Deluxe Corp (DLX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Deluxe Corporation second quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during today's call. Please press star and then zero. As a reminder, today's call is being recorded. Now I will turn it over to host, Mr. Stuart Alexander. Please go ahead.

Thanks Shawn. Good morning, everyone and welcome to Deluxe Corporation's 2004 second quarter investor conference call. Today you'll hear from Lawrence 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 prepared comments. In accordance with regulation FD, this conference call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website and I will tell you how to access the replay at the conclusion of our teleconference.

Before I turn the call over to Larry, I will make a brief cautionary statement. Comments make today regarding earnings estimates and projections, and statements regarding managements intentions and expectations regarding future performance are forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, these comments are subject to risks and uncertainties that could cause actual future results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those presented are contained in the news release issued this morning and in the company's form 10-Q for the quarter ended March 31st, 2004.

In addition, the financial and statistical information that we'll review during this call, is addressed in greater detail in today's press release which is posted on our website, Www.deluxe.com in the investor relations section and as was furnished to the SEC in the form 8K filed this morning.

In particular, any non-GAAP financial measures mentioned during this call are reconciled to their comparable GAAP financial measures in the press release. Now I will turn the call over to Larry Mosner.

Thank you, Stu, and thanks to everyone listening today, whether via phone or the internet. We're pleased to be reporting strong second quarter results. We exceeded the high end of our earnings guidance by 8 cents per share. In addition we are excited about the opportunity to discuss our acquisition of New England business service, or NEBS, which closed on June 25th. NEBS, along with its subsidiaries is the leading company in the small business space with approximately 3.1 million active small business customers across the United States, Canada, France and the United Kingdom. NEBS has a wide variety of business products and services, including business & computer forms, checks, promotional products, stationary and personalized promotional apparel. Some of the brands in the NEBS portfolio are Mcbee, rapid forms, Safeguard, and Chiswick. As well as the flagship NEBS brand which has been serving small business customers since 1952. NEBS employs more than 4,000 people throughout its combined operations. l'll update you on our progress integrating the two companies, as well as provide company and business segment highlights in a few minutes, and as always, after the call, we will open the lines for your questions. First, however, our CFO Doug Treff will cover the financials.

Thank you Larry. As Larry mentioned, we achieved excellent financial results during the second quarter and successfully closed the acquisition of New England Business Service. We reported a 13.8% increase in second quarter earnings per share to 91 cents, compared to 80 cents last year. Net income was up slightly to $46 million from $45 million last year. We exceeded the high end of our EPS guidance for the quarter by 8 cents. Primarily as a result of of plant consolidation and other actions taken to manage our costs. EPS was favorably impacted 9 cents, due to the net impact of fewer shares outstanding compared to the second quarter of 2003. Negatively effected 3 cents due to stock base compensation competence and 2 cents negatively affected due to acquisition and integration related expenses. Our financial statements include NEBS results of operations for the last five-days in June following the acquisition. Revenue for the second quarter was flat to last year at 309 million. This includes nearly 8 million in NEBS revenues during the last five days of the quarter.

The revenue decline for our other businesses what was driven by a 6% decline in unit volumes, due to lengthening reorder cycles and lower consumer response rates for our direct check segment. As well as the overall decline in check usage, which is impacting all of our business segments. Partially offsetting the unit decline was a 3.8% increase in revenue per unit.

Revenue per unit improved as a result of our customer care organization's ongoing ability to sell premium priced license and specialty check designs and other value-added products and services, as well as price increases within direct checks and business services. This improvement in revenue per unit was partially offset by continued pricing pressure in our financial services segment.

