Deluxe Corp. Q4 2009 Earnings Call Transcript

| About: Deluxe Corporation (DLX)

Deluxe Corp. (NYSE:DLX)

Q4 2009 Earnings Call

January 28, 2009 11:00 am ET


Jeff Johnson - VP, IR

Lee Schram - CEO

Terry Peterson - CFO


Jamie Clement - Sidoti & Company LLC

Mike Hamilton - RBC Capital Market

Charlie Strauzer - CJS Securities

John Kraft - D.A. Davidson


Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Deluxe Corporation earnings conference call. My name is Francis, and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today, Jeff Johnson, Treasurer and Vice President of Investor Relations.

Jeff Johnson

Thank you, Francis. Welcome to Deluxe Corporation’s 2009 fourth quarter earnings call. I’m Jeff Johnson, Deluxe’s Vice-President of Investor Relations and Treasurer. Joining me on the call today are Lee Schram, Deluxe’s Chief Executive Officer, and Terry Peterson, Deluxe’s Chief Financial Officer. Lee, Terry and I will take questions from analysts after the prepared comments. At that time, the operator will instruct you how to ask a question.

In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe’s website. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I begin, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management’s intentions and expectations regarding the Company’s future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, these comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning and in the Company’s Form 10-K for the year ended December 31, 2008.

In addition, the financial and statistical information that will be reviewed during the call is addressed in greater detail in today’s press release, which is posted in the News and Investor Relations section of our website,, and was furnished to the SEC on the Form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release.

Now, I’ll turn the call over to Lee Schram, Deluxe’s CEO.

Lee Schram

Thank you, Jeff. And good morning, everyone. I’d like to begin by welcoming both Terry and Jeff to their new positions as Chief Financial Officer and Head of Investor Relations. I am already seeing significant contributions from each of them and I’m confident they will truly partner with me in continuing to transform Deluxe.

In a continued challenging economic environment, we delivered a very strong quarter. We reported revenue at the high-end of our expected range while adjusted earnings per share was well above the high-end of our range. All three segments delivered strong revenue. Checks and forms both performed well and we continue to grow loyalty and retention, broaden security and new business services revenues over the prior year.

We saw stronger revenue performance later in the quarter than expected. We also continued with strong execution against our cost reduction programs and spending controls, all of which drove better than expected adjusted earnings per share and operating cash flow.

Adjusted diluted earnings per share from continuing operations grew 3% over the prior year, and we generated $206 million in operating cash flow for the year. We are prudently managing our Company and not taking our eyes off of process improvements and cost reductions while driving strong operating cash flow. But we are investing in future growth areas and focusing more on sustainable revenue growth as we continue to transform Deluxe and execute our turnaround plan.

In a few minutes, I will discuss more details around our recent progress and next steps, but first, Terry will cover our financial performance.

Terry Peterson

Thanks, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of $0.59, which included restructuring and transaction-related costs of $0.11. Excluding the restructuring and transaction costs, adjusted EPS from continuing operations of $0.70 was $0.06 favorable to the upper end of our previous outlook, and 3% higher than the $0.68 reported in the fourth quarter of 2008.

The prior year benefit is from higher revenue levels and the associated margin flow-through, plus an approximate $0.06 per share benefit related to lower performance-based incentive compensation expense.

Revenue for the quarter came in at $340 million, which was at the high-end of the range of our previous outlook. In fact, all three of our business segments delivered at the high-end of our expectations.

Revenue was down only 6.7% from 2008 and grew on a sequential quarterly basis. Small Business Services revenue of $206 million was down 5.8% versus 2008, and up $12 million from the third quarter. Revenue was unfavorably impacted by continued economic weakness, including a weaker than expected result in holiday cards, but sales of checks and forms were stronger and business services showed solid growth.

Financial Services revenue of $95 million was down 7.2% versus the fourth quarter of last year. The decline was due to the impact of lower check orders, partially offset by higher revenue per order as a result of the third quarter price increase.

Direct Checks revenue totaled $39 million, down 10.3% on a year-over-year basis, but better than the full-year rate of decline due to improved re-order performance.

