Deluxe Corporation CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.30.10 | About: Deluxe Corporation (DLX)

Deluxe Corporation (NYSE:DLX)

Q3 2010 Earnings Call

October 28, 2010 11:00 a.m. ET


Jeff Johnson – VP, IR and Treasurer

Lee Schram – CEO

Terry Peterson – SVP and CFO


Charles Strauzer – CJS Securities

John Kraft – D.A. Davidson

Jamie Clement – Sidoti

David Herbert – Wells Fargo Securities


Good day, ladies and gentlemen, and welcome to the third quarter 2010 Deluxe Corporation earnings conference call. My name is Marcella, and I will be your operator for today. At this time, all participates are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jeff Johnson, Treasurer, Vice President of Investor Relations. Please proceed.

Jeff Johnson

Thank you, Marcella. Welcome to Deluxe Corporation's 2010 third quarter earnings call. I'm Jeff Johnson, Deluxe's Treasure, and Vice President of Investor Relations. 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, 2009.

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,, 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.

Lee Schram

Thank you, Jeff, and good morning, everyone. Deluxe delivered another very strong quarter. Revenue grown was 11%, or 3% excluding the one-time $25 million contract settlement, and finished near the high end of our previous outlook.

Small business service revenue, excluding the portion of the contract settlement recorded in this segment grew slightly over the prior year for the second quarter in a roll, and sequentially over last quarter as well.

Checks and Forms both performed well against our expectations, and new business services revenue grew 33% over the prior year.

Diluted earnings per share from continuing operations exceeded the high end our outlook. We had solid execution against our cost reduction programs and spending control, which along with strong revenue performance in Small Business Services, drove higher than expected EPS.

Excluding the onetime $0.31 per share contract settlement, adjusted diluted EPS from continuing operations grew 13% over prior year. In the quarter we continued our test-and-learn brand awareness and direct-response advertizing, as well as organic technology initiatives to help better position our New Business Services offerings and generate future revenue growth.

At the same time, we continued our process improvements and cost reductions while driving strong operating cash flow as we continue our transformation. In a few minutes I’ll 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 continuing operations for the third quarter of $0.99 which was $0.01 favorable to the upper end of our previous outlook in spite of a tax rate which was 2 percentage points higher than expected, due to a reduction in certain qualified tax deductions in the deferred enactment of expected tax legislation. Results for the quarter also included $0.31 from the previously announced contract settlement.

Revenue for the quarter came in at $368 million, which was near the top end of the range, of our previous outlook, and up approximately 11% from 2009, or 3% excluding the impact of the contract settlement. Small Business Services revenue up $207 million, was up 7% versus 2009, and still up slightly excluding the portion of the contract settlement recorded in this segment.

Revenue shows solid business services growth, but was unfavorably impacted by continued economic weakness. Financial Services revenue of $103 million was up 4% versus the third quarter of last year, but down 9% excluding the contract settlement. The impact of lower check orders, and lower check pricing, was only partially offset by higher non-check revenue service’s – services revenue.

Direct Checks revenue totaled $58 million, up 48% on a year-over-year basis due to the CDI acquisition. Excluding the impact of the acquisition, Direct Checks revenue was only down 4% due to continued strong reorder performance.

Gross margin for the quarter was 67% of revenue, up 3.7 percentage points from 2009. Contract settlement increased the 2010 gross margin percentage by 2.4 points. In addition, benefits from improvements in manufacturing productivity, plant consolidation, delivery initiatives, and product mix were partly offset by increased delivery rates.

SG&A expense increased $3.5 million in the quarter but was down to 42.9% of revenue compared to 46.4% in the same period last year. Increased SG&A associated with acquisition, and brand awareness in direct response campaign advertizing was partially offset by benefits from the continued execution of our cost reduction initiative.

Operating margin for the quarter was 24.1%, up 7.7 percentage points from the 16.4% generated in 2009, and was above our expectations of the 2010 margin included an expected 5.5 percentage points benefits from the contract settlement.