For the quarter, gross margin increased to 66.7% of revenue from 65.5% last year. The increase in revenue per unit, combined with the closing of three plants, productivity improvement and ongoing cost management efforts, more than offset the impact of lower unit volume. Selling general and administrative expense, or SG&A ,as a percentage of revenue was 40.9% compared to 40.4% in the second quarter last year. SG&A spending increased by $1.5 million vs. last year primarily due to additional NEBS SG&A expense, Higher stock base compensation, and NEBS integration costs. At the same time, we have reduced fixed costs during the last three quarters and have also lowered discretional spending. As a result of our increased revenue per unit, cost savings efforts and productivity improvement, our operating income increased 2.6% to $80 million. Our operating margin for the quarter improved to 25.8% of revenue from 25.1% a year ago. Now, I will move on to the second quarter's results in each of our businesses. But first I want to mention that we are still evaluating how the various operating units of NEBS will be incorporated into our reportable business segment. Therefore we most likely will report NEBS as a separate business segment through the remainder of 2004.

Financials services revenue decreased 3.7%. Lower unit volume, due to the decline in check usage and lower prices on checks sold to financial institutions contributed to the revenue decline. As we've mentioned on previous calls, financial services is experiencing heightened price competition as check usage declines. This competition produces greater discounting when we renew or sign new contracts with financial institutions.

At the same time, revenue declined operating income actually increased 7.8% to $39 million. The revenue decline was more than offset by cost management efforts during the last three quarters during which we closed three manufacturing plants. Also offsetting the revenue decline was lower discretionary spending. Moving on to our direct to the consumer business. Direct checks revenue decreased 6.3% from last year's $71 million. Operating income decreased more than 10% to $21 million. Both revenue and operating income declined primarily as a result of lower unit volume.

Three primary factors contributed to the lower unit volume. Fewer checks being written as consumers move to alternative payment methods. Longer reorder cycles that were generated by our promotional strategies for multi-box orders, and lower consumer response rates to direct mail advertisements.

This lower unit volume was partially offset by revenue from premium priced license and specialty check designs, value-added products and services and price increases. In our business services segment, revenue increased 5.5% to $64 million. While operating income increased 8% to $20 million. These improvements were due to new business gains, our ability to leverage fixed costs as revenues increase, as well as price increases. Both revenue and profitability continue to grow within business services. Primarily as a result of our small business referral program and continued high retention rates of existing customers.

Let's move on to the consolidated results for the first six months of the year. EPS increased 13.4% to $1.86 from $1.64 last year. Net income was down $1 million from last year to $94 million. EPS increased due to fewer shares outstanding, as a result of our share repurchase activity. Revenue decreased 1.4% to $618 million. The acquired NEBS business contributed $7.7 million of revenue. The decrease for our other businesses was due to a 4% declining unit volume, partially offset by a 1.4% increase in revenue per unit.

As we discussed for the quarter, unit decline was due to lengthening reorder cycles and lower consumer response rates for our direct check segment, as well as the overall decline in check usage which impacted all of our business segments. The increase in revenue per unit was due to the ability to sell premium priced licensed and specialty check designs, and additional value added products and services. Partially offset by the continued pricing pressure in the financial services segment. Gross margin increased to 66.1% of revenue from 65.4% last year. Higher revenue per unit, combined with operating efficiencies and ongoing cost management efforts offset the decrease in unit volumes. SG&A was 40% of revenue, compared to 39.5% last year. However, SG&A was down $1 million due to cost takeout efforts and reduced discretionary spending, partially offset by higher advertising expense, The impact of stock-based compensation and NEBS SG&A expense.

Operating income was 162 million, down $1 million from the previous year. However, operating margin improved to 26.1% of revenue for the first half of the year from 25.9% last year. Now to highlight a few other items from our balance sheet and cash flow.

The NEBS acquisition is included in our June 30th balance sheet. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. This allocation is preliminary pending detailed analysis and outside appraisals, as well as completion of our integration plans. The preliminary allocation resulted in goodwill of $516 million. Which may increase or decrease as the allocation analysis is completed. The acquisition initially was funded via short-term bridge financing and commercial paper. As a result, net debt total debt net of cash increased $686 million from the end of last year. Our total debt was $1.3 billion at the end of the quarter. We intend to refinance a portion of this short-term debt with long-term debt in the upcoming months. As for our share repurchased program. We repurchased 200,000 shares during the quarter.