Gross margin for the quarter was 62.8% of revenue, up slightly from 2008. Benefits from improvements and manufacturing productivity, plant consolidations, delivery initiatives and product mix were partly offset by increased performance-based compensation expense and material and delivery rates.

SG&A expense decreased $12 million in the quarter, and was 44.8% of revenue compared to 45.1% in the same period last year. Increased performance-based compensation and SG&A associated with acquisitions were more than offset by benefits from the continued execution of our cost reduction initiatives.

Operating margin for the quarter, excluding restructuring and transaction costs of 19%, was up from the 18.3% generated in 2008, and was above our expectations with favorability coming from stronger performance on our cost reduction initiatives and our continued focus on spending controls.

All three segments delivered strong operating margins. Excluding the restructuring and transaction costs, Small Business Services operating margin of 15.2% was the highest of the year and was up one percentage point over last year due to continued progress with cost reduction initiatives. Financial Services operating margin of 19.3% was in line with the full year’s operating margin, but down 1.9 points from 2008 due to the impact of volume declines and higher performance-based compensation expense. Direct Checks operating margin of 37.6% increased 4.8 points from 2008 due to significant cost reductions and a favorable mix of products sold.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $769 million, down 10% compared to $853 million at the end of 2008. Cash provided by operating activities for the year was $206 million. The increase from last year was due to significantly lower incentive compensation and interest payments, partially offset by higher contract acquisitions and severance payments in 2009.

Our operating cash flow was also stronger than our previous outlook, driven by higher than expected earnings in the quarter. Capital expenditures for the year were $44 million and depreciation and amortization expense was $68 million.

Looking ahead to 2010, we expect consolidated revenue on a full-year basis to range from 1.275 to $1.335 billion. At the high-end of the range, we are only expecting a slight improvement in economic conditions. Diluted earnings per share are expected to range from $2.35 to $2.65.

There are several key factors that contribute to our full-year outlook, including Small Business Services revenue is expected to decline in the low-single digits to flat range, as declines in core business products are expected to be offset by benefits from our e-Commerce investments, and double-digit growth in our Business Services offerings.

We expect Financial Services revenue to decline in the mid-single digits to flat range driven by check order declines of approximately seven to 8% given the continued weak economy, and increases in other forms of electronic payments, which we expect will be partially offset by higher revenue per order; a new acquisition win, which will begin to contribute volume in the latter half of the year, and continued contributions from non-check revenue streams.

Direct Checks revenue declines are expected to be in the very low-double digits to very high-single digit range, driven by check usage declines and a continued weak economy only partially offset by improved re-order volume stemming from past quantity reductions.

Continued focused execution on our cost reduction initiatives, increases in material and delivery rates, continued investments in revenue growth opportunities including Business Services, helping financial institutions grow core deposits, getting new small business customers and enhance Internet capabilities and an effective tax rate of approximately 34%.

We expect to continue generating strong operating cash flows ranging between 180 and $200 million in 2010 driven by stronger earnings on the upper end of our outlook, continued progress on working capital initiatives and lower contract acquisition payments, which we expect to be approximately $10 million. However, we also expect that variable compensation payments will be greater in the first quarter of 2010 as a result of our performance in 2009.

2010 capital expenditures are expected to be approximately $40 million, down 10% from 2009. We plan to invest in key revenue growth initiatives, expand our use of digital printing technology, complete automation of our flat check delivery packaging process and make other investments in order fulfillment, delivery productivity in IT infrastructure. Depreciation and amortization expense is expected to be $64 million, including $14 million of acquisition-related amortization.

For the first quarter of 2010, we expect revenue to range from 320 to $335 million. Diluted earnings per share are expected to range from $0.57 to $0.64, which, even at the low end, reflects year-over-year growth. In comparison to 2009, the factors affecting our full-year outlook are similar to those affecting the first quarter.

Shifting to our capital structure, we expect to maintain our balanced approach of investing organically and through small to medium-sized acquisitions in order to drive our growth transformation. We also expect to maintain our current dividend level. To the extent we generate cash flow in excess of these priorities, we plan to pay down debt in order to further strengthen our balance sheet.

