Deluxe Corp (DLX) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Corporation's 2005 fourth quarter year-end earnings conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. [OPERATOR INSTRUCTIONS]. And as a reminder, this conference will be recorded. And at this time, I'd like to turn the conference over to your host. He is the Treasurer and Vice President of Investor Relations, Raj Agrawal. Please go ahead, sir.

Thank you, John. Good morning, everyone, and welcome to Deluxe Corporation's investor conference call, covering the fourth quarter and full year results for 2005. Today you'll hear from Ron Eilers, Chief Executive Officer; and Doug Treff, our Chief Financial Officer. Ron and Doug will take questions at the end of the prepared comments. In accordance with Regulation [FB], this conference call is open to all interested parties. A replay of 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 Ron, 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, 2005. 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 investor relations section and was furnished to the SEC in the Form 8k filed this morning. In particular, any non-GAAP financial measures mentioned during this call are reconciled to their comparable GAAP financial measures in the press release.

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

Thanks, Raj.

As we stated in our press release this morning, we ended the year having accomplished a lot, particularly in the area of NEBS integration. However, the quarter did not meet our expectations. We believe that most of the issues related to our performance were short-term, and that they will not have lasting effects on our business. We will provide more details around our fourth quarter and full-year results in a few minutes. At the end of our prepared comments, Doug and I will take your questions.

But first, I have a couple of items to talk about. If you're a regular listener of Deluxe's quarterly calls, you've noticed that Raj Agrawal is our new Vice President and Treasurer -- Vice President of Investor Relations and Treasurer. Raj assumed this role in addition to his position of Treasurer following Stu Alexander's retirement last November. 2005 also brought the retirement of Larry Mosner, Deluxe's Chief Executive Officer since 2000. I have been named Chief Executive Officer on an interim basis, while the Board of Directors continues to search for a new CEO. In my 22 years with Deluxe, I have held a number of positions. The most recent of which was President and Chief Operating Officer. Since 2000, I've been a member of Deluxe's Board, and I will continue to be a Board member in my role as CEO.

Another change within the Company's leadership is the separation of the CEO and Chairman positions. And, as a result, Steven Nachtsheim has been named non-executive Chairman of the Board. Steven has been a director since 1995 and was named Deluxe's lead independent director three years ago. While Deluxe has new leadership, Steven and I are hardly new to Deluxe. In fact, I can say with confidence that the transition to our respective new positions has been seamless. After all, Deluxe's strategic direction has been in place since the NEBS acquisition in 2004. It is, to grow Deluxe by enabling our financial institution and small business customers to be more competitive. Both Steven and I embrace it completely. And it serves as the guiding principle for all the decisions we make. I will provide you with some perspective on what my priorities are and what I want to achieve at Deluxe during my time at CEO, as well as cover some business highlights and an outlook for 2006 later in the call.

But first, Doug Treff will cover the financials. Doug?

Thank you, Ron.

I'll begin by reviewing fourth quarter results. Earnings per share were lower than expected, due to several challenges in our business that arose during the quarter. We experienced inventory shortages for our Small Business Services holiday card which resulted in higher costs and order fulfillment shortfalls. This was the result of some transitions that did not go as smoothly as we had anticipated. In addition, we felt the effects of higher NEBS integration costs. While higher than expected, our synergy benefits will also be greater in the future. We do not expect either of these situations to have a lasting effect on our overall business result, as the first one was mostly operational in nature and the second was nonrecurring. Finally, we fell short of expectations as we experienced a shift in orders to less profitable products and financial services. What I mean by a shift to less profitable products is that for a number of reasons, customers are ordering a higher percentage of basic checks instead of ones with premium features.

Compared to the fourth quarter of 2004, earnings per share were $0.76, down from $0.92. Net income decreased $8 million from 2004 due primarily to revenue declines in Financial Services and Direct Checks and lower operating margins in Small Business Services, or SBS, due to higher manufacturing costs. We were partially able to offset the declines this quarter through lower performance-based compensation, additional cost reductions, and higher integration synergies resulting from the NEBS acquisition. In addition, last year's results benefited from a reduction in tax expense as a result of favorable state tax settlements. Deluxe's revenue was down 9.4% to $432 million. The revenue decline was primarily due to the loss of a large financial institution client late in 2004, continued pricing pressure, and the overall decline in check usage.

