Deluxe Corp (DLX) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter Deluxe Corporation earnings conference call. My name is Madge, and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end this 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, VP of Investor Relations and Chief Accounting Officer. Please proceed, sir.

Thank you, Madge. Welcome to Deluxe Corporation's 2008 third quarter earnings call. I'm Terry Peterson, Deluxe's Vice President of Investor Relations, and Chief Accounting Officer.

Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer, and Rick Greene, Deluxe's Chief Financial Officer. Lee, Rick, and I will take questions from analysts after the prepared comments. At that time, the operator will instruct you on how to ask a question. In accordance with regulation FD, this call is to all interested parties. A replay will be available via telephone and Deluxe's website. I will provide instructions for accessing the replay at the conclusion of the teleconference.

Before I begin, let me make a brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management's 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 future 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, 2007. 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 second 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'll turn the call over to Lee Schram, Deluxe's CEO.

Thank you, Terry, and good morning, everyone. Given the challenging economic environment, we are generally pleased with our performance in the quarter, and our solid earnings per share in the cash flow results. In this tough economy, we were able to weather the storm and exceed the top end of our adjusted earnings per share outlook range and also showed improved operating margins over the prior year excluding asset impairment charges.

With the changing economy and financial crisis, we focused on basic blocking and tackling in our core check businesses by continuing to extend contracts and further stabilizing margins while at the same time we had our best quarter ever on new, noncheck revenue. In early September, we announced the further cost-reduction program and have already initiated aggressive implementation actions in all targeted areas. At the same time, we continued to invest in our future with progress in many revenue growth initiatives, including e-commerce, where even with declining industry visitor traffic, we actually are showing growth in site visitors. Plus, in [verticalization], loyalty, retention, fraud and security, and new business services including payroll services, logo design, web services, and business network.

In this difficult market and because we already adjusted our previous outlook given projected trends, we are pleased to be able to roughly maintain our overall adjusted earnings per share outlook for the total year even with the revenue range decline. We are prudently managing our company, closely monitoring the small business and financial institution markets, and rivetted on strong free cash flow generation while offering a very attractive dividend.

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

Thanks, Lee. Earlier today, we reported diluted earnings per share for the third quarter of $0.27, slightly lower than the range in our recently communicated outlook due entirely to the unexpected noncash asset impairment charges of $9.7 million, which were caused by the recent turmoil in the broader US capital markets. Our results also included $21.9 million of expected charges for restructuring-related activities. Excluding the $0.38 per share impact of these charges, adjusted EPS of $0.65 was $0.05 favorable to the upper end of our initial outlook from July.

Revenue for the quarter came in at $366.2 million with continued softness in small business services, primarily in our US distributor and Canadian businesses. We also saw a slow start to the seasonal holiday card business. Despite the revenue shortfall in SBS, our core personnel check businesses met our expectations. Excluding the impact of the charges, operating margins for the quarter were stronger than expected, driven by a favorable shift in product mix, spend reductions, and earlier than expected savings from our cost initiatives.

Operating cash flow in the quarter totaled $79 million, which was over $20 million better than our expectation due to the timing of contract acquisition payments and favorable working capital initiatives. In the third quarter of 2007, we reported diluted earnings per share of $0.62. The 2007 period benefited from higher revenue and lower restructuring and asset charges, partially offset by higher performance-based compensation in 2007 and additional cost savings in the 2008 period. Adjusting for the restructuring and asset charges in both periods, earnings per share were comparable to last year.

Companywide, revenue in the third quarter totaled $366.2 million, down 5.8% from 2007. The year-over-year decline was due to weakness in the economy, primarily in SBS, as well as lower volume in our personal check businesses and lower revenue per order in financial services. Gross margin for the quarter was 58.3% of revenue, down 4.8 points from 2007.

The restructuring-related charges reduced growth margin by 3.5 points. Lower pricing and financial services also impacted our gross margin. As you may recall from our last quarterly call, we implemented a price increase in financial services in October which will help going forward to offset recent rate declines.

Selling, general, and administrative expense decreased $17.6 million in the quarter and was 44.9% of revenue compared to 46.9% in the same period last year. Benefits from continued execution of our cost reduction initiatives and lower performance-based compensation contributed to the improvement. Restructuring-related costs and asset impairments for the current period were $31.6 million or $0.38 per share. The restructuring costs relate to our recently announced plans to close three manufacturing facilities and one call center, plus streamlined portions of our business support and shared services functions.

Asset impairment charges of $9.7 million relate to the writedown of three trade names, primarily due to the effects of recent broader US market conditions on our assessment of fair value in relation to these assets. As a result, operating income in the quarter was $30.3 million, compared to $60.7 million last year.

Next, let's cover a few highlights in each of our three business segments. In small business services, revenue of $216.4 million was down 4.2% versus 2007. Revenue in this segment was unfavorably impacted by continued economic softness in the quarter, particularly in our core checks and forms products, partially offset by the contribution from the Hostopia acquisition and organic growth in fraud protection services. Operating income in this segment was $10.3 million or 4.8% of revenue, compared to $30.2 million in 2007. The quarter's results include $20 million of restructuring costs and asset impairment charges, which reduced operating margin by 9.2 points.