Regarding our credit facility, which is due to expire in July of this year, we have been in active dialogs with our banking partners over the past several months as we prepare to replace our existing credit facility. We believe that the credit markets have improved in the recent months, and, at this time, we remain confident in our ability to obtain a new facility well in advance of the July maturity date. We believe our strong cash flow, strengthened balance sheet and flexible capital structure position us well to continue advancing our transformation.

I will conclude my comments with an update on our cost and expense reduction initiatives. Overall, we had another solid quarter and we finished the year with $105 million from net savings on top of the $155 million already realized since mid-2006. Although this amount is in line with the net savings we expected as of last October, gross savings in the quarter were actually higher than planned, but were offset by the $7.3 million restructuring charge.

These charges were primarily reflected in our Small Business Services segment where we plan to close a call center and are realigning certain aspects of our sales and marketing organization as we continue to drive more efficient processes and grow e-Commerce capabilities.

With this charge, any initiatives we have planned for the current year, we are beginning to provide the foundation for cost reductions beyond 2010. Regarding the whole plan, we continue to expect that approximately 45% of the $325 million reduction will come from sales and marketing, 25% from fulfillment and 30% from shared services corporate infrastructure.

Following our highlight of the cost reduction activities completed in the fourth quarter and a summary of our focus areas for the remaining $65 million in 2010, these savings are all incremental to the ongoing savings that are accruing each quarter from previously implemented actions, and, again, will not necessarily be linear through the quarters.

In the fourth quarter, we continued to realign our sales and marketing back-end operations, refined our channel management structure and improved our call center productivity. We also realized additional efficiencies from our ongoing shift to online forms of advertising.

Our focus for 2010 will be on improving sales and marketing back-end operations through process centralization, simplification, platform and tool consolidation and leveraging e-Commerce capabilities.

We also announced in the fourth quarter that we will be closing our Colorado Springs small business call center, which is targeted to be completed by the end of the first quarter. We will also continue to revamp our marketing services media customer touch points, as we improve the mix of paper catalog in online search engine marketing.

For fulfillment, we had a strong quarter with lean productivity improvements and indirect spend reductions. In 2010, we plan to complete the implementation of our fully automated flat check package processing in the second quarter, complete the expansion of our digital press footprint and continue our lean product standardization, spoilage reduction, and direct and indirect spend reduction initiatives.

We also plan to advance our work on moving to a common manufacturing platform, enhance our strategic supplier sourcing arrangements and continue with other supply chain improvements and efficiencies.

Finally, for the shared services infrastructure, we continue to make good progress in managing information technology costs through data center reductions and other system utilization, networking and voice communication efficiencies. We also made progress in finance, human resources and real estate.

For 2010, we expect to continue to reduce costs in all areas as more opportunities exist to centralize, streamline, standardize and improve efficiencies.

Now, I’ll turn the call back to Lee.

Lee Schram

Thank you, Terry. I will continue my comments with an update on what we are focused on overall, and then highlight progress in each of our three segments. I will also include throughout a perspective on what we hope to accomplish in 2010.

At the enterprise level, our strategic intent remains the same, becoming the best at helping small businesses and financial institutions grow. We will continue to target our three customer segments, Small Businesses, Financial Services and Consumers. Over the strategic period, we intend to drive the revenue mix of our business from 2009’s 63% Checks, 30% Business Products, and 7% Business Services to approximately 45% Checks, 30% Business Products, and 25% Business Services.

In 2010, we will not take our eyes off of cost reductions and process improvement initiatives. Even in what we expect will continue to be a challenging economic environment, we will shift our primary focus to revenue expansion.

As we enter 2010, we believe our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities as we hope the broader economy recovers. Growth opportunities start with stabilizing and gaining share in our core check businesses, then helping financial institutions expand core deposits with loyalty, retention, analytics-driven deposit acquisition and rewards checking offers. It includes enhancing our Internet capabilities, improving customer segmentation and adding new small business customers.

Finally, the most significant opportunity is growing Business Services, including web and hosting services, logo design, search engine marketing, payroll, broaden security and business networking services. We will continue to assess potential small to medium-sized acquisitions that complement our large customer bases with a focus on Business Services, and new products and services aimed at helping financial institutions grow their core deposits.

