Deluxe Corp (DLX) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third-quarter 2003 earnings conference call. At this time all participants are the listen only mode. Later we will conduct a question and answer session giving instructions at that time. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Stuart Alexander.

Thank you and good morning, everyone, and welcome to Deluxe Corporation's 2003 third-quarter investor conference call. Today, you will hear from Larry Mosner, Chairman and Chief Executive Officer and Doug Treff, our Chief Financial Officer. As in the past, Larry and Doug will take questions from analysts at the end of the conference. In accordance with regulation SD this conference call is open to all interested parties. A replay of this call will be available via telephone and Deluxe's web site and I will tell you how to have access to replay at the conclusion of the teleconference. Before I turn the call over to Larry, I will make a cautionary statement.

Comments made today regarding earnings estimates and projections and statements regarding management intentions and expectations regarding future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 and as such these comments are necessarily subject to risks and uncertainties that could cause actual future results to differ materially from those projected. Additional information that could cause actual results to differ from those presented are contained in the news release that we issued this morning and in the Company's quarterly report on form 10-Q for the quarter ended June 30th, 2000 (ph).

In addition, the financial and sequential (ph) information we will review during this call is addressed in greater detail in today's press release, which is posted on our web site - www.com (ph) in the investors relation sections and was furnished to the SEC in a form 8-K filed today.

In particular, any non-GAAP financial measures mentioned during this call are reconciled to their comparable GAAP financial measures in the press release. With those items out of the way, I will now turn the call over to Larry Mosner.

As we reported in this morning's press release, Deluxe's earnings per share, operating income, EBITDA and net income all increased in the third quarter. We will cover each of these topics and our outlook for the next quarter during this call. Doug will provide you with the financial details after which I will discuss some highlights from our three business segments. After our prepared comments, Doug and I will take your questions.

First here is Deluxe's CFO, Doug Treff.

Thank you, Larry, I will begin by covering the operating results for the third quarter. We reported earnings per share or EPS of $1.09 on net income of $58 million. Compared to EPS of 83 cents and net income of $53 million for the same period in 2002.

Revenue decreased 1 1/2 percent from last year to $315 million. This was driven by a .9 percent decline in revenue per unit, primarily as a result of continued pricing pressure in the financial services segment. However, the impact of this pricing pressure was partially offset by the continued strength in selling premium price licensed and specialty check designs and additional value added services.

Unit volume decreased .6 percent, which was the result of three primary factors. A general decline in check usage, lengthening reorder cycles and lower response rate - partially offset by new business from financial institutions we have gained.

Gross margin was 66.3 percent of revenue, even with 2002. Our continued productivity improvement and plants and distribution centers, along with ongoing cost management efforts, offset the lower unit volume in revenue per unit. Selling general and administrative expense - or SG&A - was 38.4 percent of revenue compared to 39 percent in the third quarter of 2002.

SG&A was lower by $4 million, primarily due to lower employee cost and our continued efforts to cut spending to maintain and maximize profitability in the face of challenging business conditions.

As a result, operating income was $88 million - 1.4 percent higher than last year's third quarter. Our operating margin for the quarter improved to 27.9 percent of revenue compared to 27.1 percent a year ago. Interest expense increased nearly $4 million in the quarter. Both interest rates and debt levels contributed to the increase.

Our weighted average interest rate was approximately 160 basis points higher than last year, related to the issuance of fixed rate long-term debt over the last year. In addition, our average debt level was nearly $350 million higher in the third quarter this year as we continued to repurchase share - thereby lowering Deluxe's cost of capital and improving returns to shareholders.

Income taxes in the third quarter were lower by $7 million due to the closure of certain prior year income tax audit and tax periods. We still anticipate a long-term income tax rate of 38 percent.

Now let's look at the third-quarter results in each of our three businesses, starting with financial services. Revenue decreased 7 percent to $176 million. Operating income decreased 12 percent to $41 million. The primary factor affecting both revenue and operating income was lower prices on checks sold to financial institutions. The check printing industry is experiencing heightened price competition in unit volumes decline and this competition has produced greater discounting as we have renewed or signed new contracts with financial institutions.

Larry will expand on this topic in a few minutes.

However, the third-quarter volume comparison to 2002 is much more favorable than the first two quarters of this year as we began to see the positive impact of client gains.

In our Direct Checks business, revenue was down 1 percent $75 million for the quarter. During the third quarter, Direct Checks was able to offset lower response rates in the negative impact of longer reorder curve by moving additional customers to the more profitable phone and Internet order channels as compared to mail.

A price increase also helped offset the impact of declining response rates. Operating income for Direct Checks increased 12 percent to $24 million due to an increase in revenue per unit and productivity improvement in both manufacturing and order entry.

In our business services segment, revenue increased 16 percent to $64 million as a result of strong unit strong -- growth in unit volumes and additional new business driven primarily by the business referral program. As a result of the strong topline growth, operating income in business services increased 22 percent.