Although our share repurchase authorization is still in effect, we have canceled our 10-B5-1 program. Most likely, we will not repurchase additional shares in the near future. Instead, we intend to focus on using our cash flow to pay down debts. A look at the cash flow statement show that cash provided by operating activities was $124 million for the first half of the year, compared to $50 million in the first half of last year. The 2004 increase was due to lower contract acquisition payments, lower payments for performance-based employee compensation, and the 2003 changes in deferred advertising in accounts receivable. Contract acquisition payments were $8 million in the first six months of this year compared to $36 million in the first six months of 2003. The lower level of contract acquisition payments relates to the timing of new contracts and renewals. We anticipate operating cash flow for the year to be in excess of $235 million, including the impact of NEBS, up from $181 million in 2003. Capital expenditures, for the first six months of the year were $14 million. Including NEBS, we anticipate spending approximately $45 million on capital projects this year. Free cash flow or cash remaining from operating activities after capital expenditures and dividend payments was $73 million for the first half of the year.

Looking ahead, we expect our third quarter earnings per share to be in the range of 90 to 95 cents per share with full year EPS of at least $3.65 per share. Included in these estimates is the impact of the NEBS acquisition which is anticipated to have a minimal impact on earnings the last half of the year. I look forward to taking your questions in a few minutes, but first I will turn the call over to Larry.

Thank you, Doug. A wise person once said, good things come to those who wait. To those of you who have been listening to me state and restate that acquisitions are a part of Deluxe growth strategy, I would like to say two things, the NEBS acquisition is a good thing. And thanks for waiting. As I mentioned in my opening remarks, we completed the transaction on June 25th. The result of is a company with a customer base of more than 6 million small businesses and the ability to grow more rapidly and profitably together than either company could have on its own. In fact be we've used the theme 'better together' since day one of the acquisition. It's one of the most comprehensive, if not the most comprehensive product and service offerings for small businesses.

Our expanded portfolio will accelerate our efforts to capture a larger share of customer's wallets and also increased revenue from non-Check sources. And finally, the flexibility we will get from combining NEBS digital printing capability with Deluxe's proprietary offset technology. Because we occasionally get questions about our choice of printing platforms, l will share with you that we don't expect to replace one technology with the other. Rather, we will capitalize on the advantages of each, in order to improve efficiencies and gain flexibility in serving our financial institutional clients, small business customers and consumers. Within the many NEBS product lines, there are some common offerings with business services. This primarily includes business checks and forms. However, NEBS adds many new products to our selection. Such as greeting cards, promotional items, customized apparel, retail packaging products, display materials and payroll services.

NEBS also expands our distribution channels with its sales force, it interacts directly with small businesses. In addition, NEBS targets particular customer segments, for example, the Histaccount serves medical professionals, And CYCOM serves the dental community. There are more than 20 brands under the NEBS umbrella. Some of the more familiar ones are Safeguard and Mcbee, specializing in printed products and promotional items. NEBS and rapid forms, both of which offer products similar to the business services segment. Forms, checks, envelopes, labels and stationary. And Chiswick and Russell and Miller, companies that offer standard and custom printed packaging and display materials. NEBS also has subsidiaries that produce and distribute casual apparel for small businesses.

The potential business opportunity that exists to serve small businesses is substantial. Both in terms of the actual number of customers as well as the outlook for small businesses to represent a sizable and growing part of the U.S. economy. Consider these two items: One, there are an estimated 23 million small businesses in the United States. Between deluxe business services and NEBS, we believe we service almost 25% of them. While that is a substantial reach, there remains a tremendous potential to better serve and grow our existing customer base. And two, small businesses are a dynamic group. There is a large number of closures and start-ups every year, which adds even more potential to this large and growing market.

