Deluxe Corporation Q1 2010 Earnings Call Transcript

Apr.22.10 | About: Deluxe Corporation (DLX)

Deluxe Corporation (DLX)

Q1 2010 Earnings Call Transcript

April 22, 2010 11:00 am ET

Executives

Jeff Johnson – VP, IR

Lee Schram – CEO

Terry Peterson – CFO

Analysts

Charlie Strauzer – CJS Securities

Jamie Clement – Sidoti & Company

John Kraft – DA Davidson

Michael Hamilton – RBC Capital Markets

Dennis Xavier [ph] – Wells Fargo

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Deluxe Corporation earnings conference call. My name is Shenil, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Johnson, Treasurer, Vice President of Investor Relations. Please proceed.

Jeff Johnson

Thank you, Shenil. Welcome to Deluxe Corporation’s 2010 first 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 31st, 2008.

In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today’s press release, which is posted in the News and Investor Relations section of our website, www.deluxe.com, 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. In a continued challenging economic environment we delivered a very strong quarter. We reported revenue at the top 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 against our expectations, and new business services revenues grew 33% over the prior year.

We had strong execution against our cost reduction program and spending controls, which drove better than expected EPS and operating cash flow. Adjusted diluted earnings per share from continuing operations grew 30% over the prior year. We generated strong operating cash flow, and we were not drawn on our credit facility as we ended the quarter.

We completed the acquisition of Custom Direct in early April to extend our direct-to-consumer offerings and enhanced our cash flow generating capabilities. In late March, we started to invest in developing improved brand awareness to help better position our new business services offerings.

We have started to invest more back into the business to drive revenue growth. But, we are continuing our processes improvements and cost reductions while driving strong operating cash flow 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

Thank you, Lee. Earlier today, we reported diluted earnings per share for the first quarter of $0.65, which included $0.07 related to a one time income tax charged related to healthcare reform legislation. Excluding the one time healthcare reform related charge, adjusted EPS from continuing operation of $0.73 was $0.09 favorable to the upper end of our previous outlook, and 30% higher than the $0.56 reported in the first quarter of 2009.

Revenue for the quarter came in at $335 million, which was at the top-end of the range of our previous outlook and down only 1% from 2009. All three of our business segments delivered strong revenue. Small Business Services revenue of $192 million was down less than 1% versus 2009. Revenue was unfavorably impacted by continued economic weakness, but business services showed solid growth. Financial services revenue of $101 million was also down less than 1% versus the first quarter of last year. The impact of lower check orders was mostly offset by higher revenue per order and higher non-check revenue.

Revenue per order benefited in the 2010 quarter from last year’s price increase and the amortization of a past contract settlements. Direct Checks revenue totaled $41 million down 6.3% on a year-over-year basis, but better than recent quarter due to improved re-order performance.

Gross margin for the quarter was 64.7% of revenue, up 2.8 percentage points from 2009. Benefits from improvements and manufacturing productivity, plant consolidations and delivery initiatives will partly offset by increased delivery rates.

SG&A expense decreased $10.4 million in the quarter, and was 44.2% of revenue compared to 46.7% in the same period of last year. Increased SG&A associated with acquisitions and the acceleration of our brand awareness advertising was more than offset by benefits from the continued execution of our cost reduction initiatives and unforecasted $1.3 million gain from the maturity of company on life insurance policies.

Operating margins for the quarter, excluding restructuring and transaction related costs as well as asset imperilment charges in 2009 was 20.8% which was up from the 16.1% generated in 2009, and was above our expectations. Favorability on a year-over-year basis came from higher revenue per order, progress with our cost reduction initiatives, and our continued focus on spending controls.

All three segments delivered strong operating margins. Excluding restructuring and transaction related costs, Small Business Services operating margin of 15.4% was up 4.7 percentage points over last year due to continued progress with cost reduction initiatives.

Financial Services’ operating margin of 23.8% was up 4.5 points from 2009 due to the impact of improved revenue per order and continued progress with cost reduction initiatives. Direct Checks’ operating margin of 38.2% increased 6.3 points from 2009 due to significant cost reductions.

