Deluxe Corporation
Q1 2009 Earnings Call Transcript

Published: 23 Apr 2009

[Operator:]

Welcome to the first quarter 2009 Deluxe Corporation earnings conference. (Operator Instructions) I'd now like to turn the presentation over to our host for today's call Terry Peterson, Vice President Investor Relation and Chief Accounting Officer.

[Terry Peterson:]

For those of you who would like to follow along with our presentation but are having difficulty located it, please go to our website at www.deluxe.com click on the news and investor relations section from the top menu bar. From that page, select the investor information tab from the options on the left side of your screen and you will be directed to the icon, which contains the presentation materials. Welcome to Deluxe Corporations 2009 first quarter earning call. I'm Terry Peterson Deluxe's Vice President of Investor Relations and Chief Accounting Officer. Joining me on the call today are Lee Schram Deluxe's Chief Executive Officer, and Rick Green Deluxe's Chief Financial Officer. Lee, Rick and I will take questions from analyst 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 Security Litigation Reform Act of 1995. As such these comments are subject to risk 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 on the company's Form 10-K for the year ended December 31, 2008. In addition, the financial and the 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 relation sections 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 toe Lee Schram, Deluxe's CEO.

[Lee Schram:]

In spite of continued very challenging economic conditions, we had a strong quarter and were able to deliver on our financial commitments. We reported revenue near the middle of our expected range while adjusted earnings per share was above the high end of our range. Individual segment revenues were also in line with our outlook, although we experienced greater weakness than expected in more discretionary products, such as imaging, apparel and retail packaging products. We continued our strong execution of our cost reduction program, implemented additional spending controls, and maintained a disciplined approach to deploying capital. We drove strong cash flows and repurchased $31 million of long-term debt at a 32% discount. We saw growth in loyalty, retention, fraud and security and new business services, including payroll services, logo design, web services and business networking. We made further progress strategically and higher growth business services with an early April acquisition of C I Host customers adding small businesses to our already growing base. As planned, we just released in April a revamped deluxe.com and Shop Deluxe e-commerce platforms. We continue to prudently manage our company, closely monitor the small business and financial institution market, and focus on strong free cash flow generation as we continue to transform Deluxe and steadfastly execute on our turnaround plan. In a few minutes I will discuss more details around our recent progress and next steps, but first Rick will cover our financial performance.

[Rick Greene:]

