Deluxe Corp (DLX) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Deluxe Corporation 2005 third-quarter conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to our host, Mr. Alexander. Please go ahead, sir.

This is Stu Alexander, and welcome to Deluxe Corporation's third-quarter 2005 investor call. Today you will hear from Larry Mosner, Chairman and Chief Executive Officer, and Doug Treff, our Chief Financial Officer. As in the past, they will take questions from analysts after the prepared comments. The operator will instruct you how to ask a question if you're on the phone. Analysts listening over the Web can submit questions at any time during the call.

In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website.

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 which 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 30, 2005.

In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today's press release, and it is posted on our website in the Investor Relations section, and it was furnished to the SEC in a Form 8-K filed this morning.

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

Thank you. The primary objectives for the call today are to discuss third-quarter results and our outlook for the fourth quarter. I will share a number of positive items from the third quarter, the most significant being that we met our earnings expectations. I will also talk about some of the business channels as referenced in this morning's press release.

For instance, the pricing pressure that continues to grow within Financial Services, the fact that we are realizing benefits of some strategy-related investments more slowly than previously anticipated, and the impact from Hurricanes Katrina and Rita. These same situations are the primary contributors to the downward revision in our fourth-quarter outlook.

I will share more information with you in a few minutes, but first I will turn the call over to Doug for his comments. Doug?

Thank you, Larry. I will begin by reviewing third-quarter and year-to-date results. Earnings per share for the third quarter were $0.73, in line with the guidance we provided last quarter and down from $1.14 in the third quarter of 2004. EPS for the third quarter last year was positively affected $0.09 by the benefit of a onetime contract termination payment. Net income was $37 million, down from $58 million. Net income and EPS declined primarily due to the continuing effects of aggressive pricing competition and declining personal check usage in our Financial Services business segment.

Deluxe's consolidated revenue was down 12.5% to $413 million. The revenue decline was primarily due to a drop in unit volume in our Financial Services segment. There were two key factors for the lower unit volume. One, a large financial institution client switched suppliers late in 2004 and two, financial institution mergers.

The other reason for the revenue decline was an $8 million contract termination payment in the third quarter of 2004 which resulted in an unfavorable comparison. Gross margin for the quarter was 63.7% of revenue, down 2 percentage points from 65.7% last year. The impact of pricing pressure and the contract termination payment in 2004 were partially offset by continued productivity improvements within our plants and distribution centers and cost synergies resulting from the NEBS acquisition.

We realized incremental synergies during the third quarter compared to last year primarily as a result of savings in our supply chain, specifically in the areas of delivery costs and direct materials. Selling, general and administrative expense as a percentage of revenue was 46.5% compared to 44.3%, and SG&A dollars were down 17 million. We have been able to reduce SG&A expense throughout the business with our continued cost takeout efforts, including integrating NEBS into a shared services environment.

As a result of all of these factors, our operating income was $71 million. Operating margin for the quarter was 17.2% of revenue compared to 21.4%, reflecting the lower check unit volumes and pricing pressure.

Now I will move onto the third quarter's results in each of our three business segments. Small Business Services revenue was flat to last year at $227 million. We saw growth in our small business referral program that was offset by the client loss and FI consolidations I have mentioned. Operating income for the Small Business Services segment decreased $2 million to $23 million. Higher integration savings and growth in the referral program were offset by increased material costs and a higher percentage of corporate allocations.

We have also been filing a number of new growth initiatives that resulted in higher cost. We will talk more about these later in the call.

Moving onto our Financial Services business, revenue is down 28% to $126 million. Key factors were the client loss I mentioned, continued pricing pressures, financial institution consolidations and the gradual decline in personal check usage. As an aside, the number of personal checks being written continues to decline at a rate of 4 to 5% per year due to the growth of electronic payment transactions.

Operating income in Financial Services decreased $28 million from 54 million in 2004. Last year's operating income included the $8 million contract termination payment I mentioned earlier.

And now for third-quarter results in our direct to consumer business. Direct checks revenue is down 13% to $60 million as a result of lower unit volume. Direct Checks is being negatively affected by continued declines in consumer response rates to direct mail advertisements and the gradual decline in personal check usage.

Operating income was down $2 million to $20 million. The lower unit volume was partially offset by higher revenue per unit, synergies related to NEBS and a strong cost management effort that included the consolidation of our Direct Checks printing operations from two facilities into one late in 2004.

