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Deluxe Corporation (NYSE:DLX)

Q1 2012 Earnings Call

April 26, 2012, 11:00 a.m. ET

Executives

Jeff Johnson – Treasurer and P of IR

Lee J. Schram – CEO

Terry D. Peterson – CFO

Analysts

Charles Strauzer – CJS Securities

John Kraft – D. A. Davidson & Co.

James Clement – Sidoti & Company, LLC

Ben Glaze – Apollo

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2012 Deluxe Corporation earnings conference call. My name is Stacey and I’ll be your conference moderator for today. (Operator Instructions).

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

Jeff Johnson

Thank you, Stacey. Welcome to Deluxe Corporation’s 2012 first quarter earnings call. I am 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 by a 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 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 form10-K for the year ended December 31st, 2011. 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 at www.deluxe.com, and was furnished to the FCC 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. To use a baseball analogy, which is timely as the season is just underway, we hit a home run in the quarter and are off to a fantastic start to the year despite a continued sluggish economic environment. We reported revenue and adjusted earnings per share well above our expected ranges. Revenue grew 8% over the prior year, driven by small business services revenue growth of 15%, of which 4% came from the PsPrint acquisition. This quarterly growth rate was the strongest we have reported since we acquired NEBS in 2004. Financial services revenue grew 3% over the prior year. Checks and forms both performed well against our expectations, and marketing solutions and other revenues grew 35% over the prior year and solidly in the mid-teens on an organic basis. Adjusted diluted EPS grew 17% over a strong prior year. We generated solid operating cash flow and we were not drawn on our credit facility during the quarter, actually improving our balance sheet cash position $30 million from last December. We continued to invest in brand awareness, to help better position our marketing solutions and other services offerings, and drive future revenue growth. We also extended our process improvement and cost reduction initiatives (inaudible) operating cash flow, as we continued to transform Deluxe.

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 $.86, which included restructuring costs of $.02 per share. Excluding these costs, adjusted EPS from continuing operations of $.88 was well above the upper end of our previous outlook, and 17% higher than the $.55 reported in the first quarter of 2011. Strong revenues and favorable product mix drove better (inaudible). The restructuring charges are primarily for employee severance and infrastructure consolidations. Revenue for the quarter came in at $378 million, which is well above the range of our previous outlook. Revenue was up 8% from 2011, and up 3% on a sequential quarterly basis. All three of our business segments performed well and benefited from one extra business day in the quarter. (inaudible) revenue of $230 million grew at 15% versus last year on a reported basis, of which 4% came from the PsPrint acquisition.

While we continue to operate in a weak operating environment, we delivered growth in marketing solutions and other services, our safeguard distributor and dealer channels, and in checks and forms. Our core business also benefited from a routine price increase. Financial services revenue of $91 million grew 3% versus the first quarter of last year, and reflected a lower than expected secular check decline rate of just over 5%. The impact of lower check orders was more than offset by (inaudible) order, higher non-check services revenue and the migration of Citizens Financial Group. Direct checks revenue of $58 was down 6.5% on a year-over-year basis. Gross margin for the quarter was 66.3% of revenue, up 0.7 percentage points from 2011. (inaudible) benefit from price increases, improvements in manufacturing productivity, delivery initiatives and product mix were partly offset by increased delivery and material costs. SG&A expense increased $11.2 million in the quarter, and was 45.5% of revenue, compared to 45.9% of revenue in the same period last year. Increased SG&A associated with commissions on increased revenue, 2011 acquisitions, investments in revenue-generating initiatives and higher performance-based compensation expense was partially offset by benefits from continuing to execute against our cost-reduction initiatives and lower amortization related to previous acquisitions.

