Deluxe Corp (DLX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Corporation 2004 fourth-quarter and year-end earnings teleconference. 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I would now like to turn the call over to our host, Mr. Stuart Alexander. Please go ahead, sir.

Good morning, everyone, and welcome to Deluxe Corporation's 2004 fourth-quarter and year-end investor conference call. Today, we 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 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 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 quarterly report on Form 10-Q for the quarter ended September 30, 2004.

In addition, the financial and statistical information that we will 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 Form 8-K 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.

With those items out of the way, I will now turn the call over to Larry Mosner.

Thanks, Stu, and thanks to everyone on the line for joining us today. As we stated in this morning's press release, we had a very good year. Full-year earnings per share of 3.92 were a record. We had strong operating performance, including NEBS, which outperformed our expectations. As a result of our integration progress to date and the growth outlook for what is now our Small Business Services segment, the Board approved a 3 cents per share increase in our quarterly dividend. Doug and I will provide details on all these topics, and I'll share other corporate news, highlights from our three business segments and a brief business outlook for 2005 and beyond. As always, we will take your questions at the end.

Let's begin with the financial results from Deluxe's CFO, Doug Treff.

Thank you, Larry. For the fourth quarter, strong operating performance, along with better-than-expected results from NEBS, resulted in earnings per share of 92 cents, up from 77 cents last year. Net income was up 19 percent to $47 million, compared to $39 million last year. We exceeded the high end of our EPS guidance for the quarter, 6 cents of which was due to a reduction in our tax rate as a result of a favorable state income tax impact. We also benefited from continued efficiencies and cost containment.

In the fourth quarter of 2004, NEBS contributed $18 million to our operating income, including $9 million of acquisition-related amortization and $3 million of integration expenses. The results were negatively affected by $2 million, due to stock based compensation expense. Each of these items was noncomparable to 2003, as we acquired NEBS in June of 2004 and made the decision to expense all stock-based compensation in the first quarter of 2004.

Revenue for the fourth quarter was $477 million, up $176 million or 59 percent from last year. This includes $192 million from NEBS. The $15 million revenue decline for our other businesses was driven by a 9.4 percent decline in unit volume, due to the overall decline in personal check usage, which is impacting our Direct Checks and Financial Services business units. Also contributing to the decrease were two factors in our Direct Checks segment -- lengthening reorder cycle and lower consumer response rates.

Partially offsetting the unit decline was a 4.8 percent increase in revenue per unit. The improvement in revenue per unit was the result of two factors -- our customer care organization's ongoing ability to sell premium-priced license and specialty check designs and other value-added products and services, and price increases. The improvement in revenue per unit were partially offset by continued pricing pressure in our Financial Services segment.

For the quarter, gross margin was flat at 65.5 percent of revenue, compared to 65.6 percent of revenue last year. A number of things had a positive effect on our gross margin -- the increase in revenue per unit, the closing of six plants, other production efficiencies and cost containment efforts. These positive contributors were partially offset by the addition of NEBS' lower margin business.

Selling, general and administrative expense as a percentage of revenue was 47.7 percent compared to 41.2 percent in the fourth quarter last year, due primarily to the acquisition of NEBS. As we have mentioned on previous calls, NEBS' SG&A expense as a percentage of revenue is higher than Deluxe's, because NEBS relies to a greater degree on direct marketing and a direct sales force to acquire and retain customers. As a result, our operating income increased 24 percent to $85 million. This increase was attributable to the additional profit from NEBS, after including acquisition-related amortization and integration expense. Our operating margin for the quarter was 17.8 percent of revenue, compared to 22.9 percent a year ago, which reflects the lower profit margins on the NEBS business.

Now, I will move onto the fourth quarter's results in our three business segments. We have completed an evaluation of a reportable business segment as a result of our acquisition of New England Business Service. We will now report results for the following three business segments -- Financial Services, Direct Checks and Small Business Services, which is comprised of NEBS and our former Business Services segment.

Let's start there. Small Business Services revenue increased $195 million to $257 million, 192 million of which related to the NEBS acquisition. The remainder of the increase was due to higher volume from new business within the referral program we have with financial institutions. Operating income for the segment increased $38 million. NEBS contributed $18 million of the increase after including $9 million of acquisition-related amortization expense and $3 million of integration cost. Integration efforts have exceeded our expectations during the last six months. Teams have been aggressive in identifying and realizing opportunities for the companies. These results have come from extraordinary efforts by employees throughout the organization.