In addition, continued progress against our cost reduction plan, contributed favorably in all three segments in 2010, as well as the following segment specific factors; excluding the impact of the contract settlement in our small business in financial services segments in 2010, and the restructuring and transaction-related cost in 2009.

Small Business Services operating margin of 17.1% was up 4.2 percentage points over last year. It also benefited from a favorable product mix. Financial Services operating margin of 16.3% was down 3.2 points from 2009 driven by lower volume and lower check pricing.

Direct Checks operating margin of 27.6% decreased 6.8 points from 2009, reflecting the acquisition of Custom Direct but was up over the second quarter margin of 26.9% as we began to realize planned synergies from integrating Custom Direct.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $779 million compared to $769 million at the end of 2009. This increase was primarily related to the April cash purchase of Custom Direct for $98 million, which was funded with a draw on our credit facility.

During the third quarter alone, we reduced our credit facility borrowing by $69 million. Cash provided by operating through 9 months was $171 million. The increase from last year was due to the contract settlement, hiring earnings, and lower contract acquisition payments, which were practically offset by higher performance-based compensation payments earned in 2009 but paid in the first quarter of 2010, and higher income tax payments.

Capital expenditures for the 9 months were $32 million, and depreciation and amortization expense was $55 million.

Looking ahead to the fourth quarter, we are tightening our consolidated revenue outlook to a range of 346 to $354 million as we are not expecting improvements in economic conditions, and we are being cautious about the upcoming holiday season.

Adjusted diluted earnings per share are expected to range from 65 to $0.72. On a full year basis, this results in a consolidated revenue outlook range of 1.397 to $1.405 billion, including approximately $60 million for Custom Direct.

Adjusted diluted earnings per share from continuing operations are expected to range from $3.05 to $3.12. There are several key factors that contribute to our fourth quarter outlook in comparison to the fourth quarter of 2009, including Small Business Services revenue is expected to be roughly flat, as decline in core business products are expected to be offset by benefits from our e-commerce initiatives, price increases, and double-digit growth in our Business Services offering.

Financial Services revenue is expected to decline in the mid to upper single digits driven primarily by check order decline of approximately 8% given increases in forms of electronic payments in the continued weak economy and lower revenue per check order which we expect will be partially offset by continued contribution from non-check services revenue stream.

Direct Checks revenue is expected to increase nearly 50% driven by the Custom Direct acquisition and improved reorder volumes stemming from past quantity reductions which will only be partially offset by check usage decline in the continued weak economy.

Continued focus execution of our cost reduction initiatives, increases and material and delivery rates, continued investments in revenue growth opportunities including Business Services, brand awareness, Direct Response campaigns, web-to-print and enhanced Internet capabilities, and an effective cash rate of approximately 33%.

In comparison to the third quarter, diluted EPS, excluding the favorable $0.31 contract settlement in the third quarter is expected to be in the range of $0.03 lower to $0.04 higher in the fourth quarter depending upon how much revenue will be. But also due to higher investments and growth initiatives, including New Business Services, web-to-print, and brand awareness and Direct Response advertizing test campaigns that we expect will drive incremental revenue over time, but not contribute measurably in the fourth quarter.

We expect strong operating cash flows ranging between 220 and $226 million in 2010, driven by the contract settlement, strong earnings, continued progress on working capital initiatives and lower contract acquisition payments, which we expect to be approximately $20 million.

However, performance base compensation payments were $18 million higher in the first quarter of 2010, as a result of our strong performance in 2009.

2010 capital expenditures are expected to be a little over $40 million. For the remainder of the year, we plan to continue to invest in key revenue growth initiatives; complete automation of our Flat Check Delivery Packaging process and make other investments in order fulfillment, delivery productivity and IT infrastructure.

Depreciation and amortization expense is expected to be $75 million including $25 million of acquisition related amortization.

Shifting to our capital structure, we expect to maintain our balance 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. We believe our strong cash flow, strength in balance sheet, 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 initiative. Overall, we had another solid quarter and remain on track for delivering our $65 million target for the year. These savings, again, have not been [inaudible] through the quarters and do not include expected synergies from the Custom Direct acquisition, which are separately included in the Direct Checks expectations.

