Deluxe Corp (DLX) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Deluxe Corporation earnings conference call. My name is Rob and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). At this time I would now like to turn the call over to Mr. Terry Peterson, Vice President of Investor Relations.

Welcome to Deluxe Corporation's 2007 first quarter earnings call. I am 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 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 opened to all interested parties. A replay of the call will be available via telephone in Deluxe's website. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I begin, 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 Reform Act of 1995. As such, these comments are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning and on the Company's Form 10-K for the year ended December 31, 2006.

In addition to 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 SEC on Form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release.

Now I will turn the call over to Lee Schram, Deluxe's CEO.

Good morning everyone. We had a strong first quarter and are pleased with our financial performance and continued progress as we remain on track with our transformation. We ran on all cylinders, having performed well compared with our key objectives for 2007.

We are particularly pleased that after adjusting for the previously announced sale of the industrial packaging productline we actually grew revenue for the quarter, driven through continued growth in our Small Business Services segment, only low single digit revenue declines in our Financial Services segment, and growth for the first time since the third quarter of 2002 in our Direct Checks segment.

We also reported strong results in all our segments, and grew consolidated earnings 43% over the prior year. We reported strong operating cash flow, and reduced debt even more than anticipated.

In addition, we completed the realignment of our go to market sales and marketing organizations, initiated new loyalty retention, monitoring and protection offers, had a strong new customer acquisition rate in our Small Business Services segment, and again made solid progress on our cost reduction initiatives.

We are still in the early stages of our transformational journey, having just completed the third quarter or inning of our ten quarter or inning game. So even with these continued successes, we still have more work to do.

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

Earlier today we reported diluted earnings per share for the first quarter of $0.68, which exceeded our previous guidance for the quarter of $0.50 to $0.54. As stated in the earnings release, our results reflect better than expected operating performance in all three of our business segments, driven by strong check volume, manufacturing efficiencies, and lower SG&A expense.

In particular, our Financial Services segment exceeded expectations due to strong unit growth, as well as volume from a large bank conversion, which we had initially forecasted to occur later this year. While our enterprisewide cost reduction initiatives delivered expected results in the quarter, we benefited from a higher level of profit pull through, given a price increase implemented in late February, lower investment spending in several key initiatives, timing of new hires, and the shift of delivery cost increases to the middle of the second quarter.

Operating cash flow remained strong and also exceeded our expectations. The stronger earnings and progress with our working capital initiatives led to operating cash flow of $69 million for the quarter, and debt pay down of $68.5 million. In the first quarter of 2006 we reported diluted earnings per share of $0.48. The primary contributors to the higher earnings year-over-year were an $18.8 million reduction in SG&A expense and improved gross margin.

Companywide revenue totaled $403.8 million, down slightly from 2006. Order volume was up 4% compared to the first quarter of last year, primarily due to Financial Services client gains in the latter part of 2006, and the previously mentioned accelerated bank conversion activity.

Gross margin for the quarter was 63% of revenue, up almost 1 percentage point from last year. Benefits from strong check volumes, improvements in manufacturing productivity, and expenses incurred last year related to the closing of two facilities were partly offset by lower revenue per order in Financial Services.

Selling, general and administrative expense was down $18.8 million in the quarter. We benefited from many of our cost reduction initiatives, particularly in the areas of information technology infrastructure, call center expense, and indirect spending. In addition, lower amortization expense due to a software project we wrote off in mid 2006, lower marketing costs, and onetime investments made last year associated with the SBS growth strategy contributed to the year-over-year decline.

As a percentage of revenue, SG&A decreased to 46.9% from 50.6% last year. As a result, operating income in the quarter was $69 million, up 32%, or $16.7 million from last year.

Next I will provide some highlights in each of our three business segments. In Small Business Services revenue was down $4.3 million, or 1.8%. Excluding the impact of the sale of our industrial packaging productline in late January 2007, revenue grew at low single digit rates.

Operating income in this segment increased to $33.2 million, up from $11.8 million in 2006. The increase was driven by cost reductions, lower marketing costs as we have shifted our focus to acquiring more customers through financial institution referrals, investments made in 2006 to support our growth strategy, a $3.8 million gain from the sale of our industrial packaging productline, and lower manufacturing costs.

As a percentage of revenue, operating margin for the quarter was 14.3%, up from 5% reported last year, and marks the third consecutive quarter of double-digit margin performance,.

Moving on to Financial Services, revenue was $113.5 million, down 3% due to lower revenue per order, partially offset by an increase in volume. Revenue per order continues to be lower due to winning and renewing contracts at lower price levels, while volume was up 6.2% in the quarter, as a result of new client wins and bank conversion activity. The bank conversion activity accounted for nearly half of the order growth in the quarter.

Our Financial Services segment reported operating income of $15.7 million for the quarter. The decrease of $4.9 million from prior year was due to the impact of lower revenue and a $4.9 million gain recorded last year from the sale of a closed facility, partially offset by cost reductions and higher order volume.

Finally, Direct Checks revenue was up $200,000 from 2006 to $58.5 million. This is the first quarter this segment has reported year-on-year growth since the third quarter of 2002.

