Deluxe Corp (DLX) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Corporation fourth quarter earnings call. [OPERATORS INSTRUCTIONS] I would like to turn the conference over to our host Mr. Terry Peterson. Please go ahead.

Thank you, David. Welcome to Deluxe Corporation's 2006 fourth quarter earnings call. I'm Terry Peterson, Deluxe's Vice President of Investor Relations and Chief Accounting Officer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer and Rick Greene, Deluxe's's Chief Financial Officer. Lee, Rick and I will take questions from analysts after the prepared comments. At that time, the operator will instruct you how to ask a question. 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. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I being, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management's intentions and expectations regarding the company's future performance are forward-looking statements as defined in the private Securities Litigation Act of 1995. As such, these comment subject to risk and uncertainties which could cause actual results to differ materially from those projected. Additional information about various factors that could cause results to differ from those projected are contained in the news release that we issued this morning and on the company's form 10-Q for the quarter ended September 30, 2006.

In addition, the financial and statistical information that will be reviewed during this call is addressed in greater detail in today's press release, which is posted in the investor relations section of our website, www.Deluxe.com and was furnished to the FCC on form 8K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release. Now I'll turn call over to Lee Schram, Deluxe's CEO.

Thank you, terry, and good morning everyone. We are pleased with our fourth quarter financial performance and with our momentum as we exit 2006. We are particularly pleased with our nearly flat year on year quarterly revenue performance, including continued growth in our small Business Services segment, only mid single digit revenue declines in our financial services segment and sequential quarter-to-quarter revenue growth in our Direct Checks segment. We also reported strong earnings, strong operating cash flow, and reduced debt even more than anticipated. Although we are still in the early stages of our transformational journey, our strategy continues to take hold and our execution is improving.

To give you some additional perspective, as many of you have heard me say, using an analogy of a baseball game and innings per quarters, we are only just completing the second inning of a 10 inning game. So even with these early successes, we still have much work to do. In the fourth quarter, we spent considerable time, first with our customers, key suppliers, and investors sharing our operational and strategic direction with them. I have now had the opportunity to meet with many financial institution CEOs, key suppliers, and shareholders. Second, aligning the company around our enterprise strategy. Third, filling out our new executive leadership structure. Fourth, realigning our go-to-market sales and marketing organizations. Fifth, integrating manufacturing and supply chain into one fulfillment organization and finally continuing to simplify our businesses and executing against our previously announced $150 million cost and expense reduction targets while improving profitability and operating cash flow.

In the fourth quarter, we also made progress in each of the five areas highlighted during our last two calls, including first, improving our core check businesses by retaining key clients, continuing to increase our new acquisition rate, and progressing on the process simplification work. Second, sharpening our focus on our small business services strategy where we continue to grow revenue and accelerated our opportunities in the custom, full color digital and web to print space through our acquisition of The Johnson group. Along these same lines, we further refined our focus with the divestiture of our non-strategic industrial packaging product line mentioned in this morning's release. Third, continuing to reduce our cost structure across the business with a strong focus on our shared services functions. Fourth, continuing to increase cash flow and paying down more debt than anticipated in the quarter. And finally, executing and delivering on our earnings commitments.

In a few minutes, I will discuss more details around our recent progress in next steps. But first Rick will cover our financial performance.

Thanks, Lee. Earlier today, we reported earnings per share for the fourth quarter of $0.92. Which is exceeded our previous guidance for the quarter of $0.71 to $0.75. As we stated in the earning's release, our results reflect better than expected operating performance in the small business services and financial services segments. Primarily, related to higher revenues with resultant operating income pull through, lower than anticipated manufacturing costs, as we continue to realize productivity gains sooner than expected, and lower SG&A expenses. The reduction in SG&A stems from cost takeout actions starting to take hold in our go-to-market sales and marketing, as well as, shared services infrastructure.

Results for the quarter also included $8 million of employee severance charges related to reductions primarily in sales and marketing organizations and our back office support functions. Lastly, EPS benefited in the quarter from a $0.09 per share contribution due to a lower tax rate related to one time benefit. Operating cash flow continues to be strong and was in line with the guidance previously provided. The stronger earnings were partially offset by working capital changes which lead to operating cash flow of $67 million for the quarter. Debt pay down of $49 million exceeded our expectations for the quarter aided by the liquidation of life additional insurance policies. We have no plans to liquidate additional policies in the foreseeable future.

In the fourth quarter of 2005, we reported earnings per share of $0.76. The primary contributors to the higher earnings year over year were the favorable tax benefit previously mentioned, the $11 million pretax gain associated with terminating an outsourced payroll services contract and improved operating income from our small business services segment. This favorability was only partially offset by the severance charges and revenue declines in our personal check businesses. More specifically lower revenue per order in financial services and lower volume in Direct Checks. Results for 2005 also benefited from a $7 million down ward adjustment in the performance-based incentive compensation accrual. Company wide revenue totaled $427 million. Relatively flat to 2005. Revenue in our small business services segment increased 3.5% or $9 million compared to last year due to higher revenue per order and the acquisition of The Johnson group in October. But this increase was offset by the previously mentioned declines in our personal check businesses. Financial services order volume was up 5.3% compared to the fourth quarter of last year. Gross margin for the quarter was 63.5% of revenue, essentially flat with the previous year and up one point two percentage points sequentially from the third quarter of 2006. Productivity gains achieved in 2006 were offset by lower revenue per order in financial services. Selling, general, and administrative expense was down $9 million dollars in the quarter.