Let's move onto consolidated results for the first nine months of the year. Net income decreased 5 1/2 percent to $153 million, driven primarily by lower revenue and higher interest expense. Revenue decreased 3.6 percent to $942 million due to a unit decline of 4.7 percent, partially offset by an increase in revenue per unit of 1.1 percent.

Gross margin decreased to 65.7 percent of revenue compared to 66.1 percent for the same nine-month period in 2002. The decrease was primarily due to the lower unit volume.

SG&A was 39.1 percent of revenues, the same as the first nine months of 2002. The expense was lower by $13 million due to lower employee costs, lower discretionary spending in response to the current business and economic environment, and reduced advertising expense.

As a result, operating income decreased 5 percent to $250 million. Operating margin declined slightly to 26.6 percent of revenues for the nine months. Our interest expense increased $11 million compared to 2002. The reasons - as I mentioned in my comments about the quarter - were due to both higher interest rates and levels of debt.

Now for a few other comments from our balance sheet and cash-flow statement. Total debt net of cash increased $38 million from the end of the second quarter as we continued to repurchase share. In addition, long-term debt grew as we issued $50 million of 3-year note at an interest rate of 2.75 percent.

The notes were issued from Deluxe's 250 million medium-term note program that was launched in September under a registration statement covering the periodic issuance of up to $500 million of debt securities. The registration statement became effective in July of this year.

We repurchased nearly 5 percent of our shares outstanding or 2.7 million shares during the third quarter at an average price of $43.32 per share. That brings our share repurchases for the year up to 10.9 million. We completed our 12 million share repurchase authorization during the third quarter, slightly more than one year after our announcement.

In August of this year, our Board authorized a repurchase of an additional 10 million shares, .6 million of which had been purchased as of yesterday. Repurchasing our stock continues to be a prudent investment. The new authorization demonstrates our commitment to effectively putting excess cash to work to maximize returns for all shareholders. At the same time, it will continue to move us toward our target capital structure.

A look at the cash-flow statement shows that cash provided by operating activities was $151 million year-to-date. Through nine months, cash-flow is 15 percent lower than last year due to reduced earnings, higher advertising spending and higher upfront contract acquisition payments. Contract acquisition payments were $45 million through nine months of this year, compared to $34 million through nine months in 2002.

Free cash flow was down 9 percent year-to-date, compared to 2002. The lower operating cash flow was partially offset by less capital spending and lower dividends due to fewer shares outstanding. Year-to-date, capital expenditures were $16 million. We have reduced our capital spending rate during 2003 in response to business conditions and to focus our efforts on a limited number of initiatives.

We anticipate spending approximately $25 million on capital projects this year.

We have revised our earnings guidance for the fourth quarter and full year as our news release stated this morning. We now expect our fourth-quarter earnings per share to be in the range of 72 to 76 cents per share. This will result in full-year EPS of approximately $3.45 per share. Fourth-quarter estimates include approximately $5 million of severance expense, associated with actions we've taken to reduce expenses. But excludes the impact of additional share repurchases subsequent to September 30th.

Larry will discuss the factors affecting guidance in the fourth quarter in his comment. I look forward to taking your questions in a few minutes but, first, I will turn the call back to Larry.

I'll begin my comments by addressing the reasons for the lower earnings guidance we gave in this morning's news release before covering the normal business segment highlights.

As I said in the release, our previous guidance was based on our intent to not only retain existing clients but also aggressively acquire new business in our financial services segment by providing financial institutions with greater value. But, before I get ahead of myself, I think your understanding of the challenges we face would be more complete if we first take a look at the state of the check printing marketplace primarily as it impacts financial services - Our largest business segment where unit volume shortfall and pricing erosion are impacting us.

Here are some of the facts. First the check is a mature product, even though Americans still write more than 40 billion check a year, current study showed that its use is declining about 3 to 4 percent a year primarily due to increased use of alternative payment methods. Fact number two is that the economy continues to negatively affect our business even though the government recently reported an improvement in the unemployment rate. As we've reported before there tends to be some lag time between what the economy is doing and the results it has on our business.

There is another economy related statistic that has been impacting our order volumes. The U.S. Census Bureau recently indicated that annual moving rates have declined across the country. Because the household move typically requires new checks, fewer moves translates to fewer check order units.

The last fact is that we are in an extremely competitive pricing environment. This certainly isn't new but it has escalated rapidly. Just last quarter we shared how pricing pressures were spreading to the community bank and credit union sector.

Now how does this pricing competition play out? We're seeing check suppliers aggressively defend their existing accounts. This offensive posture manifests itself in a couple of ways.

Lower prices and suppliers having a harder time wooing business from other check printers. The natural tendency to want to keep the business you already have while trying to win new business means that business frequently is retained or won at lower margins.

Empirically, the situations I've just discussed are industry wide. However, there are also a few Deluxe specific facts that are impacting our forecast for the fourth quarter.

First, we will not have the level of unit volume from new business we were anticipating in financial services. Second, while we have retained and acquired a number of major accounts over the past 12 to 14 months, the vast majority of them have come at lower margins. And third, our Deluxe select program, overall, is exceeding the targets we set for it.