Earlier today we reported diluted earnings per share for the first quarter of $0.24, which included non-cash impairment charges of $0.40 and restructuring related cost of $0.03 partially offset by a $0.11 per share benefit from gains on long-term debt repurchases in the quarter. Excluding these items, adjusted EPS of $0.56 was up 8% from the prior year and was $0.10 favorable to the upper end of our previously communicated outlook. Revenue for the quarter came in at $339.5 million with continued economic softness impacting primarily small business services where more discretionary products such as imaging, apparel, and retail packaging where short of expectations. Revenues from our personal check businesses were in line with our outlook. Excluding the impact of impairment and restructuring charges, operating margins for the quarter were well above our expectations with the favorability coming from continued focus on spending controls, better than expected results on our cost reduction initiatives, and favorable product mix in the quarter. Operating cash flow in the quarter of $63 million also exceeded our expectations due to the favorable operating results, as well as benefits from working capital initiatives. In the first quarter of 2008, we reported diluted earnings per share of $0.52. Higher revenue in the 2008 period and associated margin of flow through was more than offset by significantly higher savings from cost reduction initiatives in 2009 as compared to the net savings generated in the same period last year. Companywide, revenue was down 10% from 2008. There was one less business day in the 2009 quarter, which accounted for a decline of approximately $5.4 million. Continued weakness in the economy, primarily in SBS, as well as the impact on our personal check business of declines in check writing and turmoil in the financial services industry, also contributed to the year-over-year reduction. Gross margin for the quarter was 62% of revenue nearly flat with 2008. The restructuring related costs incurred primarily as part of our manufacturing footprint consolidation reduced gross margin nearly a full percentage point. Gross margin benefited from improvements in manufacturing productivity, delivery initiatives, and favorable product mix. Selling, general and administrative expense decreased $20.7 million in the quarter and was 46.7% of revenue compared to 47.5% in the same period last year. Benefits from continued execution of our cost reduction initiatives and lower spending contributed to the improvement. Asset impairment charges of $24.9 million for the current period related to the write-down of goodwill and a trade name in SBS primarily due to the effects of U.S. market conditions on our assessment of fair value in relation to these assets. Adjusted operating income in the quarter was $54.5 million down just slightly compared to the $55 million last year on a lower revenue base. Next, let's cover a few highlights in each of our three business segments. In small business services, revenue of $193.3 million was down 8.7% versus 2008. Revenue in this segment was unfavorably impacted by continued economic softness in the quarter, continued declines in the use of checks and forms, one less business day, as well as lower Canadian exchange rate, which alone accounted for a $3 million reduction. These declines were partially offset by contributions from the Hostopia acquisition and organic growth and fraud protection services. This segment reported a loss of $6.6 million compared to income of $21.8 million in 2008. The quarter's results include $24.9 million of asset impairment charges and $2.4 million of restructuring related costs. On an adjusted basis, operating income was $20.7 million or 10.7% of revenue. In financial services, revenue of $102 million was down 10.4% versus the first quarter of last year. The decline was due to the impact of lower check usage, continued disruption in the financial services industry, and one less business day. The benefit of a price increase in the fourth quarter of last year offset continued pricing pressure from normal contract renewal activity. Financial services operating income was $19.6 million for the quarter or 19.2% of revenue up from $19 million or 16.7% of revenue in 2008. Finally, direct checks revenue totaled $44.2 million down 14% on a year-over-year basis due to the continuing declines in check writing, a weak economy that is negatively impacting our ability to sell additional products, and one less business day. These reductions were partially offset by higher revenue per order from recent price increases. Operating income in this segment was $14.2 million for the quarter or 32.1% of revenue up 3.5 points from 2008. Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $812 million compared to $853 million at the end of 2008. During the quarter a total of $31 million of long-term debt was repurchased on the open market resulting in a net gain of $9.3 million. Cash provided by operating activities for the quarter was $63 million. The increase from last year was due to significantly lower incentive compensation payments and benefits from our working capital initiatives partially offset by higher planned contract acquisition payments in 2009. Capital expenditures for the quarter were $10 million and depreciation and amortization expense was $17 million. Looking ahead to the second quarter, we expect revenue to range from $325 million to $340 million. Adjusted diluted earnings per share are expected to range from $0.43 to $.0.51, excluding $0.02 of restructuring related costs. Although we expect a solid second quarter with basically a flattening of the economic impacts at the top end of the revenue range to a slightly worse trending at the bottom end of the revenue range, we do not expect as strong a performance sequentially as compared to the first quarter due to the following. A range of lower expected revenue and commensurate earnings per share primarily driven by the ongoing secular decline of checks, first quarter tax form seasonality not repeating, plus the first quarter is historically the strongest quarter of the year in our direct checks business, which creates an unfavorable operating income mix shift. These are only partially offset by one additional business day expected growth in new business services and some expected initial benefits from our e-commerce investments. Also, higher expected material cost driven by scheduled rate increases and a slightly higher effective tax rate of nearly 35%. Partially offsetting these factors we expect another strong quarter in cost reductions associated with the $300 million reduction initiative. However, some cost savings were accelerated into the first quarter, which will lessen the incremental flow through in the second quarter. We expect the challenging economic conditions will persist throughout the year and are adjusting our consolidated revenue outlook range to $1.3 to $1.385 billion for the full year with the top end decreasing slightly due to Canadian exchange rate changes and declining patterns seen in the first quarter in more discretionary imaging, apparel and retail packaging products. In addition, we are raising our expected adjusted earnings per share to a range of $2.05 to $2.35, excluding $0.35 per share related to asset impairment charges, restructuring related costs and net gain on repurchase of long-term debt. There are several key factors that contribute to our full year 2009 outlook. Given our continuing expectation of a weak economic outlook throughout 2009, we expect small business services revenues to decline in the mid single to low double digits as declines in our core business products will be partially offset by benefits of our e-commerce investments and strong double-digit growth in our business services offerings. In financial services, an expectation of check order declines of approximately %6 to 7% given the turmoil in the financial services industry and increases in other forms of electronic payments, which we expect will be partially offset by continued contributions from non-check revenue streams, double-digit revenue declines in direct checks. Given check usage declines and the weak economy which is negatively impacting our ability to sell additional products, focused execution on our cost reduction initiatives, partially offset by year-over-year increases in material delivery costs, as well as higher performance-based compensation and significant increases in employee and retiree medical costs. An effective tax rate of nearly 35% for the balance of the year bringing the full year rate to approximately 34%, excluding the impact directly attributable to the first quarter asset impairment charges and the net gains on repurchases of long-term debt. We expect to continue to generate strong operating cash flows ranging between $175 and $200 million for the year. We expect that lower earnings will essentially be offset by continued progress on working capital initiatives and lower performance-based incentive compensation payments in 2009. We expect contract acquisition payments to be approximately $20 million. Capital expenditures are expected to be approximately $40 million as we execute our plan to expand the use of digital printing technology, further automate our flat check delivery packaging process and make other investments in manufacturing productivity, as well as key revenue growth initiatives. Depreciation and amortization expense is expected to be $65 million, including $18 million of acquisition-related amortization. Finally, I'll provide a few comments regarding our capital structure and ongoing uses of cash in 2009. In the first quarter we continued to generate strong cash flows and consistent with our strategy prudently utilized cash for organic investments and to pay down debt, including opportunistically purchasing some of our long-term notes at an average discount of 32%. In April, we also completed a tuck-in acquisition of C I Host customers. We currently have no concerns regarding our ability to maintain compliance with the financial covenant in our credit facility and are confident in our ability to obtain a new credit facility in 6 to 12 months, which will replace our existing facility before its July 2010 expiration. With no long-term debt maturities until 2012, we remain consistently focused on a disciplined approach to capital deployment that balances the need to continue investing in initiatives to drive top line growth, including tuck-in acquisitions and further debt reduction. We also expect to maintain our current dividend level. We believe our strong cash flow, strengthening balance sheet and flexible capital structure positions us well to continue advancing our transformation. Now I'll turn the call back to Lee.