Now I will move onto results for the first nine months of the year. Earnings per share were $2.33 compared to $2.99 last year. Revenue was up $194 million. NEBS contributed $312 million towards this increase, most of which was due to the timing of the acquisition that took place in June of 2004. Revenue was down in our other two businesses for the same reasons I mentioned earlier.

Operating income for the first nine months of the year declined 12.5% to $230 million. Included in the 2005 results were a $19 million increase in acquisition-related amortization expense and an $8 million increase in integration costs compared to the same period last year, which were more than offset by a $20 million contribution from NEBS operation.

Now to highlight a couple of items from our balance sheet. As we announced previously, we completed the sale of our PremiumWear apparel business during the third quarter. As you may recall, we had announced in 2004 that we intended to sell this business, which we acquired as part of the NEBS acquisition.

Net debt, total debt net of cash, decreased $36 million from the end of 2004 as we paid off a portion of our debt. Our total debt was $1.2 billion at the end of the quarter, and we expect it to be approximately 1.1 billion at year-end.

A look at the cash flow statement shows that cash provided by operating activities for the first nine months was $114 million compared to $214 million for the same period last year. The decrease was due primarily to higher contract acquisition costs, income tax and interest payments from last year.

In addition, net income was lower. We expect cash from operating activities to be approximately $200 million for the full year. Contract acquisition payments in the first nine months of the year were $67 million compared to $10 million last year. These payments are prepaid product discounts related to financial institution contracts that are amortized over the life of the contract.

Capital expenditures were $42 million for the first nine months of the year. As Larry mentioned in his opening comments, we are making some strategy-related investments. One of these projects -- in fact, the most significant single project we are working on -- is the major upgrade of our call center and order capture technologies. This upgrade will leverage a common SAP systems infrastructure to deliver superior tools for serving our clients and customers.

We expect our capital spending in 2005 to be approximately $55 million, and we anticipate depreciation and amortization to be approximately $110 million for the year, including acquisition-related amortization of $40 million.

I will wrap up my prepared comments with EPS guidance. We expect fourth-quarter earnings per share to be between $0.84 and $0.88, which would put full year earnings per share in the range of $3.17 to $3.21. The reasons we have revised our outlook for the fourth quarter are increase pricing pressure in our Financial Services segment, growth initiatives that support our business strategy are taking longer to gain traction, and the impact from Hurricanes Katrina and Rita.

On a comparable basis, we expect fourth quarter 2005 to be relatively flat to our fourth quarter of 2004 results. As a reminder, in the fourth quarter of last year, we reported EPS of $0.92, $0.06 of which was due to a favorable state income tax settlement. We anticipate providing 2006 guidance when we report our year-end results in late January as is our usual practice.

I will join Larry in taking your questions in a few minutes, but first I will turn the call back to him.

Thank you, Doug. We continue to make good progress integrating the pieces that make up our Small Business Services organization. We see evidence of our business strategy taking hold as we both strengthen and capitalize on the interdependency between the Small Business Services and Financial Services segment.

I will begin by reviewing what we mean by this interdependency. Those of you who are viewing the webcast are seeing the graphic representation.

Our Financial Services business serves financial institutions, helping them manage the demand deposit account relationships they have with their consumer and small-business customers. We target the demand deposit account because it's the most significant relationship that financial institutions have with their customers.

At the same time, our Small Business Services segment serves the unique needs of small businesses. It is actually in pursuing these distinct strategies that we realize the interdependency I mentioned. The thousands of relationships we have with financial institutions across the country help generate small-business referrals who we serve on behalf of financial institutions through our Small Business Services segment.

Working with and serving the needs of these millions of small businesses benefits financial institutions and strengthens our ability to both retain and acquire clients in our Financial Services segment.

We believe we have an unsurpassed value proposition for financial institutions. We not only offer superior quality checks in the most popular styles and designs, but also products such as DeluxeDetect and IB TheftLock in programs such as Deluxe Business Advantage and our Knowledge Exchange Series. I will provide you with details when I discuss our Financial Services segment.

First, however, I will cover Small Business Services. One of the tools we are using to get more in touch with Small Business Services is a tiered segmenting model. Each tier is defined by distinct criteria. For instance how often the customer orders, the dollar value of an average order, which order channel the customer prefers, and their loyalty to our brand or brands. This model allows us to align sales, service, products and resources to individual businesses based on the criteria I just mentioned.

Ultimately what we are after here in addition, of course, to a more profitable business is a sales and service environment that allows customers to order how they want, where they want and when they want, regardless of which channel they choose. The degree to which we are successful using customer segmentation will be determined by the cost to serve in each channel, the wallet share potential in each tier and also our ability to move customers to a higher value tier.

