Deluxe Corp (DLX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Deluxe Corporation earnings conference call. My name is Gina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Terry Peterson, Vice President of Investor relations and Chief Accounting Officer. You may proceed.

Thank you, Gina. Welcome to Deluxe Corporation's 2007 fourth-quarter earnings call. I'm Terry Peterson, deluxe's Vice President of investor relations and Chief Accounting Officer. Joining me in 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 analyst 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 web site. 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, 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 web site, www.Deluxe.com and is furnished to the SEC on the 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'll turn the call over to Lee Schram, Deluxe's CEO.

Thank you, Terry, and good morning, everyone. Despite a more challenging economic conditions, we had another solid quarter and are pleased with our financial performance and continued progress with our transformation as we exit 2007.

For 2007, we reported slight consolidated revenue growth excluding the previously announced sale of the industrial packaging product line. And we stabilized the check revenue base and financial services and direct checks. Actually reporting revenue growth for the quarter in financial services.

We made progress on our new revenue expansion in this initiative, further piloting and progressing potential revenue opportunities. We continue to execute on our $150 million cost reduction program and finished the year ahead of plan. And also further framed our incremental $75 million cost reduction initiative.

For the year, we grew earnings per share 41% over 2006. Operating cash flow continued to be very strong, and we repurchased another $8 million of common stock in the quarter. We are now well into our transformational journey. More than executing against commitments with tremendous progress and revenue, earnings, and cash flow, but we recognize we still have a lot of work in the year ahead.

Given our accomplishments, clearly we are disappointed with the recent declines in our stock price. But we remain steadfastly focused on executing our turnaround plan, which we strongly believe will drive shareholder value for the long term. In a few minutes, I will discuss more details around our recent progress and provide a perspective on what we hope to accomplish in 2008. But first, Rick will cover our financial performance.

Thanks, Lee. Earlier today, we reported diluted earnings per share for the fourth quarter of 77 cents, which was in the range of our previously communicated outlook for the quarter. Revenues for the quarter came in at $414 million, down slightly from our earlier expectations.

While revenue performance since our small business services segment was negatively impacted by general economic softness, check volumes in our financial services segment were stronger than expected. Operating performance benefited from continued execution on our cost reduction initiatives, and we accelerated into the quarter over $2 million of investments to drive further cost reduction activities.

Finally, earnings per share benefited four cents from a lower effective tax rate. Operating cash flow finished the year strong and was in line with our expectations. Strong earnings and continued progress with our working capital initiatives led to operating cash flow of $67 million for the quarter.

In the fourth quarter of 2006, we reported diluted earnings per share of 92 cents. Those results included a gain of 14 cents per share from terminating an underperforming outsourced payroll services contract, and benefited another four cents per share from a lower effective tax rate. 2007 results included benefits from our cost reduction initiatives partially offset by the impact of lower revenue and by higher performance-based compensation and advertising expenses, as well as a higher share count. Companywide, revenue in the fourth quarter totaled $414 million, down 3.1% from 2006.

As we have previously noted, the prior year benefited by $13.6 billion from the industrial packaging product line which was divested in January, 2007. Gross margin for the quarter was 63.6% of revenue. Basically flat with the prior year. Improvements in manufacturing productivity as a result of lean initiatives and lower material costs related to product mix were offset by higher delivery costs from postal rate increases. Selling, general, and administrative expense was flat in the quarter on a year-over-year basis.

As I previously mentioned, benefits from many of our cost reduction initiatives, particularly in the areas of call center productivity and information technology infrastructure and lower employee severance charges in 2007 were offset by higher performance-based employee compensation and advertising expenses, as well as the $11 million gain realized in 2006 from terminating the outsourced payroll services contract.

As a result, operating income in the quarter was $70.4 million, compared to $78.9 million last year. Let's now shift our focus to some highlights in each of our three business segments. In small business services, revenue of $251.4 million was down $5.7% or $15.1 million versus 2006. As noted, 2006 revenue included $13.6 million from the industrial packaging product line which we sold in January, 2007.

Adjusting for this divestiture, revenue in the quarter was down slightly as economic softness was partially offset by a favorable Canadian exchange rate and growth from the Johnson Group acquisition in October, 2006. Operating income in this segment was $37.1 million, compared to $49.2 million in 2006. The decrease was driven primarily by the 2006 payroll services contract gain of $11 million.

In addition, continued cost reductions, including lower manufacturing, information technology, and selling costs and lower employee severance charges in 2007 were more than offset by increases in performance-based employee compensation and advertising expenses and slightly lower revenue.

As a percentage of revenue, operating margin for the quarter was 14.8%. A 1.4-point sequential quarterly improvement and extending our trend of delivering double-digit operating margins in this segment.

In financial services, revenue was $112.9 million, an increase of 2.5% over fourth quarter 2006. The quarter reflected continued strong check volumes and slightly favorable revenue per order from an earlier price increase. Financial services reported operating income of $18.7 million for the quarter, or $16.6% of revenue, up from $16.2 million in 2006.

Delivery rate increases and higher performance-based employee compensation expense were more than offset by higher revenues, benefits from cost reduction initiatives, and lower employee severance charges this year.

Finally, direct checks revenue totaled $49.7 million, down only 1.6% on a year-over-year basis. Revenue this quarter benefited from continued success in selling additional accessories, premium features, and services which partially offset the impact of lower order volumes.