As we noted in our last quarterly call, revenue this quarter benefited nearly $3 million due to weather-related production and shipping delays that occurred in our Colorado location at the end of December. Revenue for this segment also benefited from recent investment in additional advertising and successful selling of additional accessories, premium features and services.

Operating income was flat at $20.1 million. As we have previously discussed, we're modestly increasing our advertising spend as we work to regain volume in this business and partially offset the decline in check usage. These investments were successfully offset by additional cost savings in fulfillment and back office infrastructure to maintain robust operating margins.

Turning to the balance sheet and cash flow statement, we continued our focus on debt reduction. Total debt at the end of the quarter is down to $947.3 million, a reduction of $68.5 million since the end of 2006. Cash provided by operating activities was strong at $69 million. The modest decrease from 2006 was due to higher payments of $12.1 million for medical and severance benefits during the quarter related to our decision last year to lower the level at which we prefund these benefits.

Higher tax payments of $8.6 million driven by higher earnings at the end of 2006, and higher performance-based compensation payments of $3.7 million related to 2006's operating performance. These factors were partially offset by higher earnings in the quarter and solid progress across all of our working capital initiatives.

Capital expenditures were $4.4 million for the quarter, and appreciation and amortization expense was $17.3 million. The lower than expected level of capital expenditures was primarily due to shifting of investments until later in the year.

Looking ahead to next quarter, we expect our second quarter revenue to range from $382 million to $390 million, and diluted earnings per share to range from $0.52 to $0.56.

While we anticipate another strong quarter of year-over-year improvement in earnings per share, we do not expect as strong a performance substantially in the second quarter as compared to the first quarter due to the following, lower expected revenue and commensurate earnings per share, primarily driven by Financial Services and Direct Checks, given the onetime bank conversion, and $3 million of weather-related volume not expected to repeat in the second quarter. Plus the first quarter is historically the strongest quarter of the year in our Direct Checks business. Higher expected delivery costs, driven by increased Standard A and flat rates previously announced by the United States Postal Service.

We expect another strong quarter in cost reductions associated with the $150 million reduction initiative. However, we expect less pull through to the bottom line, primarily driven by expected increased investment spending and the aforementioned higher delivery costs. These factors will only be partially offset by an expected lower tax rate.

Given our positive momentum, we're raising our full year guidance. On a full year basis we expect revenue to range from $1.57 billion $1.6 billion, and diluted earnings per share to range from $2.45 to $2.65. Excluding the impact of the divestiture of our industrial packaging productline, the revenue range assumes an encouraging flat revenue trend relative to 2006.

There are several key factors that contribute to our total year 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 divestiture of the industrial packaging productline; continued revenue pressure in Financial Services and Direct Checks, although the rates of decline are expected to ease to single digit levels, lower than the 2006 and 2005 rates of decline; focused execution of the previously announced $150 million cost and expense reduction initiatives net of investment.

Again these net savings will not be linear on a quarterly basis. And an ongoing effective tax rate of approximately 36%, which translates to about 37% for the full year given our higher first quarter rate.

The increase in our overall tax rate for the year is driven mostly by the unfavorable tax rate specifically attributable to the first quarter gain on the sale of the industrial packaging productline. Overall the higher tax rate accounts for $0.05 per share reduction in our total year earnings versus our previous guidance.

We expect operating cash flows to range between $225 million and $245 million for the year, on par with the $239 million reported in 2006. While 2007 will benefit from higher earnings and additional working capital improvements, they will be offset by the onetime benefit of $35 million in 2006 related to a decision to lower the level of prefunding our medical and severance payments and higher tax payments. We still expect contract acquisition payments to be approximately $20 million.

Capital expenditures in 2007 are now forecasted to be approximately $35 million, with investments 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 growth.

Depreciation and amortization expense is still 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 $150 million to $170 million, as we continue to strengthen credit ratios and enhance financial flexibility.

Finally, a few comments on capital structure and our financing activity. The strong cash flow and better than expected progress on debt reduction in the first quarter positions us well to address the fourth quarter maturity of the $325 million of 3.5% bonds currently outstanding. As we have stated on prior calls, we plan to repay this obligation from a combination of cash flow from operations, availability on our existing credit facility, and likely some replacement funding. Our intention is to repay this October 2007 obligation while also maintaining an appropriate level of financial flexibility to facilitate execution of our growth initiatives.

We continue to actively work with our banking partners to formalize a capital structure strategy that both addresses this upcoming maturity and aligns with our business objectives longer term.

I will join Lee and Terry in taking your questions in a few minutes, but first I will turn the call back to Lee.

I will continue my comments with a perspective on our overall enterprise objectives for 2007, highlight each of our three segments, including how we are progressing against our key initiatives, and close with a progress update on our cost take out program.

At the enterprise level we have established three key objectives for 2007, including growing revenue, improving operating performance, and improving service performance. For growing revenue, as Rick indicated, our revenue guidance for the year basically reflects flat revenue, excluding the industrial packaging sale. As part of getting the flat revenue we expect to grow Small Business Services in the low single digits, which we expect will largely be offset by single digit declines in both Financial Services and Direct Checks. We also expect Financial Services to begin to deliver revenue from new non-check streams, including customer acquisition and loyalty solutions and fraud and security products and services.