Turning to the balance sheet and cash flow statement, during the quarter we've repaid the $26 million that was outstanding on our credit facility at the end of 2009. We also invested $3 million of excess cash in cash equivalent investments. Cash provided by operating activity was $53 million. The decrease from last year was due to significantly higher incentive compensation payments earned in 2009 and paid out in 2010, partially offset by lower contract acquisition payment and higher earnings.

Capital expenditures for the quarter were $10 million and depreciation and amortization expense was $15 million. In early April, we purchased all the outstanding shares of Custom Direct were $98 million in cash, which was funded with the draw on our credit facility. Although, the acquisition is expected to be EPS neutral in 2010 after observing $0.03 of transaction related cost those results include an estimated $11 million of acquisition related amortization expense. We also expect the transaction will generate incremental cash tax savings of approximately $10 million from certain acquired tax attributes.

Given our strong performance in the first quarter in the acquisition of Custom Direct we are improving our consolidated revenue outlook for the year to a range of $1.36 million to $1.4 billion, which includes approximately $60 million for Custom Direct. The high end of the range we are only expecting a slight improvement in economic conditions.

Adjusted diluted earnings per share from continuing operations are expected to range from $2.55 to $2.75. There are several key factors that contribute to our full year outlook including Small Business Services’ revenues is expected to decline in the low single digit to flat range, and declines in core business products are expected to be offset by benefits from our eCommerce investments and double-digit growth in our Business Services offerings.

We expect financial services revenue to decline in the mid single digit to flat range driven by check order declines of approximately 8% given the continued weak economy and increases in forms of electronic payments, which we expect will be partially offset by higher revenues per order, from price increases and the continued amortization of a past contract settlement.

The new SunTrust win which will begin to contribute volume in the second half of the year and continued contributions from non-check revenues streams. Direct Checks revenue including the Custom Direct acquisition is expected to increase in the upper 20s percents range driven by $60 million from the Custom Direct acquisition and improved reorder volumes stemming from past quantity reductions, which will only be partially offset by Check usage declines in a continued weak economy.

Continued focus execution on our cost reduction initiatives, increases in delivery rates, continued investments in revenue growth opportunities including business services, brand awareness, helping FIs grow core deposits, acquiring new small business customers and enhanced Internet capabilities and an effective tax rate of approximately 35% which excludes the first quarter charged of $3.4 million related to the recent healthcare reform legislation. We expect to continue generating strong operating cash flows, ranging between a $195 million and $215 million in 2010 driven by an incremental $15 million from the operations of Custom Direct, stronger earnings, continue progress on working capital initiatives and lower contract to acquisition payments which we expect to be approximately $15 million. However, variable compensation payments were $18 million higher 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 and IT infrastructure. With the acquisition of Custom Direct, depreciation and amortization expense is now expected to be $75 million, including $25 million of acquisition-related amortization.

In the second quarter of 2010, we expect revenue to range from $335 million to $345 million. Adjusted diluted earnings per share are expected to range from $0.58 to $0.65, which, even at the low-end, reflects year-over-year growth. In comparison to 2009, factors affecting our full year outlook are similar to those affecting the second quarter.

In comparison to the first quarter adjusted EPS is expected to be lower in the second quarter due primarily to three factors. First, historically, Direct Checks revenues are strongest in the first quarter. Thus, we expected sequential revenue decline in this segment outside the Custom Direct acquisition. Second, we had an unforecasted $0.03 per share gain in the first quarter from the maturity of company-owned life insurance policies. And lastly, we’ve began investing late in March to improve our brand awareness, which will continued throughout Q2.

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

We’re also pleased to report on a new $200 million credit facility in the first quarter at attractive rates and turns. We believe our strong cash flow, strengthen balance sheet and flexible capital structure positioned us well to continue advancing our transformation.

I will conclude my comment with an update on our cost and expense reduction initiatives. Overall, we had another solid quarter and remained on track for delivering our $65 million target for the year. This savings do not include expected synergies from the custom direct acquisition, which are included in the Direct Check expectations.

These savings again will not necessarily be linear through the quarters. In the first quarter we continued to realign our sales and marketing backend operations. We find our channel management structure and improved our call center productivity. At the end of the first quarter we completed the closure of our Colorado Springs Small Business call center. We also realized additional efficiencies from our ongoing shift to online forms of advertising.

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

We will also continue to revamp our marketing services media customer touch points, as we improve the mix of paper catalog and online search engine marketing.