The severance charges and higher customer care costs and commissions associated with increased volume in SBS were more than offset by the gain associated with terminating an underperforming outsourced payroll services contract and reduced marketing costs in SBS due to decisions earlier in the year to increase our focus on gaining new customers through financial institution referrals. As a percentage of revenue, SG&A decreased to 45% compared to 46.5% last year. As a result, operating income in the quarter was $79 million up $4 million from last year. Next, I'll provide highlights in each of our three business segments.

In small business services we continue to see growth. Revenue in this segment was up $9 million or 3.5% driven by higher revenue per order, a higher number of first time buyers and the acquisition of The Johnson Group at the end of October. Operating income in this segment increased to $49 million. Up from $35 million in 2005. The increase was driven by the gain from terminating an outsourced payroll services contract, continued revenue growth, lower manufacturing costs due to the closing of two facilities in mid 2006, lower marketing costs, as well as, lower amortization expense. As a percentage of revenue, operating margin for the quarter was 18.4% up from 13.6% reported last year and a low of 5.1% reported in the first quarter of this year, if you exclude the impact of an impairment charge in the second quarter. Our positive fourth quarter performance as an indication of the continued traction being made to profitably grow this important segment of our business.

Moving on to financial services, revenue was $110 million, down 6% due to lower revenue per order partially offset by a 5.3% increase in volume. Revenue per order continues to be lower due to winning and renewing contracts at lower price levels and an unfavorable shift in product mix. While volume continues to benefit from new client wins. Our financial services segment reported operating income of $16 million for the quarter. A decrease of $4 million from last year, primarily due to the impact of lower revenue. In our direct to the consumer business, Direct Checks revenue was down 12.1% from 2005 to $51 million, marking our lowest quarterly rate of decline this year. In addition, segment revenue grew sequentially from the third quarter. Volume in this segment is down from last year, driven by the decline in personal check usage, lower reorder volumes, and reduced advertising spend in previous periods.

However, revenue is improved relative to previous quarterly trends as a result of successful selling of additional accessories, premium features, and services. It should also be noted that revenue in this segment was negatively impacted by nearly $3 million in the quarter due to weather related production and shipping delays that occurred in our Colorado location at the end of December. Operating income declined $6 million due to the overall volume driven revenue declines, an increase in advertising costs and the previously mentioned weather related delays. As we discussed on last quarter's call we are modestly increasing our advertising spend as we work to regain volume in this business.

Turning now to the balance sheet, other current assets decreased by $17 million from the end of 2005. Most of this decrease stems from our decision earlier in the year to reduce the level at which we pre-fund medical, dental, and severance plans. We liquidated $11 million of additional life insurance policies in the fourth quarter and sold two idle facilities at approximately net book value. Finally, total debt at the end of 2006 is down to $1 billion driven by a better than expected reduction of $151 million since the end of 2005.

Looking at our cash flow statement, cash provided by operating activities increased $61 million for the year to $239 million. The increase in 2005 was due to a $53 million decrease in contract acquisition payments, the timing of medical and severance benefit payments, which was $35 million favorable, lower income tax payments, lower performance based compensation payments related to 2005's operating performance, and other working capital improvements. These factors were partially offset by the lower earnings. Capital expenditures ended up at $41 million for the year. Depreciation and amortization expense for 2006 was $85 million including $34 million of acquisition related amortization. Looking ahead to 2007, we expect our first quarter revenue to range from $392 million dollars to $400 million. And diluted earnings per share to range from $0.50 to $0.54. On a full year basis we expect revenue to range from $1.56 billion to $1.6 billion and diluted earnings per share that $2.35 to $2.55. All of these estimates include the impact of the divestiture of the industrial packaging product line. Excluding the impact of this divestiture the revenue range assumes an encouraging roughly flat revenue trend relative to 2006.

There are several key factors that contribute to our 2007 guidance, including expected low single digit growth in our small business services segment. Excluding the impact of eliminating approximately $50 million in revenue from the the divestiture of the industrial packaging product line. Continued revenue pressure in financial services and Direct Checks, although the rates of decline are expected to ease to single digit levels and that's lower than 2006 and 2005 rates of decline. Continued execution of the previously announced $150 million dollars cost and expense reduction net of investment. Again, these net savings will not be linear on a quarterly basis. Target levels of performance based incentive compensation and a higher effective tax rate of 35 to 36% given several one time benefits achieved in 2006 that are not expected to repeat in 2007. We expect operating cash flows to range between $215 million and $235 million for the year. Still very strong, yet down slightly from $239 million reported in 2006.

While 2007 will benefit from additional working capital improvements, they will not completely offset the one time benefit of $35 million in 2006 related to a decision to lower the level of pre-funding our medical and severance payments. We expect contract acquisitions payments to be approximately $20 million. Capital expenditures in 2007 are expected to be approximately $40 million with investment in the following key initiatives. Manufacturing projects to add capabilities, increased synergies and drive cost reductions, investments in tools, processes, and systems to accelerate business simplification, reduce our cost structure, and better serve our customers, and finally, other projects to drive non-check revenue generating programs. Depreciation and amortization expense is expected to be approximately $70 million including $29 million of acquisition related amortization. We plan to continue paying down our debt in 2007 and for the year, we expect the range to be $140 million to $160 million. With the aim of improving our credit ratios and financial flexibility. To conclude, let me provide an update on our financing activity.

Our next step maturity in the fourth quarter of 2007, when $325 million of 3.5% bonds come due. Over the past several months, we have been refining cash flow projections internally while meeting externally with capital market advisors to understand market conditions and to further develop our strategy to repay this obligation. Repayment will be accomplished from a combination of cash flow generated from operations, availability on our existing credit facilities, and possibly some replacement funding. We remain very confident in our ability to address the October maturity while continuing to execute our growth strategy and we expect to finalize our financing plans late in the first quarter to early in the second quarter of this year. I will join Lee and Terry in taking your questions in a few minutes, but first I'll turn the call back to Lee.