[Lee Schram:]

I'll continue my comments with a perspective on our overall enterprise objectives for the balance of 2009, highlight each of our three segments, including how we are progressing against our key initiatives, and close with an update on our cost take-up programs. At the enterprise level, our five key focus areas for 2009 include first, financial institutions where we will work to at least maintain our core check share plus grow outside checks by helping financial institutions expand core deposits. Second, optimize cash flow from the direct to consumer segment. Third, grow revenue in small business core business products sold through enhanced e-commerce capabilities and an improved customer segment focus. Fourth, expand revenue from higher growth business services including logo design, payroll, business networking, web, hosting, and other web services. And fifth, continue advancing the solid cost reduction and simplification work already underway as part of our expanded $300 million cost reduction initiative. Early in the quarter we assembled our key leaders and field sales teams to further accelerate alignment as we continue to transform the company. This was our best leadership event since I joined the company. We talked about how our continued transformation starts with stabilizing the rate of decline in our core check businesses, then adding existing organic initiatives, such as enhanced e-commerce loyalty, retention, and fraud and security offers. It includes growing business services, such as payroll services, logo design, web, hosting and business networking services. We will continue to assess the potential tuck-in acquisitions that complement our large customer basis with a focus on business services together with new products and services aimed at helping financial institutions grow their core deposits. We left the meeting committed to building a high performance organization as a unified team of leaders with an outside in and strong customer focus while driving candor and a focused sense of urgency. All these behaviors are captured in this year's Annual Report theme of Red Means Go. Deluxe is becoming all about focused velocity, not activity for the sake of activity, but focused speed and measurable results in a company committed to transformational growth. Now, shifting to our segments, in small business services, as expected, economic softness continue to impact our business. We had small shortfalls to our first quarter revenue outlook in more discretionary imaging apparel and retail packaging products. Excluding these products, we saw stability from the fourth quarter in our remaining core products, including checks and forms. Positively we saw growth and payroll services, a continued ramp in our easy shield check protection service, and in logo design services, growth in e-commerce visitor traffic, significant growth in business networking members from partner up where we have now increased membership four-fold since our acquisition, and growth in web services from our Hostopia acquisition. We also added web services customers through an early acquisition in April of C I Host customers, which is expected to be slightly accretive to earnings per share in 2009. In early April as planned, we released an enhanced deluxe.com that is linked directly with an improved Shop Deluxe e-commerce platform. We now have approximately 90% of our best selling products and services on one platform. These moves will allow us to better cross-sell, simplify ordering for our customers, and better position our brand. We also completed the sale of our very low margin and non-strategic Russell and Miller retail packaging and signage business in January. Also in the quarter, the Deluxe Foundation announced a partnership with the Kaufman Foundation where we will jointly be supporting an initiative called Fast Track Launch Pad, aimed at helping displaced workers become entrepreneurs and start small businesses. We continue to closely monitor the small business market and are optimistic that the pace of decline is weakening. However, the National Federation of Independent Business Small Business Optimism index actually declined further from year end 2008 to March 2009 to its second lowest reading in 35 years. Small business loan availability indices remain flat at the end of the first quarter from year end 2008. Collectively, sentiment readings are still declining to at best flat overall. So, although we are cautiously optimistic that the economy is starting to bottom out, key indicators are still unclear right now and it appears far too soon to spot the floor. Outside research also supports that small business owners are currently in a profound disruptive period. They know cost control and profitability are keys to staying in business right now so they spend less and scrutinize purchases more, but they understand the need to be even more laser-focused on adding value for their existing customers. Zales is the new number one pain point and they understand this, but because of their concern around remaining in business, it will take some time to shift focus away from cost control and profitability. We believe as this disruptive period matures and the economy recovers with the transformative changes we are making with more business services offers that help small businesses get and keep customers, that Deluxe will be better positioned in the future. In addition, social networks are becoming more important for small business owners for peer-to-peer advice and partner-up helps position us well here. Our focus for the remainder of 2009 in core small business products is on acquiring new customers and increasing our share of wallet through our now enhanced Shop Deluxe e-commerce site and improved small business segment focus. In new business services, we will continue to integrate our logo design, web services and business networking services acquisitions, and we expect strong double-digit growth to continue here. We also will continue to look for opportunities to add more business services to our unified technology platform. All business services, including payroll services, loyalty and retention, fraud and security, logo, web, and business networking, are expected to generate approximately $100 million in revenue in 2009. So we are starting to build some scale capability here. In financial services, we continued again this quarter to proactively extend several check contracts and now have all major contracts extended through 2010. The largest significant extension was Chase, including WaMu, which now runs through early 2014. Completing these extensions helps lock in more predictable annuity-based check revenue streams. It also allows us to focus on winning