In the third quarter we continue to realign our sales and marketing backend operations. We find our channel management structure and improved our cost and our productivity. We realized additional efficiencies from our ongoing shift to online forms of advertizing.

Our focus for the remainder of 2010 will continue to be on improving sales and market backend operations, through process centralization, simplification, platform and tool consolidation and leveraging e-commerce capabilities.

We will also continue to improve the mix of paper catalog and online search engine marketing.

For fulfillment, we had a very strong quarter with lean productivity and improvements and direct spend reductions. We completed our digital press footprint expansion in the third quarter. In the fourth quarter, we also expect to install our fully automated flat check package processing equipment in a final site.

We also expect to continue our lean, product standardization, spoilage reduction, and direct and indirect spend reduction initiatives plus advanced work on moving to a common manufacturing technology 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 cost through data center, cost reduction, and other system utilization, networking, and voice communication efficiencies.

We also made progress in finance, human resources, and real estate. For the remainder of 2010, we expect to continue to reduce cost in all areas as more opportunities exist to centralize, streamline, standardize, and improved 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 have hoped to accomplish in the fourth quarter of 2010. And finally, provide some context looking forward to 2011.

We continue to make progress on our revenue expansion initiative and key enablers with solid revenue results again in the third quarter. So we are optimistic our focus and actions are continuing to take hold.

Our four key enablers to driving revenue growth includes strengthening our products and services portfolio, growing new customers, improving technology, and enhancing brand awareness and positioning.

Here are some examples of the progress we have made. We grew new business services revenue 33% over the prior year quarter, had our highest Shop Deluxe revenue and growth rate increase this year in the third quarter, advanced our web-to-print platform and added new distributors and dealers.

In addition to organic initiatives to improve our products and services, we continue to assess potential small to medium sized acquisition that complement our large customer bases with focuses on Small Business Services and new offerings aimed at helping financial institutions grow.

In addition to our strong print leadership expertise, we have created much stronger technology and digital leadership and expertise. In addition to my and our CIO’s, technology backgrounds from MCR, our new SBS leader also brings a strong technology background from Microsoft. We also have added technology leaders and experience from our business services acquisitions, plus added several proven key leaders in the third quarter in the e-commerce, search engine marketing, and web-to-print spaces.

We also continued test-and-learn brand awareness, and direct response advertisements including radio, online, television, and our small business hero, Mobile Tour Event, in six large cities during September and October.

Our project reps, small business, marketing labs, sponsorships, designed to build marketing expertise for nine small businesses successfully continued with favorable media exposure. We expect these initiatives will help us drive new customer acquisition and revenue growth over time as the economy improves.

It is still too early to track and measure the success of all these campaigns, but our brand campaign running primarily on radio and online media is beginning to increase awareness, as evidence by engagement on our website and click through rates that are more than double expected rates for awareness campaigns.

Our mobile tour has enabled us to reach small business owners where they are, and showcase our New Business Services solutions in an exciting and engaging way.

Now shifting to our segments. The Small Business Services, as expected, economic softness continued to impact our business. We had strong performance however, as we were pleased to report slight revenue growth excluding the contract settlement for the second consecutive quarter. Checks and forms were strong versus our expectations. Our results from targeted customer segmentation in the call center improved. We increased new customers from our financial institution, Deluxe Advantage Referral Program, and through our Direct Response campaign.

Response rates increased from better balance and enriched content in online and print based spend. Average order value and conversion rates remain strong. Our safeguard distributor and dealer channel, showed organic revenue over the prior year. We also saw strong growth in web, logo, and payroll services.

In the quarter we won several new Hostopia, North America, TelCo wholesale deals, and also continued to expand additional value added services on top of our core web services offer.