Thank you, Rick. I will continue my comments with an update on our short term actions. First on the enterprise level and then for each of our three segments and include throughout a perspective on what we hope to accomplish in 2007. At the enterprise level we are now completed our new alignment architecture and filled out our executive leadership team. We have a very diverse yet balanced mix of skill sets at the senior level of the company. That incorporates fresh external perspectives with experienced industry leaders. We also completely realigned our go-to-market field and customer care center sales and marketing organizations. We further aligned our manufacturing and supply chain under one fulfillment organization.

We made continued progress on lean and product standardization initiatives and started to reduce our indirect spend. In 2007, we plan to continue to develop our capabilities as a senior leadership team and to drive our enterprise architecture deeper to the lowest levels in the company. In our small business services segment we continue to stay focused on acquiring and retaining customers and increasing our share of the $2000 spent annually by the average small business on products and services we offer. Over all efforts are gaining traction as revenue growth and improved cost structure has produced double digit operating margins for the second straight quarter. We are pleased with the initial revenue streams from The Johnson Group acquisition and the opportunity to expand our footprint in the custom full color digital and web print space for our small business customers. We had indicated that we would look to prune lower margin current product platforms to allow us to, again, focus on products and services that move the needle more quickly. Along these lines, we just completed a divestiture of a nonstrategic industrial packaging product line. In addition to being outside our core growth strategy, this also was our highest skew product line.

The Johnson Group acquisition and industrial packaging divestiture allow us to improve our product portfolio mix within the small business services segment creating more revenue and profit opportunity while also simplifying the complexity of this segment. In 2007, our focus will be on profitable revenue growth by acquiring more of the approximately 20 million of the total available 26 million small business customers that are currently not purchasing any of our products or services and increasing the wallet share of our current 6 million plus customers. We will continue to expand in higher growth market areas such as the custom full web to print space and promotion products and further focus on vertical segmentation opportunities. We are also focused on continuing to improve our costs and expense structure with the goal of consistently driving double digit operating margins in this segment.

In our financial services segment, we continued the work of simplifying our processes and taking complexity out of the business while reducing our cost and expense structure. In January 2007, we will complete the closure of the Syracuse Call Center we announced last August. In addition, we continued our work on redesigning services at the standardized modules, eliminating multiply system and work streams and strengthen our go-to-market capabilities and processes by applying lean principles. While we continue to have all time high retention rates which are well in excess of 90%, and double the rate of new acquisitions over the past two years compared with the previous two years, we have also initiated programs to help offset the decline in our core check business and build relevant solutions for the future for our financial institution clients. We initiated our first pilots for customer loyalty programs using our integrated marketing capabilities as a differentiator for demand generation and marketing campaign management. We expect these pilots to run through the first quarter this year and remain cautiously optimistic about opportunities in this new market space. We also recently announced our new Deluxe Calling offer and are beginning to see some traction in our anti-fraud and security ID TheftBlock offer.

Last week, I had the tremendous opportunity to meet with our field sales force and many of our current customers, as well as, potential customers at our Knowledge Exchange EXPO. The focus of the EXPO was on creating relevant and memorable customer experiences. It gave us the opportunity to really target a sweet spot in our enterprise strategy and that is creating a tighter linkage between small businesses and financial institutions. We exchanged meaningful experiences around what small businesses really want from their financial institutions and what financial institutions visionaries are actively doing to transform the industry. We also featured our new customer loyalty solutions. The EXPO was simply a great success.

In 2007, we expect to maintain our high retention rates and acquire new customers. We remain focused on delivering value to financial institutions and are prepared to capitalize on the potential opportunities presented by the uncertainty in the merger plans of our two primary competitors. We also expect revenue contribution from the new customer loyalty and retention offering, as well as, Deluxe Calling and ID TheftBlock fraud and security programs. Finally, we will continue the process simplification work we started in 2006 with the goal of taking complexity out of the business and reducing our cost structure. Finally, in Direct Checks, our direct to consumer check business, in the fourth quarter we saw smaller year over year revenue declines and a sequential quarter over quarter increase in revenue while continuing to maintain our strong profitability profile. Increased revenue came from new features and accessories sold in addition to our core check revenue. The previously announced increase in marketing impressions with free standing inserts has now started in January. We expect this investment will drive improved revenue in the future. In 2007, we expect to reduce the rate of decline on revenues shown over the past few years due to our planned increase in free standing insert impressions, as well as, our continued strategies around the sale of additional premium priced features and accessories. We expect increased free standing insert advertising spend will be offset by lower manufacturing costs and lower SG&A. Keeping our profitability profile roughly in line with the 30% operating margin level.

In addition to these actions in each of our segments, I would like to provide an update on the previously announced cost and expense reduction initiative where we are targeting $150 million in savings by the end of 2008, net of required investments, using as a baseline full year 2006 guidance provided last July on our second quarter call. As a reminder we expect approximately one-third of the $150 million to impact cost to goods sold and two-thirds to impact SG&A. The primary targeted functions for savings, include our go-to-market sales and markets where we have estimated 15 to 20% of the $150 million, fulfillment including manufacturing and supply change, where we have estimated 35 to 40% of the $150 million, and finally, our shared services infrastructure including information technology, finance, human resources, and real estate, where we have estimated 40 to 45% of the $150 million. Again, our goal is to move these key functions closer to stringent external benchmarks, as well as, putting them all on a road map towards their destination. Here is some further color on our progress. Overall, we believe we have been able to achieve approximately $15 million or 10% of the $150 million in savings net of investment in the second half of 2006. So we're off to a good start.