Our focus on improving operating performance is centered on our business processes, including achieving our 2007 target of 50 to 55% of a total $150 million cost reduction program, reducing SG&A expenses, improving operating margins, and driving cash flow improvements and debt reduction.

Our focus on improving service performance is centered on our customers, in making it easier for them to do business with us by continuing to improve our order fulfillment processes, building brand awareness, increasing customer loyalty, and improving data analytics. These key objectives highlight the importance for our future of both growing revenue and reducing costs, and thereby improving operating margin.

We also will have this year for the first time an additional two-day Board meeting focused exclusively on longer-term strategic growth initiatives.

Now shifting to our segments. In our Small Business Services segment we gained traction as revenue again grew, excluding the sale of the industrial packaging productline, and cost and expense discipline allowed us to produce the third consecutive quarter of double-digit operating margins.

We continued to stay focused on acquiring and retaining customers, increasing our share of wallet and focusing on the higher growth sweet spots within the average $2,000 that customers spend annually on products and services that we offer.

We had a strong new customer acquisition quarter driven by our Deluxe Business Advantage program. We continue to be pleased with revenues from the Johnson Group acquisition, and the opportunity to expand or footprint in the custom full color, digital and Web to print space.

An example of this, we have leveraged the Johnson Group's capabilities in the Direct to Consumer segment by offering a Web-enables business card capability to Direct Checks customers previously done through an external supplier. We continue to expand in higher growth market areas such as the custom full-color digital and Web to print space and promotional products, and further focus on vertical segmentation opportunities.

We just completed an extensive externally led research project in mid April that will help us better understand vertical segmentation opportunities in the small-business market.

In the first quarter we also closed a very small acquisition in the custom forms area, specifically targeted at revenue and margin enhancement opportunities in our Canadian market.

In our Financial Services segment we delivered very strong revenue and operating income performance. We continue to simplify our processes and take complexity out of the business, while reducing our costs and expense structure. We completed the Syracuse Call Center closure as planned in January. Unit volumes increased 6.2%. Our retention rates remained at all-time highs in excess of 90%, and new acquisition rates remain strong. Additionally, we have proactively extended several contracts with existing national customers.

In addition to our strong for check revenue, I am particularly pleased with the initial pilot programs we have running. They are designed to deliver relevant solutions for the future for our financial institution clients in order to help offset some of the declines in our core check business.

To give some more color here, our Welcome Home toolkit, an on boarding loyalty solution introduced in late 2005, reported revenue results in the first quarter that matched revenue for all of 2006. We also closed an order with a non-Deluxe check customer, which is encouraging.

Initial pilots for our suite of customer loyalty programs, known as Impressions, leveraging our integrated marketing capabilities for demand generation and marketing campaign management are still in progress. We now have 10 community pilot -- bank pilots in place, having started one to three each from November 2006 through March 2007. These will each run for at least 60 days before an additional readout out on the results will be relevant. The ones that started late last year are so far producing promising results.

Our Deluxe Calling new indirect lenders service offer has delivered results for the Boeing Employee Credit Union stronger than our initial pilot program with them. And we have signed up two additional new customers that will provide revenue in future quarters.

Finally, in the fraud and security space we closed a significant ID TheftBlock order with Commerce Bank, a financial institution where Deluxe is not the primary check supplier, as well as several other new wins in this space.

It is still too early to understand whether all these new product offerings can have a meaningful impact on our revenue, but we are encouraged with our progress thus far. I can tell you that I am personally spending more of my time learning and really assessing these initiatives, including our ability to build leverageable scale capability.

Finally, in Direct Checks, in the first quarter we reported a modest revenue increase. Revenue benefited from a previously announced weather-related shipping delay in late December of 2006. But the single digit revenue decline, excluding the $3 million, was very encouraging. Clearly our decision to invest modestly in freestanding insert impressions, as well as our strategy of selling additional premium priced features and accessories, is working. We also were able to deliver very strong operating income performance in the quarter above our 30% target. I'm really proud of all of our Direct Checks employees for simply an outstanding first quarter performance.

We are starting to put together the fundamental building blocks of a growth process for non-check related products and services. These are steps that have not been put in place before that will be the foundation for the two-day session with our Board, I mentioned earlier. And that should pay dividends as planning today will lead to better opportunity to execute in the future.

I'm honestly encouraged by the energy, resolve and passion of the sales and marketing teams working on these key new revenue growth and market segmentation initiatives. But it is important to understand that we have a lot more work to do here.

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. Here is some further color on our progress. Overall we had another solid quarter delivering on our expected cost reductions, and we remain on track to deliver the previously committed 50 to 55% of the $150 million this year.

You may also recall that we indicated we expect around 50 to 60% of this to directly benefit the bottom line. In the first quarter a greater percentage actually fell to the bottom line, principally due to the timing of delivery rate increases, which are now not expected to negatively impact us until mid-May 2007; lower investment spending as we took additional time to absorb all the organization structure changes and lineup all of our key initiatives; as well as the price increase implemented in late February that was not offset by price concessions at the annualized expected rate, given it is still early in the year.