For fulfillment, we had a very strong quarter with lean productivity improvements and direct spend reduction. We plan to complete the implementation of our fully automated flat check package processing in the middle part of this year and over the remainder of 2010 we will complete the expansion of our digital press footprints 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 cost 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 throughout the balance of 2010.

As mentioned on our last call, we are shifting our primary focus to revenue expansion, but we will not take our eyes off of cost reductions and process improvement initiatives. We are off to a good start with solid revenue results in all three segments in the first quarter. So we are optimistic our focus and actions are beginning to take hold.

We believe there are four key enablers that are critical right now to driving revenue growth. First, strengthening our products and services portfolio, which is beginning better position to deliver sustainable future revenue growth as the broader economy recovers. It starts with Checks where we are stabilizing and pursuing share gains through new acquisition wins, through enhance customer experience and through simplifying offers.

We also capitalized on our strategy of optimizing cash flow in our Direct Check segment through our acquisition of Custom Direct.

Next, we are better optimizing our business product’s portfolio by broadening our distributor and dealer channel reach, by improving our Internet experience and through new offers including electronic tax forms, stamps and e-holiday cards.

Finally, in business services, we are growing web and hosting services, surcharge in marketing, payroll, broaden security, loyalty and retention, analytics driven deposit acquisition, rewards checking and business networking services. We will also continue to assess potential small to medium size acquisitions that compliments our large customer basis with a focus on Small Business Services and new offerings aimed at helping financial institutions grow their core deposits.

The second enabler is customers where we’re focused on improving their experience through enhancing our Internet capabilities, driving clear customer segmentation plus adding new customers. Our third enabler is technology with our unified delivery services platform. We will continue to invest in developing service offers that all have the same customer looking field and we’ll create additional scalable organic services.

And finally, fourth, improving our brand awareness and positioning. Our objective is to communicate our brand, point to differentiation and benefits earlier before customers consider and decide to purchase Deluxe products and services. We started in late March, and we’ll ramp more in April and through the balance of the year to improve Deluxe’s brand awareness. We work extensively with several external experts to determine how best to reach more businesses. Based on this work, we have decided to advertise through network, and national public radio, including through mobility and online media including cnn.com, entrepreneur.com, fastcompany.com, time.com, newsweek.com and others.

Further, we will also invest in advance for Small Businesses actively participates including Logo and a signature series with Entrepreneur.

We also recently introduced project RAV [ph] which is the year long marketing webs sponsored by Deluxe designed to build marketing expertise for Small Businesses. These investments will ramp through the balance of the year and were in our initial outlook for the year. We expect them to help us drive revenue growth overtime as the economy improves.

Although we expect to continue to improve EPS quarterly this year, over prior year at the high-end of our outlook through margin expansion and cost reductions. We’re also investing some back into the business to drive even more sustainable and higher revenue growth for the future. We have the ability to major our return performance from these brand initiatives, and this will determined the size and extent of investment levels over time.

Now, shifting to our segments, in Small Business Services as expected economic softness continued to impact our business. We had strong performance however, as revenue exceeded our expectations, and we’re pleased at this point to get to about flat with the prior year.

Checks and forms were strong. Our results from targeted customer segmentation in the call center improved. Response rates increased from better balance and in rich content in online and print base spend. Average order value and conversion rates remained strong.

Our Safeguard distributor and dealer channel result showed strength and revenue in Canada exceeded our expectations. We saw growth in sales of our EZShield check protection service and continue growth in PartnerUp business networking members. We saw growth in web services and completed the migration of 80,000 Aplus.net customers to Hostopia’s single, unified platform.

We signed up more media partners to help us grow our MerchEngines search engine marketing revenues. 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. However, key small business optimism indices continue to hover at historic lows and in March took a step back. Small businesses remained apprehensive about hiring and capital investment spending remained at record lows.

Key indicators are still unclear and while we saw continued slight improvement in the first quarter, 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, experienced tight cash flow and struggle with getting loans. Demand for expansion loans is still 35% below to 2006 peak level. 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 service offerings that helps small businesses to get and keep customers, Deluxe will be better position in the future as a indispensable partner for growth.

Our focus to the balance of 2010 in core small business products is on acquiring new customers, increasing our share wallet through enhanced ShopDeluxe eCommerce site and on improved segmentation.

