Deluxe's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.26.12 | About: Deluxe Corporation (DLX)

Deluxe Corporation (NYSE:DLX)

Q4 2011 Earnings Call

January 26, 2011 11:00 am ET

Executives

Jeff Johnson – Treasurer and Vice President of Investor Relations

Lee J. Schram – Chief Executive Officer

Terry D. Peterson – Chief Financial Officer and Senior Vice President

Analysts

Charles Strauzer – CJS Securities

James Clement – Sidoti & Company, LLC

John Kraft – D. A. Davidson & Co.

David Leibowitz – Horizon Kinetics

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter Deluxe Corporation earnings conference call. My name is [Jenna], and I’ll be your operator 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 today’s 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 conference, Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations. Please go ahead.

Jeff Johnson

Thank you, [Jenna]. Welcome to Deluxe Corporation’s 2011 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 in 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, 2010.

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.

Lee J. Schram

Thank you, Jeff, and good morning, everyone. Deluxe delivered another very strong quarter. We reported revenue and adjusted earnings per share at the high end of our expected ranges. Revenue grew 4% over the prior year quarter driven by Small Business Services revenue growth of 12%, of which 4% came from the PsPrint acquisition. This quarterly growth rate is the strongest we have reported since we acquired NEBS in 2004.

Checks and forms, both performed well against our expectations, and marketing and other services revenues grew 25% over the prior year. Adjusted diluted earnings per share from continuing operations grew 6% over the prior year in spite of a higher than expected tax rate.

We continue to invest in brand awareness to help better position our marketing and other services offerings and drive future revenue growth. We also advanced process improvements and delivered on our $60 million cost reduction commitment while generating a better than expected $235 million in operating cash flow for the year.

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 D. Peterson

Thank you, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of $0.78, which included restructuring and impairment costs of $0.05 per share. Excluding these costs, adjusted EPS from continuing operations of $0.83 was at the upper end of our previous outlook and 6% higher than the $0.78 reported in the fourth quarter of 2010.

EPS was negatively impacted in the quarter by $0.04 per share due to a higher than expected effective tax rate, which was driven primarily by discrete tax adjustments for a valuation allowance and a state tax settlement, plus an unfavorable shift in income between tax jurisdictions. The restructuring charges are primarily for employee severance and infrastructure consolidations.

Revenue for the quarter came in at $366 million and grew 4% over last year and 3% sequentially from last quarter. All three of our business segments performed well. Small Business Services revenue of $229 million grew 12% versus last year on a reported basis, including PsPrint which added nearly $8 million of revenue in the quarter.

While we continue to operate in a weak economic environment, we delivered growth in marketing and other services, our safeguard distributor and dealer channels, and in checks and forms. SBS revenue also benefited from previous price increases.

Financial Services revenue of $83 million was down 6% versus the fourth quarter of last year. The impact of lower check orders was only partially offset by higher non-check services revenue. Direct checks revenue totaled $55 million, which was down 7% on a year-over-year basis.

Gross margin for the quarter was 64.5% of revenue, up 0.5 percentage points from 2010. Benefits from price increases, improvements in manufacturing productivity and delivery initiatives were partially offset by increased delivery and material rates in 2011.

SG&A expense increased $1.5 million in the quarter and was 43.5% of revenue compared to 44.9% of revenue in the same period last year. Increased SG&A associated with acquisitions, brand awareness campaigns and investments in revenue generating initiatives were partially offset by further cost reductions and lower performance based compensation.

Excluding restructuring and impairment cost, adjusted operating margin for the quarter was 21.4%, up from the 19.5% generated in 2010 and was above our expectations. Compared to last year, favorability came from an improved gross margin and lower SG&A expense. All three segments delivered strong operating margins compared to expectations.

Excluding restructuring and impairment costs, Small Business Services operating margin of 18.9% was up 1.1 percentage points over last year due to previous price increases and continued progress with cost reduction initiatives. Financial Services operating margin of 21.2% was up 2.8 points from 2010 due to better products and services mix and cost reductions. Direct Checks operating margin of 31.9% increased 4.6 points from 2010 as we continue to realize planned synergies from integrating Custom Direct and lower acquisition related amortization.