In our go-to-market sales and marketing, we have now realigned our field sales force and inbound and outbound customer care centers across our two largest segments. We expect that this realignment will us to more effectively leverage our people, processes and locations and to make it easier for our financial institution clients and small business customers to do business with us. We still have work to do this year to realign our sales and marketing operations to more efficiently support our frontline field sales and customer care centers. For fulfillment, we made continued progress in the quarter on lean initiatives and product standardization. We were also able to continue to achieve some cost reduction from centralizing and leveraging our indirect spend. In 2007, we expect to continue our lean initiatives, product standardization, improve our sourcing, reduce skews, realign order fulfillment, as well as, continue to reduce our indirect spend.

Finally for shared services infrastructure, we made progress in information technology. Again, the area we expect to realize the greatest percentage of infrastructure savings. In lowering our data center costs, improving mainframe and server utilization, reducing the cost of our networking and voice communication, and improving our partnering with key third networking and improving our partnering with key third party providers in these areas. We expect to continue to reduce costs in each of these areas in 2007, as well as, more strategically align IT capability and delivery with our business segments needs.

For finance, we have a line around our new enterprise structure and segments and continue to standardize more of our internal processes and recording. We expect this work to continue in 2007, along with adopting best practices across finance. Outsourcing additional transaction processing functions and increasing efficiencies, while again, ensuring we maintain the strong internal controls and processes already in place. For human resources, we started to realign our model in support of our new enterprise alignment and this will further continue in 2007, along with continuing to strengthen our processes around attracting and retaining talent and continuing to focus on ensuring our benefit structures are in line with competitive benchmarks. For real estate, we continued our vacant facility dispositions by completing the sales of both our Pittsburgh and Peterboro properties in the fourth quarter. We will also benefit from the Syracuse Call Center closure as it helps us better align existing capacity with our needs. More opportunity exists to consolidate facilities and to enforce space standards.

As a continued reminder, it's important to note that there will be offsetting effects to these cost and expense reductions due to continued pricing pressure, imprint material and delivery increases, and planned targeted levels of performance based incentive compensation, to name a few. Reductions also will not be linear through the period. As there will be investments and then more of a ramp up that will occur over time. We expect to make significant progress in 2007. Estimated at 50 to 55% of the total $150 million reduction. This incremental progress is on top of the approximate 10% savings already achieved in 2006. To anticipate your questions, the best way to think about how much of the $150 million is expected to benefit the bottom line is approximately or roughly 50 to 60% of the reductions. For example, using 50% expected to be achieved of the $150 million or $75 million in 2007, then approximately 50% of this, or approximately $37 million, would benefit the bottom line directly.

As you can see from my comments, we made solid progress in the quarter. But we still have a lot of work ahead of us. The continued news is that I am still finding a lot of areas to work and that need improvement. I also like our opportunities to better position our market leading brands and new revenue offers. Create stronger integrative marketing and printing capabilities and every day I'm more excited about our energized, passionate and focused employees that know we need to continue to change and want to be part of positively moving Deluxe into the future. We know that a couple of quarters of positive improved results is only the beginning. That shareholders continue to hold us accountable and that we need to consistently deliver quarter after quarter. We believe that we are working on the right issues and that as we continue to execute our plans, we will gain momentum, further improve our operational and financial performance, and keep Deluxe on the right path to greatness. Now, operator, Rick, Terry and I will take your questions.

[OPERATOR INSTRUCTIONS] And our first question comes from the line of Charles Strauzer with CJS Securities, please go ahead.

Good morning. A couple of quick questions for you. Look at your guidance about the check declines, you say you want to try and get those into the single digits. Is that your goal to have for the full year of '07 in single digits or by, say, Q4

I think what we put out as guidance for the full year is what we're focused on at this point in time. How quickly in each of the core check segments, all that will play out is really dependent on the investments we've made in the Director Checks business and free standing inserts. And that will take some time to get in the market. But, we also have, we are excited about some of the new features and accessories that we really put in place. Depending on how quickly some of those things continue to materialize, and we're aggressively looking at programs every day.

How those take off is going to have an impact and if you think about the core financial institution side, again, how, we have to look at mix is important, we have to look at timing of the ramp on some of these programs that we, the new customers that we put in place or brought on last year and exactly how that's all going to play out. But, I think if you think about it, the way we're trying to frame right now, Charlie, is really think about it as our full year guidance single digit space.

Got it and then touching upon, a little bit more, the Direct Check side. Obviously, uou've been Ramping up the spend there, I've seen the advertising seculars picking up in the Sunday papers. You have a pretty good sense of usually of how successful is it going so far what's the early indication of the traction you're getting back on that?

The way, Rick and I were laughing the other day. We both live in different parts of the twin cities, sunday morning inserts, I picked up the insert, Rick picked it up in his paper and we kind of had some fun with that. It's great to see, we're excited about it. I think the way you got to think about it is it doesn't come overnight. You put those out in front of people. And then you see the ramp start to occur. And it's a first time buy and then what's really key for this part of our business is to get the reorder buy. SO, I would tell you that our initial enthusiasm is pretty positive right now. But it's something that we've got to leave. I mean we're only January one into this we see a little bit of time to let the market absorb it and see this is going to play out. But, I would say, early read on this is pretty positive.

That's great. And one last question for Rick. Your cash flow from operations guidance, does that include the $20 million of contract acquisition payments in there?

Yes, it does.

Okay great thank you very much.

Thanks Charlie.

Thank you.

And our next question comes from John Kraft at D.A.Davidson.