We will continue to focus on improving the efficiency and effectiveness of our inbound, outbound 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 Aplus.net customers, add e-mail marketing customers, continue to rollout MerchEngines SEM offers and had logo and business networking enterprise customers.

All business services including payroll services, loyalty and retention fraud and security, logo, web, search engine marketing and business networking are still expected to generated approximately $120 million to $130 million in revenue in 2010, up from $91 million in 2009.

In financial services with all large contracts except one already extended through 2011, we are now focusing on extending contracts due in 2012 and beyond. We also are working closely with SunTrust to begin migration to Deluxe in the second half of 2010. On the two competitive RFPs we indicated on our fourth quarter call that we began working. One was extended with the current provider, but only for one year with a commitment to go to four RFP. The reason for the delay was due to an acquisition migration, which is taking priority right now. A second opportunity is still being worked and pending.

We are seeing some acquisition migration, new account penetration challenges in several banks and weak consumer spending. Given this, we are tightening our outlook to an expected unit decline rate of approximately 8%. Again this quarter, and expected in 2010, we saw a strong overall new acquisition rates and our retention rates remained strong and excess of 90%. In the quarter, we simplified our processes and took complexity out of the business while reducing our cost and expense structure. After completing significant research and co-creation with our financial institution partners of all sizes, we will introduce in the middle of the second quarter a new transform check program complete with simplified check designs and pricing options, a new customer self service portals, dashboards and consultative tools.

Also late in the first quarter, we are the first of three regional knowledge exchange exposed with the two others plan in the second quarter. The focus of this years exposed is on findings from the collaborative work of representatives from 15 financial institutions. We address the question, how do financial institutions sale multiple products and services to baby boomers and millennial in times to distressed.

We made progress again in the quarter and advancing non-check revenue growth opportunities that focused on helping financial institutions grow core deposits. Revenue grew over last year in these non-check services which include loyalty, retention, fraud and security, analytics deposit driven acquisition and rewards checking offers. We are off to a solid start with our exclusive partnership with BancVue to bring rewards checking offers to our community bank and credit union customers. Also late in the quarter we completed a small tuck-in acquisition of Cornerstone who has been a partner of ours and bringing to additional analytics-driven deposit acquisition marketing programs to our community banks.

We expect this acquisition will help us scale new deposit services offers more quickly and robustly for our financial institutions. We are also providing financial institutions with the comprehensive Reg E offer to a system in the notification and permission of overdrive practices for their clients which for us includes printing, call center and various marketing services. As you can see momentum continues to build in these non-check revenue initiatives. And we expect all our offers will contribute more to financial services revenues in 2010 and 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. We continue to look for opportunities to provide accessories in other Check related products and services to our consumers.

We also acquired Custom Direct in early April and we have already started the integration into our Direct Check segment. We are excited to leverage the best of both Direct Checks and Custom Direct into a best-in-class direct-to-consumer check experience. We believe there are revenue enhancement synergies through our call center scripting and up sell capabilities plus cost reduction opportunities through material, procurement, delivery, media and marketing expense leverage and other SG&A reductions. At the same time Custom Direct had some wonderful best in class capabilities in bindery and avoid spoilage that will help improve our capabilities as well.

For 2010 we expect revenue growth in the high 20s percent range driven by the Custom Direct acquisition and improved reorder curves only partially offset by declines in consumer usage in a continued weak economy. We expect to reduce our manufacturing cost and SG&A in the segment and drive our operating margins to the upper 20s percent range including acquisition, amortization and transaction costs while generating strong cash flow.

As we exit the first quarter on the hills are very strong quarterly performance in a continued challenging economy. We made good progress to get a transforming Deluxe, but we still have a lot of work and opportunities ahead of us in the balance of 2010. We are only expecting the economic climate to improve slightly through the balance of the year at the high-end of our outlook range.

As I indicated earlier our primary focus is on revenue growth and we are investing in our future with better product and services offers in all three customer segments. We are playing offence making positive strategic moves to reposition the company for sustainable longer revenue growth. The SunTrust win helps stabilize for Checks and we have more competitive opportunities now 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. At the same time we will not take our eyes off cost reductions and process improvements, and we expect to continue to generate strong cash flows and provide a very attractive dividend.