Additionally, as you may recall, direct checks experienced weather-related production delays in the fourth quarter of 2006, resulting in $3 million of lower revenue last year. Operating income was $14.6 million for the quarter or 29.4% of revenue, up $1.1 million from last year. The increase was driven by benefits from cost reduction initiatives and lower advertising expense, partly offset by lower order volume.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $844.1 million, compared to $1 billion at the end of 2006. On October 1, we fully repaid our $325 million obligation on 3.5% notes utilizing proceeds from liquidating short-term investments and available capacity on our committed lines of credit. Through the remainder of the quarter, we continued to pay down debt with our full-year reduction totaling $175.7 million.

Our total debt reduction for the year fell below the previously communicated range due to additional Q4 share repurchases totaling $8.3 million to partially mitigate delusion from equity-based compensation, as well as higher year-end cash balances and slightly higher capital expenditures.

Cash provided by operating activities for the year finished strong at $244.7 million. The increase from 2006 was driven by continued progress with working capital initiatives and improved operating performance. Partly offset by higher payments for medical and severance benefits and the higher income taxes.

Looking ahead to 2008, despite expectations of a more challenging economic environment and the pressures of lower check usage on our core check business, we are still optimistic that we can deliver nearly flat consolidated revenue ranging from $1.56 to $1.61 billion on a full-year basis.

In addition, we expect to achieve double-digit growth in earnings per share, which translates to an EPS range from $3 to $3.20. There are several key factors that contribute to our 2008 full-year outlook. Given the economic uncertainty that we expect will impact parts of our small business services segment, we are being prudent in planning only very low single-digit growth rates for the year with most of the growth expected in the second half.

In financial services, given contract renewal timing and recent successes in extending existing national contracts, we expect no significant changes in our customer base. In addition, we expect a continuation of 4% to 5% market declines in check writing and a competitive pricing environment. With the related revenue pressure being partially offset by a modest second half ramp of revenues from several new loyalty, retention, monitoring and protection products.

From an economic standpoint, checks tend to be fairly resilient to downturns in the economy, so we expect the economic softness to have only a minor impact on our personal checks businesses. We expect revenue declines in direct checks to be more in the high single digits driven by declines in check usage, the year-over-year lapping of several new feature and accessory initiatives, although more new initiatives are planned in 2008. And the $3 million revenue benefit in 2007 attributable to the weather issues previously mentioned.

Other factors contributing to our 2008 earnings per share outlook include continued progress with the previously announced $225 million cost and expense reduction programs and an effective tax rate of approximately 35%. We expect operating cash flows to remain very strong, ranging between $230 and $250 million for the year.

2008 will continue to benefit from earnings growth and additional working capital improvements, but they will be largely offset by the higher performance-based incentive compensation payout in the first quarter of 2008, given our strong financial performance from 2007. We expect contract acquisition payments to be approximately $15 million.

Capital expenditures in 2008 are expected to be approximately $30 million, with continued investment in initiatives which drive manufacturing productivity, business simplification, and non-check revenue growth. Depreciation and amortization expense is expected to be approximately $60 million including $23 million of acquisition related amortization.

For the first quarter of 2008, we expect our revenue to range from $375 million to $385 million, and diluted earnings per share to range from 50 to 54 cents per share. Reflecting the following factors in comparison to 2007. Again, given the economy, we are being prudent with our revenue projections for small business services, particularly in the early part of the year.

As a result, excluding $3 million in 2007 revenue attributable to the divested industrial packaging product line, we are projecting low single digit declines in SBS revenue in the quarter. In financial services, we expect to perform better on the revenue line than the expected 4% to 5% consumer-driven decline in checks written, due to a full quarter benefit of delivery price increases implemented in the latter part of the first quarter of 2007.

Revenue and direct checks is expected to be down on a year-over-year basis in the low double-digit range, primarily because of the $3 million benefit we realized in the first quarter of 2007, from the weather-related issues late in 2006 that shifted revenue between years. Factors on the cost side driving our first-quarter outlook include higher delivery costs in financial services and direct checks as higher postal rates in 2008 are not fully offset by our new flat check delivery packaging solution.

Higher investments in e-commerce, verticalization and merchandising for SBS and in loyalty retention, monitoring and protection solutions in financial services to drive expected revenue growth in the second half of the year. Continued execution of the $225 million cost and expense reduction initiatives net of investment, and an effective tax rate of approximately 35% to 36%.

Finally, from a financing activity perspective, we plan to pay down the remaining $67 million from our credit facility during 2008. As we maintain our strong operating cash flow, we will continue to focus on effectively deploying excess cash to drive long-term value. Our priorities for uses of free cash flow include investing both organically and with tuck-in acquisitions to augment growth.

We will also consider other opportunities to create shareholder value, which include modest share repurchases and evaluating our dividend level. As a reminder, our new notes limit our ability to make restricted payments for items such as share repurchases and higher dividends. As we continue to generate a sufficient level of net income, our flexibility to make restricted payments will continue to increase over time.

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 progress.

First, at the enterprise level and then for each of our three segments. I will also include throughout a perspective on what we hope to accomplish in 2008 and wrap up with an update on our cost reduction initiatives.

At the enterprise level, we are pleased with the momentum we have achieved on our process improvements and result in cost reduction initiatives. While work here continues, we have a solid infrastructure in place coupled with the strong economic-resistant annuity-based core check business. These are great foundational pillars to build upon. We will not take our eye off costs, but our transformation efforts are now shifting to focus more heavily on revenue expansion initiatives.