We are seeing evidence of wallet share gains with our small-business customers. One of the factors behind this success is a tool we are using called multivariable testing, a technique we have used in a number of areas. Without going into a lot of detail as the name implies, a multivariable test allows you to test many factors or variables at once. We are using it to determine the best sales approach or combination of approaches to help us maximize revenue and increase wallet share while meeting the needs of small-business customers.

In other news from our Small Business Services segment, Microsoft Office has chosen to partner with us in rolling out a new line of offerings designed to enable small businesses to manage their sales, marketing and financial processes within the familiar easy-to-use Microsoft Office environment. Small Business Services is supplying Microsoft Office customers with compatible business checks, forms, and envelopes and related printed products that are designed specifically for use with Microsoft Office small-business accounting 2006.

Links within the Microsoft Office software helps guide customer to a private-label website where they can easily order a comprehensive selection of Deluxe products in the formats and styles that best meet their needs.

The SBS Microsoft relationship is a natural fit because we're both committed to delivering integrated solutions that help small businesses start, growth and drive.

Now I will move onto Financial Services. Before I cover highlights, I want to talk about the pricing competition Doug mentioned and that we referenced in this morning's press release. We have been operating in this competitive environment for quite some time now. In recent months, however, and due in part to FI consolidations, competitive pricing appears to be accelerating. Quite a while back we consciously made the decision not to compete on price alone. Yes, we have to be competitive on price. However, we don't believe that merely offering the lowest priced checks is the strategy that will best serve our clients and our shareholders in the long run.

We have seen proof of this as financial institutions respond favorably to our value proposition and to our products, programs and initiatives, particularly the ones that target their most critical issues and concerns. It is this strategic partnering approach with financial institutions that helps differentiate Deluxe from the competition.

One such example is our Deluxe Business Advantage program or DBA. Deluxe Business Advantage is the manifestation of the interdependency between Small Business Services and Financial Services I talked about earlier. DBA is the fast and easy way for banks to refer small businesses to Deluxe for checks and related products. It comes with a number of advantages. It is a unique, proven and tested model that grows revenue through programs designed to increase customer satisfaction and retention.

The process involved is simple -- standard and repeatable. It offers personalized service with face-to-face sales representatives who visit both FI branches and the small businesses. DBA is a program that is unmatched by any of our competitors, giving Deluxe a key competitive advantage, and it generates sales leads that we then refer back to FI clients. Since launching DBA to a select group of financial institutions last spring, client feedback has been very positive.

Last quarter I talked about our collaboratives, an initiative that grew out of our Knowledge Exchange Expos. In late September, Financial Services launched the second collaborative, a group of financial institution executives who are developing and testing innovative ways to improve their relationships with customers. Ultimately the goal is to increase customer loyalty, retention and revenue in today's competitive Financial Services environment.

The theme of the 2005/2006 collaborative is transforming the customer experience for small businesses. Small-business customers are more important than ever to financial institutions and to our own business strategies. And with 25 million small businesses nationwide and SBS serving 6 million of them, Deluxe is strategically positioned to meet the unique needs of small businesses, as well as help financial institutions improve the relationships they have with their small-business customers.

In the first collaborative, 11 financial institution executives spent a year addressing customer satisfaction with personal account holders. They designed and implemented ideas to meet customer needs for a more personal and significant connection. The group unveiled their findings to industry peers at the Deluxe Knowledge Exchange Expo held last April. Both the Knowledge Exchange Expos and the small-business collaborative embody our role as a trusted valued business partner helping banks and credit unions excel in the size of their customers and members.

One event that is part of our Knowledge Exchange series is Web-based seminars. In fact, we held one just yesterday during which our guests from the Disney Company spoke about empowering employees. Attendance hit an all-time high. With more than 1000 people participating, the Web service we used told us that the participation rate was way above average.

How do these programs affect our numbers? There is a direct correlation between participation and retention. The retention rate among Knowledge Exchange collaborative members is extremely high as is the retention rate among Knowledge Exchange members who participate in these events.

We continue to hear success stories that illustrate the impact of both the 2004/2005 Knowledge Exchange and the collaborative on the customer experience. One attendee said, I thoroughly enjoyed the Knowledge Exchange session. We are committed to moving our credit union towards creating a unique experience that supports our purpose and brand promise.

Here's another comment. The issue of improving customer service at every level is a top priority for us, and your materials were right on target with our immediate needs.