Gross margin for the quarter was 63.9% of revenue, down 1.5 percentage points from the previous year. The primary contributor of the decline was the impact of pricing pressure in our Financial Services business. Higher manufacturing costs within SBS due to integration activities and the holiday card inventory shortage also had a negative impact. While gross margin overall was down, there were two factors that strengthened it. Another quarter of record productivity levels in our Financial Services and Direct Checks plants and distribution centers, and the strong synergies we're realizing from the NEBS acquisition. These synergy benefits extend across the business units and are not limited to just SBS. As an example, we are seeing incremental savings from procurement synergies as we enjoy the benefit of larger volume discounts and material costs.

Selling, general, and administrative expense as a percentage of revenue is 46.5% compared to 47.6%, and decreased $26 million. Two key factors contributed to the improvement. Lower performance-based compensation costs as a result of underperforming our full year target, and NEBS acquisition-related synergies. As a result, our operating income was $75 million. Operating margin for the quarter was 17.4% of revenue compared to 17.8%.

Now, I'll move on to the four quarter's results in each of our three business segments. Small Business Services revenue was $257 million for the quarter, flat compared to 2004. We had higher revenues from our financial institution referral program called Deluxe Business Advantage, or DBA, higher revenues from customer retention efforts, such as sharing best practices across brands, and benefits from other sales initiatives. But they were largely offset by declines due to the loss of the large financial institution client. Operating income for the quarter decreased to $35 million from $38 million in 2004. Integration savings and lower performance-based compensation were offset by higher manufacturing costs, a full allocation of corporate shared service costs to SBS, and investments to support our key strategic initiatives to drive future revenue growth.

Next, I will discuss the results within Financial Services. Revenue was $117 million, down 22.5%. The most significant factors compared to last year were volume declines and pricing pressures. Approximately two-thirds of the $34 million decline was related to volume. The remainder was due to pricing pressures. As a result, operating income decreased $4 million to $20 million. At the same time, operating margin increased due to lower performance-based compensation, cost management action, NEBS acquisition-related synergies, and production efficiency.

And now for fourth quarter results in our direct to the consumer business. Direct Checks' revenue was down nearly 15% to $58 million due to a decline in unit volume resulting primarily from lower response rates and the decline in personal check usage. Also contributing to the decline are banks free check programs for customers. Operating income was down $3 million to $20 million. Operating margin, on the other hand, was up due to two primary factors -- a greater percentage of corporate shared services costs were shifted to SBS, and reorders made up a larger percentage of total orders. Reorders are more profitable than initial orders because customers qualify for special pricing only on their first order. The result is improved operating margins.

Now, I'll move on to results for the full year. Earnings per share were $3.09 compared to $3.92 for 2005. Revenue is up $149 million. NEBS contributed $308 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 $159 million in our other businesses for many of the same reasons I mentioned in regard to the fourth quarter results. Operating income for the year was $305 million, a 12.4% decline from the previous year. The decline was attributable to lower operating performance in Financial Services and Direct Checks. Operating margin was 17.8% of revenue, compared to 22.2% in the previous year. Net income decreased $40 million from 2004, due primarily to lower operating income and higher interest expense as a result of higher interest rates and a full-year impact of the NEBS acquisition financing.

Looking at our balance sheet, total debt decreased $77 million from the end of 2004. Our total debt was $1.17 billion at the end of the year. We will focus on paying down our debt in 2006 with the aim of improving our credit ratios and financial flexibility. Our cash flow statement shows the cash provided by operating activities for the year was $175 million compared to $308 million last year. The decrease was due primarily to higher contract acquisition payments, which were $54 million higher for the year, related to retaining and gaining new financial institution clients. The decrease was also due to higher interest payments related to a full year of acquisition debt and higher interest rates, along with lower earnings and higher performance-based compensation payments related to 2004. Capital expenditures were $56 million for the year, tied to some strategy-related investments. We expect our capital spending in 2006 to be approximately $50 million, invested in the following key initiatives. The migration to a new order capture technology in order to reduce our IT cost structure and to serve our customers even better. Our SBS call center expansion as we anticipate revenue growth from the DBA program and our strategic selling initiative. And lastly, other projects to add capabilities and increase synergies, primarily in manufacturing. We expect these initiatives to put us in a better position to deliver strong top and bottom-line growth in SBS, as well as reduce costs through the the Company. Depreciation and amortization is expected to be approximately $90 million, including $34 million of acquisition-related amortization.