On our third quarter call, we provided an initial perspective on 2010, including a low to mid-single digit decline in revenue and an EPS range of a low-single digit decline to a low-single digit increase. Today, we released an improvement to a 2010 revenue outlook range from a decline of approximately 5% to roughly flat compared with 2009 and a diluted earnings per share range of a decline of 4% to an increase of 9%.

More specifically, the upper end of our outlook assumes the current economic trends improve only very slightly, that we secure only one of the competitive national opportunities with revenue starting in the latter half of the year, and that we generate double-digit revenue increases in new business services plus get some modest growth from our other core initiatives.

On the lower end, we have assumed that not all of our new revenue initiatives in Business Services increase as much as expected and there is a slight deterioration in the economy. We believe this is a balanced and, therefore, prudent way to plan.

Now shifting to our segments. In Small Business Services in the quarter, as expected, economic softness continued to impact our business. We had strong performance, however, especially late in the quarter with revenue at the high-end of our range. We ended the year with better results in checks and forms while holiday cards fell short of our expectations. Our Internet traffic increased and our average order value and conversion rates remained strong.

We saw a continued ramp in sales of our EZShield check protection service and continued growth in PartnerUp business networking members, where we have increased our membership to over 165,000 members. We also implemented a private label PartnerUp solution for one of the largest national banks so that they could make it available to their small business customers.

We saw solid growth in web services from our Hostopia acquisition and we are nearly complete with migrating the 80,000 web services customers to Hostopia’s single, unified platform. We are off to a good start with our MerchEngines search engine marketing acquisition, with revenues slightly exceeding our expectations as we closed out the year. Strong interest also continues in our new, internally developed e-mail marketing service called EasyContact by Deluxe.

We continue to closely monitor the small business market and are optimistic that the pace of decline is weakening. In fact, we saw small sequential revenue growth from the third to the fourth quarter. Key small business optimism indices are increasing slightly, but small businesses have not shifted to hiring and capital investment spending remains at record lows.

Although we are cautiously optimistic the economy is bottoming out, key indicators are still unclear. And while we saw some slight improvement late in 2009, it is too early and the ramp not significant enough to call it an upward trend.

Small businesses continue to spend less, scrutinize purchases more and struggle with getting loans and with cash flow. The good news is that increasing sales continues to be their number one pain point, and we now offer many products and services to help them here. As the economy recovers, with the transformative changes we are making to deliver more business services offerings that help small businesses get and keep customers, Deluxe will be better positioned in the future as that indispensable partner for growth.

Our focus for 2010 in small business products, core products, is on acquiring new customers, increasing our share of wallet through our enhanced ShopDeluxe e-Commerce site and on improved segmentation. We will continue to focus on improving the efficiency and effectiveness of our in-bound, out-bound and online customer touch points to maximize revenue scale capability.

In new business services, we expect to gain new customers through our Hostopia telco-focused wholesale model, add services for our customers, add e-mail marketing customers, continue to roll out MerchEngines SEM offers and add logo in business networking enterprise customers and ad sales.

All business services, including payroll services, loyalty and retention, fraud and security, logo, web, search engine marketing and business networking are expected to generate approximately 120 to $130 million in revenue in 2010, up from approximately $90 million in 2009. So we are starting to build scale capability.

In Financial Services, we continue to proactively extend several check contracts and we now have all large contracts, except one, extended through 2011. On the two competitive RFPs we indicated on our third quarter call that we were working, we are pleased to announce that we won SunTrust, which is expected to migrate to Deluxe in the second half of 2010 and is included in our outlook. But we did not win the other opportunity.

There are also two other large competitive opportunities that we have already started to work that we expect will be awarded late this year.

In the quarter, we did see the rate of decline of checks perform slightly better than our forecasted rate of 8%. In 2010, we expect check order declines to be around seven to 8%. Some of this is due to the turmoil in the financial services industry, some is due to increases in electronic payments and some is due to the economy.

Again this quarter, and expected in 2010, we saw strong overall new acquisition rates and our retention rates remain strong, in excess of 90%. In the quarter and continuing in 2010, we simplified our processes and took complexity out of the business, while reducing our cost and expense structure.