Turning back to acquisition and integration news, I'm pleased to report that Rich Schulte has been named President of the new NEBS DBS business. Prior to being named President of Deluxe Business Services in October of 2001, Rich held a number of positions at Deluxe, at Check's Unlimited and at Current. Both before and after Deluxe acquired it in 1987. Because of his experience in many functional areas and his management record in growing revenue and profits. Rich was a natural choice for this position. Of the 14 quarters Rich was President of business services, revenue increased from the previous quarter in 12 of 14 quarters. In fact, between the first quarter of 2001, and the second quarter this year, revenue in the segment increased 28.4% and profits increased 48%. Rich has named leaders within his new organization and his established integration teams comprised of both Deluxe and NEBS employees who are focused on realizing the synergy opportunities as these two great companies and closures come together. The teams have moved ahead quickly with their plans.

I will share a few early highlights. But first I want to welcome publicly all NEBS employees to Deluxe. I want to say thank you for your corporation and patience as we combine these two great companies. In any acquisition, employees from combining organizations feel at least a little anxious about the future. Particularly in the early stages of integration. However, we have found NEBS employees to be engaged, professional and willing to contribute ideas in what we can accomplish together. The spirit of cooperation within and across teams has been excellent. I know this because either I or someone from our executive team has visited every one of NEBS North American facilities in the past month. We talked with groups as well as individuals. We have answered questions and addressed concerns and we have shared information and had open and honest exchanges. Employees have responded very favorably Employee enthusiasm and cooperation will go a long way in helping us realize our plans for integration timing, cost savings and revenue opportunities. More about those in a minute.

As I said earlier, the acquisition of NEBS is a good thing. And that is particularly true for shareholders. We expect the acquisition to be accretive to earnings and cash flow in 2005. In addition, we anticipate it will provide returns beyond our cost of capital as we realize our synergy goals.

Already we have begun to shape the new organizational structure. For instance, we have made the decision to move a number of functional areas to a shared services model. These areas include HR, IT, manufacturing, finance and supply chain. We believe that taking a shared services approach whenever practical will best position us for success and allow us to leverage all of our strengths across all of our business units. Be assured that any and all future changes we make will be driven by our goal to serve clients and customers more effectively. And enhance our operational excellence.

Now I will move on and talk about how this acquisition meets the criteria that we've established for acquisitions. This NEBS/Deluxe combination delivers products and service offerings that are adjacent to each other. The ability to leverage core competancies and increase operating efficiencies. In earnings and cash flow accretion.

And finally, we believe the transaction will deliver value for our shareholders. Specifically in 2005, we expected to add between 35 and 45 cents in earnings per share. We intend to accomplish these results by utilizing the best talent of both companies to drive operational synergies that will generate at least $25 million in annual cost savings, beginning in 2005. In fact, we have already identified a number of opportunity to realize cost savings, such as eliminating redundancies, leveraging our shared services environment and enhancing productivity by implementing lean principals and sharing best practices. Looking beyond the business, operational and financial benefits of the acquisition. NEBS and Deluxe compliment each other in less tangible but equally important aspects. Such as value we place in our respective customers, employees and business partners. Corporate mission and company culture.

If you know anything about Deluxe, you know that it's not uncommon for employees to have worked here 20, 30, and even 40 years. The same thing is true at NEBS. I'm sure you will have questions related to the acquisition, but for now, l will move on and talk about our financial services business segment.

First, I would like to commend each employee in financial services on a tremendous quarter. In spite of the challenge of declining revenues. This business segment had a better quarter in terms of operating profits than a year ago. Clearly employees in financial services are willing to reexamine how we do things. To think differently about our business and to challenge cost relentlessly All of which allow us to reap the success.