I'll wrap up my prepared comments with earnings guidance. The Company expects 2006 first-quarter EPS to range from $0.48 to $0.52, and full-year EPS from $2.70 to $2.90. There are a few key factors contributing to our outlook for 2006. Anticipated lower revenue in Financial Services and Direct Checks, most noticeably in the first two quarters. Merger activity among financial institutions that led to the loss of some accounts at the end of the second quarter of 2005 will produce unfavorable comparisons in the first half of 2006. In addition, we see competitive pricing pressures continuing into 2006. I will also note that spending on the key initiatives I mentioned is weighted more heavily in the first half of the year. Later in the year, we expect to realize the benefits of bringing more banks and branches onto our Deluxe Business Advantage program and executing our SBS sales strategy.

If in closing, we anticipate operating cash flow in 2006 to increase significantly from 2005, primarily due to lower contract acquisition payments, lower performance-based compensation payments, and other improvements in working capital. With that in mind, we expect operating cash flows to be between $240 and $260 million. Up from $175 million in 2005.

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

Thanks, Doug.

As has been the format of Deluxe's calls in the past, I will discuss a number of business highlights as well as our outlook for the rest of the year. However, given our results for 2005, I'd like to begin by sharing my perspective on the direction of the Company as well as my priorities and what I want to achieve in my role as CEO. Deluxe is a company in transition. A transition that was set in motion with the acquisition of NEBS a year and a half ago. Guiding us through this period of evolution is the strategic direction I referenced earlier. The board supports this strategy, leadership supports it, and with Deluxe's talented and dedicated employees behind it, we are confident in our ability to navigate our Company successfully from a mature market to the small business market, a space where we believe there is real potential for growth. Having yet to arrive at our destination, however, means we will need to not only invest in our business, but also continue to take costs out where we can. In the process, we likely will be faced with some difficult decisions. We believe that, once through this transition, Deluxe will not just survive, but also thrive as we position ourselves to meet the needs of our customers.

That's our desired state. What kind of work will it take to get there? Specifically, what do I want to accomplish as CEO? My first priority is to put the Company on solid footing to achieve its growth objectives within SBS. Critical to this strategy is leveraging the relationship between Financial Services and Small Business Services in order to increase our relevance to our clients and customers. The programs that manifest this strategy are Deluxe Business Advantage and other sales efforts targeted at small businesses. Growing our presence in the small business space, we believe, will create a path for the Company's long-term success while also improving our financial position. This might be a good time to review the basis for the level of our confidence in the small business space. To cite a couple of statistics, the small business association estimates that there were nearly 25 million small businesses in the U.S. in 2004, a 1.8% increase from just three years earlier. And Visa USA estimates that small businesses spent more than $4.5 trillion in 2005, and it's growing yearly.

Moving on to other priorities for 2006, as I mentioned, cost reduction will continue to be part of our work. In fact, it's a key priority in 2006. We've come a long way in this area in the past several years, through a number of initiatives, such as lean manufacturing and plant consolidations. We can do more. For example, the new order capture system we're implementing will help us take additional costs out of our business. Furthermore, we will continue to generate savings from the NEBS integration which should be completed in 2006.

Now, I'll move on the talk about our Small Business Services segment. When we acquired NEBS in the summer of 2004, we knew that our first priority would be to execute against our plan for achieving synergies. The next critical piece was to develop a comprehensive strategy for the Small Business Services segment. Our strategy work is now complete. There are three key pieces to the strategy. One, to increase the number of customer referrals through our Deluxe Business Advantage program. Two, to gain wallet share by bringing our breath of products and services and selling channels to our customers in an integrated, cost-effective way. And, three, to consolidate NEBS businesses for greater efficiency and market impact.

Here are some details on each of the three elements of our strategy. First, increasing the number of customer referrals through our Deluxe Business Advantage program. As a reminder, Deluxe Business Advantage, or DBA, is a program in which Deluxe offers face-to-face, personalized service to small businesses referred to us by financial institutions. The program leverages the relationships between our Financial Services business, our financial institution partners, and the breath of products and services SBS offers. I'll provide additional details of this program in a few minutes. The second piece of our Small Business Services strategy is to gain wallet share with our new and existing customers. It's not uncommon for a small business to purchase its checks from one supplier; letterhead, envelopes and business cards from another; and forms from yet another. We know small businesses. With the breadth of our SBS products, we can satisfy many small business needs, thereby simplifying their purchasing process. When a business looks to us for multiple products, we become more than a supplier. We become a knowledgeable partner that small businesses can count on. The third element of our strategy is to consolidate portions of the SBS business for greater efficiency and market impact. We intend to consolidate our multiple brands in order to create synergies, maximize our sales effort, and create clarity with customers.