We made progress again in the fourth quarter in advancing new non-check revenue growth opportunities. Revenue grew over last quarter in our non-check loyalty retention and fraud monitoring and protection solutions. We are also excited about our recently announced exclusive partnership with BancVue, where we will partner with them under a revenue sharing arrangement to bring rewards checking offers to our community bank and credit union customers.

Momentum continues to build in these new non-check revenue initiatives, and we expect all our offers will contribute more to Financial Services revenue in 2010 than they did in 2009.

In Direct Checks, our revenue was higher than our expectations driven by improvement in re-order curves and we delivered an exceptional 38-point operating margin in the quarter, excluding restructuring-related cost. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers.

For 2010, we expect very low-double digit to very high-single digit revenue declines driven by consumer usage reductions and a continued weak economy, but improved re-order curves. We expect to reduce our manufacturing costs and SG&A in this segment, and drive our operating margins to the low to mid-30% range while generating strong cash flow.

As we exit 2009 on the heels of a very strong quarterly performance and a challenging economy, we have made tremendous progress in transforming Deluxe, but we still have a lot of work and opportunities ahead of us in 2010. As I indicated earlier, we will not take our eyes off of cost reductions and process improvements. But we are investing in our future and adding a stronger focus on revenue.

We enter 2010 better positioned as far as product and service offers for all three customer segments. The SunTrust win helps stabilize core checks and we have more competitive opportunities not in our outlook. If the economy improves, we should have upside in Small Business Services revenue as we know it is important for us to demonstrate growth in this segment.

We do not believe Deluxe is getting enough credit for our strong performance in these challenging economic times. As in 2009, our revenue declined only 8% and adjusted diluted earnings per share from continuing operations declined only 3% from 2008, all this while starting to play offense, making positive strategic moves to reposition the Company for sustainable longer-term growth, generating strong cash flows and providing a very attractive dividend.

Before I open the call up for questions, I would like to take this opportunity to thank all Deluxe employees for their hard work, dedication and solid performance in what clearly was a challenging 2009. Thank you, Deluxers. Let’s get off to a great start in 2010. Ready, set, let’s grow.

Now operator, Terry, Jeff and I will open the floor for questions.

Question-and-Answer Session


(Operator Instructions) And your first question is from the line of Charlie Strauzer with CJS Securities.

Torin Eastburn - CJS Securities

This is actually Torin Eastburn filling in for Charlie. I think you answered all my questions in your prepared remarks.


Your next question comes from the line of Jamie Clement with Sidoti. You may proceed.

James Clement - Sidoti

Lee, you ran through some pretty detailed assumptions with respect to your guidance. What I’m curious about is today, compared to three months ago when you first started talking about 2010 in general terms, was the economy the biggest driving factor in kind of being able to tick up some of those assumptions? Or are there some things that you got done internally at Deluxe over the last three months that has you more encouraged? I assume it’s probably a mix, but maybe you could discuss that a little.

Lee Schram

Jamie, it’s actually everything. I would also add the new, large national win. Again, we did not have anything, as we indicated, when we gave the initial perspective in October last year. I think what’s happened right now is we clearly feel like a lot of the hard work and a lot of the initiatives that we’re putting in place are starting to play out for us. I would say that we feel a little bit better about where things are from an economic standpoint, but not great. I think you can see that pretty consistent with everybody out there on a similar vein right now. But I think, Jamie, the best way to answer it is I think the number on things that we’re doing internally, things that we see in the economy and then, obviously, the focus on getting this new opportunity with this large national bank.

James Clement - Sidoti

Okay. And perhaps the next question best to Terry. With respect to the transformation to flat packaging, I think you said you should be pretty much wrapped up in the second quarter of 2010, is that right?

Terry Peterson

Yeah. That is correct.

James Clement - Sidoti

Well, approximately what percentage of orders are going out flat right now? Like how far along the way are you?

Terry Peterson

Well we’ve got one of our three manufacturing plants converted over to that new system. And this system produces the packaging for any orders that we send out where it’s one box. So if there’s multi-boxes, it would go out in a different configuration. But one of the three plants is up and running.