And another. Please let us know when you have more events scheduled like this because I will definitely bring more team members with me.

Another product that is allowing us to distinguish ourselves from the competition is the DeluxeCard Visa gift card. This prepaid card is available in branch, meaning that consumers can walk away with an activated card ready to use. The DeluxeCard enables banks and credit unions to meet growing consumer demand for a flexible payment tool and universal gift solution. The in branch order process provides financial institutions a new revenue stream with minimal initial investment. Partnering with Deluxe means banks and credit unions can eliminate the financial burden of starting their own in-house card program.

I will move on to talk generally about some of the business wins during the third quarter. There tend to be common reasons why financial institutions choose Deluxe as their business partner. One, a mutual dedication to making customer interactions compelling and memorable. Two, acknowledgment that Deluxe was the best source for delivering innovative Financial Services solutions and excellent customer service. And three, the desire to have turnkey solutions that are designed to build satisfaction and loyalty among small-business customers.

Here is what a few of these clients said about choosing Deluxe. Deluxe is an engaged partner who understands our business. We share a commitment to providing solutions that drive growth, increased customer satisfaction and improved operational efficiency for financial institutions.

And the third example, we have aligned philosophies that emphasize superior customer service as the cornerstone of business. Through our growth, our partnership with Deluxe will enable us to meet customers' evolving needs.

Now I will move onto our Direct Checks business segment. At the risk of sounding like the proverbial broken record, our Direct Checks business continues to be challenged by the same conditions we have been talking about for some time -- lower response rates to our direct marketing offers and higher advertising rates. We are not alone in experiencing lower response rates. Direct Marketing Association confirms that direct to consumer media response rates are declining, regardless of the particular product or service being offered.

Our Direct Checks business also is being challenged by a more recent development, the trend for banks to offer free checks to a greater number of customers. Even customers who initially turn to Direct Checks suppliers are susceptible to being wooed back to ordering from the financial institution when the checks are free.

I will move on general news by starting with an update on shared services. As you probably heard me discuss on previous calls, a shared services approach is allowing us to maximize asset utilization, improve distribution and service to customers and reduce cost. Transition proceeds on schedule.

Here are a couple of examples of what we are accomplishing in this area. We are leveraging both our proprietary offset and state-of-the-art digital printing technologies as we integrate the NEBS business in order to maximize productivity and minimize manufacturing costs across the entire enterprises. And we are consolidating inventory management systems within our operations. These examples happen to be from manufacturing and supply chain. However, we experienced similar opportunities within the other functional groups that make up shared services -- finance, human resources, legal and information technology.

I will share one more general business item with you. Once again, Deluxe has received an outstanding corporate governance rating from ISS, Institutional Shareholder Services. ISS is the world's leading provider of proxy advisory and corporate governance services. They recently ranked Deluxe better than 99.5% of S&P 400 mid-cap companies and better than 100% of companies in our peer group of commercial services and supplies.

Before I close, I want to cover one last topic. In this morning's press release, we referenced Hurricanes Katrina and Rita. Immediately after the levies broke in New Orleans, the Deluxe foundation made a $50,000 grant to the American Red Cross. The foundation also established a $100,000 donation match for employees, retirees and directors. For our financial institution clients and small-business customers who were affected, we are doing a number of things to help them get their businesses up and running.

We are working aggressively to replace lost product. We worked with UPS and USPS to find ways to get orders into undeliverable areas or to relocated businesses. We established the Katrina collection of holiday cards, of which a portion of the proceeds will go to the Red Cross. And we helped our financial institution clients and their branches with essential products they needed to serve their customers.

Our thoughts continue to be with all the people who experienced the loss of loved ones, homes or businesses as a result of these massive storms.

I will close my prepared comments with a business outlook. As we stated in this morning's press release, there are a number of issues challenging our business, issues that have caused us to lower our guidance for the fourth quarter -- pricing pressures, the duration and cost of some internal initiatives and the recent hurricanes.

As I mentioned earlier, the pricing pressures in our Financial Services segment are not going to go away. In fact, they appear to be escalating. In order to continue to be the leader in this space, we must come to the table ready to compete, and we believe we will be successful by capitalizing on the features that differentiate us and allow us to rise above the competition.

As far as our strategy-related initiatives, short-term patience will play off in long-term rewards, allowing us to deliver a common platform from which to build a lower-cost IP infrastructure and install the necessary tools for serving our clients and customers.