Excluding restructuring-related costs, operating margins for the quarter were up 21%, was up from the 19.7% generated in 2011. It was above our expectations, with favorability coming from strong revenue performance, including a favorable product mix. All three segments delivered strong operating margins compared to expectations. Excluding restructuring costs, small business services’ operating margin of 17.4% was down 0.9 percentage points over last year due to the higher expenses associated with the PsPrint acquisition, increased commissions and investments in revenue-generating initiatives, which was only partially offset by continued progress with cost reduction initiatives. Financial services’ operating margin of 24.2% was up 5.8 points from 2011 due to higher revenue from price increases as well as continued progress with cost reductions. Direct checks’ operating margin of 21.3% increased 4.9 points from 2011, as we continue to realize planned synergies from integrating custom direct and lower acquisition-related amortization.

Turning to the balance sheet and cash flow statements, during the quarter we increased our cash and cash equivalents balance by $30 million. As previously described in our 10-K, we leveraged a favorable credit market in the first quarter and opportunistically strengthened our capital structure by amending and expanding our $200 million credit facility from a maturity date in 2013 to 2017. Cash provided by operating activities was in line with our expectations, at $52 million. Stronger operating performance and the discontinuation of our defined contribution pension plans were more than offset by planned contributions to or VEBA trust for future medical costs and higher contract acquisition and interest payments.

Capital expenditures for the quarter were $9 million, and depreciation and amortization expense was $17.1 million. Given our strong performance in the first quarter, we adjusted our consolidated revenue outlook for the year to a range of 1.445 to $1.475 billion. We are not expecting much improvement in economic conditions in the balance of the year. Adjusted diluted earnings per share are also expected to increase to a range of $3.20 to $3.40, excluding $.08 related to restructuring-related costs.

There are several key factors that contribute to our full-year outlook versus 2011, including small business services revenue is expected to increase in the high single digits, and benefits from our e-commerce investments, price increases, our distributor and dealer channels, and double-digit growth in marketing solutions and other services offerings are expected to offset declines in core business products. We expect financial services revenue to decline in the low to mid-single digits range, driven by secular check order declines, which we expect will return to approximately seven to 8% during the remainder of the year, partially offset by higher revenue per order, the Citizens Financial Group migration and continued growth from non-check revenue streams. We expect direct checks’ revenue declines in the mid- to high single digits, driven by check order volume reductions in a 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 solutions and other services offers and enhanced internet capabilities. (inaudible) and an effective tax rate of approximately 33%.

We expect to continue generating strong operating cash flows, ranging between 225 and $245 million in 2012, reflecting stronger earnings, offset by higher income tax payments and contributions to our VEBA trust. We expect contract acquisition payments to be approximately $15 million for the year. 2012 capital expenditures are expected to be $35 million, roughly the same as 2011. We plan to continue to invest in key revenue growth initiatives and make other investments in order fulfillments and IT infrastructure. Depreciation and amortization expense is expected to be $64 million, including $15 million of acquisition-related amortization.

For the second quarter of 2012, we expect revenue to range from 353 to $362 million. Adjusted diluted earnings per share are expected to range from $.76 to $.81. In comparison to the first quarter, adjusted revenue and EPS is expected to be lower in the second quarter, primarily due to three factors: first there was one more (inaudible) in the first quarter, which represents approximately $6 million in revenue; second, historically direct check revenues are strongest in the first quarter, thus we expect a sequential revenue decline in this segment; third, we are prudently planning FS secular check rate declines in the seven to 8% range, which is above the first quarter decline rate, but in line with our previous projections and historical trends over the last two years.