James Clement - Sidoti

Okay. And are we to assume that the costs associated with converting the other two plants, are you not generating any net savings due to this process just yet?

Terry Peterson

Certainly we are generating savings from the one plant that is...

James Clement - Sidoti

Sure. But in terms of the amount of money that you have to spend on the other two, does that offset how much your savings just at this time. Obviously, I assume in the second half of 2010, you’ll be fully positive?

Terry Peterson

Well, really, what we’ll be investing in primarily is capital equipment, so to get the actual machines into the plants and up in running. So most of that is actually capital related. So certainly there are some operating costs to get that converted and to get it up to running to full capacity. But most of the dollars that we’re talking about are actually capital.


Your next question is from the line of John Kraft with D.A. Davidson.

John Kraft - D.A. Davidson

Just, well first, congratulations to you, Terry and Jeff, and also for all of you on the SunTrust deal. Specific to that, I guess, I have a few questions. The first is should I assume that the uptick in contract acquisition payments in Q4 was related to that deal? Or is that something that should hit in 2010?

Terry Peterson

It’s never really been our practice to comment on contract acquisition costs related to any one particular customer. The little uptick that we had at the end of this year versus what our previous expectation one was really driven more around a payment that was due at the very beginning of January that actually slipped into December. So it was really just more of a timing matter than anything else.

John Kraft - D.A. Davidson

Well along that line, before I go back to the SunTrust, what do you expect for that line in ‘010? I didn’t hear you say that.

Terry Peterson

Approximately $10 million for next year.

John Kraft - D.A. Davidson

10 million. Okay. And back to the SunTrust deal, can you talk about how and what was the reasoning, the rationale that they chose you? Was there more than simply price?

Lee Schram

John, this is Lee. I think the way I would best describe it is that I think what we did is we surrounded them with the innovation that we put into our plants in terms of the flat packaging, the digital presses. I think we also talked to them extensively about our small business offer and what we’ve been doing to enhance that with a lot of the business services moves that we’ve been making. And, clearly, price is always going to play an element in these, John.

But I think what we try to do is focus on the differentiation that we believe we have right now versus the competitors that are out there, so that was the focus. And I’m just extremely pleased and proud of the Financial Services team and all the people that actually had a chance to play in this, and this, obviously is a significant win for us.

John Kraft - D.A. Davidson

Did they also sign up for the Business Advantage program?

Lee Schram


John Kraft - D.A. Davidson


Lee Schram

Yes, John.

John Kraft - D.A. Davidson

Interesting. And then changing gears a little bit, Lee, you said that on the financial institutions side of the business that revenue sort of picked up late in the quarter. I guess I was wondering whether or not you have seen follow through in January?

Lee Schram

What I think I said is in Small Business Services we saw it pickup. We actually saw an improving trend from October to November to December, it is really therefore, the strongest was late in the quarter. And, again, these are only slight, John, at this point in time. And I think also mentioned that the rate of decline in checks, we put out there at 8%. We performed a little bit better there as well. So it was really in both those. And then with the only 10% decline in Direct Checks in the fourth quarter and year, particularly year, we were down like 13%. We clearly saw some improvement there. So I think it was all three, which is why we’re encouraged with the way results played out.

As far as this year, the best way I would describe it right now is the guidance that we put out there between the low and the high-end takes into account exactly the perspective that we had as we exited the year and kind of the not too far out ahead, but not too much worse in terms of the economy. The same way we looked at the full year at this point, John.

John Kraft - D.A. Davidson

Okay. And just last question probably for Terry here. Could you just rattle through your various debt instruments and balances as of the end of the quarter?

Terry Peterson

Yeah. Our credit facility, we had about $26 million drawn at the end of the period. The 2012s had approximately $280 million outstanding, the 2014s had about $263 million, and then the 2015s had about 200 million even. So that was roughly about $769 million total.

John Kraft - D.A. Davidson

Sure. And then just last piece on the credit facility. What was the rate again?

Terry Peterson

The credit facility rate at the end of the year, it’s LIBOR plus 75 basis points. So it was well under 1%.


(Operator Instructions) Your next question is from the line of Mike Hamilton with RBC.