In our go to market sales and marketing area we completed our field sales force and inbound and outbound customer care center realignments across our two largest segments. Our sales teams are beginning to work together and getting to know our customers better, while starting to understand our revamped processes. Changing the complete sales and marketing culture is hard work, but I am proud of how these teams are embracing the change. We also started working the first quarter with realigning our sales and marketing back end operations to more efficiently support our frontline field sales and customer care centers.

For fulfillment we had a strong quarter on lean productivity improvement, and also made progress on product standardization initiatives. We also delivered planned quarterly cost reductions from centralizing and leveraging our indirect spend activities. For the balance of 2007 we expect to continue our lean initiatives, product standardization, improve our sourcing, reduce SKUs, realign order fulfillment, as well as continue to reduce our indirect spend.

Finally for shared services infrastructure we made progress in information technology, lowering our data center costs, improving mainframe and server utilization, reducing the cost of our networking and voice communications, and improving partnerships with two key third-party providers. We expect to continue to reduce costs in each of these areas over the balance of 2007, as well as more strategically align IT capability and delivery with our business segments' needs.

For finance we continue to standardize more of our internal processes of reporting, and determine which additional transactional processes would be outsourced later in 2007. We expect to continue adopting best practices across the finance organization, increasing efficiencies, while again ensuring we maintain the strong internal controls and processes already in place.

For human resources we completed our site support realignment, started to strengthen our processes around attracting and retaining talent, and continued to improve our benefit structure with process and cost improvements in our pension benefits area.

For real estate we continued our vacant facility disposition by exiting our lease in our Athens, Ohio facility. We also made the strategic decision to outsource the day-to-day management of our real estate and facilities functions. This will help us in the future as we look to complete highest and best use analyses, and better enforce space standards.

As a reminder, it is important to note that there will continue to be some offsetting effects of these cost and expense reductions due to continued pricing pressure in print material and delivery increases, and planned targeted levels of performance-based incentive compensation, to name a few. We expect continued solid progress on our cost reduction initiatives in the second quarter. However, we do not expect as much savings to fall through to the bottom line as in the first quarter.

Also, as previously noted, reductions will not necessarily be linear through 2008, with investments and reductions being lumpy. Although we're still solidly on track to deliver the 50 to 55% of the $150 million in 2007.

As you can see from my comments, we made terrific progress in the quarter. But we still have a lot of work ahead of us. We expect continued strong performance in the second quarter as well. The good news is that Rick and I continue to find areas to work and that need improvement. I also continue to like our opportunities to better position our market leading brands, the potential of our new revenue offers in vertical segmentation initiatives, our ability to create stronger integrated marketing and printing, and we continue to develop more and more as a collective Deluxe team.

Clearly we are off to a solid start to the year. And I'm confident that as we continue to execute, we can deliver a year of strong progress and financial returns in 2007.

Now operator, Rick, Terry and I will open the call up for questions.

(OPERATOR INSTRUCTIONS). Charles Strausser, CJS Securities.

Rick, a quick housekeeping question for you. I don't think you gave us the D&A by segment, if you could give that to us.

Can you repeat that, I am sorry I didn't quite hear that.

Depreciation and amortization by segment, could you give that to us again, if you haven't given it out?

We have not. We didn't disclose that in our commentary, but I do have those numbers available. If you could just bear with me for a minute.

Terry is looking. (multiple speakers) Just gave him a second here.

By segment it is -- for Small Business Services it was -- for 2007 first quarter -- about $13.7 million, $2.3 million for Financial Services, and $1.34 million for Direct Checks.

Thank you very much. Lee, can you just talk a little bit too about some of the recent changes in the competitive landscape, has that changed the way you and Rick have thought about your strategic plans for the year and going forward? And also maybe give us an update on your thoughts of acquisition targets and the like.

I think if you think about what we have been pretty consistent, and Rick and my comments externally is we really are focused on what we really need to be doing right now. And obviously we're very aware of the merger of our two competitors in the check business. But as I have said I think pretty consistently, what we're trying to make sure that we do is keep executing on two things, getting better around revenue growth opportunities, staying strong still in the core check business, but also making sure that we improve our processes and get our cost structure down.

I think it is important -- as the merger unfolds, I think it is important that we stay the course from those areas that I just mentioned. And really that is what we're focused on right now. I think you can see in the quarter that focus really becomes apparent in terms of the reductions we got and on the strong quarter that we had in the Financial Services space.

If you think about acquisitions, all companies I think, if they're doing their job between management and the Board, are always looking for -- out into the market to round out what they're doing organically. We have been doing that pretty much since I got here. And we are also looking at constantly how things play out in our strategic deck that we've got, and whether everything really makes sense or not.

What we did in the quarter, I mentioned we made a very small acquisition. But we think it is a real winner for us. It is really targeted just getting us stronger in our Canadian market and what we think is -- it is just a small business that we picked out that is in the custom form space that, again, is just more of that rounding out of the opportunity within that average $2,000 spend to get into those higher sweet spot areas for us. And we just think this was an opportunity.

We will continue to look at those kinds of things as we have been. I think we have been pretty consistent in not only doing that and saying that we're going to do, but really turnaround and then executing on that. That is really the kind of things that we're going to continue as both a Board and a management team to look for.