Simultaneously we will continue to focus on cost management, while moving forward with our integration efforts in SBS. We remain solid in our confidence to execute our business strategy while leveraging Deluxe's unique assets and strengths for the benefit of the financial institutions and small businesses that we served.

Now Doug and I will be pleased to take your questions.

(OPERATOR INSTRUCTIONS). Philip Olsen (ph).

Actually two separate questions. First, in terms of the share repurchase program, we have seen some disappointing earnings over the past couple of quarters. At what point in time would management potentially look to restart that program and provide a little bit more support to the stock?

Secondly, as I am sure you are well aware, Honeywell has announced its desire to sell Clark American. I think their goal is to have an announcement by year-end. It would seem strategically that it would be a very nice fit for Deluxe. I just want to get a sense if that is something you're currently looking at, and if so, how would you look to structure such a transaction?

Thank you for the question. Regarding the share repurchase program, right now our focus is on debt paydown. We are focused on maintaining our BBB+ rating and intent on ensuring the capital structure is consistent with doing that.

As we continue to generate additional cash and we do achieve the debt paydown targets that we have, them we will look at how else we might use the cash.

Secondly, related to the Honeywell sale of Clark American, we do not comment on acquisitions whether they are things we are working on or things we are not working on. So I won't be addressing that specifically.

John Kraft, D.A. Davidson.

I wanted to talk about the pricing pressures. You are claiming that they are actually getting worse, yet the contract acquisition payments in the quarter saw a significant drop-off. I guess two parts. One, can you help me reconcile what is happening there? And two, do still expect 73 million in those payments for the year?

John, two comments. In terms of reconciling the dollar spending, we do not always make contract acquisition payments at the time when we enter into an agreement, but the timing of a specific payment may vary quarter by quarter. And what we are seeing is the dynamic that is taking place in the marketplace.

The second part of your question --

73 million.

$73 million. Yes, we believe it will be approximately that amount for the full year.

Would you say that given your current outlook for '06 that you are going to be able to continue to be successful in shifting away from the contract acquisition payments, despite the pricing pressures?

We will provide more insight into 2006 in January, but the specifics of when large contract acquisition payments are made has to do with the timing of when those contracts come up for renewal, if it's our account or when it comes up for bid, if it's not a Deluxe account. So we will discuss that further in January, but certainly this year will be the most significant we have had in terms of contract acquisition payments, and it relates to some very large customers and clients that we have -- that we have renewed or acquired.

Okay. And specific to large contracts, this third came on in the quarter, correct?

John, can you restate that again?

Just was curious (technical difficulty)-- third moved on to your platform?

It came on in the third quarter.

Which month?

Around the first of the quarter.

Okay. And some of the -- it appears there is some discounting going on in the small business segment. Is there some incentives that you're giving these banks to participate in your business advantage program? Is that what is going on (technical difficulty)--?

No, there is no incremental incentive to participate. It is presented on the merits of being able to meet the needs of the Small Business Services customer, as well as the bank. I think just to remind you and everyone is that when we lose an FI client, not only does it affect the Financial Services but it also affects the Small Business Services because those accounts are usually serviced entirely by a provider.

So when we lose a large customer either through an RFP as we referenced last year, or through FI consolidations, if that is a loss, it not only affects the Financial Services but also affects the Small Business Services. So I'm not sure if that provides that insight, John, you're seeking. But there is not any special discounting going on in that area of the business.

Okay. Fair enough. And on the Direct Checks segment, the lower response rates and less frequent ordering, is that -- are you somewhat of a victim of your own success and your ability to sell larger orders that these end-users just don't need to order quite as frequently? (multiple speakers)

I think that is a fair statement, John. In other words, as we are successful in selling them in the case of additional check quantities, that that does do is extend the reorder cycle out longer than what it has previously been. We have recycled around that. I think for us we have seen that being less of an impact today than the response rate, and the changing dynamics as we mentioned in our prepared comments of many of the banks now beginning to use free checks as an incentive to gain customers for them, so what that does (technical difficulty)-- transaction versus the profitability of the financial institution transaction. And there is not any -- statement there in terms of a general, but there would be a product mix shift.

Got you. And, Doug, just so I'm clear, debt payments expected for the year, if my number is right, you're looking at paying down about 130 million?

It will be -- I've provided in the comments that we will be at about $1.1 billion, the operating cash flow guidance we have lowered a little for the full year from where we were in the second quarter. We have lowered it by about $20 million from where it was, and that is primarily driven by the lower outlook in addition to some working capital effects.

And the result or the effect of the lower cash flow will be felt in the amount of debt paid down, correct?