Turning to the balance sheet and cash flow statement, total debt at the end of the year was $742 million, down from $755 million at the end of 2010. We ended the year with nothing drawn on our credit facility, despite $86 million of cash acquisitions during the year. Cash provided by operating activities for the year was $235 million, a $23 million increase from 2010.

$25 million contract settlement collected in the third quarter of 2010 was more than offset by benefits from our costs savings initiatives and price increases, as well as lower contract acquisition, income tax and severance payments in 2011. Capital expenditures for the year were $36 million, and depreciation and amortization expense was $73 million.

Looking ahead to 2012, we expect consolidated revenue on a full-year basis to range from $1.42 billion to $1.46 billion. Diluted earnings per share are expected to range from $3.10 to $3.30.

There are several key factors that contribute to our full year outlook, including Small Business Services revenue is expected to increase in the mid-to-high single digit range as declines in core business products are expected to be offset by benefits from our e-commerce investments, price increases, our distributor and dealer channels, and double-digit growth in marketing and other services offerings.

We expect financial services revenue to decline in the low to mid single digits range driven by recurring check order declines of approximately 7% to 8%, which we expect will be partially offset by higher revenue per order, the Citizens Financial Group migration starting next week, and continued growth from non-check revenue streams.

Direct Checks revenue declined in the mid-to-high single digits driven by check volume reductions in the sluggish economy, additional cost and expense reductions, increases in material and delivery rates, continued investments in revenue growth opportunities including brand awareness, direct response campaigns, marketing and other services offers and enhanced internet capabilities, and an effective tax rate of approximately 33% for the year.

We expect to continue generating strong operating cash flows ranging from $225 million to $245 million in 2012, reflecting stronger earnings in the mid-to-upper end of our outlook offset by higher tax payments. We expect contract acquisition payments to be approximately $15 million.

2012 capital expenditures are expected to be approximately $35 million or roughly the same as 2010. We plan to continue to invest in key revenue growth initiatives and make other investments in order fulfillment and IT infrastructure. Depreciation and amortization expense is expected to be $62 million, including $15 million of acquisition-related amortization.

For the first quarter of 2012, we expect revenue to range from $358 million to $366 million. Diluted earnings per share are expected to range from $0.76 to $0.81. In comparison to 2011, the listed factors affecting our full-year outlook are similar to those affecting the first quarter, but as a reminder, historically Direct Checks has their strongest revenue quarter of the year in the first quarter and the first quarter benefit from one extra business day compared to last year and the second quarter this year.

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 and repurchase shares to offset dilution. 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 because we exited 2011 with nothing drawn on our credit facility. It is possible we may accumulate larger investments on our balance sheet in 2012 in anticipation of paying off the $85 million of notes maturing in December. 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 year and we delivered on our commitment to reduce our cost and expenses in 2011 by approximately $60 million bringing our total reduction since mid-2006 to $385 million. Strong performance in the fourth quarter help to offset the impact of restructuring charges.

Looking ahead to 2012, we will continue our focus on the revenue growth phase of our transformation but will not lessen our focus on cost reductions. We expect to drive an incremental $50 million of cost reductions net of investments in 2012. Our focus in sales and marketing for 2012 will continue to be on improving sales and marketing back-end operations through process centralization, simplification, platform and tool consolidation, and leveraging e-commerce capabilities. We will also continue to improve the mix of paper catalogue in online search engine marketing.

In fulfillment, we expect to continue our lean, product standardization, spoilage reduction, and direct and indirect spend reduction initiatives, plus further consolidate our manufacturing technology platforms, enhance our strategic supplier sourcing arrangements, and continue with other supply chain improvements and efficiencies.

Finally, for the shared services infrastructure, we expect to continue to reduce costs in IT and other areas as more opportunities exist to improve efficiencies.

Now, I'll turn the call back to Lee.

Lee J. Schram

Thank you, Terry. I'll continue my comments with an update on what we accomplished in 2011 overall and then where we are headed in 2012. I will then highlight progress at each of our three segments, including a perspective on what we plan to accomplish in 2012.

