Deluxe Corp (DLX) 2004 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by and welcome to the Deluxe Corporation third quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded and I would now like to turn the conference over to our host, Stu Alexander. Please go ahead sir.

Thank you, Mary. And good morning everyone and welcome to Deluxe Corporation’s 2004 third quarter investor conference call. Today you will hear from Larry Mosner, Chair 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 is open to all interested parties. A replay fo the call will be available via telephone and Deluxe’s website. I’ll 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 made today regarding earnings estimates and projections and statements regarding management’s 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 that we issued this morning and in the company’s Form 10-Q for the quarter ended June 30th, 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 FCC in the Form 8-K filed this morning. In particular, any non gap financial measures mentioned during this call are reconciled to their comparable gap financial measures in the press release.

Now I’ll turn the call over to Larry Mosner.

Thank you, Stu. And thanks to the audience for joining us today. We’re pleased, once again, to be reporting strong earnings results. We exceeded our earnings guidance by .19 per share. Doug will speak to the reasons in a moment. Later, I will update you on the terrific progress we are making on the integration of New England Business Service and discuss a number of other topics.

Highlights from Financial Service and Direct checks, the Check 21 legislation that went into effect today and Deluxe’s continued cost management efforts. At the end of the call, we’ll take your questions. But first, I will turn it over to Doug who will cover the financials.

Thank you, Larry. For the third quarter, earnings per share were $1.14 compared to $1.09 last year. Yet income was flat compared to last year at $58 million. We exceeded a high end of our EPS guidance for the quarter by .19, primarily due to a contract buy out from the early termination of a contract we reported to you back in 2003 and continued efficiencies in cost containment.

Compared to the third quarter of 2003, EPS was favorably impacted .09 due to the contract buy-out and .06 due to the net impact of fewer shares outstanding. EPS was negatively effected .05 due to NEBS integration related expenses and .04 due to stock based compensation expense.

The combined effect of these items was an additional .06 per share toward third quarter EPS. This quarter was the first full quarter that included NEBS operating results. NEBS contributed $4 million to our operating income, including $4 million of integration expenses.

Last year’s third quarter results were positively impacted by approximately .14 per share from the expiration of certain income tax periods and completion of tax audits.

Revenue for the third quarter was $485 million, up $170 million or 54 percent compared to last year. This includes $177 million from NEBS. The $7 million revenue decline for our other businesses was driven by a 7.3 percent decline in unit volume, due to lower consumer response rates and lengthening reorder cycles for our Direct Checks segment, as well as the overall decline in personal check usage, which is impacting our Direct Checks and Financial Services business segments.

Partially offsetting the units decline were the contract buyout I referred to earlier, which was valued at approximately $8 million and a 2.9 percent increase in revenue eper unit. The improvement in revenue per unit was the result of our customer care organization’s ongoing ability to sell premium priced licensed and specialty check designs and other value added products and services, as well as price increases within Direct Checks and Business Services. These improvements in revenue per unit were partially offset by continued pricing pressure in our Financial Services segment.

For the quarter, gross margin decreased to 64.8 percent of revenue from 66.3 percent of revenue last year, primarily the result of adding NEBS lower margin business to Deluxe.

A number of things had a positive effect on our gross margin. The additional revenue from the contract buy-out, the increase in revenue per unit, the closing of three plants, and other production efficiencies.

Before moving on, I’ll make you aware that on July 1st, we changed our method of counting for inventories from the last in – first out method, also known as LIFO, to the first in – first out or FIFO method. This change resulted in a $2.2 million reduction in costs to goods sold in the third quarter. We believe the FIFO method is preferable for our business. We have very quick inventory turnover, so using the LIFO method has little impact on our financial reporting. The change did not impact NEBS, as it was already under the FIFO method. This change means we now follow consistent inventory accounting practices throughout the Company.

Now I will move on the S G & A. Selling, general and administrative expense as a percentage of revenue, was 44 percent compared to 38.4 percent in the third quarter last year. S G & A spending increased by $93 million versus last year, due to NEBS. NEBS S G & A expense as a percentage of revenue, is higher than Deluxe’s because of NEBS’ direct marketing business model. Our cost reduction and productivity improvement efforts outside of NEBS, reduced S G & A.