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. As you saw in the first quarter, 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 a solid start to 2012 in the first quarter. As we delivered on our expected cost and expense reductions toward our $50 million commitment, net of investments, in 2012. Our focus in sales and marketing in 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 catalog and online search engine marketing. In fulfillment, we expect to continue our lean product standardization, spoilage reduction and direct and indirect spend 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 Schram

Thank you Terry. I will continue my comments with an update of what we are focused on overall, and then highlight progress in each of our three segments. I will also include throughout a perspective of what we hope to accomplish during the balance of 2012. Our primary focus in 2012 continues to be on profitable revenue growth. We have created more differentiated, technology-led check offers through investments in automated flat packaging, digital printing and online portals and dashboards. We also have significant growth opportunities in marketing solutions and other services, including for small businesses, logo design, web services, social media, web-to-print, search engine marketing, search engine optimization, payroll and fraud and security services, and for financial institutions, customer acquisition, risk management and profitability offers. We will continue to assess potential small to medium-sized acquisitions that complement our large customer bases, with a focus on marketing solutions and other services. We have strengthened 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, risk management and profitability offers.

Today we are introducing a framework that includes four subcategories that we expect to continue to use going forward in 2012, to help provide more insight and clarity for marketing solutions and other services revenue. First, small business marketing is expected to represent approximately 43% of total marketing solution and other services revenue, with expected organic growth rates this year in the mid-teens, although expected actual growth rates will be higher this year, closer to the mid-30s, given the PsPrint acquisition in July of 2011. Key growth initiatives include scaling web-to-print by cross-selling to our customer base and adding new customers through major accounts and partners. Second, web services, which includes logo and web design, web hosting, SEM, SEO, email marketing, social and payroll services, and are expected to represent approximately 27% of total marketing solutions and other services revenue, with expected growth rates this year in the high teens. Key growth initiatives include adding wholesale telco and major accounts, cross-selling to our retail base through bundled presence packages and adding new customers. This category also is our focus area for tuck-in acquisitions. Third, fraud, security and risk management services are expected to represent approximately 25% of total marketing solutions and other services revenue in 2012, with expected growth rates this year in the low double digits. Key growth initiatives include scaling our program services for both national and community banks, and fraud and security offers for small businesses and direct to our consumers, adding bankers dashboard customers, as well as adding features for our installed bankers dashboard base. Finally, other financial institution services are expected to represent approximately 5% of total marketing solutions and other services revenue, with expected growth rates this year in the low 30s, a very high percentage driven by a small starting revenue base. Key growth initiatives here include adding new cornerstone, switch agent and gift and reward card financial institutions. We expect marketing solutions and other services revenues to be approximately 265 to $275 million in 2012, up from $223 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% in the previous two years.

In addition to the items just mentioned, in order to accelerate revenue growth, we are continuing to invest more in brand awareness and positioning. We are continuing to refine our branding strategy and expect to ramp spending more from the first quarter to the second quarter and even more in the third quarter.

Now, shifting to our segments. In small business services, we had a strong performance despite a continued sluggish economic climate. Revenue grew 15%, 4% of which came from the PsPrint acquisition and represented the strongest rate we have reported since acquiring NEBS in 2004. Checks and forms performed well against our expectations, as did seasonal tax forms. Our results from targeted customer segmentation in the call center improved. We increased new customers from our Financial Institutional Deluxe Business Advantage Referral Program, and through our direct response campaigns. Response rates increased from better-balanced and enriched content in online and print-based spend. Average order value and conversion rates remain strong. Our safeguard distributor and dealer channels grew revenue over the prior year. We announced a partnership with Lowe’s to reach our collective small business contractors. We also saw growth in web, SEM and payroll services. In the quarter, we won a contract with a large South American telco. We expect to migrate their small business customer web services to our platform in the latter half of 2012. We ended the quarter with over 500,000 web hosting customers.

We continue to closely monitor the small business market. Optimism indices have improved six of the last seven months, but moved down in March, keeping the indices at historically low levels. Small businesses are slowly starting to hire, and planning for capital investments over the next three to six months has stabilized. They continue to spend cautiously, scrutinize purchases and experience tight cash flow. Small businesses’ expectations for real sales gains continue to be more positive, but the outlook for business conditions has become slightly more pessimistic. 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 owner’s number one pain point, and our portfolio is 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 an 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 revenue scale capability.