During the fourth quarter, we further clarified our revenue growth drivers and framed them into three major groups. Strengthening our core check and office products platforms, adding ad agencies and enablers, including transaction, loyalty and retention, and monitoring and protection solutions.

And finally, expanding our portfolio by adding higher growth services for small businesses. This may also include in the future penetrating additional new, higher growth markets like medical, telecommunications, and government with our core office products and services. Revenue growth will come from investing organically, expanding and creating partnerships and tuck-in acquisitions to augment growth.

We made progress on key enablers including improving our e-commerce and analytics capabilities and focused more crisply on key vertical segments and enhanced merchandising both for small businesses and financial institutions. I will incorporate examples of these potential new revenue opportunities and key enablers throughout my segment updates.

Now shifting to our segments. In small business services, we had another solid quarter of new customer acquisitions driven by our deluxe business advantage program. Continued to expand custom colored products through the Johnson Group acquisition and announce an exciting partnership with web site pros.

As initially mentioned on our third-quarter call, we did see some continuing signs of softness in our retail and contractor verticals that we believe are driven by economic conditions that also had some impact on our holiday greeting card program in the fourth quarter. We made progress in expanding our e-commerce capability but still have much more work to do here with interfacing, state-of-the-art customer-facing tools with back-end systems. The results of our second wave of an extensive vertical segmentation pilot with retailers, contractors, and other professional services, so far, have been very encouraging. Initial pilot results show that our share wallet, average order size and breadth of products purchased increased.

To give some more color here, orders already placed have exceeded our forecast by 36%. We are seeing a 35% greater response rate compared with our control group. And a significant shift of almost three times to products that help our customers grow rather than simply run or maintain their businesses.

In 2008, our focus again will be on profitable revenue growth. We remain focused on acquiring new customers and increasing our share of wallet where we believe we can sell more personalized forms and related products, as well as higher growth solutions including custom, full color, digital, web-to-print, and promotional products.

In addition, we see opportunities to help small businesses grow by expanding our portfolio into marketing services such as logo design, web site creation, campaign management, mailing, and other related services. We are investing heavily in the first half of the year to build out stronger e-commerce and vertical segmentation capability that we believe will help drive higher revenue growth in the second half of the year. We also believe given current market conditions that we need to more prudently plan at a lower revenue growth rate.

In financial services, we continued again this quarter to proactively extend several check contracts with existing national customers. Order volumes in the quarter were flat year-over-year despite ongoing check-writing declines. Our retention rates remain in excess of 90%, and new acquisition rates remain strong, especially in the credit union space. We continue to simplify our processes and take complexity out of the business while reducing our cost and expense structure.

In addition to our strong core check revenue, we made progress in the fourth quarter in advancing new noncheck revenue expansion opportunities and had our strongest revenue quarter in 2007.

To give more color here, from our suite of customer loyalty and retention solutions known as impressions, we launched 11 new customers with revenue that will ramp and extend throughout 2008. For Deluxe calling, we added several new scripts and customers, and we successfully completed an initial pilot with a very large financial institution. We will be extending the calling pilot this year and starting a test of our on-boarding, welcome home tool kit solution with them this quarter.

We also saw a meaningful revenue increase from our stored value gift card program, and finally in the monitoring and protection space, we strengthened our relationship with our key partner that we expect will help drive more revenue in the space in 2008.

Momentum is clearly building in these new, noncheck revenue initiatives, both inside the company as we build better go-to-market product launch capability and externally with our customers. These new initiatives are helping Deluxe be viewed by financial institutions as more than just a check provider but as a trusted partner.

They are singles and doubles right now, especially with the expected financial institution focus on controlling costs this year, but have the potential to contribute more significantly over the next several years. In 2008, we expect to maintain our high retention rates and acquire new check customers. We also expect some revenue contribution from the new loyalty and retention, stored value gift cards, and monitoring and protection offerings. Our expectation is that these new initiatives could add 2% to 4% incremental revenue in the financial services segment this year, and they are also accretive to operating income.

Finally, we will continue the simplification work with the goal of taking complexity out of the business and reducing our cost structure. In direct checks, we reported a 2% revenue decline in the fourth quarter. Our investments in freestanding and certain presence focus on selling additional products such as holiday greeting cards, stored value gift cards, and premium price features and accessories are expected to continue enhancing results. We also had slightly improved operating income profile in the fourth quarter with an operating income to revenue ratio of close to 30%.

In 2008, we expect higher single-digit declines in revenue driven by consumer-driven declines, the year-over-year lapping of several new feature and accessory initiatives, and the first quarter of 2007 $3 million weather-related revenue carryover from 2006. This alone drives almost a 1.5% decline for the year.

We are also starting to focus on other products and services that we can sell directly to consumers in addition to checks and related accessories. We expect the continued increased freestanding insert advertising and enhanced internet search engine spend will be offset by lower manufacturing costs and lower SG&A. Keeping our profitability profile within one to two points of a 30% operating margin level.

In addition to these actions and each of our segments, here is an update on our cost and expense reduction initiative both the originally announced $150 million program and the more recently announced $75 million addition to the program.

Overall, we had another solid quarter. Delivering to our expected levels on the $150 million reduction initiative or an additional 60% this year on top of the 10% achieved in 2006. The balance of the $150 million in cost reductions, approximately 30% or $45 million is expected in 2008.