Moving onto our financial services business, revenue decreased 8.6 percent or $14 million to $151 million. Lower unit volume due to declining check usage and lower prices on checks sold to financial institutions resulted in the decline. Financial services continues to experience-price competition as check usage declines in financial institution merger activity progresses. This competition produces greater discounting when we renew or sign new contracts with financial institutions.

Operating income in financial services decreased $3 million to 24 million. Our cost management efforts partially offset the revenue decline in the past year. These efforts included closing 4 manufacturing plants in this business segment as well as reducing discretionary spending.

And for our direct to consumer business. Direct Checks revenue decreased 5.9 percent from last year to $68 million. This decline was a result of lower unit volumes, the same situations we have been discussing for some time now were the cause of the decline in unit volume, namely 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.

Despite the revenue decline in Direct Checks, operating income increased 10.2 percent to $23 million. The lower unit volume was more than offset by higher revenue per unit, productivity improvements and strong cost management. The Direct Checks team closed one facility and successfully consolidated its operations into one location.

Moving on to our full-year results, EPS was a record $3.92 compared to $3.49 last year. Net income increased 2.9 percent to $198 million. EPS was positively affected 34 cents, due to the net impact of shares outstanding compared to 2003, and 10 cents due to a contract buyout in the third quarter. EPS was negatively affected 14 cents, due to stock-based compensation expense and 11 cents due to acquisition and integration expenses.

Revenue for the year was up $325 million. NEBS contributed $363 million to this increase. The decrease for our other businesses was the result of a 6.1 percent decline in unit volume, due to the overall decline in check usage and the factors I discussed earlier. Partially offsetting the unit decline impact was a 2.6 percent increase in revenue per unit. Operating income for the year increased $29 million to $348 million. NEBS contributed 23 million of the increase. The remainder of the increase was the result of our continued productivity improvements and cost management efforts. The operating margin was 22.2 percent for the year, compared to 25.7 percent last year. The decrease is the result of the lower-margin NEBS business.

Now, to highlight a few other items from our balance sheet and cash-flow statements. As discussed in our third-quarter call, 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 plans. We expect this allocation to be finalized sometime this quarter. The preliminary allocation resulted in goodwill of $450 million, which may increase or decrease as we complete the allocation analysis.

Net debt -- total debt net of cash -- increased $637 million from the end of 2003, due to the acquisition of NEBS. Our total debt was $1.2 billion at the end of the quarter, down slightly more than $50 million from September 30th. Deluxe issued $600 million of long-term debt in October, replacing a similar amount of its short-term debt. We are currently focused on paying down debt and improving our debt coverage ratios. We expect to pay down approximately $180 million of debt during 2005.

A look at the cash-flow statement shows that cash provided by operating activities was $308 million for the year compared to $182 million last year. The increase was due primarily to the NEBS acquisition, operating efficiencies and cost management efforts we continue to employ, as well as lower contract acquisition payments, which were $16 million for the year compared to $48 million in 2003. We anticipate operating cash flow in 2005 to be in excess of $265 million, including higher contract acquisition payments comparable to the 2003 level. Capital expenditures for the year were $44 million. We expect to spend approximately the same amount on capital projects this year. We expect depreciation and amortization to be approximately $110 million in 2005. In 2004, free cash flow -- or cash remaining from operating activities after capital expenditures and dividend payments -- was $190 million, compared to $79 million in 2003.

As we announced in our earnings release this morning, we increased our regular quarterly dividend by 3 cents a share, bringing it to 40 cents or $1.60 annually. The annual dividends have been $1.48 per share since the mid-'90s. The two primary reasons behind increase are the NEBS integration has gone extremely well and has, in fact, exceeded our cash-flow expectations, as a result of steady operating results and integration-related synergies; and, secondly, we expect year-over-year growth from our Small Business Services segment to offset declines in our core check business beginning in 2006.

Having concluded my comments related to our financial statements, I have one more item to share. On December 8, Standard & Poor's announced its decision to move Deluxe from the Benchmark S&P 500 index to the S&P 400 MidCap index. When a company is removed from the S&P 500, it can experience volatility or increased trading volume, particularly as S&P 500 index funds are forced to liquidate their holdings of that company's stock in order to mirror the index. That was the case with Deluxe's stock. On the day of the move, more than 5.5 million shares of Deluxe were traded, an all-time high volume and more than 13 times our daily average. In recent weeks, we have seen the trading volume stabilize somewhat, but the transition contributed, no doubt, to a weaker stock price.