In marketing solutions 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 by selling web bundle packages, add other marketing services, payroll services and logo customers and continue to expand our search engine marketing customer base. For web-to-print, we are creating a single best-in-class integrated platform that combines organic investments we have already made in the front-end customer experience with PsPrint’s strong back-end processes and scale web-to-print offers for our small business customers.

In financial services, we saw a secular check decline rate of approximately 5%, which was better than our forecasted decline range of seven to 8%, driven by strength in both the national and community segments, although strength in the community segment was more pronounced. In addition, we began processing checks for Citizens Financial Group as planned in late January.

We had strong overall new acquisition rates, and our retention rates remain strong on deals pending in the current quarter well in excess of 90%. We were informed in the quarter that we did not win the very large national competitive RFP we discussed in the previous two calls. Positively, there are still opportunities we are pursuing with this financial institution in other areas. While commending us on our value proposition and differentiated offer, the financial institution said they could not afford the disruption of a migration given other competing internal priorities. We continue to work a number of other RFPs, none of which are included in our outlook in 2012. We also simplified our processes and took complexity out of the business, while reducing cost and expense structure. Even though the first quarter secular decline rate was approximately 5%, we are prudently planning for check units to remain within a decline range of around seven to 8% in 2012 for the balance of the year. We also expect retention rates in excess of 90% on deals pending this year, and with over half of our 2012 community bank contract renewals already completed by the end of the first quarter, we are well ahead of last year’s pace. As a reminder, we also implemented a price increase at the start of this year.

We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Revenue grew over last year in these non-check services, which include customer acquisition, risk management and other profitability offers. In customer acquisition and specifically our cornerstone direct marketing analytics offer, we saw continued solid growth in new financial institutions that will roll out in 2012. We also saw a continued ramp, both in adding financial institutions and in the number of switches completed for our new switch agent service. Bankers dashboard also continued to perform well in the first quarter, where we added many new financial institutions. 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 solutions and other services in financial institutions 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 significant progress with the custom direct integration, we are still working on a number of initiatives to create an integrated, best-in-class direct consumer check experience. We continued to see a ramp in revenue enhancement synergies through our call center scripting and upsell capabilities, as well as synergistic cost and expense reductions. For 2012, we expect direct checks revenue to decline in the mid- to high single digits, driven by continued declines in consumer usage and a sluggish economy. We expect to reduce our manufacturing cost and SG&A in this segment and drive our operating margins in the 30% range, while generating strong operating cash flow.

As we exit the first quarter on the heels of an exceptionally strong quarterly performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us in 2012. Our outstanding first quarter performance positions us well to grow revenue in 2012 for our third consecutive year. We are conservatively not expecting the economic climate to improve much throughout the year, until we get better clarity as the year unfolds more. If the economy improves, we should have revenue upsides. At the same time, we will not take our eyes off of cost reductions and (inaudible), and we expect to continue to generate strong cash flows and an attractive dividend. 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 risk. Our technologies and channels are stronger, our e-commerce offers more robust, our infrastructure better and our management talent is deeper and aligned 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 a check printer, thereby changing our product mix and resulting stock price multiple.

Now Stacey will open the call up for questions for Terry, Jeff and I.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Charley Stauzer with CJS Securities.

Charles Strauzer – CJS Securities

Hi. Good morning.

Lee Schram

Hi, Charley.

Charles Strauzer – CJS Securities

Hey, a couple quick questions. Terry, for you, what was adjusted net income, not EPS, but adjusted net income if you have that number?

Terry Peterson

Adjusted net income? We don’t report adjusted net income externally. So you can back into it with the, you know, with the EPS pieces that we gave you.

Charles Strauzer – CJS Securities

And what was the – do you know the tax rate associated with the adjusted EPS was?

Terry Peterson

I think about the same as what it is under consolidated.

Charles Strauzer – CJS Securities

All right.

Terry Peterson

They’re almost identical.