new competitive national accounts where we believe there are many opportunities by year end 2010. Again this quarter we continue to see strong overall new acquisition rates and our retention rates remain strong, in excess of 90%. We continue to simplify our processes and take complexity out of the business while reducing our cost and expense structure. In addition to our core check revenue, we made progress again in the first quarter in advancing new non-check revenue growth opportunities. Revenue grew over last year in our non-check loyalty retention and fraud and monitoring protection solutions. Although we continue to see momentum building in these new non-check revenue initiatives, we also continue to see decisions by financial institutions taking longer with more approval levels and a focus on spending less. For the remainder of 2009, as indicated on our last earnings call, we continue to expect check order declines to be around 6% to 7% for the year. The first quarter order decline was higher mostly due to the one less business day in the 2009 period. Some of this decline for the year is due to the turmoil in the financial services industry and some is due to increases in electronic payment. We expect to maintain our high retention rates and to acquire new customers. We will be introducing a planned price increase in the third quarter driven by rising material and delivery processing costs. We also expect some revenue contribution from non-check offers aimed at helping financial institutions grow core deposits. Finally we will continue the simplification work with the goal of taking complexity out of the business and reducing our cost structure. In direct checks, our revenue was in line with our expectations and we had another solid operating margin in the quarter coming in at 32%. We continue to look for opportunities to provide accessories in other check related products and services to our consumers. For the remainder of 2009, we expect double-digit declines in direct checks revenue driven by consumer usage reduction in a weak economy. We expect to reduce our manufacturing costs and lower SG&A in this segment and keep our profitability profile within one to two points of a 30% operating margin while generating strong cash flow. In addition to these actions in each of our segments, here is an update on our $300 million cost and expense reduction initiative wherein $90 million of net savings are expected to be realized in 2009 on top of the $155 million already realized since mid-2006. We expect to realize the remaining $55 million in savings in 2010. Approximately 40% of the $300 million reduction impacts go-to-market sales and marketing, 30% impacts fulfillment, and 30% impacts shared services infrastructure. Overall, we had another solid quarter delivering more than expected in the first quarter. For 2009, reductions again will not necessarily be linear through the quarters. While we expected less savings to flow through in the first quarter due to higher expected duplicative and upfront cost to transition three fulfillment centers and reposition our channel and sales support structures and higher costs for a release to update Deluxe.com and Shop Deluxe early in the second quarter, we actually were able to overcome all of these. We executed better than expected and pulled forward savings into the first quarter in four primary areas, including channel and sales support structure realignment, information technology, human resources and real estate. Here are some highlights of the key cost reduction activities for the first quarter and focus areas for 2009. These are in addition to the ongoing savings that are occurring each quarter from previously implemented actions. We continue to realign sales and marketing backend operations, refine our channel management structure, and improve our call center productivity. We also closed our thoroughfare call center in the first quarter. In 2009, we will continue to realign sales and marketing backend operations through process centralization, simplifying business processes, platform and tool consolidation and leveraging e-commerce capabilities. We are also revamping our marketing services media customer touch points as we improve the mix of paper catalogue, online and search engine marketing. For fulfillment, we had a strong quarter with lean productivity improvements and indirect spend reductions. In 2009, we will close five fulfillment sites, three of which are now closed and the remaining two are scheduled to close later in 2009. We expect to completely automate our flat check package processing by the end of 2009, introduce more digital printing, which we initiated in the first quarter, continue our lean product standardization, spoilage reduction and direct and indirect spend reduction initiatives, plus advance our work on realigning to a common manufacturing platform. We are also initiating more strategic supplier sourcing arrangements and other supply chain improvements and efficiencies. Finally for shared services infrastructure, we continue to make good progress in information technology driven by data center cost reductions and other system utilization, networking, and voice communication efficiencies, as well as in finance, human resources and real estate. For the remainder of 2009, we expect to continue to reduce costs in all areas as opportunities exist to centralize, streamline, standardize and improve efficiencies. More specifically we are reducing outsourcing and contractor spend for information technology shifting to a more regional self-service human resources structure and continuing to reduce our real estate footprint with a planned 13% square footage elimination, although there is a dependency here on a weakening commercial real estate market. As you can see, in spite of a very challenging economy, we made good progress again in the first quarter in transforming Deluxe, but we still have a lot of work and opportunities ahead of us in 2009. We are not expecting the economic climate to improve and are hopeful that the pace of decline is slowing down, but this is still unclear. We are expecting stability in our core check revenues, continued strong progress on our cost reduction initiatives and more meaningful revenue contributions from e-commerce and our new business services in non-check financial institution revenue offers. We continue to believe Deluxe has demonstrated its value as a disciplined and stable company in these challenging economic times and that we are making positive strategic moves to reposition the company for sustainable longer term growth, while currently generating strong cash flows and a very attractive dividend. Now, operator, we'll open the call for Q&A.