One of the key initiatives that supports our SBS strategy is our Deluxe Business Advantage program. DBA generates additional revenue by increasing small business customer referrals in our SBS segment and by creating a critical competitive advantage in our efforts to serve the needs of financial institutions. In fact, DBA was a clear advantage in retaining and acquiring a number of clients in 2005. Here's why. Small businesses are important to financial institutions. Small businesses see the value in our extensive products and services. Because our expert sales associates interact directly with these small business referrals, the financial institutions' new accounts people don't have to be experts in the unique needs of small business owners. We're very pleased with the response to DBA since launching it last spring. In fact, it's exceeded our expectations.

Another initiative we're rolling out is a new SBS sales model which integrates our field, outbound and inbound sales channels. The new sales model supports our wallet-share strategy and facilitates the delivery of our value proposition, which is, letting both established and new small businesses buy when, where, and how they want from experts who know they're business, understand their needs and simplify their business operations. We are confident that our strategy will drive top and bottom-line growth for Small Business Services. In fact, we anticipate mid-single-digit revenue growth with even stronger operating income growth.

Moving onto SBS highlights, NEBS Canada has launched its first complete web-to-print Internet ordering solution. The site's functionality allows us to flow orders seamlessly and directly from the web into production. It also significantly increases the efficiency of our Canadian operations and eliminates administrative costs such as composition and proofing. We're already leveraging this strategic advantage to bring in new business. One such business, a Canadian retail operation with 300 locations, will begin using our web-to-print application during the first quarter. In other web-related news, NEBS.com was one of 50 online stores to receive the Circle of Excellence Award from bizrate.com. The 50 award winners were chosen from a pool of more than 47,000 Internet retailers and are recognized for achieving high customer satisfaction ratings in several areas. Customer support, ease of finding products, product selection, prices, overall look and design of the site, variety of shipping options, order tracking and on-time delivery. We are proud of this award as it confirms one element of our value proposition. Letting both established and new small businesses buy when, where, and how they want.

Now, I'll move on to the Financial Services business. The competitive pricing environment in this segment continues, as does the gradual decline in check usage. Both situations have been pressuring our business for some time now, and we don't see them changing. Still, we acquired and retained key pieces of business in 2005, not by offering bargain-basement check prices, but by having the most valuable collection of products, services and programs to help financial institutions meet their business objectives. We extended relationships with a number [of] business partners during the fourth quarter. Just a few examples are, the Independent Bankers Association of Texas; Arvest Bank, a midwest financial institution; Century Bank in the Northeast; and the Virginia Credit Union League. Fueled by our efforts, as well as the investments we made in acquiring contracts in 2005, we expect our share of the financial institution channel to grow in 2006.

Financial institutions are connecting with our value proposition, which is helping them profitably acquire, retain and grow their customer relationships. A couple comments from financial institution executives demonstrate this. One said, We feel this is more than a check-printing relationship -- it's a strategic partnership. Another said this about his financial institution's relationship with Deluxe, This agreement solidifies and strengthens Deluxe's position as the financial industry thought leader and demonstrates its commitment to helping us create value. Our value proposition is backed by what we believe are the most comprehensive and robust products, services and programs any check supplier has to offer. For instance, DeluxeSelect, our program that gives financial institutions the opportunity to rely on us for their check merchandising. Our broad selection of check packages, licensed designs and related products. Our fraud prevention services. Our ability to provide outstanding customer experiences while promoting the financial institutions' brand. And, our Knowledge Exchange Series.