Charles Strauzer – CJS Securities

No problem. And my phone was cutting out a little bit earlier, but did you give out segment guidance on operating profits? I know you did the sales growth ranges, did you give any guidance on operating profit?

Terry Peterson

No, we didn’t give any new perspective there. You know, our position on margins within the operating segment is that, you know, we are [inaudible] to deliver growth and operating income at the segment level and our focus is really to try to hold the margins kind of where they’ve been at. So the growth focus is on the dollars, not necessarily the margin growth rate. But you know, as we get into the segments, you know, small changes in levels of investments drive a little bit of a rate change. You know, usually within a point or two at the segment level. That’s kind of where we’ve been. It’s a spot where we expect to stay.

Charles Strauzer – CJS Securities

Got it. And also, did you get an update on [inaudible] in terms of the number of members on that site so far?

Lee Schram

We did not, Charley. It’s not a number that we gave out today.

Charles Strauzer – CJS Securities

Got you. Okay. Thank you. And then lastly on the RFP side, I know you didn’t win the larger one, but are there any of your larger contracts coming up for rebid in the next 12 months or so?

Lee Schram

We have, as we said, consistently in the last several calls, just a handful of what we would consider the larger ones, but they’re very small amounts, Charley, relative to the big large national, and those will be coming due towards the end of the year. And we expect to, obviously, we expect to be able to maintain those.

Charles Strauzer – CJS Securities

Great. Thank you very much.

Lee Schram

You’re welcome, Charley.

Operator

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

John Kraft – D. A. Davidson & Co.

Congratulations, Lee, to you and your team.

Lee Schram

Thank you, John. I appreciate it.

John Kraft – D. A. Davidson & Co.

Sure. The first question, I guess just to clarify, Lee, and maybe dig into it a little bit more, the distribution subsets, you know, obviously you’ve got the newer retail and the telcom and the legacy financial services, and I talked a bunch with Jeff about how these, I think some of these are sort of underappreciated. Is there a way you can give us a feel for the new customer and the contribution from each of these segments? Is there a breakdown there that you could provide us?

Lee Schram

John, if I follow where you’re heading, you’re talking about in small business services, the mix of the 500,000 web services customers, is that what you’re…

John Kraft – D. A. Davidson & Co.

Well, yeah, and the new wins, the new customers that you’re gaining, are they predominately still coming from the business advantage platform, the financial services or is it a pretty good mix between those?

Lee Schram

No, let me give you a framework on where we’re seeing new customers, and let me start. We are still obviously, as I mentioned in the prepared comments, gaining customers through our Deluxe business advantage program. But at the same time, we are also gaining customers outside of that program.

What I would tell you is that the growth rate over last year was about the same, I think very strong double digit growth rate in both the DDA and the non-DDA. Okay? Then what I would tell you is the mix between – we are also getting new wholesale customers as well as through our telco arrangements that we have. And we are also seeing strong growth in the retail side. So we’re actually getting strength, John, in DDA, non-DDA and then also in the wholesale and the retail mix of the services space.

John Kraft – D. A. Davidson & Co.

Okay, well, that’s helpful. It sounds like it’s across the board there. And then if we could also just dig into a little bit, the decline in the industry, or the decline in the decline on the check side, of 5% in the quarter, now you did exclude Citizens from that, right?

Lee Schram

Now, this is the – the way to think about this is, we continue to look at this thing, obviously we know it’s a hot spot for ourselves let alone externally, and so we do what we call a pure same-store sales or apples-to-apples compare. So think of Citizens, since it wasn’t in a year ago, it’s not in those – we take them out of the compares of that approximate 5%.

John Kraft – D. A. Davidson & Co.

Sure. And then, but you did say that there was some strength in the community bank side of things and I guess my question was, if you just could guess whether maybe there’s a migration of customers from the larger banks to the community banks, maybe due to that bank switch day or is it coming fairly evenly across the larger and the small banks?