[Operator:]

(Operator Instructions) Your first question comes from Charles Strauzer - CJS Securities.

[Charles Strauzer:]

Just a quick question for you, you've given a tremendous amount of detail and I thank you for doing that. It's always very helpful in kind of going through the model. But when I look at kind of the uses of free cash flow, Lee, and the $40 million of CapEx spend and given the distressed nature of many of the companies that are in your space that are out there, the smaller companies I should say on the printing side, perhaps would asset purchases be more advantageous given the market environment these days rather than buying new?

[Lee Schram:]

Pardon me?

[Charles Strauzer:]

You said you wanted to ramp the digital platform with CapEx in your $40 million, basically are there some distressed assets out there that could potentially be more advantageous purchases rather than purchasing new equipment I should say?

[Lee Schram:]

We didn't imply that everything was new in terms of what we're purchasing there. So I think what we're trying to do basically, Charlie, in the capital space is continue to follow our transformation in terms of the work that we think that we need to get done to, not only get our costs out, but also to get more efficient over time and the way we do manufacturing. But not only in the way we do manufacturing, but also in the other areas that we think are important to continue to build the company, so e-commerce investments and other organic investments that we talked about loyalty retention, fraud and security and so on and so forth. So it's a real balanced perspective, but we didn't mean to imply that everything is necessarily new in terms of asset purchases.

[Charles Strauzer:]

So you are thinking the same way and then just if you could expand a little more on current trends with Hostopia? I know that's into an area that's being viewed as a way for businesses to kind of reduce their expenses by taking advantage of going online a little bit. Have you seen a kind of pick up in trends there at all?