That provides me with a perfect transition to an update on the Knowledge Exchange Series. Knowledge Exchange is a curriculum for our financial institution clients to help them gain knowledge to improve their relationships and image with their customers. The Knowledge Exchange Series has four components, and based on the structure, it's self-cycling. The first component is an annual exposition to which we invite hundreds of clients, along with some of today's most important thought leaders. The goal of these expos is to address the top of mind issues for and concerns of financial institutions. A current topic for the Knowledge Exchange Series is the practice of experience management. In other words, improving a financial institution's image with their customers. The second component is regional workshops held throughout the the year. These events could be described as expo-lite and for those client whose couldn't get to the larger symposium. The third element is a collection of communication tools, quarterly publications, web-based events and teleconferences. Even though the latter two don't involve face-to-face interaction, the content is still based on the big issues and challenges important to attendees. The fourth and last component of our Knowledge Exchange Series is the collaborative. A year-long program in which leading financial institution representatives agree to participate on behalf of the entire industry. The group chooses the issue that's most important strategically to financial institutions. Acting as organizer and facilitator, Deluxe works with the collaborative to develop resolutions. At the end of the year when their work is done, the collaborative presents their result at the next expo. The current collaborative, the second one to be formed, has adopted the theme of transforming the customer experience of small businesses. They've charged themselves with the task of developing and implementing ways to increase loyalty, retention and revenue in their small business customer segment. The first collaborative demonstrated it's not only individual financial institutions that benefit, but also the entire financial services industry.

Moving on to our third business segment, Direct Checks, 2005's challenges were primarily the same ones we've been dealing with for the past several years. Specifically, lower response rates to our direct marketing efforts. There are a couple of reasons for this trend. Fewer customers who qualify for our new customer promotions, and the decline in check usage. Regarding direct marketing response rates in general, as we've shared before, other direct marketers are experiencing similar declines. The last challenge to our Direct Checks business are the free check programs banks commonly offer prospective customers.

Having covered the business segments, let's look ahead to 2006. We will continue our cost management efforts, specifically reducing SG&A expense in the portions of our business that are mature. Continuing to execute these cost takeout initiatives will help us sustain the cash-generating ability of our check business. We will continue to invest in lean manufacturing as we introduce the principles that have been second nature to us within our production environment to new areas of our business. As a result, we expect further improvements in productivity, service, and quality. We are on schedule to close the Athens and Commerce facilities during the second quarter. These are the two locations we announced a year ago. I want to thank all the Athens and Commerce employees for their contributions and commitment through the years. We will continue to leverage both our digital and offset printing technologies to gain efficiency and functionality. As an example, we have introduced digital presses for a limited production of short-run checks. Digital capabilities allows us to meet the needs of our FI partners beyond just the check package.

I have one last item before Doug and I take your questions. As we mentioned, we are in the process of implementing new order capture technology with an expected 2006 completion date. The project is a critical initiative for our business. When fully operational, it will reduce our technology costs, streamline processes, reduce redundancies, and give us the ability to expand the services we offer customers. I want to thank the project team and our business people for their unwavering focus on this key initiative.

In closing, while we expect 2006 to be a year of transition and challenges, we are also looking forward to it being a year in which we will begin to see our SBS business strategy gain significant traction and serve as the catalyst for our growth in the years to come. We will gain -- we will grow our share of the FI channel as we capitalize on some recent contract wins, and we expect our cash flow to improve significantly.

Now, Doug and I will take your questions.

[OPERATOR INSTRUCTIONS]. Philip Olsen, UBS.

Thanks. Actually, I've got a couple of questions here. First, on the CEO search, can you maybe just give a little bit more insights into what that process is? I guess I'm a little surprised that it would actually take kind of the 14 months to try to find someone. Do we have a short list of potential candidates? And how close are we to having a formal announcement? That would be the first question.

Okay. Philip, this is Ron. Let me address that one. Our Board continues the search for our permanent CEO candidate. And their goal is to make certain that they clearly get the best individual to become the next CEO at Deluxe. That individual is going to be critical in helping us maintain our leadership position in the markets that we serve and to continue our growth into new markets. I would expect the Board to make its decision sometime during the course of 2006. As you may be aware, I have pulled my name from that process for personal reasons, at least for the permanent CEO position.

Okay. That's great. Thanks for the insights there. Second, in terms of the cash flow guidance you're providing, '06, a fairly material increase versus 2005, but against a backdrop of continuing weak earnings environment. Can you maybe just kind of walk us through what are the puts and takes that underscores that cash flow improvement?