I'll close my comments with a look ahead to 2005. We expect our first-quarter earnings per share to be in the range of 75 to 79 cents per share, with full-year EPS of approximately $3.30 per share. We anticipate that the operating margin in financial services will be better than we indicated at the end of the third quarter. It will only decline approximately 4 points, which is the low end of the range we indicated last quarter.

We also anticipate stronger operating results in 2005 than we had previously indicated in Small Business Services. In fact, we expect the operating strength in Small Business Services associated with the acquisition of NEBS to nearly offset the decline in Financial Services.

Now, I will turn the call back to Larry.

Thank you, Doug. As I said earlier, I have a number of topics, but I will begin with the NEBS integration. Together, we have already accomplished a great deal in combining New England Business Service and Deluxe, and we are delivering on the expectations we stated last May, both strategically and financially. As time has passed since we finalized the acquisition, it is becoming clear to us that the Deluxe/NEBS combination truly is greater than the sum of its parts.

Here are some examples of what our newly-formed Small Business Service organization is delivering -- one of the most comprehensive product and service offerings for small businesses that will allow us to accelerate our efforts to capture a larger share of customers' wallets; the ability to leverage our core competencies, generate profitable revenue growth and increase operating efficiencies; a positive impact on our product mix by significantly increasing our non-check revenues; and last but most definitely not least, a base of more than 6 million small-business customers. Based on the success we have had thus far in the integration process, along with the strength we have seen from this business segment, we are confident that we will realize both the cost synergies and the growth we anticipated.

I have a couple more integration-related items to share with you. We have formed a team within our customer care group to begin work on a virtual call center organization for the core Small Business Services brands. Prior to the NEBS acquisition, these call centers were run independently of one another. This combined but virtual structure will promote best practices, leverage systems, tools and knowledge across all the brands and create selling opportunities. Once telephony and order entry systems are consolidated, we will be able to route calls more effectively and virtually across the organization. This will have a positive impact on the customer experience, revenue and our operating expenses.

And the last item, before I move on to other areas of the business -- we're in the process of piloting an enhanced version of our small-business referral program for financial institutions that is built around the combined offerings of Financial Services and our new Small Business Services segment. I will be able to share more about that next quarter.

Now, I will move on to other topics. We completed the sale of NEBS' European operations on December 31, 2004. This decision is based on our strategy to focus on clients and customers in North America. I would like to thank all the European employees for their hard work in making these operations successful.

In addition to selling the European operations, we have also begun looking for a buyer for our apparel business. PremiumWear is a prominent designer and supplier of apparel and accessories to the promotional products and golf industries. A sale would include their headquarters in Minnetonka, Minnesota and the distribution center in Clarksville, Tennessee. PremiumWear's products are marketed under several brands. Divesting this business will allow us to devote our resources to the many critical initiatives underway in our Small Business Services segment.

In the area of cost management, we closed six facilities in 2004, and by year end, we had successfully transferred to work to other locations. Although we still are in the process of integrating the NEBS businesses, we are announcing our intent to close two additional facilities -- the locations in Athens, Ohio and Los Angeles, California. Approximately 575 employees will be affected.

While I have said it before, I want to say it again. It's never easy to close facilities. With these two particular locations, we believe our decision will allow us to reduce costs, produce work more cost effectively and to leverage equipment and technologies by moving work to other existing facilities. We plan to close the Athens facility within the next 18 months and the Los Angeles facility by the end of this year. I thank all of the affected employees for their contributions and commitment. As in the past, we have a system in place to help support them as they transition to future opportunities.

Now, I will move on and update you on our shared services model. We continue to migrate functional areas to this type of environment, which allows for economies of scale. As we mentioned last quarter, the Company's finance group is one of the affected areas. Adopting a shared services environment in finance will accomplish two primary objectives -- first, allow corporate finance to focus on its vision to reflect best practices, increase efficiencies, reduce redundancies and enhance controls in light of Sarbanes-Oxley; and second, free up the business unit finance organizations to focus on strategic and business analyses.

We are also moving our manufacturing organization to shared services. This environment is allowing us to create centers of operational excellence. By having fewer production facilities, we can concentrate the technology and expertise under a single umbrella, rather than dilute this function by spreading it across a larger number of facilities with separate reporting paths. This structure promotes continued improvements, helps reduce waste and allows one part of the business to benefit from another's successes.

Here are a couple examples of how these statements translate into performance results. Our base forms distribution centers improved productivity 11.5 percent from the prior year. In our business services area, productivity improved 10.4 percent from the prior year.