Good morning gentlemen. A couple questions on the competitive and pricing environments and following on the last question, I guess. The contract acquisition payments in Q4 really fell off and yet you're guiding to, an increased year over year in 2007. The first question is why? And then secondly, is it too early to tell or is it possible to read into the competitive landscape with your competitors merging and potential opportunities for you to see maybe less pricing pressure or some sort of disruption.

Here's the way I would think about it right now. You're right. The dropoff did occur. I think we've been pretty public about our belief. I think some of our competitors have been public as well. Moving more away from the contract acquisition space. And we've been public about fewer of the big national opportunities out there for all of us right now. Because we're all locking in. There are opportunities and still in the national space that are sitting out there right now, that we plan to compete for and also there's opportunities in the community space.

So, I think what we don't know to your second half of the question, John, is what's the market going to do if this you know merger of our competitors actually happens. So, what we're doing is we're being smart. We put a plan together that whether there's two of them or one of them is irrelevant to us. Our customers will dictate what's going to happen in the market and we believe that's how we have to be prudent until we get more clarity around what's really going to happen with our two competitors. I think what we've done is smart about it, we built a plan that we're not, that we believe we can actually deliver on and we're being smart in the way we articulated the expectation right now on the contract payments.

Okay. That's fair. And then the industrial packaging divestiture, that was all in the SPS segment correct?

That's right. Think of it, John and for everybody else, I've talked about opportunities to get us repositioned and refocused. We spent a lot of time with a lot of you in the quarter on trying to really explain what we're trying to do to really get a sharper focus on that mix of the $2000 that really, we're trying to get after. Things that we're doing well at today, that we want to get stronger at, core checks, core forms, and then the sweeter spot of the opportunities. Obviously, the custom full colored digital web to print is an exciting opportunity for us.

But, we also want to be smart about areas like the industrial packages. Which is basically for us a corrugated box and poly bags business. It's not core to us and it's a lower margin, operating margin business and it's not a place when I think about where do I want to put investment in a small business space, I really want to be putting a lot of initiative in. We have the opportunity to find a great partner for our employees. We got some terrific employees in that space as well and give them an opportunity to focus on somebody that wants to investment in that business more and really make more out of it than is strategic for us to be doing today. That's really why the decision was made.

Okay, understood. And then, also in that segment, you did cite that you're seeing more first time buyers is there a way to characterize that as a result of your financial institution referrals kicking in or direct sales efforts to new targeted, buyers or where are those coming from.

John, you've picked it up well, I think this came up on the last call. Several people started asking for clarity around this. I'm not yet ready to declare data analytic victory in this space, but what I will tell you is Rick and I continue to be encouraged that we're starting to understand better the mix of new business, John, and whether that's driven by new acquisition or think of it as continued ramp from people that we're already doing business with. So, what I will tell you is that, the encouraging sign that we saw in the fourth quarter is a bigger ramp in the new part of the acquiring new clients or new small businesses in the quarter. And that's encouraging. But, are we perfect yet on understanding the clarity between the new and the repeat and how all the analytics work, no.

We're getting better, and that's part of the comment around if you remember, I said something about the IT and trying to become more strategic for our segments. That's the work that Mike Degeneffe, our CIO, is going to be working on with the segments this year. As we get better on this, John, we'll try to give more clarity to the investor here. We're seeing improvement in the new acquisition but again it's a little early to say with the perfection here what all this means.

Ok, that's fair. Well, how about this though, the business advantage program and the number of FIs that are a part of that. Is there a way that we could get a count there or see how that's tracking?

I don't have an exact number or count for you. I would say that it is continuing to improve. The excitement of it is very, you know, it's still continues to be very positive at this point. We saw a number of our customers at the EXPO last week where they are in the program and I think the huge opportunity for Deluxe, John, is really to again, this sweet spot of, really, I call it aiming in the middle between that financial institution and that small business owner and bringing them together. And if you were at the EXPO you would have just, you would've had a smile on your face, like I did about the ability for us to really move this along. That's really is the encouragement around it and we heard people talk about, customers talk to me about DBA and the program. So I don't have a count or a number but I will tell you it does continue to be positive for us.

That's fair and then this last question hopefully easy question. The director business that you were impacted by $3 million for weather related manufacturing delays, is that, are you caught up? Or will you be caught up by Q1 -- expect a bit of an uptick there?

I think one of the things to be careful on here, we wrestled with mentioning this on the call. Because we had a good quarter. But, we don't want to get out ahead of ourselves. We do expect some catchup in Q1. And because of this, which again, is a positive. We had a couple of December storms in Colorado Springs, it just knocked us out. We couldn't get trucks in and we couldn't get people in to be able to through some of the volume that we had. This is going to be kind of a catch up event. And it's included in our guidance for first quarter and the full year.

Thanks guys. Good job in the quarter.

Thanks John.

And our next question comes from the line of Mike Hamilton with RBC Dain.

Good morning. The first one continuing on in the first quarter, I'm assuming that guidance includes the pretext gain mentioned off of the packaging and does it include any restructuring?

It does include the pretext gain and Mike, it includes any restructuring as well. As we've continued to stay consistent here, we will keep the guidance both and what we put out to include everything. This whole idea of net of investment which obviously includes any restructuring.

You care to give any range on restructuring in the quarter?

No.

That's fair. I just ...

I will tell you, Mike, that one of the things that's important is that a lot of the initial heavy lifting and hard decisions that we had to make on the people side are behind us.

Yes. The second one, if you could comment a little bit on small business and in you thinking what it will take to get some lift on the revenue side, given that there were some execution issues in fourth quarter '06 while your revenue was stronger and the other two segments. I had been expecting a little more lift in the small business.

Mike, I think you meant 2005, fourth quarter?

Yes, 2005. I'm sorry.