For the incremental $75 million in cost reductions announced on the third-quarter 2007 call, we expect approximately 1/3 of the reductions to be realized in 2008, and 2/3 were the balance to be realized in 2009. You may recall that we indicated around 50% to 60% of these savings were expected to directly benefit the bottom line.

In the fourth quarter, as we indicated on the third-quarter call, a little less than 50% to 60% fell to the bottom line primarily due to investments in noncheck revenue initiatives and acceleration of cost reduction investments. For 2008, reductions again will not necessarily be linear through the quarters and approximately 50% to 60% will also fall to the bottom line.

However, the percentage will be lower in the first half, especially in the first quarter, as we are more aggressively investing in new, noncheck revenue solutions and key enablers, both of which are expected to drive additional revenue in the second half of 2008. Here are some highlights of the key cost reduction activities for the fourth quarter and continued areas of opportunity as we move forward in addition to the ongoing savings that are occuring in each quarter from previously implemented actions.

In our go-to-market sales and marketing, our focus continues to be on realigning sales and marketing back-end operations and refining our channel management structure through processed centralization, simplifying business processes, platform and tool consolidation, and leveraging e-commerce and vertical segmentation capabilities.

For fulfillment, we had a strong quarter on lean productivity improvements and in direct spend reductions. And in late October, we completed our initial implementation of the new flat check delivery package.

For 2008, we expect to continue our lean product standardization and direct and indirect spend reduction initiatives. Plus advance our work on realigning to a common manufacturing platform. We also plan to initiate more strategic supplier sourcing arrangements and enhance value stream mapping improvements and efficiencies.

Finally, for shared services infrastructure, we continue to make good progress in information technology driven by data center cost reductions and other system utilization, networking, and voice communication efficiencies.

In 2008, we expect to continue to reduce costs in each of these areas mentioned, as well as better rationalize and standardize applications and technology and more strategically align IT capability and delivery with our business segments' needs. For our other shared services infrastructure functions including finance, human resources, real estate and legal, we continue to standardize more of our internal processes and improve efficiencies. Opportunities still exist to centralize, streamline, standardize, and improve efficiencies in these functions.

As you can see, we made solid progress in the fourth quarter and in 2007. But we still have a lot of work and opportunities ahead of us in 2008. We expect economic market challenges especially in the first half of the year. Continued strong progress on our cost reduction initiatives, stability in our core check and office products revenues, and more meaningful revenue contributions from our new revenue offers and key enablers. We are confident that as we continue to execute, we can have another year of strong progress and financial returns.

Before I open the call up for questions, I would like to take this opportunity to thank all the Deluxe employees for their hardwork and dedication which helped make 2007 a great success. Thank you, all Deluxers. Now Rick, Terry and I will take your questions. Operator.

(Operator Instructions) And your first question is from the line of Jamie Clement with Sidoti&company. You may proceed.

Lee, Rick, Terry, good morning.

Good morning.

Lee, with respect to the 2008 outlook, you know, if it's possible for maybe for you to simplify things as to make sure that I heard things -- that I heard things correctly. With respect to the cost profile of the company and expecting a better second half than first half, is that related to -- is that more related to higher investment costs in the first half, or is it more of an expectation of, you know, the ongoing cost-cutting plan yielding results in the second half, or is it a combination of the two?

Well, Jamie, let me start with -- look, we are very committed to getting this company to grow. And based on that, we've been investing in some of the initiatives that we've been talking about for several quarters now. But we have made a conscious decision that we're going to put more money into it right now. And we're serious about it, and we have the whole company rallying behind it. And we believe it's going to absolutely help.

A lot of these pilots that I mentioned, I gave a lot more color this quarter, are really starting to be -- look opportunistic for us. And it seems like we're doing the right things. And what we decided what we're going to do, Jamie, is basically put more money right now into that, you know, especially in the first quarter. There will be some obviously in the second quarter, as well. But I'm talking about not just the normal amount that, you know, we've been doing, putting more into it. It's at the same time, you're right, I think you read it right. We also are getting the ongoing benefits from the cost reduction initiatives that we took out. And we'll get more initiatives and benefits going and we have them, and that will give us a bigger play later in the year.

So if you think about lean productivity as we ramp through a year, we had a great quarter in lean productivity improvements in our fulfillment sites, and then we kind of go through a ramping -- a ramp-up that occurs and we get stronger in the second half of the year, and that was my comments about being more linear and more lumpy. So, we got some timing things going on here. We really have a lot of confidence that we're doing the right things. We've been executing. And we've got to get obviously an economy here that plays with us.

But a lot of what we're out there, we're piloting with our customers both on the financial institution side, as well as the small business side. It's just really encouraging, the response to what we're doing. And based on that, that's why we decided to make a stronger play in the first - especially the first quarter but the first half of the year.

Okay. And you know, just a related question of that. I -- you know, obviously the -- you know, the economy has been mentioned both in the press release and in the -- in your remarks.

With respect to guidance, you know, I would assume that the market's reaction, you know, with respect to your stock today -- you know, probably people look at your guidance for the first quarter and then people look at your guidance for the year and they say, uh-oh, you know, are you all baking in too much of an economic improvement in the second half of the year? Followup to that question, I mean, it sounds to me like you have definitive programs in place. You referred to some of your pilots and that sort of thing, you would expect even without a major uptick in the economy that you would have a better second half than the first half . Am I reading that

You read it really well again, Jamie. Look, I mean, let's go back for a couple of quarters before I even get on that, you know, just the past quarter. I mean, we have been putting investments. We've mentioned the hiring of a world-class leader in e-commerce, and we mentioned, you know, other product management and marketing people we've been bringing into the company.