That's terrific. And just one last thing, you mentioned that you had gotten some contract extensions. Where some of those -- were contracts that were coming up for renewal next year or this year?

I would use the word, both. And the good news here is that these are national names. They're not the biggest names you know, but they are still very, very strong names. We really -- I'm just really thrilled with my sales team. Getting out, getting ahead of the curve and really getting these things done from my vantage point is another terrific way to combat what is going on in the marketplace today. I just can't say enough good news about my sales team.

Thanks. Congratulations on the good execution here.

John Kraft, D.A. Davidson.

Good morning, gentlemen, and nice work so far here. I wanted to talk about the large bank conversion that happened a little earlier than you thought. Is that -- is the conversion complete?

Basically yes. And just think of it this way, we knew this conversion was going to happen. We planned for it to happen. But we planned for it to happen more through the year, with actually the biggest impact being in the second quarter. And what happened is when we sat down -- and the sales team sat down and partnered up with the customer, the customer wanted to basically get the conversion done, in effect all in the first quarter. Clearly it benefited us in the first quarter, and yet at the same time we didn't plan it that way initially is the way to think about it.

You had talked about winning some new business from Wachovia. Was that Wachovia?

Winning new business from Wachovia? I don't -- I don't think I mentioned (multiple speakers).

No, we did not mention new business from Wachovia.

Maybe I am mixed up here. But that is completed -- that was completed in the quarter?

I would use the words basically completed.

That fine. Also, on the pricing increases you say that you received in February, is there a way to characterize a certain particular segment of the market? Was that small bank, community bank market, anything we can read from that?

I think the way to think of it is across the board is the best way to really frame it. It varied depending on the types of products and services, so to speak. Different ones had different rates, so to speak, but that is how we did.

Then I guess last question. What percent of your business is from Canada?

I don't know the answer to that. I guess if I think -- it is not a huge percentage of our business, but it has been an area that has done well for us, and an area that we think we can even move more quickly. And obviously that is why we took advantage of the acquisition that we did. It is not -- think of less than $100 million to frame it.

Mike Hamilton, RBC Dain.

First just details. As we look out beyond '07, is that to the best of your knowledge now the 36% tax rate a reasonable one to be using?

That will be a good rate for the balance of the year. I will put a caveat (inaudible).

I think you mentioned '08, is that right?

That is correct. Longer-term, and again based on the planning you got in place now.

That is a reasonable rate. I will caveat that though like most companies we're adopting new accounting standards for taxes this quarter and that will perhaps introduce a little bit of volatility quarterly. But our best sights right now I would say that is pretty reasonable.

Do you have a shot at what your -- on your overall revenue per order, what it looked like in the quarter?

I don't think we have that information readily available. We probably have it --.

We will have that in the --.

That fine.

It is in our Q.

Finally, could you talk a little bit conceptually to what you're seeing in the small-business pull through out of your bank accounts, the financial institution, what you're seeing in accounts that have been in place a few quarters here now? And also if you are expanding that account base?

I think the way to think about it is when we signed up several of the larger deals that we had last year, that we were public about -- I will use an example, U.S. Bank last year and into the first quarter. We have the benefit of continuing to improve those relationships throughout the year, and then now into this year as well.

After this quarter the U.S. Bank won't be left. But the good news is we have got other areas and other relationships that we created along the way and that we have now opened up that also have given us some encouraging new acquisition business in the small-business space. I guess without getting into specific customer things, which we normally don't do, that is the way I would think about it from a big picture standpoint.

But you have picked up some additional customers?

Yes, we have. I think you can see in the volume numbers that both Rick and I mentioned, we did get -- we did grow volumes in the quarter. And therefore those volumes are solidifying as part of our strategy to link that small-business relationship more closely with the financial institution relationship through our Deluxe Business Advantage program. That is the way -- you are thinking about it the right way.

Thanks. Nice execution.

Christopher Mammone, Deutsche Bank.

First of all, congratulations on a remarkable turnaround. I think if you go back and look at your stock last summer where people were leaving you for dead, this is fantastic. That said though, as a long-term holder of Deluxe bonds, I have to say that I have a lot of reasons to feel a bit bitter. And the reason is your stock has doubled, our bonds haven't moved.

One of the reasons the bonds haven't moved a whole hell of a lot has been because you folks really haven't provided a great deal of clarity as to what you're going -- what you're thinking is in terms of leverage, privatization, your refinancing. I would really appreciate if you could take this opportunity to clarify for the market, give us some color on what you're thinking in terms of refinancing your upcoming maturity, what options you're looking at, things like that. It really would be very helpful to me. And I'm sure it would be very helpful for you in terms of getting that financing at an attractive price.

Let me try to address that question for you. Certainly we have been spending a great deal of time over the last several quarters, not only on looking at the execution of our transformation here, but then also how that plays into our capital structure going forward, and what is needed both in the near term in terms of addressing the $325 million maturity that is coming up later this year, as well as longer term.

And we have consistently been speaking to our focus on continuing to reduce our debt overall. We had significant opportunity and execution on that in 2006. And as we have reported here today, continued strong execution, given our cash flows in the first quarter, and a reduction of $68.5 million in debt here in the first quarter of the year.