And now Shenil, we will ask you to open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Charlie Strauzer of CJS Securities.

Charlie Strauzer – CJS Securities

Hi, good morning.

Lee Schram

Hi, Charlie.

Charlie Strauzer – CJS Securities

Great margins across the board there, I just want to talk a little bit more about the strength there, and what kind of – what drove back behind the scenes and sustainability of those kind of margins? I know that obviously in the Direct Check side with Custom Direct being fall within, those margins are obviously coming down as they are integrated in, but let’s start with Direct Check, if you look at kind of with the 38% whatever in the quarter and kind of look out – 2-3 years down the road. Is there anything or any impairment that usually once you fully integrate both companies to prevent those margins from kind of getting back above copy the low to mid-30s?

Lee Schram

I think Charlie, it was going to happen there is, as we integrate the few companies, we will instead up to 20s right now, we are obviously going to continue to work to improve that from here, again I think we’ve had a couple of… we have 38% performance in Q4 and 38% performance is really the drivers are where as we leverage our cost structure really well. We did better than we expected in the fourth quarter, we did better than we expect in the first quarter on revenue and therefore able to again what level lot of that for right through the bottom line.

And I don’t expect that you will see as strong as we – as we move to the balance for the year, but we are doing everything we can that continued to make sure that our cost structure in that segment, as well as when we introduced the Direct… the Custom Direct capabilities into the segment are going continue to help us. But, I am not going to point right now, Charlie we are going to predict way out and so we really look at and we got our teams out in Maryland and in Arkansas their two sides right now working with the teams and pulling things together, but it’s obviously we have expectations we build and we able to do this acquisition, but until we really understand in more detail what I would tell you is, this is probably best I can give you right now.

Terry Peterson

And the other thing to you Charlie in my prepared comments to, I did mentioned to that just the balance of this year we are expecting right now primarily about $11 million of additional acquisition related amortization, so we’ll have to drawback for few years here as well.

Charlie Strauzer – CJS Securities

Understood, understood and then if you look at the in the strong margins like in Small Business. I think that was a much better than how you’re looking for and talk a little bit more about what drove that in and the sustainability of those margins?

Lee Schram

We are really getting, first of fall we had a very strong Checks and forms quarter it was a little bit above what we expected in the segment and obviously we make good margins on those. I think the good news there as we’re just a little light on the more discretionary products and services there’re more products and that probably the Checks and form is a better place for us to have the strength. And therefore that will better overall operating margins. And we are… Charlie, we’re getting better and better at and I saw this many, many calls that turning and dials around where should we invest online through paper, through our call centers and this is the job that’s never over.

And I think that we’re pleased but we also have been saying we expected to see some margin improvement in Small Business, and I think as we further develop and enrich our business services offers as well I think that you will see more sustainability towards what you’re margins that you saw that’s put out in the first quarter. Now, the flip side is that as we’ve made a lot of comments in this prepared comments about brand and getting brand awareness to be stronger, so that will impact our operating margins bit in the Small Business segment as we investing a little bit more in the brand space.

But, we think it’s a good investment and the right investment because we also think that's going to help bring us revenue more top line revenue overtime and it’s time well as we all know this economy will get better at some point and I think that's when we are – we are positioned right and we are thoughtful about how we are doing this, we think it’s going to help us there as well. So, I think there was balancing factors to think about.

Charlie Strauzer – CJS Securities

Great. And I just want to kind of macro question, when you – you maybe get some samples back from your call center etcetera, what are the Small Business customers telling you of the loosening of the first string little bit more, are they thinking about spending more, is it getting harder for them, what the general trend you’re seeing amongst your customer base?

Lee Schram

I think as what I said in the prepared comments, I think they are just being exceptionally smart and prudent how they spend, where they spend and again what we are noticing more and more is they are looking for how do we get in keep customers and how do we differentiate ourselves out there and clearly like any company they are also looking for how they lean their structures as best they can. But, I think what we identified – I said in the prepared comments show you exactly where they are at this point.

Charlie Strauzer – CJS Securities

Excellent. Thank you very much. Congratulations.

Lee Schram

Thank you, Charlie.

Operator

Your next question comes from the line of Jamie Clement of Sidoti.

Jamie Clement – Sidoti & Company

Good morning.

Lee Schram

Hi, Jamie.