And, you know, we've been -- we've been putting money in and plowing into it. But what we're really seeing now is as we're getting the learnings out of somebody, this pilot work that we're going through, we're starting to see more and more interest and more enthusiasm. And so what we're doing is we're -- we're turning the crank up more to try to get, you know, the bigger investments so we can get these things coming in the -- you know, as our profile plays out.

What's going to happen economically, obviously, that's anybody's, you know, guess at this point in time. We did see signs of it, we mentioned a little bit at the tail end of the third quarter. We obviously see it in the fourth quarter. And obviously as we're getting out of the gate, we don't know yet, right? We don't know where it's going to go. But you're right.

The programs that we're driving, the things that we're doing, they -- they should be effective, and the way to think about it, Jamie, is there's a huge market out there with that share of wallet, if you go back to the 15% that we only have today. So there's a huge potential in good and bad markets for us to really be able to get out there, and get business. And it's not, you know, some of it could be economic related depending on the short-term buy cycles that people have.

But we just believe that the drivers that we've got in terms of the enablers and the focus on some of these new growth areas for us are really going to help. We've also gotten a nice play from some of the services focus that, you know, I mentioned web site pros. We just think that's another partnership that's going to help us, and there's other things out there that we're looking at and driving, and again, our small business customers are starting to look at us in a different way, as well. So you kind of package all that together and that's why we believe the play isn't -- and unfortunately, you know, the guidance that we put out in the first quarter isn't where we, you know, where everybody like it to be. Well, let me tell you something. We're not running the company for the quarter. And we believe what we're doing is absolutely the right thing. And it's going to pay dividends for our investors and the people that really want to be parts of Deluxe, our employees, our shareholders, you know, and so on and so forth. That's the way to think about it now.

Okay. Thanks very much for your time. I'll let somebody else get on the call. Thank you.

Thank you, Jamie.

Your next question comes from the line of Charles Strauzer with CJS securities. Please proceed.

Hi, good morning.

Hi, Charlie.

Hey, just kind of taking up where Jamie left off a little bit. If we can show that a little bit more on the operating metrics. I know Lee kind of gave a rough send of where operating measures would be - operating profit would be for the direct checks. But I didn't know if you had given out for the financial services or small business where you thought the operating margin targets might be for the next year. And the kind of ramp we should see.

Yeah, I -- Charlie, we didn't give it out. The way I would look at it is if we're going to -- you know, if we're going to be roughly where -- you know, within a point or two of the 30 points on direct checks, and we're going to improve the performance of the company, the way I would look at it is if we're going to stay in the three segments which we are today, we want to make sure that we're improving each of the segments we're in. So I would look at it -- we expect the profile to get, you know, as it gets better through the whole year with the full-year guidance that we have, that it will, you know, there will be some of that benefit that will accrue to the small business services segment. There will be some of that benefit that will accrue to the financial services segment. I would tell you that I -- you know, probably a little more will go in the -- to benefit the small business services segment.

Got it. So the -- you think the majority of the cost-cutting or larger chunk of the cost-cutting savings will benefit small business services?

Because it's a largest segment, Charlie, you know it's almost 60% of the company's revenue, yeah. I mean, you're going to get more benefit there. But I don't want to underscore the continued improvement that the financial services group and the fulfillment people are absolutely rivetted on improving, you know, the cost profiles, its efficiencies as I mentioned in the script in that space, as well. So I would just say some of it is just because of the larger segment, it takes more of a cost. Some of it is just because they are going to get a little more efficiency. But I don't want to underscore the fact that there will be improvements and financial services, as well.

Right. I think if you look your revenue guidance and your EPS guidance for '08, I think you're implying that you're going to see operating margin improvement in both those segments. It's the assumption that I think you guys have to draw.

I think you got it right.

Yes.

Great. And then one quick question for you. What do you call the effective interest rate right now? And also on the -- you know, the remaining debt. And also, when you look at the tax rate in this quarter that just passed, you will see a little bit of a benefit there. Can you explain that again with what happened there.

Yeah. In terms of the effective interest rate and our interest expense, you know, certainly as we have made progress in continued debt reduction through 2007 and the fact that we will continue to pay down the remaining amount on our credit facility as we go into 2008, we will see a -- a modest improvement in year-over-year interest expense. And certainly, you know, the -- the overall effective interest rate where we paid off the $325 million last year, which was, you know, notes that were investment-grade notes at the time at 3.5%, you know, the overall mix changes given that the new notes we issued in 2007 were at a higher interest rate. That effective rate goes up a little bit. But given lower debt levels, we do expect to see a slight, modest improvement in our overall interest expense. In terms of the tax rate and the impact in fourth quarter, maybe I'll let Terry give a little more specifics around some of the opportunities and improvement we had there.

Yeah. Terry actually has a tax director that reports right to him.

Before I do that, I wanted to add one more comment on the interest rate and what the effective rate might look like going forward, too. Charlie, if you were to take basically the three maturities that we have out there, that represent most of our outstanding debt, and did a weighted average calculation on that, you come pretty close to an effective rate for the year.

Excellent.