Yes. This is Doug. I'll answer that question. 2005 wasn't a typical year for us in terms of our overall cash flow from the business. We had higher than normal contract acquisition costs. For example, we had $70 million of contract acquisition payments in '05 compared to $16 million in '04. We anticipate that that'll be much lower in 2006. In addition, we expect to see growth from Small Business Services. We also will have lower performance-based incentive compensation payments in 2006. And, finally, we are looking for some improvement working capital, specifically in the areas of receivables management, reducing the days sales outstanding and receivables and also doing some work in the payables area.

Okay. Next one, is in terms of the balance sheet, you mentioned on the call that a free cash flow -- or that debt reduction is a priority right now. First, on that is with the dividend payout ratio approaching 60% next year, are we at a point in time where the Board would look to cut that as a way of accelerating debt reduction? And a related question is, following the recent downgrade by Moody's, would just like to get commentary in terms of how much commercial paper you currently have outstanding, and if you can maybe give a little bit of color with respect to your ongoing access to the commercial paper market.

Sure. I'll take those, Phil. On the dividend payout, we are not planning at this time to make any changes to our dividend policy. Certainly that's the topic that the Board discusses and we continually monitor that. But we believe that the operating results will give us the ability to generate the cash flows and to meet those debt payment obligations and also to continue to pay the existing dividend. Secondly, related to the downgrade by Moody's, we are still able to access the commercial paper market. Although we have a split CP rating, we have been able to continue to issue commercial paper. And, as a result, have not had to draw on our revolving credit facility. If we needed to, we have a $500 million credit facility in place that we could draw on that serves as a backstop currently to commercial paper. But we will continue to issue our short-term debt in the commercial paper market as long as that's available to us.

And how much is outstanding as of today?

Approximately $200 million.

And then last question, S&P, I guess, in terms of the rating, S&P recently announced that it was expanding its review of your ratings to incorporate your A2 commercial paper rating. Can you maybe give us any insight into the dialogue you're having with S&P and to the extent that they decide to lower your CP rating, at that juncture, would you most likely look to refinance the CP with your bank debt?

A couple of questions. One, we certainly have ongoing regular conversations with both rating agencies that rate our debt. And when they take that action, or what that action will be, I certainly don't have a feel for that. That's within their control. If they do downgrade our short-term debt and we are at the A3-P3 level with both rating agencies, we would seek to issue commercial paper if it was available to us. If it wasn't, we would draw on the credit facility.

Great, thank you.

John Kraft, D.A. Davidson.

Good morning, gentlemen.

Good morning, John.

Wanted to go back to your comments about the contract acquisition payments expected in 2006. How much visibility do you have into those at this point in the year, and what gives you confidence that you'll be substantially, I think you said, below '05 levels?

Good question, John. As you know well, having -- following our Company and our industry, that the timing of contract acquisition payments is dependent upon when large contracts come up for renewal or come up for bid. And certainly, '05 was a year in which we saw significant amount of up-front payments. In 2006, we have an outlet to that and have a good feel for that timing. And the confidence level we have around that number certainly can vary under certain circumstances. But right now, we have knowledge of certain accounts and contracts that are out there. And that number is -- we have a high degree of confidence in that it'll be significantly lower.

Do you think that it's possible we could see levels as low as what you saw in '04?

No, I don't anticipate that. To give you a little more color on that, I would anticipate it would be about half of what it was in 2005.

Okay. And I don't know if the last caller -- I think you might have answered this. But I just wanted to clarify it, also, where you think the debt level might be at the end of '06.

Well, we've provided the guidance-related operating cash flow of $240 to $260 million. Also, I anticipate the capital spending will be about $50 million. So taking that plus the dividend into account, I anticipate that, if you take the low end of that, 240 less the 50 is 190, approximately $80 million in dividend payments, gets you to about 110 million on the low end of the range that we provided.

Okay. Fair enough. And also, you mentioned pricing pressures. Is there any change from your perspective in those pressures relative to what you discussed and saw as of last quarter?

John, this is Ron. Generally, we expect the pricing pressure in the Financial Services segment to continue. And -- as we would go into next year. Our goal -- and as we approach the business, is not to compete solely on price. It's to differentiate ourselves with the value that we bring to the marketplace, which we think is very significant versus our competition. Talked about some of those strategies and the value in my prepared comments. And we believe that's -- that's truly what has caused us to win business that will come on in '06 and it is how we go to market. Now those pricing pressures, though, we do believe, will still be there. We will need to be competitive in the marketplace, but our position is we want to lead with the value that we bring to FIs. That they're beginning to see, as a real key element for dealing with Deluxe Corporation.