Lee Schram

I said in my comments, John, that we saw the rate of decline, you know that 7 to 8 we’ve been seeing, it was better for both the national and the community segments. But it was stronger in the community segment. What I will add as some additional color is that we saw the community segments in the Southeast, the Northeast and the West as far as regions in the United States, perform better than the remaining regions. What I will also add is, we also saw the same strength in those same Southeast, Northeast and West in our direct-to-consumer part of the business or the segment.

So you know, we start, obviously, thinking about those we knew were regions more impacted economically, you know, in terms of the downturn. Lots of thoughts go through our head, John, nothing that I can tell you in a quarter that’s extremely more conclusive at this point, but obviously you can tell we’re on this, we’re watching it and you know, we’re going to continue to assess this as we head into the second quarter.

John Kraft – D. A. Davidson & Co.

Okay, that’s interesting. Thank you. And then just one last follow up if I could. Really, in response to Charley’s question and Terry’s answer, you know, as I look at the trends in the [inaudible] segment margins, there’s certainly some trends, but what stands out for me, at least, is the financial services jump this quarter, really, to the highest I think I’ve ever seen. Is that something that we can expect, at 24-ish percent we can expect going forward?

Terry Peterson

John, I’d tell you, but that rate is probably on the high end [inaudible] we’d be kind of in our normal range. You remember too, we [inaudible] reminded us that we did put a price increase at the beginning of this first quarter, so that’s definitely helped. The other thing too, is that when we had a lower decline rate in the check volumes than what we had expected, we really saw some nice leverage on our fixed cost structure there. So think about the manufacturer work that we’ve done to right-size that capacity, we really saw some great leverage coming in that segment in particular with a lesser decline rate. So it’s really those factors. But I tell you, you know, again, we haven’t assumed that same decline rate going forward so some of that leverage would go away as we move into second quarter with a higher decline rate.

John Kraft – D. A. Davidson & Co.

Got you, thanks Terry, and congrats again, guys.

Terry Peterson

Thank you, John.

Operator

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

James Clement – Sidoti & Co.

Hey, good morning, gentlemen.

Lee Schram

Hi, Jamie.

James Clement – Sidoti & Co.

All right, Lee, I know you all don’t talk in specific terms about margins by product line, but you know, given the growth, you know, in the marketing and other services that you all seen recently as well as the last couple of years, can you talk about just directionally the margin trends there because obviously you’re balancing it with investment spending on your own brand.

Lee Schram

I think what you should expect as we go forward is we are clearly trying to be smart and prudent on what we invest in the brand and demand gen, as we’re trying to drive more customers and more volume in all of the services area. But at the same time, we’re clearly getting some of the larger acquisition amortization that’s weaning itself out. And so we’re trying to – and so the general trend right now is we’re improving the margins in the – and collectively in there. We really don’t, you know, break that out internally, you know, the way we run it right now. But you know, if the trend is an improvement right now because the amount we’re putting in on brand and demand gen is not as much as we’re putting in on the – or getting out on the efficiencies as we’re, you know, getting better at this across all the cost reductions and in the efficiencies that are the gains that we picked up from the amortization [inaudible]. So that’s the way I would think about it right now.

James Clement – Sidoti & Co.

How’s – the channels that you all are using to promote the brand, has that mix changed much over the last four quarters or do you have a pretty good sense now a couple years into the transformation where your money should go.

Lee Schram

Well, we – what we’re trying to do, and I'm challenging Malcolm, my small business head is, I want to win in every channel. So you know, we want to win in retial, we want to win in wholesale, we want to win with the distributors, with our partners and with major accounts. What I would tell you is, we are – and we are growing and you know, as we hear in the prepared comments, all those channels are continuing to gain momentum. The one area that we’ve been targeting a little bit more is the major accounts. We are big believers that if we can gain more access to small businesses through major accounts, in fact, many of those are actually franchises and actually are small business owners themselves, or can gain us access to small businesses. Those are areas that we think are going to help us even more. And you can see that in the table I talked about that we added this time around, the, you know, major accounts and partners.