Deluxe grew revenue in 2011 for the second consecutive year for the first time since the NEBS acquisition. We stabilized our core check and product businesses and invested in future revenue growth areas as we continued our transformation. These investments included organic initiatives like e-commerce, Web services, web-to-print, customer acquisition, regulatory and fraud and security offerings.

We acquired Banker’s Dashboard and PsPrint to expand opportunities in higher growth marketing and other services. We also continue to reposition our brand through investments in advertising including radio, online, print, television, and our Project REV, small business marketing lab.

In addition to our strong print leadership, we invested in our employment brand and created stronger technology and digital expertise by adding sales, marketing and technology leaders in marketing and other services. Our efforts earned us a jobs to web Best Social Media Innovation Award, a Talent Board Candidate Experience Award and a LinkedIn Recruiting Innovation Award. We also moved to the number one ranking on the EPA list of the largest Green Power Purchasers in the printing industry.

In shared services infrastructure, we reduce cost and improve the effectiveness of information technology, finance, human resources, real estate and legal functions. Our intense focus on cost reductions has now delivered savings of $385 million since mid 2006. We excited the year with more robust products and services, solidified processes, a better infrastructure and improved financial results. Our operating cash flow grew for the third straight year allowing us to maintain our dividend and pay down debt, while making two cash acquisitions.

In addition, we strengthen our capital structure in March with the debt refinancing and an attractive rate. We recognized that there were still a tremendous amount of work to do, but we made great strides in 2011. As we enter 2012, our primary focus continues to be profitable revenue growth. We have created more differentiated technology led check offers through investments and automated flat packaging, digital printing and online portals and dashboards.

We also have significant new solutions growth opportunities and marketing and other services including for small businesses, logo design, Web services, social media, web-to-print, search engine marketing, payroll and fraud and security services. And for financial institutions, customer acquisition, regulatory compliance, and profitability offers.

We will continue to assess potential small to medium size acquisitions that complement our large customer basis with the focus on marketing and other services. We have strengthen our channels in small business to include online, retail, wholesale, distributors, dealers and major [accounts]. Deluxe is now more capable of helping small businesses get and keep customers and helping small to mid-sized financial institutions with customer acquisition, regulatory compliance, and profitability offers.

These new solutions and channels are driving new differentiated opportunities for us to execute on our strategy and will further enable us to deliver the best personalized customer experience while offering one of the broadest products and services portfolios in each market we serve.

On our third quarter call, we provided an initial perspective on 2012, including a very low single digit expected increase in revenue and an EPS range of low to mid single digit growth. Today, in spite of a strong finish to 2011, we released ranges in line with these initial perspectives with the revenue outlook range from just over flat to up 3% compared with 2011 and a diluted earnings per share range of flat to up 6%.

More specifically, the upper end of our outlook assumes the current economic trends remained sluggish to slightly improving in the second half of the year that we implement Citizens Financial Group starting next week and that we generate double digit revenue increases in marketing and other services to approximately $275 million, up from the $222 million in 2011, plus get some modest growth from our other key initiatives.

On the lower end, we have assumed that not all of our new revenue initiatives and marketing and other services increased as much as expected and the economy remains sluggish throughout the year. We believe this is a balance and therefore prudent way to plan. We also expect to prudently invest and increase spending from our 2011 levels in both brand awareness and direct response campaigns.

We expect marketing and other services revenues to approximately $265 million to $275 million in 2012, up from the $222 million in 2011 with organic growth in the mid-teens. If achieved, this performance would translate to a total revenue mix of around 19% of revenue towards our goal of achieving a 25% mix over the strategic period and up from 16% in 2011 and 12% to 13% the previous two years.

Now shifting to our segments. In Small Business Services in the quarter as expected, we did not see any notable improvements as the economic climate for small businesses remain sluggish. We had strong performance, however, as revenue grew 12%, 4% of which came from the PsPrint acquisition and represented the strongest rate we have reported since acquiring NABs in 2004.