Sure, sure. I guess what I'm asking, I understand the pressures will always be there. I guess, if you had to say, would you say they were intensifying or staying fairly consistent?

I'd say it would be staying fairly consistent. It would be a good way to put it, John.

Okay. And then last question, also clarifying earlier caller, regarding the CEO search, if you had to guess, would you say that this replacement would come in the next few months or in closer to a year or two?

John, I can't speculate at all on that. I -- certainly, it's the expectation that something would happen during the course of 2006 and the Board's got a very active process that they're managing right now to try to get the best quality individual to lead the Deluxe Corporation in the long term. So that's probably about the best color that I could put around it.

Okay, fair enough. Thanks a lot.

Fred Taylor, Lord Abbett.

Mine have been answered, thank you.

[John Rodin], Glenview Capital.

Thank you, my question was answered, too.

[OPERATOR INSTRUCTIONS]. [John Para], MAK Capital.

Hi, Good morning. Just a couple questions. The first on cash flow to clarify. Last year, you had to take down your cash flow estimates a few times. And I understand part of that's due to higher acquisition costs. What gives you confidence this year that in your estimates for cash flow -- is your confidence higher this year in your expectations or can you help me with that a little bit?

John, that's a very fair question and something that obviously we're very sensitive to and very interested in demonstrating the results that allow us to have greater credibility with you as an investor as a shareholder. So what we are doing is we are providing guidance that we believe has very strong basis. We're very focused on executing the strategies in every part of our business, whether it be in Small Business Services, in terms of the growth we're pursuing, whether it be in Financial Services in gaining and retaining existing financial institution clients. We're very focused in our business on delivering the results that'll contribute to the cash flow. So, said a different way, we have a high degree of confidence that we will be delivering on the results that we've provided guidance for during 2006.

Okay. And you mentioned you expect lower acquisition costs this year. What's making you think that the acquisition costs trend will improve a little bit this year versus last year?

John, that has to do with the timing of major contract renewals or bids. And even the dollars that we're anticipating spending, some of those contract acquisition payments have to do with contracts that were previously signed, and this represents a second or a third year payment as part of that contract. So, we know though there isn't a tremendous amount of uncertainty. Certainly, things can happen in terms of consolidation between financial institutions. Certainly, a financial institution can go out for bid prior to the end of its contract earlier than anticipated. That could affect something like this. But at this point, it's our best take and it's a real sound projection that we have.

Okay. And then on dividends, I heard from the first caller your expectations, there's no intent to make any change. Is there a level of cash flow -- operating cash flow that would make you reconsider your dividend policy that you would be willing to share with us?

That's a real fair question. We look at the Company's ability to achieve its strategic objectives when we take into account the uses of cash that we have available. We look at our operating cash flow, we look at the internal capital spending that we need to do. And we look at the dividend payout. And we look at where we need to make investments longer term. We would certainly weigh that question more heavily if the outlook changed significantly from where we see it today. But we don't have specific parameters around that, nor are we -- I guess that's all the information -- as much information, as I can give you there.

Okay. And then last, are you considering with the NEBS acquisition, I know it's an expected vehicle of growth for the Company, are you thinking of adding on to that with other acquisitions, or are you just focused on integrating NEBS and getting that up and running?

John, this is Ron. We're certainly very focused on the continued integration of the NEBS business. And as we look at this year, increasing the cash flows, as Doug just got done talking about, such that we can improve our financial ratios and have the kind of financial flexibility such that we would be able to look at, in the future, potential acquisitions that might fit with our small businesses strategy.

Okay. All right. Well, thanks very much.

[OPERATOR INSTRUCTIONS]. [John] Patrick Walsh, Wachovia Securities.

Hi. Just, I guess I want to start with the fourth quarter. It looks like from a revenue and earnings and EBITDA standpoint, maybe a little bit light, but basically in the ballpark of what we were looking for and what you guys had said last quarter. But when I look at the cash flow number, what's applied is basically about $25 million shortfall in operating cash flow for the Q4. And I just wonder if you could elaborate a little bit more on what changed between when had you the third quarter call and year end to cause that kind of a shortfall, and what's the driver there?