So I would say they’re a little bit more, but we’re trying to get strength, Jamie, across all channels.

James Clement – Sidoti & Co.

Okay. That is very helpful. Thank you, Lee, as always, for your time.

Lee Schram

You’re welcome.

Operator

(Operator Instructions). Your next question comes from the line of Ben Glaze with Apollo. Please proceed.

Ben Glaze – Apollo

Hi. How are you guys doing?

Lee Schram

Hi, Ben.

Ben Glaze – Apollo

Just a quick question on – maybe a high-level question how we should think about the driver of check volume between I guess new account openings and reorders. Is there a way to help us there or – if that makes sense.

Lee Schram

In which segment, or overall?

Ben Glaze – Apollo

Yeah, just I guess, if you could break it down between small business and consumer, that would be great. I’m just curious is there’s like a mix we can think about as being the driver of the check volumes for you guys.

Terry Peterson

I’m just trying to think.

Lee Schram

The way the market works there, Ben, is that they – it’s an initial order and then it’s – that’s generally going to fall on the Internet, so it’s generally lower price and then a reorder that’s a higher, you know higher price, you know, once the first order is taken. I can’t tell you how, you know, probably – I’ll use a 12 to 18-month period of time between initial order and reorder. Obviously it depends on how many they’ve – a consumer buys and then when they, you know, how many they write. But that’s kind of the way that market works. The pricing through the bank channels, depending on how the banks price to the – because it’s a – our arrangement with the banks is a wholesale arrangement, so generally, though, I believe the banks just charge, on average, the same whether you’re an initial order or reorder.

Hopefully that helps you a little bit. I’m not sure if I’m helping answer your question, but I think that’s the way to think about it.

Terry Peterson

The only thing I’d add to that, [inaudible] new account openings, we’re certain new account openings at a bank are going to drive check orders, but that’s really, you know, a level of data that we don’t get good clear information on from the bank. The banks supply us with the orders that are coming into the bank, but they’re not necessarily tagging that or identifying that as a new order or a reorder or you know, what the different drives of that order comes from.

Ben Glaze – Apollo

Okay, got it. That’s very fair and I appreciate the comments. And my other question was just kind of, actually, kind of the follow up to Jamie’s which I thought was a good one and would be helpful. You had mentioned operating leverage and benefit as a result of kind of better volume performance and is there a way to help us think of that, what detrimental margins or incremental margin on volume?

Lee Schram

In the checks space again, Ben?

Ben Glaze – Apollo

Yes, just pure like checks that if we were to look at the checks products.

Lee Schram

We don’t give that out. It’s not something we’ve historically done, but I think the way you want to think about it is, if we perform better, you know, we get a 5% decline as opposed to a 7 to 8% decline, we’re going to be able to kick in more operating margin on average and it depends on, believe it or not, the mix of banks, the mix of checks that consumer are buying. So it’s not a perfect answer, but the best thing we can do is to say that that’s going to give you some better leverage in that operating margin.

Ben Glaze – Apollo

Sure. Okay. Thank you.

Lee Schram

You’re welcome, Ben.

Operator

At this time, I would like to turn the presentation back over to Lee Schram for closing remarks.

Lee Schram

Okay, again, thanks for, everybody, for participating and for your questions today. We’re now going to get back to work and we look forward to providing an positive progress report on our next earnings call, and I’ll turn it over to Jeff for a wrap up.

Jeff Johnson

Thank you, Lee. This is a reminder, that a replay of this call will be available until May 3rd, but dialing 888-286-8010. When instructed, provide the access code, 97921126. The company slides are archived in the news and investor relations section of Deluxe’s website at Deluxe.com.

Again, thank you for joining us. Have a good afternoon.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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