A few minutes ago, I discussed the customer care organization within Small Business Services. Financial Services customer care also had a productive year. One of their highlights involves DeluxeSelect, a program in which financial institutions choose to have our expert customer care representatives work directly with their customers. DeluxeSelect associate call volume doubled from the previous year's levels. You may recall that I've talked about how the DeluxeSelect channel dramatically increases the number of touchpoints where Deluxe can promote the FI's image while enhancing the customer experience. Our clients and prospective clients get an opportunity to see firsthand the excellent care customers receive, as well as get a feel for our culture when they tour our call centers. These visits often are a critical factor for our clients when considering our DeluxeSelect program. They leave our centers very impressed.

To wrap up my discussion on our business segments, here are a few brief highlights from Direct Checks. The consolidation of the Alabama (technical difficulty) Colorado Springs was completed ahead of schedule and under budget. We improved labor efficiency, and we have reduced our manufacturing cost per unit by 4 percent in the fourth quarter, compared to 2003.

2004 was an excellent year for Deluxe. I would like to thank all 9,000 Deluxe employees for their hard work. It was a year of many changes, the most notable of which was the acquisition of New England Business Service.

Looking ahead to 2005 by business segment, as Doug mentioned, we expect the performance of our newly formed Small Business Services segment to begin to offset the softness in our other two businesses. In Direct Checks, our strategy is to continue to maximize the lifetime value of our customer relationships. As far as our Financial Services business, we will invest in this business to bring greater value to the relationships we have with our financial institution clients. And we will work hard to continue to be the low-cost producer so that we can strengthen our leadership position.

And finally, looking beyond 2005 to 2006 and 2007, we anticipate growth in our Small Business Services segment, as a result of a larger customer base, expanded products and services and additional cost synergies. We expect performance in this business to drive Deluxe's consolidated revenue and operating profit and cash flows higher than what we will report in 2005.

Our strategy is sound. We are on the right course, and our continued efforts in integrating and leveraging the NEBS business will be the bridge that transports us to a successful future.

My last comment today is regarding the announcement we made in December regarding my plan to retire this year, both as CEO and Chairman. Although I have worked for just three companies in my career, I spent 40 years in the business world. So it's time to move on to the next phase of life. My wife, Judy, and I plan to spend our retirement years near our family in Chicago. And when the weather gets as cold there as January has been in Minnesota this year, we will retreat to the warmer climate of Florida.

Deluxe's Board of Directors -- and in particular the corporate governance committee -- has begun a search for my successor. In all likelihood, it will be some time yet before a new CEO is chosen, but I have assured the Board that I will stay on until they find the right individual, in order to help ensure a smooth transition. Deluxe is a great company, and I believe only great things lie ahead, particularly in light of last year's acquisition of New England Business Service.

And now, Doug and I will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Mark Reider (ph), PartnerRe.

I had a few questions, but the first one is on your cash flow from operations. You had talked about a number that was greater than 250 million for the year; I think you came in at over 300 million. And I'm just wondering, since your EPS was only slightly better than what you had said, what the difference was there, because I don't have the full cash flow statement. Is it working capital?

Mark, part of it is working capital. Part of it is the timing of contract acquisition payments that were anticipated in the fourth quarter of 2004 that will likely be in the first quarter of 2005.

And you are talking about paying down 180 million of debt in '05, but when I run my numbers, you talk about in excess of 265 million of cash flow from operations. And it would be great if it would be higher, as much higher as it was in '04, if you follow what I am saying, as in '05. But 265 of cash flow from ops, less 45 million of CapEx and 80 million of dividend -- that's only 140 million. So where does the extra 40 million come from? Is that the asset sale proceeds?

Yes, part of that is the asset sale and proceeds, and part of that is cash that comes in from the exercise of options.

And do you have a sort of number that you can throw out on the asset sales, just ballpark?

At this time, Mark, we are not providing that. We are in the process of marketing PremiumWear at this time, and would just prefer to see those proposals come in, and not provide specific guidance around what we would anticipate a range of purchase price would be.

Can you say what you allocated towards it when you made the purchase of NEBS?

No, I will decline that.

And with the 180 million, is that just basically repaying the commercial paper? Or is there any other debt that you paid down?

It's primarily repaying commercial paper.

And so, going forward after '05 --

Mark, there is a note that we have a variable-rate medium-term note due in November of '05.

Right, the 25 million. Okay. And as far as beyond '05, you said cash flow should continue to trend upward, so -- but excluding -- you are not going to have the asset sale proceeds, but can we look to 150 million or so per year of paydown in debt? Is that about right?