As a result, our operating income increased 14.8 percent to $101 million. Of this $13 million increase, $4 million was attributable to NEBS after including $10 million of acquisition related amortization expense and $4 million of integration costs.

Our operating margin for the quarter was 20.8 percent of revenue, compared to 27.9 percent a year ago, which reflects the lower profit margins on the NEBS business.

Now I will move on to the third quarter’s results in each of our business segments. But first, I want to mention that we are continuing our evaluation of how the various pieces of the NEBS business will be incorporated into our reportable segments. Therefore, we will report NEBS as a separate business segment again this quarter.

Initial Services revenue decreased approximately 1 percent or $2 million. Lower unit volumes due to the decline in check usage and lower prices on checks sold to financial institutions, resulted in the revenue decline. As we’ve mentioned on previous calls, Financial Services is experiencing heightened price competition as check usage declines and FI’s continue to consolidate.

This competition produces greater discounting when we renew or sign new contracts with financial institutions, partially offsetting these decreases was the $8 million contract buy out. At the same time revenue declined in our Financial Services segment, operating income increased, excluding the contract buyout. The operating profit improvement was due to strong cost management efforts in the past year, which included the closing of three manufacturing plants. Also offsetting the revenue decline, was lower discretionary spending.

Moving onto our direct to the consumer business, Direct Checks revenue decreased 8.3 percent from last year to $69 million. Operating income decreased 5 percent to $23 million. Both revenue and operating income declined, primarily as a result of lower unit volumes. Three primary factors contributed to the lower unit volumes. Lower consumer response rates to direct mail advertisements, longer reorder cycles resulting from our promotional strategies for multi-box orders and fewer checks being written as consumers move to alternative payment methods. This lower unit volume is partially offset by a higher revenue per unit and productivity improvements.

In our Business Services segment, revenue increased 1.6 percent to $65 million. The revenue improvement was due to new business gains and price increases. Revenue continues to grow within business services, primarily as a result of our small business referral program and continued success in retaining customers. Operating income decreased 4 percent to $22 million. Both revenue and operating income in Business Services were negatively effected by the loss of the large FI account we mentioned last year.

NEBS revenue for the quarter was $177 million, with operating income of $4 million, including $10 million of acquisition related amortization expense and $4 million of integration costs. This is consistent with our expectations.

Now to highlight a few other items from our balance sheet and cash flow statements. As discussed in our second quarter call, the NEBS purchase price was allocated to the assets acquired and liabilities assumed, based on their estimated fair values. This allocation is preliminary pending detailed analyses and outside appraisals, as well as, completion of our integration plan. We expect this allocation to be finalized early next year. The preliminary allocation resulted in good will of $445 million, which may increase or decrease as the allocation analysis is completed.

Net debt, total debt net of cash, increased $690 million from the end of last year due to the acquisition of NEBS. Our total debt was $1.3 billion at the end of the quarter. On October 1, we refinanced a portion of our commercial paper with long-term debt. We issued $325 million of three-year notes and $275 million of 10-year notes. Since we completed this refinancing prior to issuing our third quarter financial statements, the amount of commercial paper which was refinanced is classified as long-term debt as of September 30th.

A look at the cash flow statement shows that the cash provided by operating activities was $214 million for the first nine months of the year, compared to $151 million for the same period last year. The increase was due primarily to lower contract acquisition payments. Contract acquisition payments were $8 million in the first nine months of this year compared to $45 million in the first nine months of 2003. We anticipate operating cash flow for the year to be in excess of $250 million, including the impact of NEBS, up from $181 million in 2003.

Capital expenditures for the first nine months of the year were $26 million. Including NEBS, we anticipate spending approximately $40 million on capital projects this year compared to $73 million last year. (Indiscernible) cash flow or cash remaining from operating activities after capital expenditures and dividend payments, was $132 million for the first 9 months of the year, compared to $73 million last year.

Looking ahead, we expect our fourth quarter earnings per share to be in the range of .83 to .87 per share, with full year EPS of approximately $3.85 per share.

I look forward to taking your questions in a few minutes, but first I’ll throw the call back to Larry.

Thank you, Doug. I’ll begin my comments today with an update on the NEBS acquisition and our activities to integrate NEBS into Deluxe’s operations.