We continue to closely monitor the small business market and believe that the pace of decline has bottomed out. However, key small business optimism indices continue to hover at historic lows and remain choppy. With July index down, while August and September improve slightly, but ended right at June’s result, and basically at September 2009 levels. This is clearly an up and down pattern with no sustainable upward trend. Small businesses remain apprehensive about hiring and capital investment remains at record lows. They continue to spend less, scrutinize purchases more, and experience tight cash flow.

Confidence and better business conditions looking out six months has been declining. Indicators point toward a lingering slowdown that is expected to continue into 2011. 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 transformed the changes we are making to deliver more business services offerings that help small businesses, get and keep customers. Deluxe’s better position at that indispensible partner for growth.

Our focus for the balance of 2010 in core small business products, is now requiring new customers, increasing our share wallet through our enhanced shop Deluxe e-commerce site, further improving segmentation and having a successful holiday season. 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.

We also expect to further accelerate expansion of web-to-print capability so we can start to build additional revenue scale here for 2011. In new business services, we continue to add web hosting customers on our single unified delivery platform, and we now have close to 430,000 customers. We expect to gain new customers through our Hostopia, TelCo focus wholesale deal sales model.

We further expect to add services for our and Deluxe retail customers including fax to email, email marketing, mobility, copywriting, and search engine marketing offers through a combined call center and online sales model, continue to rollout [inaudible] engines, search engine marketing offers, and add logo customers.

The brand awareness radio and online campaigns, plus direct response and mobile event testing, should help Deluxe brand more robust to get more robustly recognized in the market.

All business services, including payroll services, loyalty and retention, fraud and security, logo, web, search engine marketing, and business networking are still on track to generate approximately $125 million in revenue in 2010, up from $91 million in 2009.

In Financial Services, we retained our final pending contract and now have extended all large contracts through 2011, as well as extended several large contracts that were originally due in 2012. We now have only a few large accounts due in 2012 that we continue to work to extend. Again this quarter we saw strong overall, new acquisition rates and our retention rates remain strong, an access of 90%.

We recently started working on contract terms for a new large national financial institution that will hopefully start sometime in the first quarter of 2011. Further, we responded to another large national competitive RFP with a decision pending that will come due in the ladder part of 2011.

There are also still a significant number of competitive opportunities over the next year. In the quarter, we did see the rate of decline of checks perform slightly better than our forecasted rate of around 8%. We also simplified our processes and took complexity out of the business while reducing our cost and expense structure. Our new transformed check program, complete with simplified check design, pricing options, new customer self-service portals, dashboards and consultative tools introduced in the second quarter continue to rollout in the third quarter and we will extend to even more financial institutions in the fourth quarter.

We made progress again in the quarter in advancing non-check revenue growth services opportunities. Revenue grew over both last quarter and year in these non-check services which include loyalty, client communication, regulatory, fraud and security, analytics, deposit-driven acquisition, and rewards checking offers. We continue to sign up financial institutions with rewards checking offers from our exclusive partnership with Bank View.

We are also encouraged by the performance of Cornerstone where we have already closed more financial institutions wins than we expected this year. We also had another strong quarter in providing financial institutions with the comprehensive Regulated Earnings offer to assist them in the notification and permission of overdraft 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 initiative, and we expect all our offers will contribute more to Financial Services revenue in 2010, than they did in 2009.

In direct checks, revenue was in line with our expectations driven by accelerated reorder rates, and we delivered a strong 28 point operating margin in the quarter. We continue to look for opportunities to provide accessories and other check related product and services to our consumers. We also continue to be very pleased with the integration of Custom Direct thus far, as we leverage the best of both Direct Checks and Custom Direct into a best in class direct to consumer check experience.

We continue to see a ramp in revenue enhancement synergies through our call center scripting and up sell capabilities. In addition, cost reduction activities continue with savings incurring in material, procurement, delivery, media and marketing expense leverage and other SG&A.

We expect continued revenue enhancement and cost reductions in the fourth quarter. For 2010, we expect revenue growth to be around 30% driven by the Custom Direct acquisition and accelerated reorder rates, partially offset by declines in consumer usage in a continued weak economy.