However, the increased revenue per unit is not able to offset the price erosion I spoke of earlier.

Having established a number of realities within the check segment of the payments industry, I want to share some thoughts about our response to the current business environment. Instead of going after less profitable business we're committed to focusing on financial institutions who value high-quality superior service and the best experience for their customers.

We believe this approach will help us retain business and also attract new clients who want to maximize their check program. We know that financial institutions are receptive to the notion of putting their check merchandising in the hands of experts. The success of our DeluxeSelect program is proof.

Another way we are responding to the business environment and we have demonstrated this time and again is by continuing to vigorously manage our cost. We will maintain our low cost and efficient manufacturing platforms. Our employee population is down 24 percent or 1800 positions from 2 1/2 years ago, primarily due to process improvements for activity gains, outsourcing and cost management efforts.

In addition to closing our Indianapolis facility, which we announced last quarter, plans are in place to consolidate two more facilities.

We also continued to target reductions in our SG&A expense to better align our cost structure through the realities of the marketplace. Deluxe always has been and always will be focused on value and service.

The concepts have been ingrained in our approach to business and within our culture from the very beginning. While service and value are two things that haven't changed about Deluxe, no one can argue that the payment industry continues to change and that rate of change is accelerating.

However, we are in charge of our own destinies. We have the experience, the leadership, the employees and the products and services to generate strong profitability and free cash flow from this business.

Now I would like to take just a couple minutes to share with you some business highlights. For the second consecutive year, Deluxe appeared on InformationWeek 500 listing of technology-driven organizations. This is a prestigious listing that includes the most innovative users of information technology in the United States.

Deluxe ranked 270th on the list which represents some of the most recognizable and respected companies in America. The listing ranks the IT practices of the nation's largest and most innovative IT organizations. The annual study identifies the best technology in business practices of companies that demonstrate patterns of technological, procedural, and organizational innovations. Areas examined include technology deployment, e-business, customer knowledge, infrastructure and business and technology strategies.

Technology has always played an important role at Deluxe and is more important now than ever as we strive to differentiate ourselves from the highly competitive marketplace. We will also differentiate ourselves via a range of products and services. In September, our financial services segment introduced Deluxe Performance Management - an online reporting and tracking tool that gives financial institutions unprecedented access to powerful information about their check programs. Deluxe performance management offers reports that track a variety of performance indicators, including revenue and profitability for order, order channel effectiveness, and branch performance.

This tool makes the financial institutions' check programs more powerful as banks and credit unions face growing pressure to drive revenue and enhance customer satisfaction.

Another new development from financial services is a series of knowledge sharing events that was launched just last week. We're calling these meetings Deluxe Knowledge Exchanges and they are designed to help the executives of the financial institution clients transform customers' experiences. The sessions provide the attendees an opportunity to listen to some of today's thought leaders and use this knowledge to look beyond customer satisfaction and focus on creating memorable customer experiences.

The first exchange featured a keynote presentation by Joe Calloway and Dewitt Jones. Mr. Calloway is a nationally recognized consultant and best-selling author and Mr. Jones is a freelance photographer for National Geographic. Both men spoke on how to differentiate an organization and how to effectively tap creativity to spur growth, transform customer experiences, and grow revenue.

I also presented at the inaugural meeting and am pleased to report that the feedback from our customers was outstanding. In fact, one financial institution in attendance was so impressed with what they heard that they decided to go with us on the spot.

These sessions are a natural follow-up to the two DeluxeSelect Expos we held in 2002, which were extremely well received by our clients and others in the industry. And speaking of DeluxeSelect the program continues to ramp up and exceed revenue goals. Many clients who enrolled in the program at our national rollout last spring are telling us the results are ahead of expectation.

New clients are coming on board as we continue to promote the service and streamline its processes. While there are too many program highlights to cover, I will just say that we have more than 2,500 financial institutions using DeluxeSelect and approximately 6 percent of financial services order volume is now coming through the DeluxeSelect channel.

Now I will move on to Deluxe Business Services. DBS had a terrific quarter resulting in record revenue and operating income as Doug indicated. We believe there are excellent growth opportunities in serving the small business customer.

Business services recently rolled out a full-scale line of holiday cards to our small-business customers based on a recently conducted pilot. The product offering includes premium quality traditional, contemporary, patriotic, Hanukkah, Christmas, and Thanksgiving cards. The line also features stamps and seals. We're targeting a very specific audience for all of our small-business customers via a marketing materials that include a holiday catalog and a special section within our larger catalog.

Earlier test results have indicated that this will be a good fit for business services and it complements the most developing portfolio of products that DBS will be launching to help small businesses promote, manage, and grow their business.

On the manufacturing side of business services we've converted our Streetsboro, Ohio facility to a cellular environment. The fact that the conversion was almost a nonevent demonstrates the degree to which lean and cellular related changes have become everyday events within our manufacturing environment.

And now, some highlights from our Direct Check segment. Because convenience is a primary driver for the Direct Check customer. Direct Checks continues to focus on making the order and experience fast and easy.