Terry Peterson

Hi, Jamie.

Jamie Clement – Sidoti & Company

Lee, as you went through the brand awareness and market research process with some outside consultant that you mentioned, I had an increase in marketing spending for your own brand. Can you give us sense of some of things you found out about, a) Deluxe and perception of Deluxe and then, b) the market opportunities for some of these services?

Lee Schram

Everybody that’s out there don’t – obviously, first and foremost think that Deluxe is a Check company. And by the way, that’s a wonderful thing for us because we want to obviously stay strong there, but it also can be determent if they don’t understand that there is all these other products and services that we offer. And so, what we – the research that we’ve done is to think about the decision making process Jamie that are Small Business owner goes through. And what we are trying to do is to bring ourselves forward in the awareness and interest area before we go further downstream into a… I am going to make a purchase of form or I am going to make a web services purchase or a logo purchase or whatever. So we are trying to bring the power of the Deluxe brand earlier in the awareness cycle for a Small Business owner. And then, we’ve done a lot of research and I’m always asked are we going to be on TV. On average what we’ve done through our research is more small businesses to radio and specific programs, and then hone in online to a lot of the areas that we talked about, show up at GrowCo type of events. So it’s a very robust barco process about all the different medias and places that we think we need to show up in a much deeper and richer way. So, I think that’s the process that we’ve gone through. We’ve always done some smaller testing in certain areas, but this is a more robust really thoughtful and positioned approach with all of the new, that will become on the new products and services that are out there and then how we target in segment more and more for our customers and we’re just getting better and better at the analytics and the understanding and that’s all we’ve been to how we’ve thought to this brand awareness approach.

Jamie Clement – Sidoti & Company

Okay. And, you know, that sounds pretty tiny consistent with the message that you guys have given over the last couple of quarters. So, I mean, it’s sort of fair to say that you know, the research that you’ve done can only supports your own interpretation of what the market perceptions you guys is right?

Lee Schram

Absolutely. It’s so fun you know, is out in the quarter when somebody have been to it so fun there, we see people just eyes laid up when they can come with Deluxe and realized that we have a wonderful it’s free to products and services, they can really help them and it’s just and again, what we believe is a more we can get that in front of people earlier on. We think it’s going to help us as they get to their point of purchase decision.

Jamie Clement – Sidoti & Company

Okay. Thank you all very much for your time.

Lee Schram

Welcome.

Terry Peterson

Thank you.

Operator

Your next question comes from the line of John Kraft with DA Davidson.

John Kraft – DA Davidson

Good morning, gentlemen and nice work in the quarter.

Lee Schram

Thank you, John.

Terry Peterson

Thanks John.

John Kraft – DA Davidson

I wanted to go back to some of you’ve said, towards the end you’re talking about some of the newer growth to your acquisition and you’ve said it went – the revenues went from 91 million to 120 or 130 and expect in 2010. Was that just like, a total of all the recent acquisitions or where you’re going to putting in that category?

Lee Schram

Again, John. What, you know, we’ve been asked more and more to can we help clarify it, what’s included in all these new Business Services based, which is if I think of the non perhaps [ph] non-check. And so in the 10-K file was the end of for 2009 we’re reported a $91 million number what we’re trying to do John as to give and indication for all of the segments again most of that obviously is in the Small Business Services but how much revenue to expect to generate that’s in that new business services area and that’s the 120 to 130.

John Kraft – DA Davidson

That’s a non-paper stuff. And then just a couple of housekeeping items Terry the balance on the line as of today. Can you give us that?

Terry Peterson

We did – as we mentioned we did drive that kind of facility for the acquisition of Custom Direct so that represents the, the substantial portion of our outstanding borrowings today.

John Kraft – DA Davidson

So most of that is just taken up now?

Terry Peterson

No, when the credit facility had nothing drawn on it…

John Kraft – DA Davidson

200 right, so you now have about 100 or so?

Terry Peterson

200 million capacity and then drew $98 million when we bought, when we bought Custom Direct to couple of weeks ago, so…

John Kraft – DA Davidson

Okay. So, that’s about the balance.

Terry Peterson

That’s correct.

John Kraft – DA Davidson

And then the – just specific to that pending RFP that you’re working on is there a date when that contract is due that you can give us sort of a time line up when that might be – you might have an answer?