If you’re unaware of this acquisition, Deluxe acquired New England Business Service on June 25th. The combined entity creates a single enterprise that serves more than 6 million small business customers and allows us to offer customers a broader selection of products and services. In addition, we believe it will greatly enhance shareholder value.

As I mentioned in this morning’s press release, the integration process is going well. Once the acquisition was complete and we were able to dive into the work of combining the two entities, we quickly realized that our original observations and predictions about NEBS were accurate. Both companies are customer focused. Our respective core values are similar and both NEBS and Deluxe employees are dedicated. Many have been with the Company a long time and they are committed to doing a good job. We already have accomplished a lot in bringing these two great companies together. For example, we have filled all the top leadership positions, choosing employees from both Deluxe and NEBS. We have developed and refined plans for approximately 60 synergy projects that will make us run as efficiently as possible and move us forward at a quick pace. In fact, we are on track to achieve our synergy targets. And, we have compared the two customer databases which has shown there to be very little overlap.

As we stated, both last quarter and back in May when we announced our intention to acquire NEBS, we expect the NEBS - Deluxe combination to deliver tremendous value for our shareholders. It adds more than 3 million small business customers. It gives us the ability to maximum traditional direct mail, field sales, distributors, internet sales and referral and marketing channels. NEBS product (indiscernible) boost Deluxe’s non-check product offerings while NEBS customer’s now can enjoy a broader selection of business check products and forms from Deluxe.

While our manufacturing processes are similar, we now have both digital and proprietary offset printing platforms. We will be able to leverage core competencies and increase operating efficiencies and we anticipate it will generate a (indiscernible) of earnings and cash flow.

Let’s move on to our Financial Services business segment. I will begin with a new educational resource being offered on our website – deluxe.com It’s call Deluxe Check 21 Center and it’s a web based resource that has two purposes. First, it helps consumers and small business better understand the impact of the Check 21 legislation that goes into effect today. And second, it’s a resource tool for financial institutions. You probably have heard and read about Check 21 in recent months. At the very simplest level, Check 21 allows financial institutions to convert a paper check into an electronic image. This image is called a substitute check and it becomes a legal replacement for its paper counterpart.

How will the Check 21 legislation impact checks? Here are some of the generally accepted realities of the Check 21 legislation. Check 21 does not change how consumer – your businesses – write checks. It only effects how checks our processed by financial institutions. Checks are not going away. In fact, Check 21 supports the use of checks by creating a more efficient check processing system. Checks will clear faster due to the more streamlined process. And, because less time passes, Check 21 will help financial institutions detect check fraud more quickly. Check 21 provides new option for check processing. Consumers may see electronic images, or substitute checks, on their bank statements. And, changes brought about as a result of the Check 21 legislation, will be gradual. Check imaging requires considerable time on the part of financial institutions.

Now I will update you on a new service from Financial Services – Deluxe ID Theft Block, a suite of monitoring and protection services that provides consumers with a way to guard against identify theft. The product includes five elements: credit monitoring and alerts, check order screening, identity theft consulting, identity theft lost recovery and a membership kit including initial credit report. We believe Deluxe ID Theft Block is the most comprehensive, identity protection service available, as part of the check ordering process.

Financial Services is offering ID Theft Block to customers of our financial institution clients via three channels - Deluxe Select, our order confirmation service and on Deluxe’s website. This launch represents the culmination of more than a year’s worth of focused market research and live (indiscernible) testing with more than 20,000 consumer interactions. We launched the product on October 11th, and already, have more than 1,200 financial institutions participating.

Deluxe ID Theft Block helps our clients effectively address their customer’s concerns regarding security, which then enhances consumer satisfaction and loyalty to the financial institution. In addition, the service increases revenue for financial institutions because we offer it to consumers on behalf of our FI clients.

The last new Financial Services product I will talk about is Deluxe Card – a prepaid, personalized, stored value card. Because the funds are backed by Visa, the card can be used world-wide wherever Visa credit cards are accepted. These cards are ideal gift solutions for anyone on your gift-giving list and can be purchased on Deluxe’s website. This product was rolled out with the intent to advance the Deluxe Financial Services mission of being a model supplier and partner to our financial intuition clients. By making the Deluxe card available to their customers, financial institutions can realize a number of benefits. The card expands and maximizes their street of products. It helps financial institutions retain and acquire customers. It offers a new revenue screening, one without internal investment, and, it delivers a product from which there is high consumer demand.