Starting in August our advertising materials directed to new customers began actively encouraging customers to use the phone for their first order. Historically just 5 percent of initial orders were placed via the phone. We've been able to increase it to 16 percent. Not only is this designed with customers in mind, but we're also seeing a considerable increase in revenue per order compared to orders that come in through the mail channel.

In other news, in an effort to distinguish ourselves in the marketplace and increase response to our advertising, Direct Checks continues to pursue in demand licensed properties. The Checks Unlimited and Designer Checks branch recently launched a check package featuring four different check designs based on Dr. Seuss's Cat in the Hat storybook. The launch is timely because it coincides with Universal Studios Cat in the Hat movie which will be released next month.

Other recent product introductions include a new Warner Bros. Looney Tunes design and a package featuring four popular board games from Hasbro. If you're a fan of the Twister game in your youth, you can have the colorful polka dotted game on your checks.

With that overview of our three business segments Doug and I will now be happy to take your questions.

[Operator Instructions]. Patrick Donohue with Northland Securities.

You guys are doing a lot of nice job managing the company in a declining industry and, Larry, it seems to me that the pricing and volume declines are happening at a faster clip them what we may been looking at a couple of years ago. Can you update us on the big picture for Deluxe? What's your vision in three years, where are volumes going to go and what mix of sales will be from checks vs. other business service items?

Patrick, our strategy is the same as we have articulated over the last few years and that is that we would leverage our core competencies and to do that, we would add new products, new services. And at the same time, as we see the opportunity for traction in those areas of new products and services in any of our business - three business segments - we would determine then how we can grow that product or service the quickest way we can either through organic growth or through acquisitions where we find that we can make an appropriate acquisition to gain critical mass in that segment.

We continue to explore all of those opportunities and feel very confident of our ability to leverage the relationships that we have with financial institutions and their customers in that arena, the small office home office market, as well as the direct channel. And so we see that although it might not be as evident to -- in the results today we feel there are those core competencies and the ability to leverage them and we have the financial wherewithal to make informed and intelligent decisions that will create shareholder value.

On DeluxeSelect, can you update us on the number of clients on the program?

Yes there are about 2500 customers right now and that is continuing to grow.

What percentage of orders on Direct Checks are coming in via the Internet for the quarter?

It's in the low 20 percent range -- approximately 22, 23 percent.

Doug, how is that matching up on revenues per order vs. phone orders? I know from following some other retailers that Internet orders are sometimes upwards of 75 percent plus (indiscernible) expensive than phone orders so I'm wondering on the revenue side how does that pair up?

Typically the revenue that we receive on a telephone order is higher than the revenue that we received over the Internet, because of the opportunity to interact with a customer and to determine what their real needs are and also to put in front of them what products that we have they may not be aware of. So the phone is the highest revenue per order that we have.

OK is it also the most profitable?

Yes, it is.

Lastly you stated that you will consolidate two manufacturing plants. Do you have a feel for when that will take place?

Yes we will do that in late second quarter and in late third quarter next year. Those [indiscernible] plants have been informed and they know that it takes us a period of time to make the necessary transition from a service standpoint to the other facilities to make sure we handle so we don't have any disconnect with our ability to properly service our customers.

Chris Hanrahan, Sigma (ph) Capital.

Just a follow-on to the volume question. I know this is on consolidating unit volumes looking trying to get around flat for the year just maybe you can tell us what you're looking at now?

Yes. We will see that about the same relatively down slightly for the year but we saw the rate of change -- the third-quarter performance relative to last year was significantly better than the first two quarters and you'll see improvement relative performance in the fourth quarter over last year.

I believe last third quarter (indiscernible) you guys had a -7.3 unit volume?

In the third-quarter.

Of '02 --

Yes.

Okay and fourth quarter of '02 was -6.7 so that is going to be a negative number on top of that?

In the fourth quarter? We think it will be flat slightly up in the fourth quarter.

Chuck Ruff, Insight Investment.

Given the contract nature of the business, can you talk about how expectations have kind of been shifting back and forth a bit this year? And even in the past quarter? I would think that given how much of your business is on longer-term contract -- I guess I didn't expect this much shifting around with expectations -- can you talk about that a little bit?

I think that in the fourth quarter we had anticipated our ability with very solid reason to expect that we would be able to gain more business than we think we would be able to have, that we were going to get. And so, that is the first issue for the change in the fourth quarter outlook, relative to what we have said previously. The other is that there has been an increasing rate of discount to both new contracts as well as retaining existing business and some banks are -- change their strategy are going to look to go to a single supplier or take an early approach to renegotiating their contract before the existing date. So all of those rolled up have come to our third-quarter performance, and then the driving force behind our fourth quarter outlook. We have had a fairly concentrated number of major accounts this year that have had a larger than normal effect on our pricing as we look at it today.

OK. Were there any payments received in this past quarter for early termination of contracts?

No.

OK. When you kind of went out in the past couple of years trying to gain share with DeluxeSelect and everything else, how did you expect your competitors to respond?