[Lee Schram:]

Love this acquisition. I just continue to be so impressed with the team. Here's the best way I would view it right now. We had another strong quarter in the first quarter, and what we're continuing to see we saw more of a ramp in the, if you remember their model is first and foremost a Telco focused model, a wholesale model where they get access to their small businesses, and we had more new business in the quarter and actually did better there than we expected in the quarter. And then also what we're starting to do, Charlie, is really ramp the synergy revenue from the Deluxe customers that we're trying to get to buy hosting and web services. So all I could tell you at this point in time is that we're very pleased with the acquisition and we delivered it to what we expected in the quarter.

[Charles Strauzer:]

And would you say that that's fully integrated at this point? We're at the point where you can kind of fully kind of sell a full suite of products to your existing Deluxe customers?

[Lee Schram:]

We can absolutely do that. We believe there are more opportunities to get more efficient in how we do that. So all of the different channels, whether it's online or through phone, outbound, inbound, using Hostopia, using Deluxe, we still have opportunities, Charlie, to get better with that. But I would argue that only gives us more potential to do well with this acquisition.

[Charles Strauzer:]

And then taking that a step further I know one of the things you were excited about when you made the acquisition was potentially going to your financial services customers and tapping that customer base as well. Have you had inroads into, you're talking about joint ventures or partnerships on that side?

[Lee Schram:]

I wouldn't use the word joint ventures so much as just opportunities exist absolutely to go in and leverage that platform and we are the best way to describe it right now is we're executing and doing that exactly where we thought we'd be at this point.

[Operator:]

Your next question comes from Jamie Clement - Sidoti & Co.

[Jamie Clement:]

Just a quick bookkeeping question, Rick, I'm not sure you gave this number. I know you gave the contract acquisition payment expectation number for 2009. Do you know what the amortization number will be approximately?

[Rick Greene:]

Yes I can, we usually don't provide full guidance on that for the year, but once it starts…

[Jamie Clement:]

Well I was just curious like where that was running. I mean if it's going to be roughly in line with last year?

[Rick Greene:]

It will probably be a little bit higher than last year. Our payments are expected to be a little bit higher this year so that will flow through.

[Jamie Clement:]

Lee, on the check side as you look out over the next couple of years when you are, or even just over the last couple of quarters, as you've extended contracts and as you look to win new business with the additional services that you all have built up over the last couple of years, how has your marketing changed to big financial institutions?

[Lee Schram:]

The way I would look at it is absolutely helped us. We're able to go in and position Deluxe as a company a lot stronger than just going in and trying to compete on just the pure check side. So we're able to sit down with our financial institution clients and present more horsepower, whether that's loyalty and retention, fraud and security products and services that helped those financial institutions directly, Jamie, or whether we bring more small business services through products that we already had through our Deluxe Business Advantage program, or now through the new business service offers that we have. So it's just, the way to think about it is there's just more in the toolkit for us to be able to bring to those customers and it allows them to feel like they're going to be working with somebody who's got more things that helps create stickiness to their end customers. So I believe it's directly helped us.

[Jamie Clement:]

And then just kind of changing gears a little bit on the long-term revenue growth enablers that you all have developed, whether this is e-commerce or whether it's just less manufacturing and more services, particularly to small business, how in a pretty deep recession and small businesses are obviously a big portion of your customer base, they appear to me to be taking the lion's share of the beating during this recession. How do you measure from a trend perspective what's working, what needs improvement in an environment like this?

[Lee Schram:]

It's the toughest question, I raise this every day literally as my team are tired of hearing this from me, but how do you separate the cyclical declines versus the structural declines, your ability to execute cyclically versus structurally? And the way I would describe it is we believe we're getting better and better at being able to determine which products and services and then the interactions that we have with our small businesses drive more the secular things that are going in the market versus structural things we're either executing better or not executing as well as we think we need to be. And all I can tell you is that we're not great at it yet, but I also would tell you that the ramp is improving quite a bit. And we just use a combination of tools and then research, outside research as well as direct research that we do with our huge customer base to try to drive at when are our products and services being economically challenged versus when are our products and services being more structurally challenged. So that's probably the best I can do explaining it at this point for you.

[Operator:]

Your next question is from John Kraft - D.A. Davidson.