At the same time, we continue to see escalating price competition in serving financial institutions. Occasionally, as in my next topic, we see extreme examples of it. A large financial institution and a long time client has informed Deluxe of its intention to switch to a new supplier when the contract with us runs out later this year. As I have stated on previous calls with a DFS focus selling approach, our goal is to retain clients by targeting financial institutions that seek high quality and superior service for their customers not just the lowest price check they can find. During the bidding process, the focus ultimately was on price. Had we abandoned our sales philosophy in favor of keeping the business at all cost. and retaining the client we did not want to lose, we would have done so at the detriment to the health of our business. Because this financial institution is one of the largest banks in the U.S. , the price it pays for our services already was subject to significant volume-based discounting.

Going to the pricing level that would have been required to retain the business would have put us in an untenable pricing situation and resulted in increased pressure on our margins. This financial institution's decision will negatively affect both financial services and business services because of the bank's participation in our business referral program. With this loss, we will draw from all available experience, as we eliminate the variable and fixed associated with serving this client. We don't anticipate that we will be able to mitigate the entire impact. And therefore we expect our operating income to be negatively effected by approximately $20 million in 2005. This news does not alter financial services selling approach focusing on financial institutions that seek high quality products and superior service for their customers, not just the lowest check prices that they can negotiate.

Before moving on to talk to direct checks, I would like to provide you an update of deluxe knowledge exchange series initiated by financial services in 2003. As a reminder, the deluxe knowledge exchange is an ongoing and complimentary educational series offered exclusively to our financial institution clients. The goal is to help our clients create a better experience for their customers. Ultimately stronger performance in customer satisfaction and retention delivers improved business results for these financial institutions. This exchange is a series comprised of multiple communication vehicles.. The four components are collaborative development sessions, a quarterly printed publication, a quarterly web based seminars, and quarterly audio conferences. We have 12 client members participating in our collaborative sessions, and we've averaged about 300 members for web seminar and audio conference. Currently, we've enrolled more that 2000 members representing 1200 financial institution clients surpassing our expectations by about 50%.

Now let's move on to direct checks. The direct checks segment continues to experience significant challenges. Consumer response rates to our direct mail advertisements our primary means of new customer acquisition, continue to decline. As a result, costs to acquire new customers continue to go up. We attribute the lower response rate to a couple of things. First, reduced check usage and second the fact that our target customers are receiving more direct mail offers. To address this challenge, we continue to analyze our marketing approach to ensure that we are utilizing the most effective media sources. In addition, years of multi-box promotions by all major direct to consumer check printers have lengthened the order curve.

Moving on to the topic of new products, we have found response rates to the rolled address label product line we introduced to be lower than we expected. We continue to test various advertising configurations and programs, after which we will evaluate the results and target future marketing efforts only in those channels that provide an acceptable return. In the meantime, we are testing and introducing other business ideas. For example, ID Theft card, our identity theft service we talked about last quarter is picking up momentum. Consumer demand for products developed for protection from the risks and potential losses of identity theft is strong and increasing. During the next few quarters we will be testing and evaluating a number of new concepts designed to deliver solutions to help customers organize and simplify their lives.

Next on the horizon is an attractive line of 2005 calendars. Customers will be able to choose from over 200 themes. Including many designs that either match or closely resemble check images.

Having discussed our business segments, I have one final item to talk about regarding our operational excellence. Deluxe has launched a project to upgrade the software in our order processing and call center operations. We will be leveraging our substantial SAP enterprise resource planning system and implementing a new module.

Deluxe already uses SAP for our financial system, procurement, production planning and human resources. With this new project, we will implement SAP sales and distribution module. The project will combine the technology we use to interact with customers and our back office system on a common platform, allowing us to improve the customer experience, standardize systems and processes, take costs out of our IT infrastructure in the areas of hardware, software and ongoing maintenance, streamline our order capture processes, provide a foundation from which we can more efficiently update and enhance our technology. Facilitate future innovation and growth in the services we offer our customers. Provide the risk and control measures necessary to continue to comply with Sarbanes Oxley and similar regulations, and enhance our ability to integrate new businesses with Deluxe systems. We have already seen the value of this capability as we integrate NEBS and Deluxe. We've kicked off the project and expect to implement the module before the end of 2005.