We expect to reduce our manufacturing cost, and SG&A in this segment and to drive our operating margins to the high 20% range, including acquisition amortization and transaction cost, while generating strong cash flow.

As we exit the third quarter, on the heels of a very strong quarterly performance and a continued challenging economy, we made good progress again in transforming Deluxe, but we still have a lot of work and opportunity ahead of us.

We are prudently planning, by not expecting the uncertain economic climate to improve in the fourth quarter, including being a little more cautious about the upcoming holiday season. Our primary focus right now continues to be on revenue growth, and we will continue to invest in our future with better product and services offers, and supporting brand awareness and direct response campaigns.

If the economy improves in the fourth quarter, we should have some upside in Small Business Services revenue as we know it is important for us to continue to demonstrate growth in this segment. At the same time, we will not take our eyes off of cost reductions and process improvements, and we expect to continue to generate strong cash flows and provide a very attractive dividend.

Looking ahead to 2011, our portfolio continues to become better positioned to deliver sustainable future revenue growth. A full year of custom direct, expected onboarding of a new large national financial institution starting sometime in the first quarter, and extending our large financial institution contracts through at least 2011, help to stabilize core [inaudible]. And we have more competitive opportunities coming due over the next year.

We also are expanding existing organic initiatives such as shop Deluxe and web-to-print, adding distributors and dealers, and more robustly driving value add services in New Business Services. In the more normal economy, we are excited that this could position us for solid, mid-single digit revenue growth, and strong low double-digit adjusted diluted earnings per share growth, excluding the contract settlement of $25 million in revenue and $0.31 in EPS in 2010.

However, given the continuing of uncertain economic climate and lack of directional clarity, it is more prudent for us right now, to expect 2011 revenue to range between roughly flat to up low single digits compared to 2010, which is expected to produce suggested diluted earnings per share ranging from approximately flat to high single digit growth.

Both revenue and adjusted earnings per share in these comparisons, exclude the $25 million revenue and $0.31 in EPS financial institution contract settlement. As part of these estimates, we expect to deliver strong double-digit revenue growth in our New Business Services offerings, and continue to prudently invest in brand awareness and direct response campaigns.

However, we believe it is extremely important for us to closely monitor the marketplace over the next 3 months before providing a more specific outlook for 2011.

Now, Marcella will open the phone lines for questions.

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Charley Strauzer with CJS Securities. Please proceed.

Charles Strauzer – CJS Securities

Hi, good morning. Two quick questions. One, when you look at the financial services segment, the organic declines there probably a little bit more than I was looking for. Can you give me a little bit more clarity there as to what were the drivers there? And what are you seeing there in kind of current trends versus that?

Terry Peterson

Certainly, Charley, I’ll take that question. In our margin setback just a little bit in that segment this quarter, but given where the revenue levels are in this segment, I think what you can expect to see is that anything really kind of in the upper teens and the low 20s is probably a normal range just because it doesn’t take a lot to drive a margin percentage change there. So things like price increases, new contracts, timing of investments that we make in that segment, that can create some volatility in that margin kind of in that range that I was giving there, so that certainly came through in this quarter too.

Plus, in this quarter, we saw a little bit of a kind of non-favorable shift in some of the, next to the types of products that we saw customers ordering with coming through some of the larger banks, just some of the more lower priced products, so it was really just a combination of a number of different factors.

Charles Strauzer – CJS Securities

Got it, thanks, and then you talked about the, Lee mentioned about this new contract that’s in negotiating terms. This is I’m assuming new competitive acquisition that you’ve just won.

Terry Peterson

Yes, we’re negotiating.

Charles Strauzer – CJS Securities

Got it, okay, but you’ve technically been awarded, but you haven’t finalized the terms yet.

Terry Peterson


Charles Strauzer – CJS Securities

Excellent, and then Lee, when you talked a little bit about rewards checking as a new offering, a relatively new offering, can you explain a little bit more about that is. It kind of seems like contrary to what the banks would want to do in terms of – it sounds like you’re rewarding people for using checks, is that correct, or is that just something that’s terminology?