Now I will move on to our Direct Checks business segment. As we stated in this morning’s press release, we continue to be challenged by the same conditions I have told you about on previous occasions. Although response rates are down, reorder curves are lengthening and advertising costs are up, we continue to look for ways to improve revenue from existing customers and bring in new customers. Direct Checks has launched a new product line of more than 200 different calendar designs and we are actively marketing calendars to customers who place check orders over the phone and on the internet. In addition, we are testing a limited amount of print circulation to promote our calendar product line in the general market place.

Having covered highlights from our business segments, I will move on to general, Company news. For the third consecutive year, Deluxe appeared on the Information Week 500 listing of technology driven organizations. Information Week 500 is a prestigious listing of the most innovative users of information technology in the United States. The recognition reflects our focus on technology, which is one of the ways we differentiate ourselves in the marketplace. We continually seek to find ways to apply innovative technology solutions throughout our organization. Whether it’s through customized printing presses, the manner in which we operate our call centers or our multiple order capture methods.

Now I will move on to update you on our cost management efforts. In April of this year, we announced that we would close our Anniston, Alabama facility, where employees print checks and serve customers of our Designer Checks brand. The closure is now complete and Designer Checks orders are being produced in our Colorado Springs facility. Deluxe acquired Designer Checks almost five years ago and the Designer Brand has been a tremendous asset to our Direct Checks business segment.

We’re also in the process of closing two additional manufacturing facilities - Dallas, Texas and Tucker, Georgia. With more than 100 employees, the Dallas facility produces personal checks and business deposit tickets for financial services. The Tucker plant employees more than 75 people and produces business checks and business forms with the Safe Guard brand. When we have completed these facility closings, and we expect that will happen by the end of this year, Deluxe will have closed a total of six manufacturing facilities this year.

My last consolidation related item, is that we’ve decided to consolidated nine of NEBS regional sales offices, leaving 22 offices across the country. As always, closing facilities is one of the most difficult decisions we have to make because of the effect on our employees. I speak for the entire leadership team when I extend a heartfelt thank you to all of the employees impacted by these closures.

I will share another item having to do with operations. We continue to move toward a shared services environment – something we started in 1998. With the recent NEBS acquisition, this approach creates even more opportunities to realize cost savings. The shared services concept is simple. Bring together functions that are frequently duplicated across the Company and then offer these services more efficiently and at a lower cost. This operations model is enabling us to generate greater efficiencies, standardize processes and implement improvements in the future.

I will close with some comments on our business outlook. In our Direct Checks segment, we’re faced with declining personal check buying, higher advertising costs for new customer acquisition and lower response rates to our direct marketing promotions. The decline in personal check volume, also negatively impacts our Financial Services segment along with a competitive pricing environment that has been with us for a number of years and is accelerating. As such, it’s becoming harder to offset the pressures in Financial Services with cost management efforts alone. As we stated in today’s news release, we expect revenue from this business segment in 2005 to be lower by more than $110 million and the operating margin in this business to be 4 to 6 percentage points lower than 2004.

However, we believe Deluxe is in the best position to meet the market challenges. We continue to drive to be the low cost producer, to provide the best quality and service and to differentiate ourselves in the market place with a superior value proposition as we pursue opportunities to win new business.

Another positive internal factor offsetting external market conditions, is the growth within out Business Services segment. And now, the strength we have gained from NEBS, will enhance our business referral program which services our financial institution clients and other business partners. We believe that the combination of Deluxe and NEBS puts us at a position of unparalleled strength in which to serve the needs of our 6 million plus small business customers.

And now Doug and and I will take your questions.

(OPERATOR INSTRUCTIONS) Our first question is from the line of Mark Reader with Partner Reed Asset Management.

Yeah hi. It’s Mark Reader at Partner Reed Asset Management. I’m just curious, by the end of the third quarter were all the final acquisition payments for NEBS made or will there be further payments in the fourth quarter?