I am not providing specific guidance on that, but we do anticipate if we are generating the cash flows and those are growing, that we would be able to be at that level. That would be reasonable.

And just a final question on the debt. Can you talk a little about your plans to repay the '07 maturities? Basically, you are going to be paying commercial paper here. And is it your plan just to refinance it when it comes up, or do you think you'll be able to draw on the revolver or on CP to pay it off?

It will certainly depend upon how quickly we can pay it down, but we would utilize CP first, and then we would look at our longer-term needs and uses of cash to determine whether we would want to refinance longer term.

And just moving on to the business, just percentage of contract renewals that you're going to see in '05? And can you give a little bit of color on your thoughts on that?

Because of the number of contract that we have, we turn probably a third or a fourth of our contracts over each year as they come due, because most are written in three- to five-year range. So we see this year the same as any other year.

And included in your guidance, have you factored in any losses, gains?

We factor in the ones that are coming up that we would anticipate our normal retention and ability to acquire ones that we don't have.

And can you just give us your thoughts on acquisitions? Do you believe you see any in '05, or is the plan to focus on the NEBS integration?

Would plan to focus on the NEBS integration, but certainly we (technical difficulty) look at opportunities for making strategic investments, either in infrastructure that will help us to improve efficiencies and improve operating profitability, to provide organic growth or to provide -- make the necessary acquisitions to provide profitable revenue growth -- the same criteria that we have used previously, of being accretive to earnings per share and to cash flow and to leverage our core competencies.

Nik Fisken, Stephens, Inc.

If I look at the 9.4 percent unit decline, how much of that do you think was market versus customer losses?

I think we still see the market, Nick, in that 3 to -- probably the 4 percent range and maybe a little bit above. All of the data that we see from the Check Payment Systems Association, as well as other sources, is in that. The Fed (ph) study showed, over the last three years, a 4.3 percent compound annual rate of decline. That excluded the impact of checks that were truncated at point-of-sale and converted into the electronic transactions. So adjusting for that, it was about a 3.9 percent. So we see it in that probably 3.5 to 4.5 range, Nik.

And then, given the customer losses that are going to be felt for most of this year, should we expect that to hold at about a 9 percent level?

I think the only thing that I would suggest, Nik, is that the check writing industry performance would just continue to be in that range. Our loss would be higher than that, because of the magnitude of the loss of the major customer that we talked about previously.

Can you comment on the prospects to replace Wells -- the volumes from Wells, in light of that comment that you think contract payments are going to be up in '05 around the '03 levels?

I think that we would approach any new opportunity, and try to win that based upon what we feel is the best opportunity to put Deluxe in as the supplier for a customer we don't have, and to compete for that so that it makes financial sense for Deluxe. And that would be our strategy. We would certainly not do anything out of the ordinary to try to replace a lost business. We would continue to use the same criteria that we always have, Nik, and hopefully gain back that business. But that is to be determined as we move through the process.

Are there any big contracts that you guys are currently in negotiations under -- or kind of give us an outlook for Q1/Q2?

There are some that we are in the process of, but it will probably hit in the latter part of this year or '06.

And then lastly, on the capital allocations and how you guys are going to pay down debt -- should we assume no significant repurchase program this year?

Yes, Nik. That's a fair assumption. We are focused on paying down debt and making capital investments, and don't anticipate at this time doing anything significant with share repurchase.

Sam Martini (ph), Cobalt Capital.

I'm sorry. My questions have been answered. Thank you.

(OPERATOR INSTRUCTIONS). Michael Cling (ph), Ivory Capital.

It's actually Ed Shannon (ph) for Mike. But I had a question for you on the PremiumWear. Could you give us a sense of at least the top line of that business?

The top line of the business is between $40 and $45 million, Ed.

Got it. And I also wanted to get your thoughts on the acquisition of Novar by Honeywell. I just wanted to see if you anticipate any competitive disruption in your business, given that that's business I think Honeywell has said that they plan on disposing.

We wouldn't comment on any speculation about what might happen with the acquisition of another company.

And my last question is it seems that the NEBS acquisition integration is going better than you had anticipated. Can you just give us a little bit of color, in terms of what has gone better than your initial expectations?