I have one more agenda item before finishing up with our business outlook. We have appointed two new directors to our Board, T. Michael Glenn. And Isaiah (Ike) Harris. This brings the total numbers of directors to 11, nine of whom are independent of management. Mike is Executive vice president for Market Development and corporate communications for FedEx corporation and President and CEO of FedEx-corporate services. He has valuable marketing sales and customer service, and strategic planning experience.

Ike is President of Bell South Enterprises. which is part of Bell South corporation in Atlanta. He joins our board with nearly 30 years of business experience in the areas of general management and corporate finance, which will be very valuable to Deluxe. I'm excited and honored to have Ike and Mike join our board. I will wrap up my prepared comments this morning with a business outlook. As Doug mentioned earlier, we expect third quarter diluted EPS to be between 90 and 95 cents per share. and 2004 results to reach at least $3.65 per share. We believe these targets are reasonable as well as attainable. Particularly as we begin to realize the benefits of the NEBS acquisition and continue to operate all of our businesses with operational excellence. Now Doug and I will be happy to take your questions.

Thank you, ladies and gentlemen, if you wish to ask a question, please press star then one on the touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speaker phone, please pickup the hand set before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment, please, while we wait for our first question. And our first question comes from Brian Foote from IRG Research.

Thanks, it's Brian Foote. Congratulations on the results and the guidance. Just a couple of questions here, in terms of the contract acquisition payments, looks like significantly managed downward year over year, should we be expecting higher second half results versus the first half results on that line item? I mean, are there other contracts that are coming up in the more pronounced way in the second half? Or is that number something that we can look at as a trend toward -- maybe lower up front payments going forward?

Brian, we do anticipate that the second half of the year will have higher contract acquisition payments than the first half. As I mentioned in my comments, it really varies due to timing of renewals and where those come up during the year. Still, we anticipate the contract acquisition payments will be less than $30 million for the year.

Great. The unit decline seems to be a little bit greater than would be expected given the long-term trends that have been discussed. Do you consider this to be a hiccup or should a 3-5% unit decline over time still be something that we'd be looking at.

I think from an industry perspective, 3 to 5% is the appropriate range for us to look at. Certainly checks written are continuing to decline. And we don't see that changing.

Now in terms of this customer loss, in the near future, are there any customers of that size on the horizon that we should be -- that we should be concerned about. Is this an anomalous type of reaction based on their size, or is it conceivably the beginning of a trend?

Well, I think, as we have said in previous calls -- is contracts today run typically between a three and five year range. So every year, we have a series of contracts that get renewed. And/or come up for renewal. So that won't change. I think we were seeing contracts tending to go toward the longer of that 3-5 year range. Sometimes exceeding that in terms of contract length. What has picked up is -- has been the number of FI consolidations. And those are something that is truly unpredictable in terms of which ones are going to act and when and whom they might combine with. And I think you've certainly seen that this year. So those are the key drivers. But we don't -- you know, forecast any particular unusual pattern of contract renewals.

So it's safe to say that this particular FI was a acquirer or the result of a merger?

No, they went to RFP and so we bid on that business, and we lost it. So it's that direct.

In terms of the NEBS acquisition -- and by the way, congratulations on that. -- the effect on EPS this year, you said, would be minimal. That is net of the interest -- The initial additional interest that you're taking on, I assume?

Exactly, Brian. Factor that in and there will be operating income improvement, but it will be offset by incremental interest expense.

And for the sake of clarification, that same type of rationale applies to your 35 to 45 cents next year; is that correct?

35 to 45 cents would include anticipated increased interest expense next year, correct.

Does that 35 to 45 cents also include those cost benefits that you've discussed the $25 million?

Yes, it does.

Great. I'll jump off for now. Again, good job.

Thank you.

Thank you. And the next question comes from John Patrick Walsh from Wachovia Securities. Please go ahead.

I was just wondering, translated from a NASDAQ position, it's not an absolute revenue you're going to be taking on from the NEBS business, how do you think that will impact your existing services segment, in terms of adding revenue to that business.