We expected them certainly to respond with either value on their side of product and services and or combination of price. I think those are the two things they can do. I think what we have seen so we did expect some competitive pressure on the pricing side, however, not to the degree that we have seen in the last several key quarters here.

OK and when you talked about your response -- want to make sure I understood the first part of that response. You talked about focusing on higher margin businesses and banks that value excellent service, etc. Can you expand on that a little more? I guess what I'm wondering is, are you going to continue to try to gain market share or are you -- I think so far you may have been sacrificing some profitability in order to get share. And I'm wondering if there's a shift there?

Chuck, I think that certainly we feel historically we have a position in the marketplace that is built on certainly being a trusted and valued partner for [indiscernible]. We have our highest MICR [indiscernible] world-class call centers, we have invested a lot of money in research of knowing the check customer better than anybody and consumer knowledge, most popular check designs, DeluxeSelect are now insuring things so we're going to continue to focus on where we can differentiate ourselves with the value.

And part of that is we select banks, some of them valued much more than others and it depends upon the bank strategy. So we will continue to try to certainly win new business, but it will be more focused on making sure that the bank understands -- we understand more with the bank is that they're looking to create a better customer experience, they value that for their customer retention and their ability to gain customers. And that's where we can have the greatest impact. So from our perspective by concentrating on those banks that value what we can bring to them and our position within the marketplace, and there are some banks whose price is maybe is the No. 1 and No. 2 or maybe even No. 3 position. That would be somebody that we would say probably doesn't make sense for us to try to compete in that arena where they're not going to value the things that we bring to them that will not translate into low low price.

OK I guess another way -- let me ask it this way. Would you be satisfied if your share stays where it is over the next three years if you can concentrate on the kind of banks you're talking about?

Where we try to concentrate, Chuck, is how we can create shareholder value. And so, if that is the best alternative for us and I think it makes sense where we can create value for the shareholder by managing our business to retain that in gain work as appropriately so manage our costs as we have had a very strong track record over many years of managing our costs very effectively so that we can continue to generate the kind of cash we have and say, what is the best use of that cash and as you are well aware we are returning that cash to the shareholders both in our share repurchase and in our dividend and that has worked. We continue to see doing that, consistent with our earlier comments about where we have the opportunity to create new products, new services and more value, we will invest in those things that will both generate new revenue as well as improve our cost efficiencies.

Andrew Jones, Northstar Partners.

Could you review for us what the shift in market shares have been throughout maybe the last year or two? Have you guys talked about that? I can't remember specifically whether you talked about your market share?

We really haven't, Andrew. But I think that in some segments of the market we have picked up market share and in some segments we might have launched somewhat market share, I think, it's a relative basis - take a look at relative unit declines. We probably have been on the flat to slightly up in overall. As it relates to all competitors.

And so the cost to the Company of improving service and all the things you've done to make your product better for the bank hasn't really moved the market shares at awe?

I think that, yes, it has. We have certainly -- well what we've seen, we've had very very positive response to -- for example let me be very specific in DeluxeSelect. Where it has been the differentiating factor. However part of that from a response standpoint is in some cases competition has responded with a lower price and if that delta is too great, then the question for the bank is if I am going to make the difference we need to get closer on our pricing relative to theirs. So I would say it has been a definite factor in our ability to retain and gain customers. However what has happened is the discounting has -- we had to do that even at a lower price.

So when one push comes just shove it seems like price is what's driving the business.

Not totally, no, but it is certainly a major factor.

OK and on the cost structure you guys have always kept I think a good eye on that cost, but I was wondering if you can review for us what the capacity utilization rates are, how many plants you have and if there isn't perhaps an opportunity to be more aggressive on the cost side?

Well we have, as we announced, we closed -- we announced we're going to close the Indianapolis facility. We announced today two more facilities. That will provide a total of 11 facilities, including our distribution centers. I mean, it wasn't 10 years ago we had 65. So we continue to be very aggressive on our cost management not only in number of facilities but also in improved productivity and efficiencies in all of our operations. We will continue to also look at our SG&A cost and continue to take cost out there. So we -- I mean that is just a never-ending target for us and a forever journey is to always determine how we can reduce our cost to make sure that it is the lowest possible that it can be consistent with supporting our product and service levels to our customers.

How about the utilization rates? Do you have numbers on that you can share with us?

Before I think we said on prior calls that we're in the 60, 65 percent manufacturing capacity utilization rate and that was before the announcement of the closure of the three facilities. So we will see that increase.

And, geographically, are you at the end of what you could close facility wise?

I think, conceptually, you can service the whole United States from one facility. The trade-offs are 1, our commitment level - service commitment levels - to the financial institutions that we have and their contracts with them and the level of service. In other words the time we get that order to the time the customer gets it and so we have to make sure that we are meeting those standards or that we have with the banks.