Lee Schram

It’s not checks Charley. It’s checking accounts, but basically what our partnership with banks do is that it’s an opportunity for a consumer to earn higher rates of return by how they basically manage themselves and their checking accounts. So it depends on how much they use debit, credit, and whether they take statements electronically versus in paper form. So it’s checking Charley, but it’s not paper checks. It’s checking account focus is the way you need to think about it.

Charles Strauzer – CJS Securities

Got it, so it’s all usage of the account.

Lee Schram

That’s exactly it.

Charles Strauzer – CJS Securities

Got it, excellent, thank you very much.

Lee Schram

You’re welcome Charley.


Your next question comes from the line of John Kraft with D.A. Davidson. Please proceed.

John Kraft – D.A. Davidson

Hey, guys. Just to follow up, on the financial institution segment this quarter, there’s obviously some puts and takes here, but was the SunTrust migration completed at the very beginning of the quarter, or was it sometime in the quarter?

Lee Schram

Yes, very beginning of the quarter.

John Kraft – D.A. Davidson

So you get a full quarter there, what about the lost client, when is that move out, full quarter, is that gone?

Lee Schram

No, not a full quarter. That transition is really throughout the course of the quarter, so that was the [inaudible] part of the quarter.

John Kraft – D.A. Davidson

Okay, and on the direct side, the obviously strong orders there, re-orders there, was there some particular ad spending, or what was driving that?

Lee Schram

Oh, we just did very well. We’ve had – one of the positive things with having the direct checks and having the CDI piece is being able to look at what works in two different markets for us, John. And then the timing of when our, some of the changes that we’ve made to that, to direct checks program, and then to see the CDI program is really just allowing us to take advantage of opportunities with the consumers as they re-order. So I think that’s the way you think about it.

John Kraft – D.A. Davidson

Okay, and then just lastly, on the kind of pending RSPs that you’ve been talking about, just so I can clarify here, you did win one that you’ll start in Q1. You are in final stages of I guess hearing back from them. One that would happen that would migrate potentially the latter part of 2011, and then are there, there’s how many left out there that you’re in the process of?

Lee Schram

I won’t give the number, but I will just add that there are more that are coming over the next year.

John Kraft – D.A. Davidson

Okay, thanks guys.

Lee Schram

You’re welcome John.


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

Jamie Clement – Sidoti

Hey, good morning gentlemen.

Lee Schram

Hi, Jamie.

Jamie Clement – Sidoti

Just to I guess follow up on Charley’s question. You gave a lot of information in prepared marks. Is the way you all think about kind of on-going apples-to-apples margins in your segments to knock $12.1 million out of the operating income for SPS, and $12.5 out of financial services?

Lee Schram

Yeah, that would be correct.

Jamie Clement – Sidoti

Okay, so just to clarify a little further, that’s seems like an awfully low margin in financial services, so Terry, just a little bit more on kind of what’s going on there exactly.

Lee Schram

The reporting cost effect that Terry [inaudible], the way I would think about it is we ended up in the I think 16.3 or 16.4 range I think. And I think you need to be really careful here. We’re talking about, last year I think we did $19.3 in the quarter, $1.5 million of profit here, and there’s a lot of mixed things going on between product. And there’s a lot of – we also installed the new dash-boarding, and tools, and all that stuff, and had a big ramp in the quarter Jamie for that. So I think the thing that Terry and I were trying to leave you with is there’s a lot of noise and traffic within there, but we’re not trying to give you something that we’re alarmed that there’s a new trend, or a lower trend here.

Jamie Clement – Sidoti

That is exactly what I’m asking. Yes, so in other words, I mean the margins that we’ve seen in that segment over the last couple of years kind of high teens, and you did a 20% plus just in the first part of this year, which maybe isn’t sustainable or whatever, but there’s no fundamental change in your business as a result of losing the one customer or something like that.

Lee Schram

No, not at all.

Lee Schram

Not at all.