[John Kraft:]

I wanted to briefly ask about the Chase WaMu renewal. That was the contract that you had hoped to sign or renew in Q4 and just got pushed out?

[Lee Schram:]

Yes.

[John Kraft:]

And wasn't there though another larger contract that would have been a new win for you that was out there that you were bidding for?

[Lee Schram:]

Bidding for at this point or...

[John Kraft:]

Yes, I thought you had mentioned that there were some contracts maybe you were just talking about throughout 2009.

[Lee Schram:]

Throughout 2009, I mentioned, John, that there's one that's eminent and I would describe it as that, at this point as well.

[John Kraft:]

And, Rick, you mentioned pricing pressure is that coming from competition, which has seemed to have been pretty muted lately, as far as pricing pressure, or from the banks themselves?

[Rick Greene:]

Yes, that's specifically within our financial services segment and that's really just the continued activity going on with contract renewals, and certainly we see this more in the community bank space, given the shorter tenure of those contracts. So as they're coming up for renewal, it continues to remain a very competitive pricing environment overall. We were able to offset that in the first quarter here, given the price increases that we implemented in the fourth quarter of last year. So on a year-over-year basis we saw fairly flat pricing activity in the quarter, but it remains a competitive environment certainly.

[Lee Schram:]

Yes, John, the best way I would look at it right now, I think Rick's on the right track here, the banks are obviously looking at their cost structures very closely at this point, so that alone creates pressure on the check vendors that are out there. And I would not describe the competitive environment to have been any easier than it's been.

[John Kraft:]

But specific to the Q3 upcoming price increases, now that's going to be on the larger segment or is there a particular segment there?

[Lee Schram:]

Again, it's across both the nationals and the community and the credit union space. It's normally what we're, by contract, able to do when there are more material and delivery increases that we get. And again, I want to point out to the comment that I made is that was a planned increase.

[John Kraft:]

And this acquisition C I Host, what sort of revenue run rate are you acquiring there and can you tell us what you paid?

[Lee Schram:]

It's very small it's not significant either on the revenue or on the acquisition side. So think of something less than $5 million.

[John Kraft:]

And I guess last question in the small business, you keep an eye out for other tuck-ins, I mean other holes that you're trying to fill or areas that you're particularly focusing on?

[Lee Schram:]

Absolutely, as I think I've been pretty consistent for many quarters now, we continue to look at what are the opportunities that are out there that will allow us to get stronger. And really the principle area, John, is in the business services area. So, just things that will help our customers in logo and web and business networking and related type of services, as well as we're also focused on is there things that we can do to really be stronger in helping our financial institutions grow their core deposits. So those are the principle two areas, as we mentioned in the script, that we're looking at.

[John Kraft:]

But primarily more technology products rather than printing products, is that fair to say?

[Lee Schram:]

There could be things where you can get more of a technology play, John, but you also have the opportunity to pick up print capability at the same time. So again, there's things out there that we're looking at that would probably fit both of those, and again, we're trying to be smart. We're absolutely focused on making sure that we're organically, if we can organically do something better, and that's where we should focus, but tuck-in things that work, balance that with making sure that we're smarter around the cash that we're using and again, as Rick mentioned, if there's debt opportunities to buyback, then we'll play that card as well. We're not trying to run the company for a quarter. We're trying to make sure that we're smart in this difficult economy, but we're also trying to make sure that we're investing for the longer term Deluxe.

[Operator:]

(Operator Instructions) Your next question comes from [Eric Swanson].

[[Eric Swanson]:]

Could you provide a breakout between the two bond issues that you will retire?

[Rick Greene:]

Yes, we purchased a portion of both the 2012 notes as well as the 2014 notes. About $20 million of the 2012s were repurchased, face value, and approximately $12 million of the 2014 notes. The average discount of those two blended together was 32%.

[Operator:]

At this time, we are showing no further questions available. Mr. Schram, you may proceed.

[Lee Schram:]

Thank you for your participation and your questions today. We're going to get back to work here and we look forward to providing a positive progress report on our next earnings call.

[Terry Peterson:]

This is a reminder that a replay of this call will be available until May 8 by dialing 888-286-8010. When instructed, provide the access code 61030752. The accompanying slides are archived in the newest investor relations section of Deluxe's website at www.deluxe.com. Again, thank you for joining us and have a good afternoon.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.