The other part of it is the cost of transportation from the plant to the customer is a major part of our total costs. So we have to do is the trade-offs of the efficiencies and reduced expense of closing the facility against the increased transportation cost of moving that check package a greater distance. Coupled with the service level. And that we have an ongoing business model or an analytical model - a logistics model that we use - and continually balance that to make sure that we could manage both the service levels and cost side as tightly as we can.

Cliff Josephy at H. T. Bross. (ph)

You care to offer revenue guidance for next quarter?

Revenue guidance for next quarter - we have not. In terms of what (indiscernible) our earnings per share but we think that it will be in line with what we have seen here in this quarter.

So in line with 315 million? Is that what you're saying?

Yes.

And tax record next quarter do you think you're going to be back up to 38 percent tax rate?

Yes we will be back up to 38 percent tax rate.

Let me just go back as some of you said -- what I said to you the rate of change in the fourth quarter will be about the same as the rate of change in the third quarter on the revenue side.

Revenue decline year-over-year was 1 1/2 percent third-quarter and it would be relatively comparable decline in the fourth quarter.

Okay. So looking around 30, 32 or something like that?

Yes - which is both better than the first and second quarter.

And the tax rate we anticipate the tax rate returning and remaining at approximately a 38 percent level in fourth quarter.

OK and then the SG&A came down quite a bit even though the other revenues were up quite a bit sequentially. What was a reason for that? Or reasons?

SG&A coming down? We had lower employee costs. We continued to realize efficiencies in various business units related to productivity improvement that I touched on as well. So we anticipate continuing to see those going forward as well.

OK and on the balance sheet - the deferred advertising cost - what are those (indiscernible) quarter at?

Just a second and we will have that for you.

And while you are looking for that, you can give me the contract acquisition cost as well?

Contract acquisition balance was $80 million at the end of the third-quarter and the deferred advertising balance was $28 million.

OK. The contract acquisition costs had started going up , I guess significantly in the March quarter and I thought that you had maybe gotten a big contract with the bank and that it was going to show up in the revenues this quarter but the revenues were roughly $10 million light, I was wondering what happened there? I mean was that pushed out a little bit - should we see that show up in the December quarter? Or was I just misled, not by you?

That did show up in a third-quarter at the same time we talked about on the second-quarter call, we lost some significant business. So those two factors were offsetting, and made it more difficult to see in the revenue line the impact of that gain in the new account.

Jay Kim, Sandler Capital.

I have questions -- if you could just help me understand the $7.3 million benefit on -- from the completion of tax audits and expiration of certain income tax periods?

That relates to -- we are under audit auto with IRS and now we closed out the 1999 year that's the primary contributor. We also closed out tax audits with two different states. Those are the three factors that resulted in the $7 million adjustment in the tax provision.

Okay and the expiration of income tax periods? That's part of same thing?

Yes. That's actually the 1999 income tax year.

And just to follow up on one of the previous questions. I would imagine -- so if you take the -- you said you're looking at anticipating a $5 million charge on next quarter which is roughly 10 cents an if we just look at your earnings estimates for next quarter it's about I think first client models have (indiscernible) 96 cents right now -- I'm not holding you to that number, I am just stating what is publicly out there. That represents about a dime of it.

Now is the other dime going to be the decline - anticipated decline - in revenue or do you anticipate OPECs for whatever reason ticking up a little bit or little bit of above?

Let me clarify that. The $5 million charge translates to about 5 cents per share as compared to the 10 cents -- translates to about 5 cents. The remaining difference as you mentioned on the call relates to revenue expectations for the fourth quarter.

But do you think at this point of your business that you're kind of managing to a $120 million number $121 million? That's a fair number for you to operate on?

When you clarified the $120 million number, what does that relate to?

Your SG&A number that you put up this quarter. 128.9.

I would just as soon not be specific, Jay, because the pieces between cost of goods sold and SG&A can vary. But if you do look at those factors - the $5 million charge - and understand the guidance of 72 to 76 percent but -- 72 to 76 cents per share I think combine that with a revenue answer that we provided earlier, I think you get a good deal directionally but for me to give you a specific number then some other number may pop. And I would just as -- I think you have enough data points now to triangulate on that SG&A figure.

Right - fair enough. Also I've been kind of following the story, but not hard and not consistently. One thing if you can help me with a little bit of perspective here in terms of your CapEx figure. You think the CapEx numbers that you guys are anticipating now is more like your steady-state or is it still a little high or do you feel that you're under where you'd normally be at if the economy was kind of cruising along at a reasonable rate?

Jay, in answer to that we said previously that we believe in prior calls we stated that we believe a maintenance level of CapEx -- what we need to continue to invest in the business, to remain competitive is about $20 million. The rate -- the guidance that we provided of approximately $25 million a year is approximately the longer term rate that we believe. It could be lower or higher in individual years, related to specific initiatives that we might do. As we stated in the past we make capital expenditures for two primary reasons.

One is to provide capabilities within the business to pursue and achieve strategic initiatives and help us to drive revenue growth and/or to take out cost out of the business and improve productivity in our operations. That is what we've done historically, that's what we would do in the future. But to answer your question the current guidance is a likely longer term capital expenditure figure.