The majority of acquisition payments were made in the third quarter. There will be additional payments in the fourth quarter though.

And what’s the amount – is that the executive – what’s the – is it order magnitude?

There will be some additional severance payments that are made during the fourth quarter.

And you said the primary use of cash flow is pay debt over the next 12 to 18 months. Where do you sort of expect your net debt to end at the end of 04 and the end of 05?

We haven’t provided guidance for 05 yet. We anticipate, given the operating cash flow, that we will produce in the guidance given, it the $250 million of operating cash flow that you can roll forward that incremental impact, given where we are today, at the end of the third quarter and get to the net debt at the end of the fourth quarter here.

You did at - I think at one point give an 05, if I’m correct – that you expected cash amounts to be greater than $235 million. Is that still the case?

We provided guidance in the second quarter that cash flow from operating activities would be at least at $235 million. We’ve updated that in the fourth quarter here to reflect that that would be at least $250 million. We did provide some guidance as to cash flows related to the incremental impact of the NEBS acquisition in 2005 and we are confirming and saying that we are still on target to achieve those.

And what’s that figure?

The number we had provided for EBADA (ph) is $115 to $130 million incremental benefit.

And as far as thoughts on any future acquisitions. Do you have any at this point?

We don’t comment on future acquisitions but we would – I would respond the same way that we have said before, that we will consider acquisition, hence to NEBS. But right now we are focused on making sure that we integrate that and also maximize the value and the profitability of each of our business segments. But would be continually looking for the possibility of making acquisitions that would enhance our value proposition for our small business customer and financial institutions.

And – and sort of what is your target leverage. Do you have some sort of (indiscernible) sort of a maximum of where you expect to get to?

What – we do have a target right now. But the target takes into account that we are committed to maintaining a strong investment at grade ratings. So our focus really is on maintaining coverage ratios and leverage ratios that would allow us to remain at the investment grade level we are today which is Triple B plus.

Okay. Thank you.

And our next question is from the line of Beth Wade with J.P. Morgan Securities. Please go ahead. Beth Wade your line is open. We’ll move on. Our next question then is from the line of John Walsh with Wachovia Securities. Please go ahead.

Hi guys. I was wondering if you could give us a little more color on your outlook for 05 in the financial services division. I know you said you expect the revenue to be down around $110 million, which by my calculations would have it down, essentially around 15 percent. Could you maybe break out how much of that is pricing related and how much is volume related. Also, is any of that impacted by the loss of any significant contracts. And again, how long do you expect that type of pressure to continue?

John, yes, I’d be happy to respond to that. First we see the major trends here are one – continuing pricing competition and the other is consolidation of the financial institutions and that combination creates pricing pressure.

The $110 million is inclusive of a loss of a major customer that we talked about last quarter, which was about a $75 million customer and that was as a result of an RFP (indiscernible) RFP and we did – were not awarded that business. So the issues that we have moving forward, is the continued consolidation in financial customers and sometimes you win those – sometimes you lose those, as well as the pricing pressures. As we have commented before, even when – if two of our own customers consolidate, which has happened, that ends up in a decreased operating margin or profitability from that combination because the banks are usually not at the same pricing and when they examine the two contracts, certainly they look to go to the minimum - to the lowest, and usually then say well we’re now much bigger and expect a lower price from that, which is usually the competitive arena. So it is – that I don’t know in terms of an outlook. We don’t see that competitive arena abating. We don’t see the consolidation of financial institutions slacking off. So, we, therefore, have given that outlook for that business segment for 2005.

John Walsh. Okay. And two questions related to that. The loss of that contact – when does that become effective? Is that January 1? And then based on the number you just gave, then if you X’d out that contracting loss it would sound to me that, really, the decline you’re looking at is not really that much different than what you’ve experienced over the last couple years in that segment. Is that accurate?

That is a reasonable – yes that is a reasonable analysis of that. And that contract will terminate here in the fourth quarter.

Okay. Thank you.

Thank you. And your next question is from the line of Andrew Jones with North Star Partners. Please go ahead.

Hi. Most of my questions were answered but, in terms of capital spending, I know you don’t have 05 guidance yet but, are there cost spending that’s being done with NEBS that would be at a higher level this year than next year and just the impact of the annualizing NEBS. I’m just kind of wondering whether CapEx directionally is up or down next year?