Checks and forms performed well against our expectations, with seasonal holiday cards in line in all channels except our dealer channel where they were below expectations. Our results from targeted customer segmentation in the call center improved. We increased new customers from our financial institution, Deluxe Business Advantage referral program and through our direct response campaigns. Response rates increased from better balanced and enrich content in online and print-based spend. Average order value and conversion rates remain strong. Our Safeguard distributor and dealer channels and Canada grew revenue over the prior year. We also saw strong growth in Web, search engine marketing, and payroll services.

In the quarter, we won contracts with a very large US Telco, as well as a large Central America Telco, both of which we expect will migrate their small business customer Web services in the latter half of 2012. We ended the year with over 500,000 web-hosting customers. We continue to closely monitor the small business market. Optimism indices have improved the last four months, which is encouraging, but they still remain in recessionary territory.

Small business are starting – are slowly starting to higher and planning for capital investments over the next three to six months rose to the highest level in over three years. However, they continue to spend cautiously, scrutinize purchases and experience tight cash flow. Small businesses expectations for real sale gains turn positive and the outlook for business conditions became less negative.

In summary, current optimism indices have been trending upward, but improvements are still small and need to continue and be more pronounced. The good news is that increasing sales continues to be a small business owners number one pain point and our portfolio was significantly more robust now with many offers to help them here. As the economy recovers with the transformative changes we are making to deliver more services offerings that help small businesses get and keep customers, Deluxe is better positioned as that indispensable partner for growth.

Our focus for 2012 in core small business checks and forms is on acquiring new customers, increasing our share of wallet through our enhanced shop Deluxe e-commerce site, growing distributor and channel partners and improving segmentation. We will continue to improve the efficiency and effectiveness of our inbound, outbound and online customer touch points to maximize scale, revenue scale capability.

In marketing and other services, we expect to continue to gain new customers through our Telco focused wholesale Web services model, add customers and services in our retail model, add marketing services, payroll services, and logo customers, and continue to expand our search engine marketing customer base.

For web-to-print, we expect to create a single best-in-class integrated platform that combines organic investments we have already made in a front-end customer experience with PsPrint’s strong backend processes and scale web-to-print offers for our combined small business customers.

In Financial Services, we saw the rate of decline of checks perform closer to the lower end of our forecasted decline range of around 7% to 8%. We had strong overall new acquisition rates and our retention rates remained strong on deals pending in the current quarter of approximately 90%. We now expect a decision later this quarter to the very large national competitive RFP we initially responded to in the third quarter of 2011. There are two more RFPs we responded to. One, late in the fourth quarter of 2011 and the other early in the first quarter of 2012 that we expect decisions in 2012. None of these three RFPs is included in our outlook in 2012. We also simplified our processes and took complexity out of the business, while reducing our cost and expense structure.

Looking ahead to 2012, we expect check units to remain within a decline range of around 7% to 8%, retention rates in excess of 90% on deals pending this year or Citizens Financial Group production to began next week and we have approximately 20% fewer community bank contracts up for renewal in 2012 compared to 2011. We also implemented a price increase at the start of this year.

We made progress again in the quarter in advancing non-check marketing and other services revenue opportunities. Revenue grew over last year in these non-check services, which include customer acquisition, regulatory compliance, value-added services, rewards checking and other profitability offers.

In customer acquisition and specifically our Cornerstone direct marketing analytics offer, we saw a very strong ramp to close 2011, adding new financial institutions that will rollout in 2012. We also saw a continued ramp both in adding financial institutions and the number of switches completed for our new switch agent service. Again this proprietary new service allows consumers to easily in an automated way switch from one financial institution to another. We already have several commitments from large financial institutions to pilots SwitchAgent in 2012.

In regulatory compliance, we now have nine paying customers and also nine bank association endorsements for our offer. But we continue to see decisions take longer by financial institutions as they sort through Dodd-Frank and implications on their community bank compliance programs.

The Banker’s Dashboard acquisition continue to perform well in the fourth quarter and we expect strong revenue growth in 2012. As you can see, although not as fast as we had hoped in some areas, momentum continues to build and we expect strong double digit growth in these marketing and other services in 2012.