Just last standard question related to the CapEx number. There hasn't been any changes to the depreciation schedules are anything like that of any of your major lines?

No, we have not made assumptions changes in our accounting policies related to the lives of our assets.

Nick Fisken, Stephen Incorporated.

Of the three check printers out there, I think I've heard almost everybody say that John Harland had the majority of the contracts coming up in '03. And I'd like to get some commentary on what kind of contract volumes you guys have coming up in '04 because I've heard from the industry that you guys could be the ones with the highest amount of relative revenue up for renewal?

We have two larger contracts that are coming up in '04. On a relative basis I am not sure that I can say that we have more coming up than our competition. I just can't quote that to you because I don't have that fact and I don't want to quote based on speculation.

But none this year, just the two next year.

Right.

On the repurchase program, Doug, just give me -- I don't remember this, how do you determine when and how much stock to buy? And how is it affected by quiet periods, etc.?

That's a good question. A couple of things determine what -- when we buy, how much we buy and how we set things, I'd back up and put it in the context of larger financial strategy. Our intent in establishing we announced on Aug. 5th, 2002, our financial strategy to increase our debt level and to change the capital structure to reduce our overall cost of capital and to repurchase shares. At that time and today, we have targeted debt levels consistent that will maintain current credit ratings that we have, and given the performance of the Company this year, last year that would translate to up to a maximum $700 million of debt.

How we determine whether or not to purchase shares is related to the valuation of the stock in the Company. As we look at share repurchase, we don't think it's prudent for us to be buying shares above the intrinsic value of the Company. Meaning, we have a feel for the next 3 to 5 years out what our performance will be like and we take that into account as we do a discount cash flow valuation of the Company.

Therefore we're more willing to repurchase -- we are willing to purchase more shares as the stock price is trading at a more significant discount to the intrinsic value of the Company and we -- as that price goes higher obviously share repurchase may go lower. The question becomes then, what is the Company's ability to continue to repurchase shares and how many, how much do we repurchase?

That gets into our ability to generate cash flows on an ongoing basis with which to repurchase shares. Given our outlook for the year, we been able to repurchase shares and continue to repurchase shares at a rate that you've seen in the third quarter. What we do during quiet periods is that we have established a 10b5-1 program which allows us to provide guidance to a broker, doesn't allow us to engage in the decision-making but establishes parameters under which brokers can trade on our behalf to repurchase shares.

We established those parameters. While we are not in a blackout period, while we're not in possession of material inside information that is different than what the street and we established that program. We've utilized that very successfully over the last couple of years to acquire a significant portion of the shares that we bought back.

What is the highest price you guys paid for stock?

Going back historically, the upper 40s is the highest price we have paid.

Last question for Larry. Postclosing [indiscernible] these two other plants where do you think the capital utilization is going to go to?

I don't know if we've got -- don't have that number handy, Nick, certainly it's going to be higher than the 60, 65 percent since we're taking roughly 25 percent of our system so just -- rough math, it will probably be up in the 70, 75 percent range.

So the three out of the 14 plants is 25 percent of the [indiscernible]?

Number of facilities that we got, just on the number of facilities.

But not incorporating the size of the facility.

Exactly.

Brian Ear (ph) , Pal Mara.

I had a question in terms of what you expect our custom acquisition costs [indiscernible] is that we should see declining or [indiscernible] [inaudible]?

We saw in 2002 a relatively significant increase in contact acquisition [indiscernible] upfront costs 2002 vs. 2001, it was three -- in the mid 30s, in 2002, right now we're seeing it in the mid '40s $45 million year-to-date. So we see the increase in up front payment slowing and we believe beginning to approach and mature in terms of up front payment. So I would anticipate that the rate of increase would continue to decline.

And on deferred marketing expense? [indiscernible] [inaudible]?

We actually expect this year that our expense in the Direct Checks business for advertising will be comparable to last year. If you recall on an earlier conference call we had -- we had a timing issue at significant savings in the first-quarter that benefited profitability and will have incremental expense relative to last year fourth-quarter coming up.

Chuck Ruff from Insight Investments.

The severance that is going to happen in the fourth quarter you talked about additional SG&A reduction and in the closing of the plant. Those actions alone, how much will they lower operating expenses?

We anticipate, Chuck, that the impact of the plant closings, and this is longer-term, this is not 2004. Beyond that, it would be approximately $5 million in savings.

And the severance and other SG&A reductions? I am trying to get a feel for --?

The other SG&A reductions are $2 to $3 million in annual savings that goes with [indiscernible]

Are you including the severance there or...?

That is post severance.

Are there SG&A reductions beyond the severance?

They're not any SG&A reductions that we have announced that we have factored into our guidance. We will be discussing the 2004 outlook in the January conference call as we discuss our Q4 results.

Understood. I am just trying to get an idea of -- when you talked about closing plants and reducing SG&A how much you've done. I understand that you haven't done your 2004 -- haven't completed planning and budgeting for that. But can you give us some idea how much flexibility you have in cost when you get to that point and you are looking at a revenue forecast. Can you give us some feel for the flexibility in costs to adjust to the environment as you see it?