We did have some issues around the holiday [cards] and we didn't have any of those issues I was pleased. In fact, we opened new lines to help with the ramp and everything -- I'm so proud of the Deluxe employees. They just did a terrific job in meeting the ramp and learning some new programs so to speak. But Mike, one of the things you got to be careful about is, in the fourth quarter in our small business, there's some things that were out of there. For example, we mentioned this sale in the last quarter. We highlighted it today on this getting out of this payroll services contract. We had some revenue in the fourth quarter last year that didn't repeat again.

We also had some, interestingly enough, in the industrial packaging business we had some bigger ramps earlier in the year than we had later in the year. So, there's just some -- I think we had a very good quarter I'm very please. The big question is how do we get to your point a bigger opportunity to get at this? And honestly, what we're hoping that we can do, Mike, is to focus this new structure behind field sales, inbound and outbound call center to get that synergy stronger between the FI and the small business owner. I can't tell you how that's going to play out until we get a chance to really get in and see it play out and see it work. Obviously, we wouldn't have made the move if we didn't think it was the right direction.

Finally, a little bit more strategic on the FI side. Assuming that DOJ goes with an integration with the competitors. You're not at a stage where they shift into what should be theoretically low cost producer market share leader which I would think, inherently, your FI customers would enjoy. But it seems strategically as well that philosophically if DOJ allows that there's nothing to preclude them from moving on to a monopolistic position. What's your sense of how customers are feeling about this?

Let me give you a perspective, I guess. I've been asked this question many, many times since the announcement. Look, we want to be in the check business. I think for our share holders right now if we did not have an aggressive cost attack plan right now I think people would be more all over us and I think they have a right to but because we're in that mode, and Rick and I are driving that very hard, and we still have a great small business to leverage on the way we do our costs and the way we do our check processing as well. And we're going to continue to stay aggressive and stay after that.

The way I look at it is, whether this happens or doesn't happen and I believe it will be. I think you can see from what they've come out with it's going to be a protracted period. We're going to keep our initiatives going and keep the agressiveness that weve got going and, again, as I said earlier, our customers are going to dictate in the end what they want to pay for a check and what we want to do is continue to be there to provide great quality, quality service, a great brand, and really wrap around our terrific support that we do and that's what we're focused on.

Super. Thank you very much.

Our next question comes from the line of [Lee Appella] with UBS.

Hi, good morning. I just had a quick question with regard to when you talked about taking advantage of the uncertain environment as it relates to the financial institution's business. If Deluxe is able to win over some the new contracts, upon the closure of that deal, what do you see as the risk that it leads to another wave of downward pricing pressure.

It's too early for us to comment on that. I think you have to be very careful. We don't know enough of what we don't know at this point in time. Obviously, we just got to see as we learn more about where this all unfolds and as we get involved in the process. Some of our customers are on both sides of us and them so to speak get involved in this. It's just -- I think what Rick and I have done and our team behind us has done is really be smart about, you know, building a plan that we're providing guidance for this year that really assumes a conservative view of how think about where price is going . I think that's in our best interest. Here's my concern, I think it's been my concern. If you easy up on this, that what you do is build infrastructure underneath there because you convince yourself that things are going to get better or they're okay and then you start building, I call it fat, into your organization. Rick and I don't want to do that and I think that's the prudent approach until we get more clarity as to where this is going to unfold.

Thank you.

Our next question comes from the line of Todd Morgan with CIBC World Markets.

Good morning, thank you. A quick question here. Q1 revenue for 2006 so we can kind of comp that to what your talking about in Q1 '07. Is it basically, I just need to sort of subtract a quarter's worth of Johnson and add in, or sort of add in Johnson's subtract out the divested industrial division.

Yes, I think that's a fair way to look at it.

And are those businesses fairly equal revenues on a quarterly basis?

No, no. We put this out when we announced the Johnson acquisition. It's around $20 million of revenue when we did that in third quarter. When the deal actually happened. Today we said $51 million was the business. You're going to have a lot bigger waiting on what's coming out than what's coming in is it way to think about it, Todd. I'll take a stab at that.

Thanks. Secondly, the expansion reduction program. You've obviously put a lot of thought into that and helped sort of frame the direction in the areas that your focusing on. Can you give us a sense that there's any sort of large individual projects that are really kind of critical in reaching these goals or is this just a whole serious of individual things none of which is really going to drive the whole number.

First, let me start with, Rick and I are good seals here, we train well. We have been out and we've been asked this question and we really have tried to give the investor clarity on this as best we can. I'll tell everybody, within a framework here that hopefully works and I don't want to be put on the clock so to speak on every little blip that happens, it's too hard. Here's why it's too hard. I again, go back to using a simple sample, that If we don't line up field sales and actions that we take in there with the call centers the right way, then you can get either behind or out ahead of yourself and hurt your sales organization or your marketing organization or your back end.

So, there's going to be lumpiness on some of these initiatives. I think the way to think about is, Rick and I, we work very hard with the segments and with the infrastructure groups to really make sure that we're lining up the timing of these things in a very effective way. And I will tell you that, those ranges that we've been providing in terms of the go-to-market, the fulfillment, and then the infrastructure, give you, the great thing is there's a lot of things going, there's a lot of initiatives going, so it's not like we have to have one thing work in our favor and when you have restructuring programs or transformational programs this is the way to really do it because you're dependency is not on one big thing.

I think that's the best way to frame it. Okay. That's help. Lastly, if we think about next year, I mean in the fourth quarter of this year anyway, 5% or so volume growth in the financial service segment those comparisons are going to look fairly easy for the next two quarters or so. Is that the right way to look about the expected volume activity in the FI segment?