Correct.

Okay. And the last question for you, Larry, any new or any word on the search for a replacement?

As you referenced just to make sure to bring everyone up to speed, last December we did make an announcement that I would be retiring by the end of 2005. Our Board of Directors has a search committee, and that process is ongoing. And I would expect some announcement prior to year-end as to something definitive on that front.

Ed Shins (ph), Ivory Capital.

I just wanted to clarify the loss of the large institution that you referenced. Did that happen -- I thought that happened at the beginning of the year.

It happened at the end of the fourth quarter 2004.

It was actually (multiple speakers) just specifically (multiple speakers) November.

So it will recycle here in December 1st of this year.

Okay. And that would primarily affect the Financial Services line in the segment?

It will affect both of the business units as I mentioned earlier as most of the time the discussion is around Financial Services, but there is an impact also on our Small Business Services segment.

Okay. So why did the revenue decline then? It seems like they may have accelerated in this most recent quarter, given the fact that that client was lost two quarters ago. Is there a lag effect that I was missing?

No, we also see as other -- you have got the pricing pressure, as well as other losses through financial institution consolidations. In other words, Bank A buys Bank B, and we have -- if Bank B is our customer and Bank A is another service provider's customer, usually they consolidate that, and so there has been a net effect of some client losses through FI consolidation.

Okay. But you should -- I guess by -- you should hopefully see the revenue decline decelerate in Q4 as you start to anniversary the loss of that one client. Is that fair?

That is correct.

Okay. And if I remember right, that client was I think 100 million roughly in revenue?

(multiple speakers). No, it was approximately $75 million. We had previously provided guidance that the overall decline in Financial Services would be approximately $110 million thereabouts.

Right, but that one client was 75.

Okay. Got it. And then I just wanted to also make just housekeeping on the business services line. If -- I'm just trying to understand how much of the operating income and revenue from this quarter was from the NEBS acquisition? I tried to back into some numbers based on your press release, so I just wanted to make sure I had it right. I think the revenue number looks like it was roughly 175 million for the quarter in NEBS?

Actually we have -- cycling around now and treating that as Small Business Services, so we have got comparability and total SBS against total SBS a year ago.

Okay. So you no longer disclose any of the contribution from the NEBS business?

You do it on a year-to-date basis (multiple speakers). We disclosed that.

So that 312 that you referenced in the press release?

Yes, but the intent is as we cycle around is to treat that as a total business unit and where we are coming up against comparables. So there would be a difference in the order and then year-to-date. (multiple speakers)

And there are a couple of reasons for that. One, we have moved a long ways down the path in a year and a half of integrating those businesses, and we have actually begun to operate those differently combining those in some of the business that we had previously. So there are sales that have moved from one channel to another, and that interdependency is greater and greater, and the lines are more and more blurred so we won't make sure that we have given you the best information on which to base your projection.

Okay. Got it. And then so the -- okay but -- and then you -- so the --

To provide insight that the NEBS operations contributed $29 million off that year-to-date, off that by $19 million in amortization expense and integration costs as well.

Okay. Got it. And so then you are just going to be reporting that on a combined basis going forward?

Correct.

Okay. I think on the last quarter you mentioned or it may have been the first-quarter conference call, you mention that you expect the operating income for '06 to be higher than it is in '05. Do you still expect that to be the case?

As Doug had made the comment in his prepared remarks, we will comment on '06 guidance as specifically at this point in time in January, and that has been our practice.

John Rodin (ph), Glenview Capital.

I think a lot of my questions got answered by John Kraft earlier. But I just want to talk a little bit more about competition. You guys talked about competition intensifying. You guys clearly are meaning to be responsible about it, but not driving the prices lower and really focusing on the value-added stuff, which is exactly what we would obviously want to hear. Is it your competition that is driving the competition, or is it the customers that are pushing back and driving the need for competition?

I think it is the customers, especially as I think -- one general comment. If you've got a mature business and declining, which ours is, the additions that we are seeing are not unique to this. It is particularly representative of a mature and gradually declining business segment. And so certainly we see that financial institutions as they are looking to increase their profitability are looking at every aspect of trying to make sure that the people they are getting as much value as they can not only on the relationship side and the product side, but also in the very very best pricing that they can -- from the people that are supplying them.

So it is a dynamic that is I would say more being driven by the financial institutions than it is by individual check providers just trying to compete on price alone.