In Direct Checks, revenue was in line with our expectations driven by accelerated reorder rates and strong Custom Direct accessories revenue. We continue to look for opportunities to provide accessories and other Check related products and services to our consumers. Although we have made a lot of progress with the Custom Direct integration, we still are working on a number of initiatives to create an integrated 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 as well as synergistic cost and expense reductions. For 2012, we expect revenue to decline in the mid to high single digits driven by declines in consumer usage and a continued weak economy. We expect to reduce our manufacturing cost and SG&A in the segment, and drive our operating margins in the 30% range while generating strong operating cash flow.

As we exit 2011 on the heels of a very strong quarterly performance in a continued sluggish economy, we have made tremendous progress in transforming Deluxe. But we still have many opportunities ahead of us in 2012. We have built the foundation to be an indispensable partner in helping small businesses get and keep customers by offering everything from printed products to affordable logo design, web services, and search engine marketing. We help small business compete against big business and win.

In financial services, we are growing beyond checks into a broad set of solutions that help banks acquire customers, improve profitability and manage regulatory compliance. Our technologies in channels are stronger. Our e-commerce offers more mature. Our infrastructure better and our management talent is deeper and align to grow revenue. We have developed a strong platform for long-term growth with the objective of transforming Deluxe to more of a growth services provider from primarily Check printer. Thereby changing our product mix and resulting stock price multiple.

We believe we are well positioned entering 2012 for our third consecutive year of revenue growth. Despite the economic challenges and headwinds, our financial discipline as enable us to invest in people, technology, products, services and our brand in order to position ourselves for sustainable revenue growth, while continuing to improve profitability and operating cash flow, we know it is critical for us to be able to grow revenue again in 2012 and improve the mix of our marketing and other services revenue and we are well positioned to make this happen.

Before I open the call for questions, I would like to take this opportunity to thank all Deluxe employees for their hard work, dedication and solid performance in 2011. Thank you Deluxers. Let’s get off to a great start in 2012 and remember to put your part into it.

Now, [Jenna] will open the line up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Charlie Strauzer with CJS Securities. Please go ahead.

Charles Strauzer – CJS Securities

Hi, good morning.

Lee J. Schram

Hi, Charlie.

Charles Strauzer – CJS Securities

First of all, thank you for that extensive run through (inaudible) and I appreciate the added clarity there. Lee, if you can talk a little bit more and give a little bit more color into what would happen with the Small Business Services side, the marketing services side I should say, if the economy were to continue to uptick and kind of above what your expectations with that. With that fast track, do you think those growth expectations from the mid-teens to maybe it’s more like we saw this year?

Lee J. Schram

Yes. The way I would look at it is, if we get a more cooperative economy, I think we believe we can drive a larger growth rate, Charlie, in marketing and other services. But I think for now, we’ve done a good job at the way we thought about that where the economy is and where the range is? And again, I think we are very comfortable with our organic growth of being in the mid-teens.

Charles Strauzer – CJS Securities

Got it. And then talking a little bit more about your own contracts that are kind of potentially up for re-bid over the next call in 24 month or so, can you give us a little bit more insight there – you’ve done a good job in kind of walking up or extending contracts. Any big ones that our RFPs out there right now for you on the re-bid side?

Lee J. Schram

No. In fact there is just a handful that are [coming to] this year and they are very small in terms of the size of the annual revenues and they are, what you would consider to be large nationals. But they’re not and they’re not the biggest ones, Charlie. So we do not have a lot that are doing. As I said in my prepared comments, we also have 20% fewer community bank contracts that are up for renewal this year than 2011. So the way to think about it and the way Terry and I are thinking about it is, this gives us more stability and that checking being predictive around where a check declines are going to be and then how we level (inaudible) our factories and how we run our business. So we are very encouraged and honestly it’s all due to the Financial Services sales teams and really working the contracts hard and get out in front of these. And I just – I can’t say in a positive about the performance and what they are doing.

Charles Strauzer – CJS Securities

That’s encouraging. Thank you very much.

Lee J. Schram

Welcome.