I think there's many things you have to consider. You have to consider where's price going, you have to consider where mix is going both mix of free checking versus people that are still wanting to make money on their check programs as well as mix of product. Again, I believe that our segment and our finance team within our financial services business is getting better and better at predictability here which obviously Rick and I are smiling a little bit more about. We have to watch this and keep our eye on it. No, there is impacts of new things come in and new customers and new decisions and reorder and it's not as simple as you think. We're doing our best to provide the guidance that we've got. We're also trying to get better each quarter on being more predictive in the business.

That's fair. But that sounds to me like a no. Given that some of the contracts that were initiated and started last year, it sounds like the answer is not yes, there should be a volume pick off of the business we signed up in the first half of last year.

I think the predictability -- I think the predictability is getting better, Todd. I'm just pointing out it's not just a simple look at the ones you picked up. Even within the ones you picked up, their check programs can change as well. And their mix can change as well. While, on the surface it seems obvious we got to keep our eye on it and make sure we understand that, what all that mixed variables looks like.

Okay, good. I'll stay tuned and good luck.

We have a question from the line of Hardin Bethea with DePrince, Race & Zollo.

Hi guys, how are you. There are a couple of questions. One, Rick, did the original fourth quarter guidance, $0.71 and $0.75, that included the $0.11 charge that you I guess the severance charge?

The $0.11 referred to the gain on the -- no excuse me -- yes, it did include the severance as we had said. It was net of investment on anything that we were doing with out cost reduction program.

I think $11 million --

It included the $0.14 gain on the sale of the outsource payroll contract.

But, not the $0.11 charge.

No, it also included the $0.11 charge for severance.

Got it. But it didn't include the $0.09 tax gain.

That's right, it did not include the $0.9 tax gain from the one time benefit.

Okay, okay. Lee, the realization rate of savings drop to the bottom line was that 50% of 50% a pretax number?

Yes.

Okay. And I guess when I look at that at the end of '07, it would seem to me for '08, the investment part of that, offset 50% of the drop through would no longer -- some portion of which would no longer exist I guess with the drop through increase as time progresses?

Yes, again I think this goes back to the momentum that you build as get through this, Hardin, you got your head around this the right way. But I also want to point out that there will be some continued investments that we'll make to continue to get these things out over time. More, again, built early on and then more of the ramp of benefit coming as you go up. Look, we've really tried hard and I think we took some risk here. Risk from the standpoint of just opening up and trying to be more transparent here but we're doing our best at giving you and the rest of the investors our best shot at how we think this is going to play out. As we learn and as we pick up momentum and as we go through the year we will do our best to try to help you and the rest of the investors in terms of where we're going here.

At the end of each quarter, similar to this quarter, will you disclose what the "investment was or what the charge was" to realize coast savings.

We haven't made the next leap yet, to be honest with you. We'll do our best to continue to try and give you a sense of where this is going. Rick and I have not yet sat down and said how are we going to do this, another quarter out or another two quarters out. What we're trying to do, obviously, is provide you the color around how we move forward in our best light. If we think that's beneficial we'll continue to take a look at it.

My opinion would be it is beneficial. For one investors opinion.

I can just see that small little spread sheet going right now.

The third issue or question, it's not an issue, it's a question. Lee, when you indicate there are still things you're looking at within the organization that are opportunities for either additional savings or additional -- or revenue opportunities. So I mean what kind of things beyond the plan as it stands today do you think are potential opportunities down the road?

Hardin, I want to be really careful with that. I have very -- you know, a very focused -- I'm focused, on two things. Getting through the hard work. We've put our team through a lot of work here and a lot of pain to get to where we are. I'm focused on getting that healing process and that alignment done right now. I don't want to put more on top of them until I know this thing is more baked so to speak.

I have very solid views, and with working with my team on other areas that I think are going to be sitting there for Deluxe to take advantage of. I think it's important we work the timing of this very effectively. As we get more focused on getting some of the heavy lifting behind us, we will try to come out and give more clarity to the investor on some of these ideas. For now, we're going to work hard on the items I guess that we put out in front of everybody today.

Okay. Thanks.

All right. Thank you.

Thank you.

And we have a question from the line of Sophia Taylor with Waterhouse Securities.

Good morning. Just a quick question on industry check usage. Wondering if you see anything out there to suggest industry check usage may be declining at rates greater than the historical low single digit range?

We're, we believe that 4 or 5%. Sometimes I've heard 6%. That, again,on the consumer side. I think we see one to 2% on the business side. No, I think that's still a view obviously we'll be interested to see what our competitors come out with on their insight. I think that's where we're at.

My next question is on industry consolidation. We've seen it in the small business segment with yourselves more recently in the financial institution with [MNF] and [John Harlin]. Wondering if you could speculate on what your might foresee happening consolidation wise in the direct to consumer space?

I mean, to be very honest, have we seen that CDI has put something out in looking at strategic alternatives? Yes, we've seen that. But obviously that sends a message that potential message with them. But who knows at this point? Obviously, it's early on and I can't comment more than that. What we're focused on the what we need to be doing. I think that's so important right now. I think the moves we've made to get more of the free standing inserts and more of the focus on improving our depth and breadth of features and accessories that we can provide to our customers is really what we should be doing right now.

Great. Thank you very much.

Our next question comes from the line of [Christian Amani] with Deutsche Bank.

Good afternoon. The question I had was on your refinancing package. Would you consider issuing a convert or is convert off the table right now given the dilution implications to refinance the '07 that may be maturing. I'm looking for a bit more clarity as to what times of refinancing options that you're looking at.