We have -- as I comment, a much broader portfolio of products and services that we can offer across all those 6 million customers that we have in both businesses that we will be able to provide -- enable us to provide a higher level of service to those small business customers. And really gain an increased share of wallet.

Okay. And in terms of the cost savings you expect to realize once you fold NEBS in, how quickly do you expect to realize those cost service saves and particularly for back half of this year, how much do you think you'll be able to realize in cost savings.

It terms of cost savings we aren't looking at substantial cost savings for this year, net of the costs to realize those. In addition, another unknown at this time related to 2004 is what the result of the valuation of assets will be, that will likely increase the amortization of intangible assets.

A question in terms of the balance sheet. Your debt at this point stands around 1.3 billion. What are your debt repayment plans. One per, I guess probably, year-end, where would you have that level at and maybe 18 months out. Where do you think you can get that to?

We haven't provided specific direction, John, on where debt will be at year-end, but our focus will be to pay down debt. So to the extent that more than $235 million in operating cash flow is available after Cap-Ex and after dividends, we will direct that toward debt reduction.

Okay. I guess, related to that, your working capital plans for the back half of the year, how will NEBS impact that?

In terms of working capital requirements, there are some one-time costs associated with the acquisition related to changed control payments, funding of certain benefits programs. incentive compensation payouts for the end of NEBS' fiscal year, which was at the end of June, that will have some slightly negative impact in the second half of the year.

Thank you very much.

Thank you. Our next question will come from Mark Yukelson, Segmore Hill Capital Please go ahead.

Just a few questions for you guys. You can just give an update on the facility closures?

We have completed all three of the facilities that we had previously announced and those are all completed now.

Was some of the upside on the quarter from closing those maybe a little earlier than expected?

I guess a little bit. But not marginal. We have one more facility that will be closed in our direct check business that we've announced. That is Aniston Alabama. That will close in the fourth quarter of this year. So the three I talked about were in our financial services business segment and Aniston is the fourth. That one is -- slightly ahead of schedule.

And then just on cost savings. I think it was 24 million this year and then another 12 million next year. From the plant closures. I wonder if you're sticking with those numbers or is it possible for some additional savings?

We're on track to achieve those savings. I would not raise those numbers, no.

That's it for my questions. Thank you, guys.

Once again, ladies and gentlemen, if you do wish to ask a question at this time, please press star and then one on your touch-tone phone. One moment, please. We will wait for our next question. Your next question comes from Andrew Jones from North Star partners. Please go ahead.

Good morning, guys.

Good morning. Andrew.

A couple of questions, first on the customer that you guys lost, the competitor who took that -- is that somebody that you have taken business from in the prior year, I was wondering with what the dynamic was there.

Through the RFP process, there are always customers that are moving from one supplier to another. And that change is based upon the requirements of the financial institution and who bids on that, if it goes to RFP and what the dynamics happen to be at that time. So I don't think that there's anything to characterize here that's unnatural. I think it's -- as we have commented, it continues to be a very, very competitive environment on pricing. And that has increased in its magnitude and we see that continuing.

You would say the pricing environment is even more difficult this year than last year?

Yes.

Because some of the people in the industry have talked about a more rational approach to business, but you're saying that you're not seeing that when it actually comes to filling out the RFPs.

All I can tell you is that from our experience and the RFPs to which we have responded, pricing continues to be a major requirement for the financial institution. Plus, what I had commented on earlier, is with the increased activity in financial institutions and consolidation, that puts additional pricing pressure on. For example, even where -- if there are two banks that are being combined and even if they are both Deluxe customers, that results in lower margins on the combined business. Because they aren't going to be at the same pricing and certainly the FI is automatically going to go to the lowest priced contract. And then, looking at even the price lower than that, simply because they've now got more volume that they are doing and have an expectation of greater volume discounting. So nothing to -- you know, that we haven't talked about before. But it continues.