And then also on the tax rate, we -- as we go into our year-end process, I mean, we file our tax returns on their due date, which is typically September and October time frames for most of our returns. We do a process where we go through and look to do a reconciliation basically what we had estimated from the previous year. So as we did that normal review this year, we had just a couple of items that popped up that gave us some benefit from that process. So there were -- more in the category of one-time items rather than lingering or ongoing items that will have continuing impact.

Great. Okay, great. Thank you very much.

Thanks.

Your next question comes from the line of John Kraft with D.A. Davidson. You may proceed.

Good morning. The comments you made on guidance and your outlook were helpful. But I just wanted to clarify one thing that Rick mentioned. I think you said in Q1 specifically, you expected higher stock comp. And I guess I was hoping you could quantify that.

Yeah, I think the -- the comment, John, that we were referring to as it relates to our operating cash flow, that given the strong performance in 2007, we will have a higher incentive compensation payout from a cost basis --

Okay --

In the first quarter, which is typically when we pay those out. And so that would impact the year-over-year operating cash flow, you know, as I mentioned. We will continue to benefit from higher, you know, earnings growth, as well as continued progress on our working capital initiatives. But that will be partially offset by that payment that will happen in the first quarter.

John, the way to look at it again, you know, if you -- if but it underneath what Rick's saying is that we expect that the operating cash flow, the company's, you know, the 230 to 250 range and being that the 245 is going to be a very strong number, and you strip out the fact that we got, you know, we got -- look, we got to pay people when we perform, and when you really dig underneath that and you think what are we saying, we're saying that we've got a lot of other things that we're driving and we're confident we can deliver on. And therefore, driving a healthy and a comfortable range around operating cash flow.

And the reason it pops up is kind of a noteworthy factor to point out is because of the 2006 performance really. The company didn't hit its targets in the payout which happened in the first quarter of 2007 was actually quite low. So this is really getting it back up to, you know, a higher payout level.

Understood, okay. And then, Lee, you have talked about making tuck-in acquisitions. Given the environment there may be some bargains out there. How is that pipeline looking?

I can tell you right now that we have a group of us inside the company that are meeting regularly, by regularly I mean quite often, and we are looking at a pipeline of, you know, of different capabilities and in terms of helping us with enablers and helping us with more service-oriented things that we can really drive, that help drive the additional revenue growth inside the company.

Really, what we we're trying to do right now, John, is can we get more than one thing. You know, when you look at types of things that we could be doing, can you get what I call a two for three for one. And think about the Johnson Group. What's been so exciting about that acquisition for us is that it got us into the full color space, but we've been able to get business cards into our direct checks business. We've been able to get, you know, bring digital and web-to-print capability to the company.

So it wasn't just like it got us in the full color, got us into several other areas. And that's what I tell you is the focus that we're looking at and the team's looking at on a pretty regular basis right now.

And is there a target as far as some number of deals that you expect to do in '08?

No. We're not -- we're not trying to -- you know, it's not a number. It's the quality of them, and it's, you know, the type of between the organic investments, between the tuck-in-type acquisitions. Just things that are going to help us as we continue to develop the company and, you know, reach for the top-line revenue growth that we all want.

Okay. That's fair. And then in your financial institution business with the price increases, can you talk about specifically where in the market you've been able to push through prices and where you may be able to continue to push through price increases?

Yeah. John, as we mentioned, I forget which quarter it was last year, but we actually -- I think it's by the first quarter, late in the first quarter, we kind of went through a complete assessment of our -- you know, of our -- you know, all of our financial institutions. And we have different contracts work different ways. And where we felt given the -- what was going to happen in terms of the indications we were getting at the time from the postal service on them raising rates. We basically have causes in our contract, contracts that allow us to do that.

So what I will tell you now, this is something that we're always doing. We're always evaluating opportunities to adjust price and -- in each of our segments. I don't want you to think it's just a play that's in the financial services space. So until we actually get through the work and sit down with our customers and -- and actually, you know, work through what all those potential areas, whether they be on delivery, on accessories, on the core checks or, you know, so on and so forth, you know, that's where -- you know, that's probably the best way I can leave it right now.

Okay. Okay. And then last question, a bigger picture, I guess. In the FI division, you talked about how there's really minimal impact in consumer check usage given what's happening in the banks. But what about the push back from the banks regarding signing up for some of your, you know, like your welcome home marketing program and some of these newer things? Are you getting any new push back there because of what's happening there?

John, I mentioned that in here. It's actually -- had a conversation with our head of sales literally about two weeks ago. And I asked him that same question. I mean, given the -- what's going on out in the financial industry right now, how -- is the receptivity that we saw in the fourth quarter, how are we doing? And it continues to be very strong.

And, you know, but are we cautious about -- you know, we tried to lay out a framing on how much we think we can, you know, build upon revenue -- the revenue base that we've gotten, that 2% to 4% range from the new, you know, this new initiatives. But I also mentioned that, yeah, with -- more of a focus on the expected focus on the cost end, it's probably not as big as we thought it could be, you know, probably as much as, you know, two, two, three months ago.

But I would tell you right now I still feel very good about the kinds of things that we're bringing in. Financial institutions and especially when you get into the mid-and the smaller size ones are going to need to differentiate themselves from, you know, from their competitors, their peers. And some of these things that we're working with them on are showing again that Deluxe can partner and be looked at in a much bigger and broader way than just being a check player.

Okay. Thanks, guys.

Thanks, John.

Thank you.

Your next question comes from the line of Piyush Sharma with Longbow research. You may proceed.