That continues to remain a focus for us as we look at continuing to enhance our credit ratios and improve our financial flexibility. Deluxe historically has been an investment-grade company. And certainly the capital structure that we put in place over the last several years was done at investment-grade level. And we continue to remain focused on trying to improve our credit ratios to get back towards an investment-grade type of a rating. Although, Lee has mentioned in the past previously, and I would reiterate that that is not necessarily the most important objective for us on the plate right now. But we will continue to focus on debt repayment.

We have taken the time to continue to execute on our plan here, and continue to improve our performance, which I think is beginning to really gain some traction and greater credibility as we look at our options to address this upcoming maturity. And as we have consistently said, we will look to repay that obligation from cash flow from operations, the room under our existing credit facility, as well as a likely replacement funding to help us take that maturity out.

I think if you think about it, to supplement what Rick is saying, as well is that we are absolutely keeping our eye on where rates are. And rates have tightened right now. And if you look at the trend over the last year since I have been here, and the last six months since Rick has been here, we are positioned -- if we would have gone earlier, we would have not understood exactly where we think we are in terms of the requirements that we needed, because we were still learning and understanding the business. And also the rates were actually not as favorable as the rates are moving into this more current period. I think we have actually been very smart and very strong about our focus in this area. And it is something that Rick and I and the rest of the management team is focused on as well.

Can I ask a follow up question?

Sure.

I recognize investment-grade is not your strategic objective anymore, but could you give us some color as to how much -- some idea about how much leverage on an ongoing -- on a runrate basis you're willing to tolerate given the nature of your business?

We're not specifically managing to a leverage ratio. I think the important thing to note, and what is very important for all of our investors, is the fact that we are able to generate consistent strong cash flow on a quarter after quarter basis. And given the level of cash flow performance that we have, we are very comfortable with our current leverage on the balance sheet today. But as I have reiterated, we continue to remain focused on paying down those debt levels to continue to improve that leverage ratio.

I think the way to think about it on top of what Rick said too is that we're trying to learn as a team and really take advantage of things that we see out in the marketplace, and have a balance towards absolutely the importance of generating operating cash flow and reducing our debt, but at the same time if there are other things that are out there that we need to invest organically in, or we see as things that make sense from an acquisitive nature, then we want to be balanced on that right now and keep our options open. And given what is going on the marketplace, as well as what we're trying to do to produce a longer-term stronger Company.

I think that is all the thoughtful thinking that Rick and I and our team, and Treasury and the external advisers that we've got have really been working on -- working with us on. That is the way I would think about it. And I think Rick has really done a nice job of outlining that for you as well.

Hardin Bethea, DePrince, Race and Zolo. (OPERATOR INSTRUCTIONS).

Good quarter. Good outlook. The question -- if I look at -- if I were to look at Financial Services and try to -- if you could help me understand how to dissect revenue between price increase, volume increase, or otherwise how that all netted out, kind of volume price mix.

I think these are the big picture things to think about. If you think about the decline was about 3%, overall I think it was the number in the quarter. And we grew the unit -- the units grew I think 6.2%, and we said half of that is really attributable to the growth in the big bank conversion we did.

Then you think about we still see and still believe -- we're all anxious to see the Fed's report when it comes out, we understand later this year, about the market and what they believe the market for checks is actually doing. But we're still modeling 4 to 5% decline. It is probably a good rule of thumb to use.

I think based on that, you add up all those pieces, and then you layer in the starting impact in the quarter of -- at the end of February of the price increase that we put in there, all those are the pieces to really wrestle with. The challenge is to -- because you have some things, and the timing of some things when they occurred within the quarter, it makes it a little bit more challenge.

But I think the net take away that you want to think going forward is we expect that, as we have said, we expect to get this thing from the 14, 15% rate of decline that we had in the prior couple of years, really last year specifically, we expect to get that into a single digit decline. I think that is the way --. When you mesh all the pieces together going forward between the ongoing price opportunity that we've got in terms of making the change on that with the expected fact that there is going to be more price concessions, as there is over -- every day those become more and more prevalent in the marketplace.

And then we're not going to have this ongoing conversion. I think all those are the things you really need to think about. I can't tell you exactly how much was each piece. We didn't roll it up that way in terms of the way we laid it out. We just try to be clear to the investor in terms of where that map -- to frame it out.

One, I guess, a follow-up related to pricing. I guess help me understand price increases announced in February versus price concessions when you renew contracts. Or in fact it sounds like you pulled some contract renewals forward proactively. And then competitively, what you're seeing on the pricing front.

I think that the way to think about it is we got our price -- our pricing change out during the end of February timeframe is really the best I can put our line of thinking around. I think again go back to what I just indicated, I think the way you have to think about it, the concessions over time just keep peeling off more and more. And later in the year you expect price concession to be a little bit more than you would at the beginning of the year. I think that is the balance that you have got to think about. As we get better as a team at modeling all this out and really operating within our internal processes. But I think that is really the best way to frame and think about it here. That is really what the timing of what happened.