Right. With a loss of that magnitude, you guys put a number on it. Given that you start out that much in the hole for next year, is it possible that with the cost savings and everything, that you can still see stability in the earnings from the check business? Or is it destined to decline with a loss like that coming from right off the top.

I would say that we're going to see continued pressure on margins in the check section of our business. Do I not see it abating. The rate of decline might slow. But I do not -- and that's an unknown at this point. But I see it just becoming more and more difficult to offset pricing pressures with increased cost savings. As you know, we have been exemplary in our desire and execution for managing the cost side of our business over the last many years. We continue to do that. But some of these pricing pressures and the pressures on margin will probably be greater than our ability to offset them completely by just on the cost side.

And one last question, on the NEBS acquisition. Once you kind of get beyond the cost savings of integrating that in with your business, what kind of growth rates are inherent in the kind of product lines that NEBS has? Is it different than your business services? Or you can just talk about that in general, please?

Sure. I think that, first of all, the growth rates -- the business is a big chuck of their business are very similar to ours in terms of checks and forms, but they also are in non-check product, which is a positive. None of those businesses are what I would call high-growth, revenue growth businesses. They are all in a mature and stable businesses However they do have growth associated with them. Probably in the low single digits. And the value that we see in that will be for us to leverage the broad product and services portfolio that we have across a much larger business customer base and to bring greater value to each of those businesses to increase share of wallet. And, at the same time, look for new products and services that we can identify that would enable us to bring those into our portfolio either through organic and/or additional acquisitions that would provide additional growth. We really see the NEBS acquisition as establishing a very solid platform for servicing that small business segment and being able to expand that both on organic and in looking for additional opportunities for acquisitions.

Thank you.

Thank you. And ladies and gentlemen, once again, if you do wish to ask a question, please press star, and then one on your touch-tone phone. We have a follow-up question from Mark Yukelson from Sigmore Hill capital. Please go ahead.

Just a question under guidance for the year. What are you guys including in that for integration and acquisition expenses?

In our guidance there. We are saying that the net impact of NEBS will be nominal, a minimal impact, favorable or unfavorable to EPS that all results will net to zero.

Is there any way you can give us an idea? In this quarter you broke out the two cents that you attributed to acquisition related expenses. You can give us an idea of how much that expense related to those two things you see going forward?

Mark, I think at this time, it would be best to wait until a third quarter call to give greater visibility. Right now, as you understand, given that we were closed just a month ago. We are very much pressing forward with the development of integration plans and efforts. Any guidance that I gave you now would be fairly preliminary. So just as soon talk to that on the third quarter call.

Thank you, guys.

This is Larry Mosner. I just wanted to come back here and thinking about the response I just gave and provide greater clarity about the overlap. My comments were with relative to product overlap. If the question intent was on customer overlap. We see very, very little customer overlap in the customers that we have as well as that. So I just wanted to add that for clarification. We are ready for the next question.

At this time, we are showing no questions from the phone participants.

Okay. Thanks, John. And thanks to our audience for attending today's call. In closing, I would like to reiterate my enthusiasm for the NEBS acquisition. Together, NEBS and Deluxe will have a combined strength that will allow us to accomplish great things as we serve a customer population of more than 6 million small businesses. Our collective portfolio of products and services will enhance our position within the challenging check printing marketplace. Particularly as it relates to helping thousands of existing and potential financial institution clients improve relationships with their small business customers. From a manufacturing perspective combining NEBS digital printing capabilities with Deluxe's proprietary offset printing technology will give our company a broader technical platform. I believe the net result will be increased value for our shareholders. And now I would like to turn the call back to Stu.

Thanks, a replay of this call will be available until August 6th by dialing 320-365-3844. Provide access code 738494. The audio presentation and accompanying slides will also be archived on Deluxe's website www.deluxe.com. I would also like to remind you that Deluxe will report third quarter earnings on October 28th at 10:00 central time with a teleconference and webcast. We would like to thank you for joining us today.

Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.