Operator

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

James Clement – Sidoti & Company, LLC

Yeah, good morning gentlemen.

Terry D. Peterson

Hi, Jamie.

Lee J. Schram

Hi, Jamie.

James Clement – Sidoti & Company, LLC

Terry, if I could, I just was – wanted to just one housekeeping item. The charts towards the bottom of your press release, which shows the segment breakdown of our restructuring and impairment charges?

Terry D. Peterson

Yeah.

James Clement – Sidoti & Company, LLC

That that number and I apologize actually lost my – that number actually, excuse me, differs from the number, it’s in the text by a little bit. And so I think we see $4.3 million in the chart and then I think you highlight $3.1 million?

Terry D. Peterson

Yeah.

James Clement – Sidoti & Company, LLC

Or earlier so, I assume the difference is the $1.2 million impairment charge?

Terry D. Peterson

Yeah, that is the difference entirely.

James Clement – Sidoti & Company, LLC

And Terry where, what segment is that in?

Terry D. Peterson

The impairment charge actually will come through the Small Business Services segment.

James Clement – Sidoti & Company, LLC

Small Business Services. Okay, just wanted further up and Lee more sort of more important issues that I’ve asked that if this question or similar is being the question before. As you all have continued to build the marketing services business, the just the non-print businesses in general. Can you give us an update on what you learned about building the Deluxe brand among the Small Business customers, and particularly looking out to 2012, where your marketing dollars that are going to go in terms of advertising in brand building, what’s worth and maybe what hasn’t worth?

Lee J. Schram

Yeah, I think what we are finding is that, it starts with a general brand awareness that Deluxe can do more than just be a great check company and where we put what we call chart Jamie put general dollars into that and we believe its working. We’ve also put money into most of the money other than that into demand generation and direct marketing capability and the way to think about or again is where we believe that a combination of radio, which has been the primary way we’ve spent the money, but continued – will continue to look at the television market to see if that make sense, because we’ve gotten some benefit from that.

We will look at the partnerships that we have and the relationships we have. I’ll use the example in an entrepreneur.com has been a wonderful partner for us. And we’ll continue to do the print, things that we do and we think that we do well. So we are constantly looking at this Jamie and trying to figure out all the time how do we get better and how do we make sure we understand the return we get on the investments that we’re making there. And we’ll continue to do that in 2012 and we – as I said in the prepared comments, we’re going to put more money into that in 2012 than we did in ’11, but we’re also keep looking for what we believe is the right returns on investment and that’s how we are approaching it.

James Clement – Sidoti & Company, LLC

Okay, and just if I could ask one follow-up Lee. As if you talk about returns on investment, it’s you not getting the point where the next maturity likely to be taking care of in cash. If you think about the balance sheet and you think about acquisition opportunities and what you want your balance sheet to look like, have you – do you think there is any benefit to delevering the balance sheet in a more meaningful way over the next couple of years to really have a balance sheet that looks more like a services company than print manufacture. I mean [does] that answer it all into the thinking?

Lee J. Schram

I think, our capital structure really, today really isn’t driving what we are trying to do with transformation and what we are trying to do with strategy. But we also recognize to that, from many parts of our business, we’re still generating a lot of cash flow.

James Clement – Sidoti & Company, LLC

Absolutely.

Lee J. Schram

Cash flow to the levels that are probably in excess of our needs.

James Clement – Sidoti & Company, LLC

Exactly.

Lee J. Schram

And with the way we are looking out, we do anticipate that we will continue overtime to reduce that debt level some just like we have been over the past four or five years as well. So I would expect that pattern and that trend to continue. But again, I just want to make sure that people understand that our capital structure is in no way limiting or driving to direction we go with the transformation.

James Clement – Sidoti & Company, LLC

And Terry, just to sort of clarify my question, I was really asking that question more from the fact that you are on a position of strength now.

Terry D. Peterson

Yeah.

James Clement – Sidoti & Company, LLC

With respect to where you are and you actually have probably more flexibility than you certainly had three years ago.