I would go back to Larry's comments in the script and just indicate that as business conditions change we intend to be able to align our infrastructure consistent with what it takes to serve clients and to maintain probability at the same time. I can't provide you more guidance than that at this time.

Okay. There were similar comments to that last quarter about focusing on interest -- focusing on operating expenses. Right now looks like you are behind the curve that revenues and business have declined faster than expected. And you have not adjusted expenses enough to keep profitability increasing. When you look out at '04, do you expect you'll be able to adjust cost to plan for operating profit increase? Now that doesn't mean '04 operating cost will increase because I understand like with all businesses surprises happen and revenues never come in exactly as forecast. But trying to get some idea of whether you have got enough flexibility in your operating cost structure to make -- to get ahead of the curve?

Just one comment I would go back to and I would cite the third-quarter results. Our operating margin actually improved. It really varies quarter to quarter, when we are ahead of the curve, when we are behind the curve. I think it would be most beneficial to wait until the January call and we can continue the conversation, because then as we have specific guidance then you'll be able to understand what, how much flexibility we do have and what we're building into next year.

Andrew Jones, Northstar Partners.

The cost savings from closing the plants I am assuming that shows up in the cost of goods sold line.

Correct.

And the SG&A line, could you give us any characterization or color on what the big bucket might be, how much is corporate? How much is related to business services or any of the segments just to give us more of a feel for that?

Andrew, we don't break that out typically. We do discuss in the MD&A in the 10Qs and the 10Ks what factors are that are affecting the change quarter over quarter and year-to-date results. But we don't typically break out the individual pieces.

How about cost of good sold vs. SG&A. People that are out servicing with DeluxeSelect are they in the cost of goods sold or are they in selling -- is selling really selling people or how much of it is service people as well?

Now I understand what you are getting at there, Andrew. The cost of goods sold is largely our printing facility, the distribution centers etc. that support the facilities and what is in selling general and administrative is really the cost to capture the order. Our customer care centers, it's our selling cost to have a direct field, a field organization to have marketing expense associated with both direct-mail and direct response and also it's our support functions. Those are some -- most of our IT costs are in SG&A. And I think that will give you a good feel for the big bucket.

So if it's moving it is in the SG&A? [indiscernible]

(MULTIPLE SPEAKERS)

-- associated with producing the check itself it is in SG&A.

My last question is the business services segment is grown to be a fairly important part of the whole picture. Is exhibiting very different financial characteristics, then the checkprinting business and I was wondering whether that the business that is potentially separable from the Company -- in the past you guys created great shareholder value by separating E bonds from the check business and I was wondering if that's any opportunity down the road does that business continue to get bigger and if you guys continue to not get value particularly highly in stock market as you are if there's any chance of that is something that could be separated?

We're not going to comment on whether we separate any of our businesses, that's a strategic issue. But you are right, that business unit has demonstrated characteristics of results that are different from the financial services business unit and certainly our objective is to -- going back to my earlier comments -- is to create value for shareholders, is to provide new products, new services where we can create value for our customers and their clients and their customers and that is certainly one of the business units that has those characteristics. So we continue to see that as an opportunity. I mean if you say, could you physically separate it? Yes I mean it is a business unit that you could put a fence around but that would come down to a strategic decision vs. a tactical (inaudible)

One other comment on the SG&A side. Our three business units do have different characteristics of SG&A. If one takes a look at the direct marketing businesses in general they are higher SG&A business than -- and we got two of those - both our Direct Check business and our Deluxe Business Services business unit. Their SG&A is considerably higher as a percentage than our financial services business. And that's very consistent as one looks across industry in the direct marketing, direct response kind of categories. So we do have different characteristics. I just want to point that out as you're thinking about how that applies to issue the three business segments.

Final question is a follow-up from Cliff Josephy. H.T. Bross (ph)

My question is when you talk about the pricing pressure in the press release? I just want to know, is that exclusive of the contract acquisition cost -- as a separate? Are you talking about that separately?

Contract acquisition cost is really a prepaid discount. It is saying all right I am going to give you your checks at a lower cost and we're going to pay that upfront. So it's a time value of money added to the discount. It's just a prepaid discount.

I understand what that it, so when you talk about pricing pressure you're talking about the contract acquisition cost -- contract acquisition cost?

All of it.

There are no further questions. Please continue.

Just a reminder that a replay of this call will be available until October 23rd by dialing 320-365-3844. And when instructed, provide the access code, 701906. The auto presentation and accompanying slides will also be archived on Deluxe's web site - www.Deluxe.com. In addition, Deluxe will present at the Northland Securities investors conference at the Minneapolis Downtown Radisson Hotel on Thursday, October 23rd at 1:50 PM Central Daylight Time. We will webcast the presentation and also archive it on our web site for those not able to view it live. Again thank you for joining us today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your anticipation and for using AT&T Executive Teleconference. You may now disconnect.