Jamie Clement – Sidoti

Okay, changing gears a little bit, Lee, can you talk – I think I asked the same question three months ago. The direction of your marketing spending on your new services, can you give us an update on kind of what you have learned through this process in terms of what you’re finding effective, what you are tinkering with, that sort of thing?

Lee Schram

I think the way that we’re approaching this is first and foremost is we are not stopping our print. We find there’s certain things that work exceptionally well through print. But we have automated print first with online, and so we have – if you look at a percentage increase, we have clearly increased our online spend and profiled AR.

And then what we’re doing Jamie is we’re testing into various different things, whether it’s working with customers, and various partnerships, or sponsorship relationships that we have for example with, to the direct response to TV testing that we did, to the mobile tour events that we did.

And what I would tell you is they’re all contributing to more customers and then adding the brand awareness initiatives that we’re doing. But there are certain things that we clearly see that are better, and the print online still is better than the other ones, but those are newer. And so we’re going to continue to keep tweaking, and testing, and getting more robust. Nothing is bad at this point and time. All are contributing. It’s just a matter of how do we keep getting better at tinkering with this thing to the point – how we’d like it to play out in the long runs. I think that’s the way to think about it.

Jamie Clement – Sidoti

Yeah, okay, that makes sense. Just one final question. Lee had mentioned that you all were cautious with respect to the holiday period. Are you, just to be specific, are you – I know one of the seasonally, the things that you have in the fourth quarter that you don’t have in other parts of the year in volume is the greeting card business. I’m assuming you’re not expecting much out of the greeting card business based on what you’re saying here.

Lee Schram

I think the way Terry and I sat down and looked at this is the way to think about when we put guidance out for Q3, we said we’re expecting a slight improvement over the balance of the year. Now we’re kind of saying, and we haven’t seen that. I don’t think anybody is seeing it at this point, so all we did is tighten it a little bit. The holiday, because of that, because holiday comes in the fourth quarter for us, and by the way, holiday for us is not just greeting cards. It’s our bags, and bows, retail packaging offers, ask form stuff kind of. We call it – I guess we should call it separate, but that stuff buckets that are more at that time of the year. We’re just – we’re not seeing anything yet because it’s too early for us. Our big card ramp actually Charley happens, or Jamie, happens in November. But we’re just because of the uncertainty, is we thought it was prudent to tighten back a little bit.

Jamie Clement – Sidoti

That’s very fair because they are other companies out there that are in the greeting card business that have given pretty cautious outlooks over the next couple of months. So I just wanted to make sure that you guys were on the same page there.

Lee Schram

Yeah, I think that’s all we’ve done is tighten this just given the uncertainty, but we’ll go at it with the same vigor that we always do. And we’re prepared, and obviously we’re starting to see some sales already. But the big ramp doesn’t occur for us until the mid-November timeframe.

Jamie Clement – Sidoti

Okay, thank you all very much for your time.

Lee Schram

You’re welcome Jamie.


(Operator Instructions) And your next question comes from the line of David Herbert with Wells Fargo Securities

David Herbert – Wells Fargo Securities

Good morning guys, how are you?

Lee Schram

Good morning.

David Herbert – Wells Fargo Securities

Just a quick question on the balance sheet, you guys have I guess a little shy of $300 million of the 5% senior notes due at the end of 2012, and you have a couple of other maturities in 2014, 2015. Just curious about your thoughts about how you might address that.

Lee Schram

Yeah, I mean the 2012’s that are the first maturities that come due for us, but actually the very end of 2012. So we’re still a little over a couple years away from having to repay those notes, but we’re pretty aware that right now the market right now for high yield issues is pretty strong. And we certainly always look at opportunities, and consider our capital strategy. But at this point and time, we’ve not announced that we’re planning to do anything differently with those bonds at this point and time. But we’ll certainly continue to look at our options, and evaluate alternatives for the company.

David Herbert – Wells Fargo Securities

Okay, thank you.

Lee Schram

You’re welcome.


This concludes the question and answer portion of today’s call. I would now like to turn the call back over to Mr. Lee Schram for closing remarks.

Lee Schram

I’d just like to thank you for participating and for your question …

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