Terry D. Peterson

Yeah we do. Now going forward is when we say we want to pay down debt, it’s not quite as easy as it was.

James Clement – Sidoti & Company, LLC

Yeah, absolutely.

Terry D. Peterson

…perhaps with the credit facility because our public know us we don’t trade quite as heavily as we might like…

James Clement – Sidoti & Company, LLC

Right.

Terry D. Peterson

…in order to be able to pay down the days we want to pay down.

James Clement – Sidoti & Company, LLC

Understood. Thanks as always for your time.

Terry D. Peterson

All right. Thank you, Jamie.

Operator

Your next question comes from the line of John Kraft, D. A. Davidson. Please go ahead.

John Kraft – D. A. Davidson & Co.

Hey guys hope I can – hope you can hear me well I’m on a cell phone here. I just had a couple of follow-ups. The first regarding something I think Lee you just said and I just want to make sure I heard it (inaudible) obviously you’ve ramped up your marketing spending. Did you say you were going to ramp it further?

Lee J. Schram

Yes, we plan to spend more and what I would call on brand and demand creation and the direct marketing campaign initiatives in 2012 than we did in 2011.

John Kraft – D. A. Davidson & Co.

Great. Certainly it seems like it’s working for you.

Lee J. Schram

Yeah.

John Kraft – D. A. Davidson & Co.

And then on the large Telco wins. Can you talk a little bit more about what the Telcos are doing and what they had been doing before kind of their motivations for switching over to you?

Lee J. Schram

Yes. We are really excited about these and at some point, we hope to be able to release the specific names, but think of it as they’ve used others to start their Small Business, web hosting and Web services and they’ve decided to come to Deluxe both what we’re excited about, both from a migration of the base, as well as what really got them excited is, we’re good at doing this and also the opportunity to bring more of the services that we have in our portfolio than other providers that they’ve used in the past. So I think of it as the strength, John, of the migration capability of the great development and engineering team that we’ve got, as well as the products and services that we can wrap around that and are richer in our portfolio and that’s really the reasons why they made the move. So we expect that these migrations as you know, we’ve done some on the past they take time, but we expect these to come on board in the latter half of the year.

John Kraft – D. A. Davidson & Co.

So they were competitive takeaways.

Lee J. Schram

Yes.

John Kraft – D. A. Davidson & Co.

Nice. That’s all I’ve got. Thanks, Lee.

Lee J. Schram

You’re welcome, John.

Operator

Your next question comes from the line of David Leibowitz with Horizon Kinetics. Please go ahead.

David Leibowitz – Horizon Kinetics

Good noon. A few quick questions. One, what is the status of your underfunded pension plan at the end of the year versus a year-ago?

Terry D. Peterson

We are fully funded on the – it’s actually a post employment benefits plan. We are fully funded for the portion that those assets can be used for. There is a small pool of benefits out there that the asset pool did not relate to, but we are – even as you look at it overall, we’re nearly fully funded.

David Leibowitz – Horizon Kinetics

And what is the size of the stock repurchase program still left to be utilized?

Lee J. Schram

I believe we have roughly about half a million or 5 million shares I think still outstanding.

David Leibowitz – Horizon Kinetics

And do you have any intention this year of making significant purchases or is this more stock price related or acquisition related?

Lee J. Schram

No, the share repurchases that we have been doing for the past couple of years have really been focused on offsetting dilution from the employee plan activity. We actually have limitations in a couple of our note agreements that limit some of the share repurchase capabilities for the company. So I would not that we would be looking to step that up beyond just the need to offset that dilution.

David Leibowitz – Horizon Kinetics

And lastly, do you have a target for free cash flow this year versus 2011?

Lee J. Schram

We do – I mean we actually don’t issue specific guidance on free cash flow, but we do give you the components. We have indicted operating cash flow of 225 to 245 and then CapEx of about $35 million. So –

David Leibowitz – Horizon Kinetics

Now you seem to leave a lot of room to possibly increase the dividend rather than just [an answer] will be maintained, is there any reason why the board has chosen not to increase the dividend?