Lee Schram

I expect later this year. John with already sometimes they delay on.

John Kraft – DA Davidson

Sure.

Terry Peterson

Give you a specific line and why would have comeback or the best I can give you as it will absolutely be this year and it will be, I think it will be the second half this year will not get to a decision.

John Kraft – DA Davidson

Okay. And then just to the last just on the SunTrust is officially onboard at very beginning of Q3 or they are going to hit the tail in Q2?

Terry Peterson

No, it will be a second half of the year and we are looking for obviously getting started with our new partner here.

John Kraft – DA Davidson

Sure. Thanks, guys. Congrats again.

Terry Peterson

Welcome John.

Operator

Your next question comes from the line of Mike Hamilton of RBC.

Mike Hamilton – RBC Capital Markets

Good morning and thank you.

Lee Schram

Hi, Mike

Terry Peterson

Hi, Mike.

Michael Hamilton – RBC Capital Markets

I would like to come back to just – perhaps I missed it but in some of the earlier discussion on segment margin I wanted your thoughts on sustainability in the financial institution side of checks. Obviously best margin you have shown in long time in that business and you really are pretty different company when you were driving the kind of margin that you are showing now?

Terry Peterson

Yes, I know. I will go and take that one, Mike. We feel really good about the margin that we produced in the financial services along with the other two businesses and we do with the lot of the cost reduction initiatives that we have really pushed and delivered on, we feel pretty good about being able to sustain in that low 20% range as a margin in financial services related to the balance of this year.

Michael Hamilton – RBC Capital Markets

Congratulations.

Lee Schram

Mike something I want you to think about and this is important, it is also important competitively that – we believe we have been very consistent and I would say almost every script if you went back and look at them over the last four, five quarters. I always talk about we continue to work on process improvement and cost reduction specifically in financial services. In this quarter, I mentioned on the call that in the middle of second quarter we are going to introduce several new things in the way that we worked with financial institutions and their consumers on Checks. And so, we believe a lot these actions are, and we work really hard with banks of all sizes to create this offer. Again, we kind of stuck high level in describing that because we believe that competitively we have some things that are going to be powerful here for us. So, that’s how I would think about it Mike and therefore we expect those to gain us benefits as we roll these things out starting in the middle of the second quarter.

Michael Hamilton – RBC Capital Markets

Tactically does this offering become a hybrid between Direct and traditional FI?

Lee Schram

No. It’s specific to what we are doing with our financial institution partners.

Michael Hamilton – RBC Capital Markets

Fair enough. But it’s not designed to be an offering that gives a lower price point to those who desire and who want to do things on their own. In other words, customer who comes in and says I’ll go through the portal on my own, get a little price on Checks, okay.

Lee Schram

No, it’s more the way we work with financial institutions. And there is all sorts of reporting both at their end and our end, that’s always being worked and challenged. I’ve said this for years, make people think making a Check is a very simple thing and distributing it. It’s a very tedious and complex process between the financial institutions and the Deluxe. So, that’s more when I am talking about the portal and the benefits it gains the financial institution and the benefits therefore that it also gains with Deluxe. We didn’t do this on our own. We work really hard with the largest mega banks to the smallest community banks and really coming up with and we believe is a better offer for everybody.

Michael Hamilton – RBC Capital Markets

So having interface efficiencies?

Lee Schram

Yeah.

Michael Hamilton – RBC Capital Markets

Okay, fair enough. Couple of detail questions. One the 600,000 restructuring in the quarter, I assume that is actually a million nine, if we add in a million three on insurance proceeds there is an offset. Is that accurate, Terry.

Terry Peterson

No, I mean, the insurance proceeds are fully independent and separate, there is a smaller restructuring actions that we took in the company and we had some partial offsets with some adjustments to pass the actions, but that is really nothing too significant that way going forward, the plans will be adjusted for more around the transaction related cost with Custom Direct, but the insurance that has really nothing to do with that.

Michael Hamilton – RBC Capital Markets

So that was not booked in SG&A the insurance proceeds?

Terry Peterson

The insurance proceed, the insurance gain was booked in SG&A, yes, but it was not part of the restructuring number.

Michael Hamilton – RBC Capital Markets

I will catch up with you offline and my maths doesn’t work there. One last one and Terry, on your 11 million amortization, is that incremental on 2010 just to be sure I understand?