I think, across the board, almost everything, in terms of when we looked at the NEBS acquisition, we knew it would be a very good fit with us. And we felt the culture would fit, and the culture has been an extremely good fit. The employees at NEBS are very, very focused, very capable individuals. And between the two organizations, the people are working in a very collaborative way to find ways to improve revenue and to improve operating efficiencies. And so it is just, I would say, across the board. We haven't found any areas where we have run into any significant difficulties. And there are many challenges, just from a technology standpoint, in terms of systems and operating procedures, et cetera, but we are working our way through those in a very proactive way, very collaborative, and coming out with good results based upon the great work that our combined employees are doing.

And then, the upside that you are seeing, in terms of the cost-cutting expectations?

-- are a result of the work that is going on, yes.

And then, your comments regarding '06 -- I guess, starting '06, you expect that the profit growth in that new combined business to offset the decline in the check printing business? Did I hear that correctly?

Yes.

Set is the overall business at that point expected to grow slightly, or is it expected to be flat?

Our statement was that we expect in '06 and '07 that our consolidated both revenue and operating profit would show growth over 2005, and '07 would show growth over 2006.

(OPERATOR INSTRUCTIONS). John Patrick Walsh, Wachovia Securities.

I was wondering if you could give us a little more color on the pricing. Obviously, the price increases you referenced in the release, around 5 percent, is certainly a 180 from what we have seen in recent quarters and recent years, for that matter. Can you tell us a little more about what was driving that, and whether you also think that trend is going to be sustainable as we move through the year?

John, I think we would see that will vary by business segment. We would probably not be able to sustain, on a consolidated basis, that kind of price level. The pricing pressures in the Financial Services segment will continue. The ability to affect selling prices in the direct business is much -- we control that out to a much greater degree, but I think that will slow, as well. Simply, we'd have to be sensitive to the market forces. And in the Small Business Services, that is an area we will continue to explore as we refine our product mix and marketing programs.

And on the contract front, I guess last quarter, you alluded to the fact that there would be other contracts coming up, I guess, kind of over the next 12 months, and from an industry standpoint, you thought you might have a chance to win. I'm just wondering if you have made any progress on that front, and whether you still think, as we move through '05, there might be upside on potential contract wins for you?

I wouldn't speculate, John, on any of that. We approach every one of those in a professional and aggressive way, consistent with what our expectations are for the right thing for the Company. And on those, it is difficult to speculate. You don't know until a contract is agreed to and signed.

And also, on the SG&A line, you lumped in the stock-based compensation and the integration costs. I was wondering if you could break those out for us, and also give us a sense of, as we move through '05, what your expectations are for both of those line items?

In terms of stock-based compensation in 2004, we expensed an additional $10 million compared to 2003. For 2005, we don't provide specific guidance, but within the guidance we have provided, that would be included already.

Another 10 million increase?

Not in terms of increase, no. But it would be included in the operating income and in the $3.30 EPS guidance. So we would not see a significant increase beyond the 10 million.

And what about for the integration costs?

The integration costs we don't break out. Previously, we had disclosed that we anticipated that we would realize at least $25 million of synergies from the integration of NEBS at this point, and consistent with our earlier comments, we actually believe that that will be higher than the $25 million previously provided.

And in terms of the tax rate, obviously that was one of the benefits you had this quarter. As you look out in '05 also, is your expectation that the tax rate is going to be lower? Maybe if you can give us a sense of what you think the (multiple speakers) tax rate will be?

We are actually anticipating that the tax rate will be approximately 38 percent for the year.

Nik Fisken, Stephens Inc.

One follow-up. The higher contract payments that you expect in '05 -- is that a function of expected wins, or payments for business already won?

That's a good question, Nik. A significant portion -- approximately half of that -- is associated with existing business that we already have, that are already under contract.

So half of the expectation is contracts already won?

Correct.

Michael Cling, Ivory Capital.

Just a quick question on the new combined Business Services segment. The operating margin this quarter is around 15 percent. Is that a good run rate to be using for '05? Or do you think that there is still more cost savings that are going to roll into that number, as we progress through the year?

A couple of things, Michael. There will be additional integration savings that we would anticipate and growth in that business that we would anticipate. Specifically related to the margin, we don't provide guidance on a particular business segment, typically.

And, Mr. Alexander, there are no further questions in the queue. Sir, please continue.

This is a reminder that a replay of this call will be available until February 3 by dialing 320-365-3844. When instructed, provide the access code 766039. The audio presentation and accompanying slides are also archived on Deluxe's website, www.Deluxe.com. Again, we would like to thank you for joining us today. Have a good afternoon.

Ladies and gentlemen, that does conclude our conference call for this morning. Thank you very much for your participation, and for using AT&T Executive Teleconference. You may now disconnect.