Lee J. Schram

Our top priority right now from a free cash flow usage today is really to make sure that we have made the right organic investments and the right small to medium size tuck-in acquisitions to really keep this transformation moving forward and to make sure that we get it to a level where it’s really sustaining – a changed revenue profile for this company. So that really continues to be our top priority and I believe I can speak to the Board in saying that until we have advanced that transformation further along, we don’t anticipate that redeploying more capital towards dividends. And this time is the right move for us.

Terry D. Peterson

And first, David, the think about the dividend yield that we are giving today, we think is a very competitive market rate as well. So that’s how we look at where we are with the dividend.

David Leibowitz – Horizon Kinetics

Just one observation on your last comment, the fact that your dividend yield is a function of stock price as much as what you were paying on dividend, so it could be argued that perhaps being a little more liberal with the shareholders would give you a higher stock price which would then reduce the yield on the stock. But again that’s just an observation based on what you said and let me thank you for the time.

Lee J. Schram

Welcome, David.

Operator

Your next question comes from the line of [John Robert with Provident]. Please go ahead.

Unidentified Analyst

Hi guys. Congrats on a good quarter. Thank you, Joe.

Lee J. Schram

Thanks, Joe.

Unidentified Analyst

Just a clarification on 2012, it looks like implied adjusted EBITDA will be about flat year-over-year. I’m just wondering why that is given the revenue growth and given the $50 million of net cost savings.

Lee J. Schram

As we have done in the past, I mean our cost savings on a net basis, we don’t just let those drop down to the bottom line, dollar for dollar. We do use some of that to provide investments back into the business to help the transformation. We will also – we also have little bit less D&A coming in next year as part of that as well and I think those are kind of the top things that come to mind quickly.

Unidentified Analyst

And could you share with us the revenue contribution from the acquisitions in Q4 and 2012 guidance?

Lee J. Schram

Yeah, we did indicate that the largest of the acquisitions that are coming through this quarter that weren’t there a year ago was the PsPrint acquisition and that was just about $8 million for the quarter.

Unidentified Analyst

And for 2012?

Lee J. Schram

For 2012, we don’t have any guidance built in for future possible acquisitions.

Unidentified Analyst

Okay. Thank you.

Terry D. Peterson

You’re welcome.

Operator

You have a follow-up question, it’s from the line of John Kraft, D. A. Davidson. Please go ahead.

John Kraft – D.A. Davidson & Co.

Hey just one additional question that was on the price increase in Small Business Services. Can you give us some details I guess specifically how much that contributed to the growth and, as well as specifically where those price increases were the most prominent?

Terry D. Peterson

John, we won’t give you the real specifics competitively. But to think about what we continue to do is we look at where our products and services are priced and versus what’s going on in the marketplace and we take advantage where we can to make sure that we continue to be what we would call market competitive. So that’s the way to think about it and by the way it works no different in Financial Services as well.

John Kraft – D. A. Davidson & Co.

And as well as I guess then maybe a follow-up on that. Would you anticipate this is kind of a one-time reset of your pricing or would you potentially have kind of something planned going forward with that as well?

Lee J. Schram

No, we’re always looking at this John. We’ve continuously done this for the last several years. We’ve gotten better and better understanding where the competitors are, where we can raise price, what we can raise price for. How we do it and its not a one-size fits all formula, where we just slap something out there. It’s very scientific with the process we have to go through and that’s probably the best I can do in giving you a framework for it.

John Kraft – D. A. Davidson & Co.

Okay. That’s helpful. Thanks guys.

Lee J. Schram

You’re welcome, John.

Operator

That concludes the Q&A session. I’d like to turn the call back over to Mr. Lee Scharm for closing.

Lee J. Schram

Again, I just like to thank everybody for your participation and questions. We actually got more questions today, which was terrific. And we’re going to go back to work and we’ll get back to you and hopefully be able to provide a positive progress reports on our next earnings call. I’m going to turn it back for Jeff for some housekeeping close.

Jeff Johnson

Thank you, Lee. This is a reminder that a replay of this call will be available until February 9 by dialing 888-286-8010. When instructed, provide the access code 98465171. 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 afternoon.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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