Good morning, guys.

Good morning.

Good morning. Firstly on SG&A when you mentioned the performance-based employee compensation, is it the same as the performance share plan?

No. The way that -- the way to think about what we mean by that is we have a -- as I think every company does, has a variable compensation plan, Piyush. But what Rick's alewding to in his comments is really, you know -- alluding to in his comments is really, you know, we pay people on top of their base salary. We do it for management, we do it for the whole company. We have different programs depending if you're in sales or in support areas. But that's really what we're referring to. And again, back to Terry's earlier comment, earlier question, I mean, in '06 we didn't have much it because we didn't -- we didn't perform as a company. So that's really what the big general comment around the performance incentive, you know, comp means.

Okay. Secondly, on small business services, the softness that you've recently noticed, was it more pronounced in checks or in the access region, other printed product business? And then also, do you plan to offer or you've already started offering check access areas in this segment?

What I would say is that it -- it was really in the retailer, again, as I mentioned, in the contractor space. They're -- it's tough to say, it's probably more, you know, a cut of just a general comment. Here's why. There are some places within those segment that we saw last checks, but it can also be timing of when there -- you know, when they're in reorder patterns, too. So our data to use is just not good enough to tell us, you know, where things are at.

But let me give you a classic example of what we were hearing and, you know, we get feedback from many different places here. We get feedback from our outbound calling. We get feedback from our pilot work that we're doing, the broader economic indicators that are out there with small business.

But one of the telling comments, you know, that we saw and it was very, very late in the year, is a lot of our outbound call center people went calling great customers of ours from the past on -- we haven't seen you order holiday greeting card yet this year. What we got is "I'm not spending the money because -- and I'm going to basically e-mail blast all my customers rather than spend money on cards." We also saw more of a shift in the card mix. Meaning, the more oil-oriented cards that people historically buy more, the more, you know, more glitz cards. They were moving more towards ink-based card.

And therefore -- those are the kind of learnings and tellings that we look at when we -- you know, when we look at what's going on from more of an economic standpoint. That's the way I would best explain it.

Okay. And then on your e-commerce initiatives, could you put a little more color on that. What specifically are you doing there?

As I've mentioned in previous, you know, calls, we are not -- we do a lot on e-commerce in our direct checks, you know, business. You know, things come through -- checks comes through the mail, the phone, and electronic commerce. And we also have e-commerce capability in small business services, as well. But we're not yet at the -- at the competitive space that we should be able to get at in this space. So we have to open channels, great inbound, outbound field, and we do have e-commerce capability today. But we have an opportunity to use to be a much bigger, to have a much bigger play in that space than we do today.

And so what we're doing is we've got state-of-the-art -- we've got a great here, first of all, and a great team of people under that leader. And we've got state-of-the-art front-facing customer tools that we're putting in place. We're -- what we're working really hard at is getting all of those glued together with our back-end systems. And remember, our back-end systems have all -- all the work that we have to go through from the -- from the [inaudible] acquisition and all the different brands and so on and so forth. So that's the work right now.

And we're confident we're on the right track. And we feel there is a nice opportunities for the company especially through some -- opportunity for the company especially through the pilot work. Once we get the foundation laid it's going to help us a lot.

Okay. Would you guys have readily available information as to or maybe give me annecdotal information. What happened to your call center headcount in the second half of '07 versus first half of '07? Was it flat, down?

Call center headcount now? It's probably up because we have seasonal people that we bring into the company, Piyush. I mean, the end of the year is bigger even though the holiday cards, though I mentioned it was impacted, we still have a nice holiday card program. So I would say overall, it was probably -- you know, you can't -- looking at the exact headcount at any one point in time, it isn't the only way to look at it. It's the productivity on the people.

Again, I would expect that the end of the year there was more people on board rather than less.

But if you compare our end of the year this year compared last year, we're down total across the company, not just call center, total across the company. Yeah.

Okay. On additional $75 million in cost savings, is it still 1/3 [cocks] and 2/3 SG&A as the $150 million program?

Yeah. I think that's still a good guide post to use.

Okay. And then finally, could you provide some color on the rollout or to flats in the last quarter? I mean, I'm specifically interested if you saw any sequential benefit on gross margins between fourth quarter and third quarter.

Yes. We -- as we - if you think about the third quarter, we were really in the midst of rolling it out into all of our financial institution fulfillment sites. In the fourth quarter, we would have had some benefit after we got the last sites in, as I mentioned on the third-quarter call when we did it from the last site in Kansas City. Yeah, there would have been a little more benefit.

Okay. That's all I have. Thank you very much.

Thank you, Piyush.

Your next question comes from the line of Mike Hamilton with RBC/Dain. You may proceed.

Good morning, everyone. First, just a detailed question. Educate me on your DNA when you look at your expectation of the $23 million in amortization '08, is the $44 million that I'm showing for '07 a comparable number?

The amortization, the $23 million usually for amortization that we talked about was just the amortization related only to the intangibles that we've acquired with companies that we have bought. There are other internally generated intangible assets, too, like software projects as an example.

Right.

You're kind of doing apples and oranges there.

Right. Right. What would we be looking at overall? Reported basis off of the 44 or $45 million that you showed in '07?

Well, the intangibles is about $29 million in '07. The intangible portion of that amortization related to the acquisitions.

