously will, we are ready to go.

Townsend Buckles - JP Morgan Chase & Co, Research Division

Okay. And can you talk, maybe, a bit more if that goes through what the upside is for you?

Robert A. Mason

I don't want to do any signaling in terms of where and how fast we'll be going. But there is some clear upside for us with that NSA.

Operator

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

Charles Edward Cerankosky - Northcoast Research

Looking at the Shared Mail tax and exploring a little bit about the wrap sell-through not being as strong as it was, what's sort of behind that, Rob, and how would you rather trade a page on the wrap or an ad on the wrap versus another piece inside? What are the economics of that?

Robert A. Mason

I want them both, Chuck. The issues there I called out on our Q1 call, I think. We changed some of the alignment in terms of wrap reporting. We enhanced the focus on that product. And I think some of the sequential improvement we saw in that product, it is due to that. As you look at the economics of the wrap versus a piece, depending how you look at it, you've got a fixed-inventory product with the wrap. So the flow-through, once you put a client on that wrap at a reasonable price, is nearly 100%. Because we got to publish those 4 pages anyway. So the idea with the Wrap is we want to sell that early and often as we can. And the earlier we sell it, we're going to get a better price with higher margins. As we go deeper into the selling cycle, the price is going to fall along with the margins. So it's really about getting the sales force focused, selling actively and early on the selling process, and then turning their full attention to filling out the package.

Charles Edward Cerankosky - Northcoast Research

Got you. So that's the first part of the process.

Robert A. Mason

Yes.

Charles Edward Cerankosky - Northcoast Research

What was the pricing impact to revenues in Shared Mail in the quarter?

Robert A. Mason

Pretty much, it was relatively flattish, maybe slightly down, Chuck. We've said that 2012 would be a year that we were going to use price surgically. We don't want to, certainly, give up price, but we're also going to use price to hold on and gain new business. So we'd like to see that as a positive. We don't see it as a reversal in terms of the trends that we're overly alarmed or concerned about.

Charles Edward Cerankosky - Northcoast Research

All right. And then, Bob, that impairment charge in the quarter, how much of that was tax deductible?

Robert L. Recchia

All of it's tax deductible.

Charles Edward Cerankosky - Northcoast Research

All of the impairment charge? It looked like if you took all of the impairment and restructuring charges together, it had a pretty low tax rate on it. Am I missing something there?

Robert L. Recchia

We had a tax -- we figured 17 point -- whatever the number was. $17.2 million and then netted [ph] down to $10.7 million. So whatever the tax rate is -- 35%. So there might be a couple items in there that didn't flow-through, but for the most part, everything is tax deductible.

Operator

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

Daniel Salmon - BMO Capital Markets U.S.

Two questions. Just -- first for Bob, just -- I may have missed them. But if -- some housekeeping questions around total pieces, total packages and unused postage. If you can give those. And then second question was just for Jim around both Brand.net and the Circle Square. The first is, and I don't know if this is a relevant number for Brand.net, but if it is, if could you give us a rough idea if it is sort of a billings number for it in terms of how much media you're buying, or that business is buying on behalf of clients today? And then second on Circle Street, not as familiar with them. It sounded like what you were describing is a little similar to a daily deal type of model. Is that how you view it or there are some key differences from what we see in that model out there today?

Robert L. Recchia

All right, so I'll start and give you the stats for the quarter. Packages, about $923 million. Pieces per package, we mentioned, was $9.8 million. And then you can just factor it out. Revenue per package then comes down to around $349 million.

Robert A. Mason

And I think, Dan, you asked about unused postage?

Robert L. Recchia

That's right, unused postage.

Robert A. Mason

It was 15.8 -- 15.8%.

James D. Parkinson

So on the Brand.net billings, we don't break that out. So I can't give you that number. For Circle Street, it is a little -- it's quite a bit different, I think, than a daily deal. Because what it really is designed around is national brands being able to speak locally and connect with local clients on a fairly regular basis. And we've taken -- and what the Circle Street product does is it brings to the franchise owner the ability to access display, media, social, mobile, things that they couldn't normally access because the agencies in places -- they don't really have the connections. So you combine that then with our ability -- because a lot of them also need a strong off-line capability. So you combine Circle Street with our off-line capability, and we really give a complete campaign capability to a small franchise owner who, quite frankly, doesn't always get the attention that they need.

Robert A. Mason

I think -- and I think, just to add that -- to what Jim said, is that there's that preexisting relationship that we have to that franchise owner. We know their business, we know their paying points and we know what they're trying to do to drive the business. And that really puts us in that position to recognize the greenfield there.

Operator

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

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

I've got a couple. With the restructuring in the business line there, what's sort of left when you take out the custom co-op and -- just a straight FSIs and the other business?

Robert A. Mason

We really didn't do any restructuring per se. The products that we've exited, Ed, were not part of the FSI segment.

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

Oh, okay.