But I don't want to take away the fact that we again believe that this is going to be solid. It is not going to be down 3% now and we expect it to do down 14% for the balance of the year. That is not what we're trying to say. And I think that is what we have been pretty consistent on as well.

As far as price in the market, again, Rick and I -- I think here's an area we have been very consistent about. It is very important that we continue to anticipate that the market is going to be a market that is going to be commoditizing price in our modeling and our thinking. And the reason why that is important is we're not -- we then allow ourselves to put the right cost structure in place underneath there, and also to keep going to after the efficiency improvements that the Financial Services team is really driving. That is the kind of thinking.

If the Street or the markets or whatever then say, we don't think price is going to be as aggressive, will then obviously we build a better cost structure underneath there and it should help us. But that is not the best way for Rick and I to be prudent in how we're building up our modeling and what we're doing. I think that is the best way to think about it.

From a cash flow perspective, and you have put yourself in a good position to meet the original debt reduction goal -- I guess when I look forward without any real significant changes in capital spending, I guess it went up a little bit, but capital spending expectations or otherwise, but it seems to me that expectation for debt reduction, cash flows is still conservative. How much of a replacement would you see in a new financing?

We're not going to get into that discussion.

Maybe another way, what is the -- is there kind of target optimal capital structure you aim to get to before you would divert cash flow for other purposes?

The way -- I think again, back to an earlier question, I think that what has been challenging for a little bit for Rick and I is that it is a hard thing within the culture of the Company, because they have rightly rightfully been such a strong investment-grade Company for many, many -- obviously the majority of years they have been in business. But we haven't had the luxury of being able to be in that space over the last year plus.

What we're trying to do is really work within the group. They are terrific on this about understanding how to think about it moving forward. We are focused on continuing to improve here. And you can see that in the quarter. You can see it in the words that both Rick and I use, and then in the execution and delivery of that. So it is important, but I want to articulate the flexibility is important too for where we're going to make sure that we -- if we see something organically that makes sense that we want to invest in, or we see something from an acquisitive nature that makes sense, that we want to be thoughtful about that, while we're balancing the absolute laser-focus to continue to improve our cash flow and bring down the debt. That balance is where we're really thinking about right now. And so it is not a specific number other than we want to get better, but we also want to be flexible at the same time. I also want to let a few other questions come here so.

I'll get back in queue if I have more.

Charles Strausser.

One quick follow-up for you is, when you look at the small business segment -- I know you talked a lot in the -- when you get in front of investors about getting a better share of the wallet. Can you give us a little bit more of an update there on some of the initiatives there? And are you seeing some good traction in terms of guiding the salesforce and guiding your marketing efforts towards getting more of that share?

I mentioned -- I think this is really important for us -- I mentioned that we just completed a study in mid April that was an externally led -- I'm not going to give the name of the (multiple speakers). And the genesis of that and the importance of that study will help us get stronger around how do we aggressively attack share of wallet.

The challenge that we have (multiple speakers). The challenge that we have is to try to figure out what are the take aways from that work. And we just haven't gotten to the point where we deciphered it enough to really put all the actions in place for us. But I expect that we will report on our next update and give you and the rest of the investors a perspective on where we're going. But I think the way to think about it is to allow us to even run harder and more aggressively at really getting after the share of wallet opportunity that we have.

I think a lot of people are harping on the balance sheet questions and the leverage questions. I think one of the things I think, at least I'm hearing it right and have heard it right in the past, is that once you get past this maturity you're really not going to have any maturities come due for quite some time. And there will be a fair amount of free cash flow this is going to be building. Is that a fair statement still?

I think it is very fair.

Very fair. I think you read it right.

I think a worst-case -- the way I look at it is a worst-case scenario is that you have $325 million of debt coming due, and you have got ample ability on a worst-case scenario to use your credit line and your cash flow to pay that off. It doesn't assume like there is any jeopardy of being able to pay off that maturity. It is just a question of what form and what structure it takes. Is that the right way to look at that as well?

Well said as well.

Yes, very accurate.

Philip Olesen, UBS.

Actually two quick ones. First, as the Clarke and Harland deal moves towards completion, do you think that there may be opportunities to pick up new Financial Services clients that previously weren't on your radar screen, either via change of control provisions that maybe embedded within some of those contracts?

This is Lee. I think what I will -- the way to think about I guess is that we are out there and -- we always want to be in on every deal. Right? That is the goal, and I would say our competitors have always wanted to be on every deal as well. I think the best way for me to leave this with you is that, are we being invited to more places than we -- and by invited I mean getting in there a bit easier than maybe we have historically have, I think the answer is yes.

Now will that play out in terms of opportunities and a change, it is just way too early to be able to make a call on that honestly. As you know, the merger is not done yet. But I think that is really the way to think about it. And I have heard that comment pretty consistently from our sales leaders.

Secondly, on -- several times during both the prepared remarks and in the Q&A you talked about having the flexibility to potentially look at opportunities to enhance your organic growth capabilities. Previously you had given the indication that as you executed on the plan you would want to position Deluxe potentially to look at transformational acquisition opportunities. Has your thought -- understanding that there is potentially a two day Board meeting on that type of subject. But has your thought process evolved at all in terms of the type of opportunity that you would like to pursue?