And given the fact that the contract payments are improving or at least they did this past quarter, yet the competition is increasing, is that a function of what you referred to earlier, which is just the timing of the upfront contract payments, or is that a function of people moving away from the upfront contract payment and maybe just taking lower pricing to begin with on the contract?

It is more of an issue of the timing.

Got you. But they are not going away is what you are saying?

We would like to see them go away, but they are not. In essence they are a prepaid discount, so it is the timed value of money that really comes out in the net result of the pricing that the bank experiences from our perspective.

Got you. Thanks.

Peter Hughes (ph), CSFB.

Just one question to clarify a question that John had earlier. In regard to your debt reduction target, you are planning on reducing it to 1.1 billion by the end of the year. And is that included -- is your operating cash flow guidance net of any debt reduction in the fourth quarter?

The operating cash flow guidance does not take you through capital spending in your dividend payments.

Right. Okay. So if you were to take that 200 million and then look at capital expenditures implied by the guidance and the $20 million dividend payment, it looks like liquidity might be stretched a bit if you were to bring it down -- if you were to try to bring debt down to that level. Are there any other asset sales or anything else factored into this guidance that is not included -- that you have not stated already?

Onto the liquidy question and that way, there isn't a liquidy concern in any way from the standpoint of our ability to access the commercial paper market and our ability also to continue to generate positive cash flows to reduce that debt. And what we are doing here is revising a downward operating cash flow approximately $20 million for the quarter for the full year from where the guidance was in July when we last spoke with you.

Right. So if you were to start with operating cash flow and walk down three-year CapEx guidance, which works out to about 13 million for the fourth-quarter dividend payment of 20 million, and then it looks like you would have to reduce that by at least 50 million or so to get down to 1.1 billion. You know, that implies since you're starting the quarter with a $15 million cash balance, that you would be reducing the cash balance further to hit that debt reduction target?

So with that said, I was curious as to whether or not there are any assets sales or anything else included?

We do anticipate some small assets sales in the fourth quarter related to facilities that we have closed in prior years or earlier this year.

Okay. Great. Thank you. As far as PremiumWear goes, is there any way you can quantify the cash proceeds from that sale?

We disclosed those. They are in the condensed statement of cash flows that were released this morning under the cash used by discontinued operations. That is not the sale price of PremiumWear though, but we show $11 million there, and that involves the operations of the business combined with the purchase price or the sale price of PremiumWear.

Mark Router (ph), PartnerRe.

Are you still targeting the cash flow to be up in '06 versus '05? I know you were saying that earlier in the year. I'm wondering if that is still true.

We will be providing guidance on cash flows for 2006 in our January call. We anticipate we will provide that guidance at that time as we work through what our plan looks like for the year, okay? That is our normal practice to provide that annual guidance in the January call as compared to provide it at the third-quarter call here.

Right, right. I'm just asking you about the statement that you made earlier in the year.

Yes, we will update that in January. We're not updating that at this time. We want to give a full picture in all its appropriate context in January.

Okay. And can you talk about some of the new customers that have come on and how that will affect comps next year just sort of at a broad basis?

Well, we don't comment on any specific customers. Any time that we do is we might issue a press release if the financial institution is interested and wants to and willing to share their decision with the general public.

But, as we have said, that usually a contract with financial institution is a three to five-year contract, and these cycle every year in some percentage of the total. And the timing determines the wins and losses and the opportunity to bid or to retain an existing customer (technical difficulty)-- impacted by the consolidation of financial institutions. As they continue -- and we anticipate that financial institutions will continue to consolidate. So it is affected by many things, and those are the key factors.

Okay. Any major contracts rolling off next year?

No.

Okay. I think there might be some opportunities to pick some up?

Well, we are always interested in (a) retaining the customers that we have, and (b) when RFP opportunities, request for proposal opportunities present them sales to be able to bid on those.

Saba Hekna (ph), New York Life Investment Management.

Most of my questions have been answered. I just wanted to go back to, first of all, this question with respect to mergers or acquisitions. I understand that you would not want to comment on any acquisitions, but I was just wondering from a matter of financial policy whether management would be willing to sacrifice its investment-grade ratings for an acquisition opportunity?

We would not make any comment on that. Specifically what I would say to you is what we have said consistently every quarter, and when we get this question, the criteria that we have had remains the same. And that is that we would consider acquisitions that leveraged our core competencies, there were adjacent to the spaces that we are in and that were accretive to earnings per share and to cash flow. Those are key criteria.