Right now, some of our capital spending in 2004 is focused on some systems capabilities that will also provide technology enhancements for our clients and customers and also reduce our cost base. As we complete those projects, we anticipate we will continue to make those types of technology investments in NEBS so some capital spending this year will go away and other will be replaced next year. We have provided specific guidance yet, Andrew, on what our capital outlook would be next year but I wouldn’t anticipate substantially increased CapEx spending from where we are this year.

Okay. And, a separate question. Just on market share in the check business, the decline that you experienced this quarter, how much of that is related to contract losses versus what you see the general industry doing?

Oh, most of it is the contract losses. Contract retention or acquisition and pricing pressures are the two primary drivers that – versus just total overall unit decline within the industry - that’s still a factor but it would come in third out of those three.

I think last quarter you said that a good guess for the industry was down three to five percent going forward. Do you still think that’s the case?

With all the data that we have, which is good information coming from the Check Payments Systems Association which is a professional association of all the check printers, and they honestly contribute the data and we get that and – but that data is showing numbers that support that three to five trend. Just a comment on that, Andrew. There is sometimes information in the press relative to the Federal Reserve which are showing much higher numbers, which are really focused on checks processed. And, because they don’t process all the checks and second, not all checks go through a check processing center with electronic issues, there is a difference between those numbers. So, sometimes people who look at the industry data get confused about what the trend of checks is versus checks process. So, just to add that clarifying note.

Okay. And I’m – you – the talk about the revenue decline $110 million with the – the contract that was lost – I think you put a number on the operating income impact as $20 million. The incremental from going from $75 to $110 what does that cost you on the operating (indiscernible) line. I think you get - you said something about overall operating margins – I didn’t have time – I didn’t go back and try and –

Andrew we – the guidance we gave was we see the operating margin percent dropping 4 to 6 percentage points. Because we don’t – we have a range here, just to give some insight as to both the revenue size of loss as well as the pricing pressures and impacts of all the things I talk about – either lost business and the pricing – for FI consolidation. And then we continued to work very aggressively on the cost containment, but as I mentioned in my comments – prepared comments – is that it’s becoming very difficult to offset the magnitude of that kind of a drop in a short a period of time with cost take out that will enable us to maintain the margins.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And we do have a question from the line of Ed Shen with Ivory Capital (ph). Please go ahead.

I just wanted to follow up on the contract that was lost. Was this RFP a result of – specifically as a result of financial institution merger activity?

No. This, as I mentioned, was a contract that went to a Request For Proposal and it was a bid situation and we did not win the bid.

Okay. Got it. And then, any update in terms of – and you know just – contract acquisition payments and whether or not you’ve see the activity level there, decrease at all?

Our numbers, as I mentioned in my comments earlier, are down year to date, pretty significantly, compared to last year. It is more due to the timing and the winning or losing of contacts that have effected that I believe than the overall industry dynamic trend toward upfront contract acquisition payments. One thing we are beginning to see a little bit of related to contract acquisition payments, is sometimes these payments being spread annually through the contract as compared to 100 percent of the cash being up front. But, the significant declined compared to last year, is primarily due to the timing of new contracts or renewed contracts.

Got it. And then, just the operating margin decline that you are looking at in the Financial Services segment for next year. Does this contemplate any further consolidation of printing facilities?

Yeah I would – yes it does. In other words we are - we said that we would be closing two more facilities this year. One of those facilities has serviced – our Dallas facility has serviced the Financial Services segment and that would be closed by the end of this year.

Yeah. Okay. Great. Thank you.

Thank you. Our next question is a follow up question from the line of Mark Reader with Partner Reed Asset Management. Please go ahead.

Hi. So, the 4 to 6 percent – that incorporates any benefits that you would get from cost improvement or opportunities (indiscernible) costs.

That we have identified at this point in time – aren’t – yes.

Okay. And, any major contracts that are coming up that you have - any thoughts on as far as your ability to continue to renew those or is it – not a lot of new contracts coming up the pipeline?