Got you. Okay. Yeah, that's helpful. Thank you. Just want to make sure off of guidance on my attempt to mesh progression of year. Basically, you're driving for something in the range of 21% operating margin or better by the time we get to fourth quarter '08 with the seasonality that that quarter typically contains. Is that accurate?

Mike, we haven't given -- we haven't given that specific of information. So we're not going to comment on that at this point.

Is there anything material in other below-the-line items that would change just the natural flow that's got to take place to get to a $3 number?

Meaning in interest income or interest expense?

Right. Right.

No. No. No.

Okay. Yeah. Thank you very much, guys.

You're welcome, Mike.

Your final question comes from the line of (Adam Spellman) with PPM America. You may proceed.

Thank you. Quick question, when we look at - I think you said your check business across all three segments is around 65% or 64% of total company?

Yeah, that's what we reported, Adam, for 2006. We haven't yet, you know, published that number for 2007.

Okay. But just -- using kind of a rough number, that implies there's a pretty good jump. Again, this is no surprise, a pretty good junk of kind of checks sitting within sbs. Is that right?

Yes, yes.

And then obviously, you know, it's very clear, it's a very different trend in the check business between financial services and direct checks. When we think about the performance of the checks business sitting within SBS, is -- what does that performance look more like? Is it more like kind of financial services check business or more like direct checks?

Adam, what we've historically said, and I think this is still stays pretty consistent, is that the 4% to 5% unit decline or checks written decline, which by the way the fed study did come out in late December and the last three years supported I think a 4.1% decline. So very much in line with what we've been publicly saying, and -- but we've also publicly said that the decline is probably more 2% to 3% a year in the small business space, and principally because a lot of small businesses and they continue to tell us, use checks as an audit trail for their bookkeeping purposes. So it actually is a little bit less there, down the 2% to 3% compared to the 4% to 5% that we see in the financial service space.

Okay. And then just to pound everybody over the head one more time, the reason that you're able to - in the financial services segment, the reason you're able to keep kind of flattish or up revenue a little against the 4% to 5% decline in volume is price increases and then kind of new products and upsells?

In the past -- in the -- I think all of 2007 and where we just finished up, yeah. We had -- you're right, price increases and also I would go back to my comments around being able to have a very high retention rate and being able to bring new acquisition business in. Meaning we're getting new customers, as well.

Okay. Question on. SBS. When we look at the trend, say, in the fourth quarter, I understand we have to pull out that business that was sold last year. That kind of get you to flattish looking revenue. But then you've got some foreign currency that inflated the growth rate right and you had a small amount of revenue from an acquisition in the current year. When you pull up the effects and the acquisition of it's material, what's kind of the organic growth rate for the fourth quarter in SBS?

As we mentioned in my comments, Adam, the SBS part of the business was impacted because some of the economic softness that we saw in the fourth quarter. And so pulling out the $13.6 million from the divestiture of the industrial packaging products line leaves you down just slightly. So the benefits from foreign exchange and the little bit of revenue from Johnson group acquisition were slightly more than offset by the economic softness that we saw in the quarter.

We bought the Johnson group in October of 2006. So we lapped most of that period already now.

Okay. Great. Then on the first-quarter guidance, I think I heard this. But just help me out here of three, you know, just to use the mid-pointer guidance, 380 versus 404 last year. And did you say there's still some revenue that we should be pulling out of the 404?

Oh, yeah. Yeah, there's -- as we mentioned in the direction checks business, there's $3 million of weather-related revenue that shifted from fourth quarter 2006 into the first quarter of 2007. And so when you look at the direct checks business, there's -- There's also $3 million in industrial packaging revenue that was in -- before we sold the business in late January, 2007, there was about $3 million and that Rick made that comment as well.

Yeah.

$2 million, $3 million Adam, they're just different things.

Got it. Thanks. And then almost done here. Just your operating cash flow definition again. I think I forgot what you guys said it was - but the number. But what was that again, is that cash flow from operations or --

Cash flow from operations. Right off the statement. Cash flows in our SEC filings.

Okay. Can I just, you know, maybe just final bigger picture question. You step back, you generated a lot of free cash flow last year. Your guidance is, again, a pretty strong free cash flow generation. You've done an excellent job kind of paying down debt. You have low leverage. But yet, you know, your stock's been going the wrong way on you. How do you -- and I understand you made some comment, but how do you think about use of the free cash flow, and, you know, or do you feel like there's more pressure to do acquisitions or buy back stock given what's happened with your stock price?

Yeah. No, we certainly don't -- we take into consideration all the opportunities there for, you know, deploying cash effectively to drive value for our investors. You know, our priorities for those uses of excess cash are -- are focused primarily on investing organically. We've talked a lot today about some of those areas where we're investing organically to drive growth, as well as potential tuck-in acquisitions. And Lee has made several comments on that robust pipeline that we're continuing to look at and work. And beyond that then, you know, there are other options for us in using that excess cash, share repurchases or an opportunity, as well as, you know, our Board and with management, we continue to look at our dividend levels for the company. We are in the near term restricted by the restricted payment basket. But it will really, you know, primarily focused on investing organically and potential tuck-in acquisitions.

How big is the restricted payments basket?

Excuse me?

How big is the restricted payments basket you just mentioned that restriction --

It grows over time. That's on file with the SEC in the latest documentation with the notes we issued in May of last year.

We've gone just a little past our time now. We're going to have to cut the calls off at this point. Gina, can you come back on the line and provide the closing?

Sure. In the interests in time, that concludes the Q&A session. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.