Sure, for the $325 million maturity in the fourth quarter we continually evaluate financing options and as we get closer to the maturity we'll determine the best way to repay that obligation. Obviously, as I mentioned, we're continuing to model our cash flows and as we continue to generate strong cash flow, that combined with availability under our existing credit facilities and then possibly some partial refinancing will allow us to, we're very confident that we can take out that $325 maturity. To your point, we've been looking at all different types of financing vehicles, as well as, where our current 2012 and 2014 bonds very training is possibly an indicator of potential pricing for a similar long term debt type vehicle.

The spreads on those bonds have continued to tighten versus the double B index and and that continues, we'll monitor that performance and weigh that information against potentially what kind of pricing you would get on a vehicle such as a convertible, as well as, what type of dilution effect that might have as we move forward. But we will make some decisions here and dial that in a little tighter as we get to late in the first quarter and early in the second quarter but we're very confident that we will be able to address the maturity in October.

I'll add on to Rick's comments. We've done a tremendous job of sitting down and getting a lot of terrific capital markets players through here and we visited a lot and we're aware of convertibles as an alternative and we're going to look at everything and continue to do the work we've been doing and we think we're in a pretty positive position. We feel very comfortable where we are. And as long as we continue to keep getting better, we got to be prudent about how we do this and what the best vehicle in the end or vehicles that we'll will use. Honestly, I think that's where we're sitting right now.

Thank you.

You're welcome.

Our next question comes from the line of Tom -- [Westface Capital].

Hi. On the direct business, it was encouraging to see the sequential improvement after many quarters of pretty significant decline. Over the same period of that decline, companies like custom direct has managed to maintain its revenues pretty consistently, pretty flat. Can we assume from that it's really the decline was a result of just a lack of add spending and not going forward. We could expect you to manage that business to at least maintain revenues even in light of declining volumes.

I think you're on to it. I think there's a lot of things. Obviously the biggest share in the space, --- I think we just lost our way. We stopped investing and I think what we believe and it's out in the marketplace is the more times you put your name inter of a consumer the more likely they going to either come back through the mail, the internet, or the phone to order your check. We just stopped a lot of this. And we've made a concerted effort to get back more in the space. Do we believe it's going to help us? Yes, clearly we believe it's going to help us as we move forward.

Again, the question from an earlier caller, we've got to see the timing of when all that is going to play out and exactly how it's going work out. We're excited about the momentum we've got right now in that space and the kind of investment we've made and then the back end hard work to get the manufacturing and SG&A down to make sure we continue to keep good profitability levels in that business. So, I think we're doing the right thing. We'll see over time as to whether or not all the smart moves we've made or, we think we've made, are going to play out.

Thanks, just a quick follow-up on your accounting of that add spend, do you expense that in the period incurred or is that amortized over, since there is a life time value of those customers, that is amortized over that expected lifetime?

Tom, this is Terry. We do defer that advertising expense and recognize it over the period we predict the revenues will be produced.

And this is my last, sorry. What is the estimated time of the lifetime value or can you disclose that?

The bulk of that advertising is over a six metropolitan period. But there's a tail, a very small tail, that does up to 18 months and then we just cut it off at this point.

Thanks very much.

Our next question comes from the line of [Hun Wong] with the Millennium Partners.

Hi, good afternoon. Congratulations on the good quarter. My hats off to you guys. Just wanted to ask you a follow-up question on the what's happening on the competitive front. With respect to, [Harlin and Clarke] combination have you guys in the past thought about doing something similar to that. If so, was it the antitrust concern that kept you on the sidelines?

I'm not going to comment on that. The way I look at it right now is what we're focused on, again, is trying to improve all of the different pieces that we've been talking about in our business and we believe, honestly, if we do that this is really the place that our shareholders want us to be right now. And that's what we're focused on. I'll let my competitors do what they need to do. I'm not -- I would direct your comments or questions to them on this, I really would. We are focused on doing the things we really believe are the right things and the exciting things and that's what we're going to do right now.

Just to clarify. Could you confirm at this point in your priority is focusing on improving the stand alone business, not necessarily doing any acquisitions or anything like that [Tim's] doing or [Ron Foreman's] doing at this point.

I think the way to think about it is we've continued to look at acquisition potential and divestiture potential. We've been doing several of these in different parts of the business each quarter and through the balance of the second half of last year and then we announced the divestiture of the industrial packaging. Rick and I are going to continue to look at that. Our board and myself look at these all the time. Are we going to continue to do that? Absolutely, we're going to continue to do that. The message I just want to leave you with is we believe that things that we're doing right now are going the continue to enhance as well as short term as well as longer term shareholder value. That's the thing that we're focused on.

Okay. Thank you.

You're welcome.

We do have a question from the line of Peter Hughes with Credit Suisse.

Actually, my questions have been answered. Thank you.

Thank you very much.

We currently have no further questions in cue. Please continue.

This is Lee with a close, let me close by saying we're really pleased with momentum we have exiting 2006 and we continue to be energized and passionate about attacking the challenges ahead of us. We plan to continue sharpening our focus on small business services. On improving our core check businesses, on introducing new relevant customer loyalty and retention and fraud insecurity offerings, taking cost and expense out of the company.

Generating strong cash flow, paying down debt, and executing and delivering against our commitments and I would really like to thank everyone for participating if for your questions and also for many of you, your willingness to meet with us over the past quarter. We greatly appreciate it. We're going to now get back to work and we look forward to providing another positive report on our next earnings call.

Thank you, Lee. This is a reminder that a replay of this call will be available until February 2 by dialing 320-365-3844. When instructed, provide the access code 851326. The audio presentation and the accompanying slides are archived in the investor relation section of Deluxe's website, www.Deluxe.com. Again, thank you for joining us, and have a great afternoon.