Terry Peterson

That is strictly, that is strictly for 2010 all incremental and all directly associated with the acquisition accounting for Custom Direct.

Michael Hamilton – RBC Capital Markets

Thanks very much. That’s it from me and again I, echo everyone else is congratulations.

Terry Peterson

Thank you, Mike.

Lee Schram

Thanks Mike.

Operators

Your next question comes from the line of Bishop Cheen from Wells Fargo.

Dennis Xavier – Wells Fargo

Good morning, this is Dennis Xavier [ph] calling in for Bishop. I just want to talk about the capital structure for a second. You have some bonds maturing in 2012 and 2013 or 2014 and I believe. And I just want to see what you thought of the high yield market right would you look to issue more debt at that guaranteed charge just wanted to get your thought there?

Terry Peterson

We just completed our work around the credit facility which is been our focus for the past as several months and our next focused area also again the 2012 so, we haven’t really come out in state articulated in strategy around that yet, but nevertheless we certainly are in the lot of communications with banks looking at options and ideas around how and also ramped when would be the optimal time to address that maturity.

Dennis Xavier – Wells Fargo

Okay. Are you kept in anyway on that guarantee trench or do you have some flexibility there?

Terry Peterson

Can you explain what’s do you mean about the guarantee trench?

Dennis Xavier – Wells Fargo

I am sorry through the seven within 3.8 [ph] debt through that level are you captured in terms the amount of debt you can’t guarantee best on the credit facility or in the debenture or anything like that?

Jeff Johnson

This is Jeff there the 20.15 [ph] you have a security but not necessarily for upstream guarantees – they have a few guarantees. They already do have a few guarantees in 20.15 [ph].

Dennis Xavier – Wells Fargo

Okay. That’s all I have, thanks.

Lee Schram

Welcome Dennis.

Operator

Your next question comes from the line of (inaudible) of Renaissance Technology.

Unidentified Analyst

Hey, good morning, guys.

Lee Schram

Good morning.

Unidentified Analyst

I just had a couple of follow-up question on financial institutions. First, how big an impact of their contract settlement amortization have on pricing? And then the second question was, if you guys can talk a little bit about how big their Cornerstone acquisition was? I know you said it was small but I was curious what kind of revenue impact it had?

Lee Schram

Let me take the Cornerstone, I’ll let Terry circle back on the financial institution question. It's small acquisition here. They primarily have been a partner with us for a little over a year now. And we partnered in the space with several others over last probably three years and finally found somebody that we think really matches what we like in terms of more analytics driven offers for primarily the community bank market in this space. And so, I think of it as very small right now, but we also believe this gives us strength and working with financial institutions, many of the ones we are working with or even saying to us, we like this, we'd like to have the more robust Deluxe name behind it, so why don’t you just buy these guys. So, obviously that was something that was always on our radar to think is that something that makes sense and we are just able to get that done. We do like the scale potential for this but right now I just think of it is a very small acquisition.

Terry Peterson

Then I go ahead and address the contract, amortization, that typically with our contract settlements and amortization and those, we typically disclose those actual numbers when they have been very, very large and very disruptive to trending and margins and such. In this case here, it was little more than the normal noise we would from quarter-to-quarter but certainly not of the magnitude that would disrupt revenue trending or margin trending. And I believe as I answered from a previous question, we expect to get those financial services margins will hold pretty steady throughout the balance of the year kind of in the low 20% range even without this amount coming through, so not material from a trending standpoint.

Unidentified Analyst

Thanks a lot guys.

Lee Schram

You are welcome.

Terry Peterson

Thanks.

Operator

That concludes the Q&A session. I’d now like to turn the call back over to Lee.

Lee Schram

Okay. I’ll just close by thanking everybody for your participation and we’ve got some new questions in here today from people, so I really appreciate that. So we’re going to get back to work here, and again we look forward to having another positive progress update on our next earnings call.

Jeff Johnson

Thank you, Lee. This is a reminder that a replay of this call will be available until May 7th by dialing 888-286-8010. When instructed, provide the access code 12038330. The accompanying slides are archived in the News and Investor Relations section of Deluxe’s website at www.deluxe.com. Again, thank you for joining us, and have a good morning or good afternoon.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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