Contracts, typically, today are written for a three to five year term. So, every year there is – there are contracts that are coming due. Some that we are the service provider on – some that others are the service provider on. We do not have any major contracts in 2005 coming due that are – where we’re the service provider. There are some coming due for whom the others are service providers and those – if they go to RFP then we will be at that process and determining whether we can win those and trying to win those. So –

Okay. Thank you.

And your next question is from the line of Ron Speaker with Janis. Please go ahead.

Ron Speaker. Yes. Just a follow up on your outstanding debt question. You mentioned the timing differences – about the commercial paper not rolling off. What would your net debt position be right now and did you use any of your cash flow in the quarter to pay down debt?

Yes. We did use some of our cash flow to pay down debt in the quarter. Our net debt today – our total debt today is 1 billion 296 million. Our net debt is a billion 282.

And then could you comment on NEBS – the EBADA that you can kind of back out looks around $18 million for the quarter. You didn’t have a comparison against a prior year. How did that business do versus a year ago?

That’s a good question. It’s important when you look at the comparison versus a year ago that we take into account the $4 million in acquisition integration related costs and $10 million of incremental amortization of acquisition related – acquisition related amortization plus the $4 million that we reported, gets you to $18 million of comparable profitability compared to a year ago. A year ago, NEBS reported operating income of $11 million.

Thank you. We have a question next on the line of Richard Grulich with William D. Whitter. Please go ahead.

Thank you. I just wanted to clarify in the Financial Services area – so is it fair to look at saying – you’re saying that the revenues will go from, you know - I don’t know – roughly $700 million down to like 580 or something like that? And then that the margins go from something – well what - I think that – what are the margins now like 30 percent operating margins – you think what at 25 on that 580?

Your rationale and logic is correct. And so whatever you know – and as we provided there, the operating margins in that business will drop by about - 4 to 6 percentage points is the range.

Year to date – let me clarify, Richard, your – the answer for you. Year to date our operating margin for our Financial Services segment is at about 25.5 percent.

Okay.

If you were to gross up the $508 million of revenue year to date, that’s the impact of the $8 million buy-out, you’d get to about $660 million of projected revenue just using – taking 1.33 times that year to date number. That would take it up $660 million. We’re talking it would be approximately $110 million less than that.

Okay. And then – and the number then would be able to take 20 – 25, use a round number – okay. So that something like 65 to – or so million operating income decrement year over year in that business but then some of that will be offset by the NEBS – was it $25 million accretive I think it was.

No. Yes it would be offset. In other words, the NEBS would be a plus.

Right. Okay.

But 25 million – I’m not sure where you –

The 25 million is the incremental synergies that we have provided guidance previously and we would confirm today that we anticipate realizing, beyond the prior results that NEBS had achieved in 2005.

Great. Okay. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) And we do have a question from the line of Mark Nicholson with Sagimar Hill. Please go ahead.

Hey guys. I just have a quick question on the Financial Services segment. Last – I guess last quarter you said that the impact of losing the business would be up $20 million. So I’m just wondering if that changed or is just, you know, the 4 to 6 percent decline on the margins coming from the rest of the business? Or does that mean – I guess there - if you’re losing 60 million profit – I was wondering if the other 40 million is from the rest of the business?

It’s from that segment. I just want to define - when you say the rest of the business you’re –

Well I mean – I mean – well I mean if – I mean – I mean I’m just wondering if – if you at last – I mean before you were estimating the impact of losing the contract would be about $20 million to profit. And, I was just wondering if that’s – I mean if that’s the same view you have today?

Yes.

Yes. Okay. That answers my question. Thank you very much.

Thank you and Mr. Mosner we have no additional questions. Please continue.

Well thank you, Mary. And, thanks everyone for joining our call today. I’ll close by saying that we believe Deluxe has numerous strengths in the markets we serve and last summer’s NEBS acquisition adds to our capabilities as we serve our financial institution clients, consumers or business partners and our six million plus small business customers.

Thanks Larry. A replay of this call will be available until November 4th by dialing 320-365-3844. When instructed, provide the access code 750500. The audio presentation and accompanying slides also will archived on Deluxe’s website – www.deluxe.com. I’ll also like to remind you that Deluxe will report fourth quarter year end earnings on January 27th, 2005 at 10:00 central time with a teleconference and web cast. Thank you again for joining us today.