I'll answer that. Some of that is working capital related. And the -- having certain noncash expenses. Performance-based compensation was a factor there. John Patrick, what it related to is that in terms of the lower performance we had, that drove the lower -- the lower result and the lower cash flow. But typically, what we anticipate is that as part of our expense, we would have accrued our accounts payable increases related to that. In not achieving the full-year targets that we had, we had a lower full-year incentive compensation payout and that contributed negatively. There were some other working capital negative impacts that also drove that number.

Okay. And in terms of the -- your outlook for next year, it appears -- it looks like it's more back-end loaded. It looks like for the first quarter you're expecting kind of a difficult quarter. Is there something specifically going on in the quarter that's going to cause that to be lighter than typical quarters that you've had?

John, this is Ron. Let me talk a little bit about that first quarter. The primary driver of the lower first quarter performance will be the revenue declines in our Financial Services business. The merger activity among financial institutions that led to the loss of some accounts in the second quarter of 2005 are going to produce unfavorable comparisons then as we look at the first half of 2006. The competitive pricing pressures I mentioned earlier are certainly in those numbers, too. And then, we are spending on some key initiatives that I mentioned that are weighted more heavily to the first half of the year. But which in fact will deliver the benefits, then, in the latter half of the year. And these are some of the strategy-related investments with our SBS business.

Okay. And in terms of the capital structure, I just wanted to clarify on your credit facility, I know you said you had the $500 million credit facility. Did I hear you say you have $200 million out right now?

We have $200 million of commercial paper issued right now, correct.

Okay. But nothing drawn on the credit facility?

Correct.

And -- okay. I think that's it. I'll hop back in the cue. Thank you.

[Lori Bilker], UBS.

Good morning. I have a couple of questions. First, is it possible for you to go through even if it's kind of a high-level basis, of how you guys calculate the performance-based compensation, especially given that that was a factor in the lower cash flow and that you're saying it's going to help improve cash flow this year, as well?

Sure, performance-based compensation is primarily tied to our -- there are a couple of components to it, but it's primarily tied to our revenue and operating results, taking into account our utilization of assets. Performance-based compensation is primarily tied to a [EVA]-type of metric so it takes into account revenue, it takes into account operating income and it takes into account how we use capital investment and how we get returns on our assets.

Okay. And do you have a breakout of that, of what it was in 2004 versus 2005?

We don't break out the incentive compensation calculation and visibility to that, Lori, if that's what you were looking at.

Okay. That's okay. I didn't -- I just wasn't sure if it was broken out or not. And then, can you also just give us a little bit more background on the 2006 guidance, possibly where you think revenues are going to go, margins, if at all you'll be able to take any pricing increases to offset some of the pressure that you've seen?

Lori, this is Ron. Let me start out with a comment certainly about our SBS business. We expect in our SBS business -- we actually expect a very good year there. And in fact, we are looking at mid-single-digit growth from a revenue standpoint and greater than that on the operating income line. Now, that is a business, too, where we're able to and plan on having pricing increases there. The Financial Services business, that segment, is one where we will continue to see the pricing pressures that we have seen in the past and some of those things won't be changing. And affecting both our Financial Services and our Direct Checks business tends to be the decline in check usage -- the personal check usage that impacts each of those businesses, which impacts their -- certainly their not only unit volumes but revenues.

And that was our last question for today. So at this time, I'll turn the conference back to Raj Agrawal. Please go ahead.

Let me first -- John, thank you. I want to close by saying that as we look at 2006, we are very pleased to see that our financial institution channel share is increasing. That our cash flows are improving significantly. And finally, we are confident that our SBS strategy will fuel top and bottom-line growth while creating a path for the company's long-term success. Now, I'll turn the call back to Raj.

Thanks, Ron. This is a reminder that a replay of this call will be available until February 2nd by dialing 320-365-3844. When instructed, provide the access code 813223. The audio presentation and accompanying slides are also archived in the investor relations section of Deluxe's website, www.deluxe.com. Deluxe will report earnings for the first quarter of 2006 on April 27th and will hold an open access call like the one today. The day before, on April 26th, the Company will hold its annual shareholder meeting at the corporate headquarters in Shoreview, Minnesota. Closer to the meeting date, we will issue a press release providing the details and also post them on our website. Again, thank you for joining us today and have a good afternoon.

And, ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. And thank you for using AT&T Executive Teleconference. You may now disconnect.