Michael Hamilton - RBC

Could you step back and give some views. You highlighted the changes, the turmoil in FI, and just kind of walk through what you’re seeing in terms of how that’s relating to your business, the bidding process, anything going on in pricing dynamics worth noting? In other words, are we seeing any big picture changes?

Lee Schram

Mike, I think this has been out there for a while now, and we’ll continue that. Financial institutions, large and small, are doing what every one of us is doing that’s in business, and that is looking for continued ways to improve their infrastructure and their cost structure and their processes. So would I say it’s heightened, more heightened now? I would say it’s just continuing to be a focus of theirs. And we built our infrastructure, and we’ll continue to build our infrastructure, that this will continue to be the way it will play out as we go forward. So I don’t think it’s any more than it’s been throughout 2009. But I think it’s prudent for us to believe that it’s going to continue as we play into 2010. And, therefore, that’s our job as we’ve been doing to continue to get our infrastructure lower and lower, and our processes improved.

Michael Hamilton - RBC

We’re seeing, out of at least a few institutions, indication of going away from free checking. What’s your assessment of opportunities or risks off of that for you?

Lee Schram

I think we have this very well surrounded. I think if you think about that, if it happens, I think if you think about the world of the direct-to-consumer space, I think if you think about the focus we have in the non-check space now in the financial institutions, the partnership that we announced with BancVue and the Rewards Checking, I think the best way to think about it is financial institutions are going to continue to need to try to figure out how they differentiate to get consumers to win in core deposits and core deposit growth. So anything that we can do to help balance that out and give more offers and more opportunities to be able to help them with that, I think plays to our advantage. So I think we’ve surrounded it with a lot of the work that we’ve done. And, again, we’re very excited actually about this BancVue partnership that we created as well. So that’s the best way right now, Mike, I would think about it.

Michael Hamilton - RBC

Yeah. That makes sense. Thanks. Lastly, we’ve come off of a couple of fairly weak years on the holiday-related sales in small business. Any changes in your thinking or approach as we go to 2010?

Lee Schram

I would first start with we didn’t bank on a huge dependency on it in 2009. So although we missed, I also would comment that it was later in the year that we saw a pickup. So it clearly was people postponing what we’ve seen as kind of historical trends. And then at the end we actually performed quite well compared to what we expected.

The best way that I would describe us right now is we know and we see, each of us here sees, that we’re getting more electronic cards than we are paper-based cards. So we’ve thoughtfully planned through that. We just did a little bit lower there, Mike, than we expected. And we’ll continue to look at, as we get into 2010, where do we expect that to go and then try to determine how much of that was more economic-based versus a change that is happening more in electronification there.

But I think it’s important, again, to put out there that this is not a huge percentage of our business in the Small Business segment. So although we didn’t like the outcome, this isn’t something to be majorly alarmed with.

Michael Hamilton - RBC

Yeah. It looks in your outlook like some of the fourth quarter hockey stick that we’ve seen in prior year expectations is out of the picture in the current year?

Lee Schram

I would look at that. And don’t forget too, again, some of that we mentioned the forms, we had strong performance there. We had some seasonality too, Mike, in the tax forms areas which we actually saw perform well in the quarter.


Your next question is from the line of Melissa Valcovic from Credit Suisse.

Melissa Valcovic - Credit Suisse

Can you say who you won the SunTrust contract from?

Lee Schram

We won it with SunTrust Bank.

Melissa Valcovic - Credit Suisse

Right. But could you say who had previously serviced the bank?

Lee Schram

No. I’m not at liberty to disclose that.


At this time, there are no other questions. I’d like to turn the call over to Lee Schram.

Lee Schram

I just want to thank everybody for your participation, and, again, for the questions today. And we’re clearly excited about our finish here. We’re going to get back to work and we do look forward to providing another positive progress report on our next call.

Jeff Johnson

Thank you, Lee. This is a reminder that a replay of this call will be available until February 11 by dialing 888-286-8101. When instructed, provide the access code 10080199. The accompanying slides are archived in the News and Investor Relations section of Deluxe’s website at Again, thank you for joining us, and have a good morning.


And ladies and gentlemen, thank you all again for your participation in today’s conference call. This concludes the presentation and you may now disconnect.

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