And as Doug mentioned earlier, our focus right now is on repayment of debt and pay down that debt. And so yes, acquisition certainly as we made an acquisition of NEBS is in our purview, but our priorities are pay down of debt, and those are the criteria that would continue moving forward if we were to continue to look at the acquisitions in the future.

Well, I understand and that has took you down a couple of notches in ratings, but still an investment-grade rating category. And you mentioned earlier in your comments that you want to maintain your BBB+ rating, but I guess the question is longer-term, what is the target leverage or target ratings that you had, including potential acquisitions? I mean are investment-grade ratings at all a long-term target?

Well, this is a conversation certainly that is important related to capital structure of the Company. At this time we do want to remain a strong investment-grade rating. That is our focus. That is our policy. That is what we are seeking to do.

Obviously if situations arise and they are unusual and they are unique opportunities, the risks associated with assuming a different debt rating would have to be evaluated against that opportunity. We're just giving you our outlook and our focus right now when we say we are operating to reduce the debt at this time. But in the future as we achieved the debt targets that we want to be at, then we will continue to look further at other acquisition possibilities or other uses of cash possibilities.

Okay. Thank you. I think that answered my question.

John Kraft, D.A. Davidson.

A couple follow-ups. Doug, can you provide us with the sale of proceeds from PremiumWear, the gross (multiple speakers)?

Yes, I can. That is $15 million.

Was that in line with what you were expecting?

That was on the low-end of the range, less than what we were expecting and hoping to get.

Okay. And how about the termination payments in the quarter. Last quarter it looked like maybe this respond -- gets back to Ed's question, but last quarter there was 12 in termination fees. Correct?

Right. They were not significant this quarter. They were not material.

Okay. And then just maybe a more broad question about the effect of the hurricanes. I can understand how that would cause a slowdown or a dip today, but might there be a spike later as moving -- just in general moving causes folks to reorder?

John, I think it is difficult. We do know that we had in many cases in those markets both financial institution customers and their branches that were shut down, wiped out, and we have been working very actively as I made in my comments to help not only the banks and the branches, but their customers get checks as quickly as possible so they can get back into a liquid mode and being able to use the assets that they have in their direct deposit accounts.

Likewise, small businesses that were wiped out or eliminated as they have moved and relocated trying to get them back up and running with checks and forms and related product. What we don't -- we do know the impact of that right now and for this year, it is difficult for us to forecast for the going forward.

For example, and I think in the small business area, it might be even more problematic, is, what is the likelihood of that small business customer getting back into business and when will that happen? Or will they say in small business that, you know, I am going to try in something new.

So we really don't know the impact of that. But we don't think it's going to be a major factor as we look forward. It will be a minor. It is just one of those things that we have to know and understand and to deal with. But we don't see anything major in the impact moving beyond the end of this year.

Lois Blacker (ph), UBS Principal Finance.

It is Lori Bliffer (ph). I just had a question on your short-term debt. Do you guys have any intentions of possibly terming out your CPs kind of to smooth out your debt schedule?

That is something we look at, but -- that we look at continuously. At this time we don't have specific plans to do that. We would certainly communicate our intent at a time -- we would communicate when we did that, but we are not planning to do that today.

Okay. And can you also just update us on your discussions with the rating agencies?

We speak with the rating agencies on a regular basis, and we meet face-to-face with the rating agencies on occasion as well, and they are fully knowledgeable as to the drivers of our business and the things that strategically we are looking at for the future direction of the business. Is there more specifics there that I can help you with?

Are you guys -- have you recently met with them or intend to meet with them in the next couple months?

Yes. We will be meeting with the rating agencies at the end of this year.

At this time, there are no further questions. I would like to turn the conference back over to Mr. Mosner. Please go ahead.

Well, thank you, John, and thank you to everyone on the call for your interest in Deluxe. I hope you'll be able to join us on January 26 when the Company reports our fourth-quarter and year-end earnings. Between now and then we continue with our work to execute our strategy of leveraging the assets and strengths of our three business segments to serve end consumers, financial institutions and small businesses. Stu?

Thank you, Larry. Before I provide the replay and archive information for this call, I would like to inform those of you that I talk to on a regular basis that this is my last quarterly investors call. After more than 34 years with Deluxe, I have decided to retire at the end of next month, and I will say that it has been a real pleasure to serve the shareholders of Deluxe over these many years.

In closing, I will remind you that a replay of this call will be available until November 3 by dialing 320-365-3844. When instructed, provide access code 798421. In addition, the audio presentation slides are archived in the Investor Relations section of Deluxe's website. Thank you for joining us today and have a good afternoon.

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.