Robert A. Mason

Our polybag sampling product came out of our Neighborhood Targeted, leaving ROP and Newspaper Inserts. And our solo direct mail business that we exited was part of our international Digital and media services business. And within that, you still got NCH, you got our Digital business, you got our In-Store business. So there's a lot there left. What we saw is an opportunity based on trends to, I think, increase our focus on the products, the solutions and the services that really are going to form the core of our future, and exit businesses that really weren't performing where we want them.

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

On the investments in the new business, are they -- was that a quarterly number you gave or is that sort of an annualized rate, was it $7 million, or whatever it was?

Robert A. Mason

No. I think I've talked about, Ed, that $7 million of losses will be in the back half of '12, bringing our annualized total for '12 to $14 million.

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

So it will be even by quarter, or doesn't it matter?

Robert A. Mason

If you think about it, the $7 million in the back half, I don't...

Operator

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

Bethany Caster

This is Bethany Caster in for Bill Warmington. I was wondering if we could go back to Shared Mail for a moment. Can you talk about the components in the 3.4% growth? If pressing was about flat, can we assume that about 1 percentage point was postage and about 2.4% was from volume?

Robert A. Mason

Yes. I think the only thing that I would caveat there -- we have a little bit of a unique situation, because the other key metric that we focus on are pieces per package, and we referenced that that was $9.8 million, pretty much flat with last year. But in each situation where we had programs in the quarter that were actually ran outside the package. And the way to think about that is, is we've talked before about our variable data postcard. These programs were a variation on that. They were not the standard templatized formats that VDP typically is, but they take advantage of the efficiency, the saturation delivery and the recognition of the Shared Mail packages ride-along. So that was really one of the key contributors to growth in terms of a volume standpoint.

Bethany Caster

So you would say that was about 2.5% of the year-over-year increase?

Robert L. Recchia

Part of the increase was driven by the increase in packages, because packages were up about 1.2% and pieces were flat.

Bethany Caster

Okay. Okay. And then can we talk about the second -- what you expect in terms of volume and pricing in the second half of the year?

Robert A. Mason

I think we'll go back to the assumptions we made, Bethany, in terms of it's going to, kind of, be a 3-legged stool between postal, volume and price. We clearly want to see an improvement in terms of the pure volume number because that's going to create a more positive flow-through. But depending on the client, depending on the market, depending on the piece, it's going to be a different variation of that 3-component formula.

Bethany Caster

Okay. And then it looks like underlying paper prices have remained stable. Can you tell us -- can you talk a little bit about your price collars and whether your paper prices are -- have moved around?

Robert A. Mason

I would say at this point pricing is pretty stable. We continue to have what I would call very unique relationships with our mill suppliers that give us a unique ability to guarantee that stability. We don't see any significant risk in the current paper market as we see it today.

Bethany Caster

Okay. And last one for me. Can you -- we didn't talk about In-Store in the prepared remarks. Sorry if you did, I missed it. Can you provide some comments on that?

Robert A. Mason

Yes. We typically don't get into a lot of specific product segment discussion. But what I'd tell you, Bethany, is that there is no new news in the FSI segment, driven by the continued pull back of CPG spending. It's not a Valassis-specific phenomena, it's an industry phenomena. The tactics in our In-Store business are all fueled by CPG funding and so that business isn't where we want to see it from a growth perspective. But again, we see this as a cycle we're working through, and through our efforts to both grow our retail footprint and our share of tactics, we continue to think of that as a good business.

Operator

And there are no further questions in the queue. I would like to turn the call back to management for any closing remarks at this time.

Robert A. Mason

Thanks, Britney. I've got just a couple of comments to wrap up with today. First, the acquisition of Brand.net puts us in a position to offer our clients the ability to further extend their relevant reach of consumers and effectively blend their spend across both digital and traditional media platforms. [indiscernible] investment we believe Brand.net will form a cornerstone of a Digital business that should be able to generate $100 million in annual revenue by the end of 2013.

Second, I think it's important to recognize the amount of thought and effort that's going into making the hard decisions behind the rightsizing of our company's product portfolio and cost structure. I'm proud of my team's effort and even more proud of how our associates have responded to these changes. I am confident that we did the right thing at the right time, and as a result, have put our company in a remarkably improved positioned to achieve sustainable comp and bottom line growth in our core and new businesses.

Bob referenced, we got a $3 million to $4 million gap we need to make up in order to deliver. We got some work to do on both the revenue and cost sides of the business. I believe our second quarter and first half performance keeps us on track despite approximately $7 million of projected losses associated with Brand.net.

As I sit here today, I am confident in our ability to deliver flattish adjusted EBITDA and our revised diluted EPS and diluted cash EPS guidance.

I want to thank everybody for joining us today, we look forward to catching up with you from the very near future.

Operator

Thank you. Ladies and gentlemen, that does conclude the Valassis second quarter 2012 earnings conference call. We thank you for your participation. You may now disconnect.

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