And I guess specifically -- in transformational I often think of opportunities that may be outside of your core competency versus more a bolt-on acquisition, or something that is contiguous to your existing product space.

I think the way to think about where we're at right now is that we are -- first of all, we're really excited about the opportunity to sit down with our Board and have this discussion. This is just a terrific opportunity to get the many members of the Deluxe team working on some of these initiatives in front of our Board and have a great dialogue.

The way I would think about it right now is that what the Company has been trying to do over the last year, and we're not done with this yet, is get our foundation to be stronger and stronger in the core check businesses, in the core forms business, in the small business area, to figure out how do we get more expensive around the small business as well. And also bring those new opportunities I talked about on the call today, and I have been talking about -- I gave a little more color on them today in the finance institution space. What we're trying to do is build around all those things.

And then as an additional opportunity, yes, we're going to absolutely look at things that we're not directly in today that we're trying to understand, does it make sense for us to be able to get into.

But I will tell you this, I believe wholeheartedly if the leadership team and the Board of the Company had not done the foundational and is not doing, we need to continue to do -- it is not over yet for us in terms of getting that foundation strong. Trying to pursue something else we will struggle with it, because we will have core processes and a bloated cost structure to be able to try to get into other areas, whether they are adjacent areas or more, in your words, more transformational areas. I think that is the way to think about it. I think that is the framing -- the best framing right now that I can leave for you.

Very helpful. And if I could just sneak in one last quick one just on the financing options. As you have spent time in recent weeks working with your bankers looking at options, do you guys still feel comfortable that whatever option you intend to -- or whatever path you intend to go down, you will be able to execute that transaction on an unsecured basis?

Again, we are still looking at a variety of different options, and obviously, terms and conditions are not something I can comment on on a hypothetical basis here as we look at various different options. But we are considering those and we will put the best thing forward at the appropriate time.

Todd Morgan, CIBC World Markets.

Two quick thoughts. I guess first of all, utilization levels in your check printing platform, given the recent conversion, if you do in fact add new customers, does that really entail any additional capital expenditure level?

No.

Okay. I guess the second point is, Lee, I don't know -- after being here a while, I think the Deluxe strategy, at least as I think about it, is to use the banking channel as a customer acquisition strategy. Can you think about -- can you talk about how robust and defensible that is? Where I am really going is if I look at other competitors, other companies -- VistaPrint, to pick one -- who are looking at much higher growth rates, partnering to my sense in a lot of cases the same kind of companies here, how do you feel about your acquisition strategy versus what some other guys are doing?

The way I would think about it is that the partnering on the financial institution side is just a part of the strategy. If you think about the small business and what we have been doing, the reason to really get the acquisition of the Johnson Group was to really give us some additional scale on customers and a customer base that they have, and that they are involved in today that we're really not involved in.

The opportunity for us to get access to segments and customers that the Johnson Group has is something that we are working from today as another growth foundation for us. Plus you've got to remember that we have other terrific customers from our base of the [Nets] acquisition. And we have some fantastic brands between McBee and RapidForms, and Safeguard and so on and so forth. And those brands bring great customer base and an expanding customer base opportunity as well.

Then think again about our direct to consumer business, and the opportunity to really take and expand the opportunity to sell things to those consumers directly. We have talked about those. And obviously given where we executed with some of the accessories and new features in that space that we highlighted in the quarter, again, I think that is encouraging for us as well.

I don't think it is one thing. I think the sweet spot opportunity to really bring that closeness between the FI and the small business is an absolute area that, again, we are laser focused on. But I don't want you to walk away and think we're not also focused on some tremendous opportunities in those other areas I mentioned as well.

We will look forward to the top line growth at some time down the road then. Thanks.

Operator, is that all the questions in the queue?

We do have one more from Hardin Bethea, if you wanted to take it.

Terry, I think we need to wrap up here, right. Do we have enough time?

I think we can maybe take one more.

Okay, we will take one more here.

A quick one. When is the upcoming Board meeting?

We never disclose our Board dates.

I just didn't know -- I didn't know of I had missed it.

We would never disclose a Board date.

Is it something that -- I mean is the result from the study of growth initiatives that will be worked into future investor conference calls?

Again, the way to think about it, is that we will try to continue to give more color on where we're going, and some of these other opportunities that I think we have. Yes, we will try our best to continue to give additional color over time. Obviously one of the focus areas we have is revenue growth. That is going to be an important thing for, not only us internally to talk about, but also externally early as well. We will do our best to try and make sure we do that.

Great, thank you.

Let me just now wrap up here with a few comments. Again, I just want to highlight that we are pleased with the start of 2007. And we really continue to be energized and passionate about attacking the challenges ahead of us. I want to highlight we still have a lot of work to do, but our objective is to continue to execute and improve our performance each day, and then to deliver against our improved commitments.

I really appreciate the participation and your questions today. And now we're going to get back to work. And we look forward to providing another positive progress report on our next earnings call.

This is a reminder that a replay of this call will be available until May 1 by dialing 888-286-8010. When instructed, provide the access code 70394039. The Company's slides are archived in the Investor Relations section of Deluxe's website at www.deluxe.com. And again thank you for joining us, and have a good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a great day.