In financial services, revenue was $103.8 million, down 8.1% versus the third quarter last year. The decline was primarily due to lower revenue per order given the competitive pricing environment. Check order volumes declined 3.7% year-over-year, although nearly half of this decline was due to one-time check conversion volume in the 2007 period. Financial services operating income was $7.1 million for the quarter or 6.8% of revenue, down from $16.7 million in 2007. The quarter's results include $10.8 million of restructuring costs which reduced operating margin by 10.4 points.

Finally, direct checks revenue totaled $46 million, down 7.6% on a year-over-year basis due to continuing declines in check writing. These reductions were partially offset by higher revenue per order from recent price increases. Operating income in this segment was $12.9 million for the quarter or 28% of revenue, up slightly on a percentage basis compared to last year. Again, restructuring charges of $800,000 in the quarter reduced operating margin by 1.8 points.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $885 million, compared to $844 million at the end of 2007. Cash provided by operating activities for the first nine months was $145 million. The decrease from last year was due to a higher 2007-related incentive compensation payment earlier this year and lower net income, partially offset by lower income tax payments and progress with our working capital initiatives. Capital expenditures in the quarter were $7 million, and depreciation and amortization expense was $16 million.

Looking ahead to the fourth quarter of 2008, we expect revenue to range from $375 million to $390 million. Diluted earnings per share are expected to range from $0.64 to $0.74, including an estimated $0.03 of restructuring-related costs. On a full-year basis, this would result in a revenue range of $1.49 billion to $1.505 billion and diluted earnings per share of $2.07 to $2.17, including an estimated $0.44 of restructuring and asset charges, $0.41 of which relate to the third and fourth quarters.

There are several key factors in addition to the impact of recent acquisitions that distinguish our 2008 outlook in comparison to the fourth quarter of 2007, including continued economic softness in the small business services segment and declines in the personal check businesses driven primarily by fewer checks being written, project costs of $2 million related to restructuring activities, continued execution of the $250 million cost and expense reduction initiatives, net of investment, and an effective tax rate of approximately 35% which equates to a full-year rate of 34%. We expect operating cash flows to range between $185 million and $200 million for the year, reflecting lower earnings, partially offset by continued progress on working capital initiatives. We expect contract acquisition payments to be approximately $20 million. Capital expenditures in 2008 are expected to be approximately $30 million, and depreciation and amortization expense is expected to be approximately $65 million including $26 million of acquisition-related amortization.

Let me conclude with a few comments on our capital markets activities. As previously noted, we funded our recent acquisitions through cash and draws against our current credit facilities. Additionally in the quarter, we repurchased $7.9 million of common stock, once again, nearly depleting the capacity under our restricted payments basket. As a reminder, this capacity rebuilds as we generate net income.

Even with these actions, we believe we continue to have reasonable access to capital in order to fund operations and execute our strategies. Our priorities for uses of cash remain investing both organically and in small to medium-sized strategic acquisitions to augment growth, and we also proactively evaluate other opportunities to create shareholder value. To the extent we have excess cash after these priorities, we intend to pay down the remaining balance on our credit facilities. 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 what we are focused on overall, then highlight progress in each of our three segments, provide an update on our cost-reduction program and close with a perspective on where we are heading as we wind down 2008 and look towards 2009.

Especially now during these challenging economic and liquidity crisis times, we understand that it is critical for us to be able to stabilize core checks and business products while over time demonstrating an ability to drive sustainable revenue growth. In order to sharpen our focus and align key leaders and capabilities, we continue to target five key areas.

First, financial institutions and our core check capabilities, plus growth outside of checks in loyalty, retention, market intelligence, and fraud monitoring and protection offers. Second, direct to the consumer and growing check share. Third, small business core business products sold through enhanced e-commerce capabilities and an improved vertical customer focus. Fourth, higher growth business services, including logo design, payroll, human resources, business networking, web hosting, and other web services. And fifth, cost reductions and simplification, where we expect to continue the solid work already underway as part of our $250 million cost reduction initiative.

Now shifting to our segments. In small business services, as expected, economic softness continued to impact our business. Short falls to our third-quarter outlook occurred late in the quarter, primarily in Canada, and in our distributor business driven by imaging and promotional products in the construction, financial services, and medical verticals. We also saw a slower start to our holiday card season that we are now prudently forecasting will continue through the balance of the year, even though purchases may only be pushed back to later in the season.

Positively, we saw growth in payroll services, a continued ramp in our EZShield check protection service and in logo design services, growth in e-commerce visitor traffic where we continue to add content and capability, growth in business networking members from partner up, and a solid start in web services from our Hostopia acquisition where they again grew at a double-digit rate year-over-year. We also are already starting to see a synergistic ramp in our Deluxe customer base purchasing Hostopia web services. Hostopia also recently won a new web services order from a very large European teleco that will begin to roll out in the first half of 2009 on a pan-European basis.

Given the state of the weakening economy, where we know small businesses are being impacted with less businesses starting up and more eliminating or delaying spending, it is clearly more challenging for us to forecast revenue. And because of this, we have widened our revenue range. For the most part, we are only seeing slightly more of a declining trend than our previous outlook right now, and principally in holiday cards, and imaging and promotional products. For these reasons and also due to a fairly significant movement in the Canadian dollar, we are adjusting our revenue outlook for the balance of the year.

In financial services, we continued again this quarter to proactively extend several check contracts. We now have all but one large contract extended not only through this year but also through 2009. Completing these extensions helps lock in newly-based check revenue streams. It also allows us to now focus on winning several competitive national accounts which will be starting their RFP processes in the near future.

Again this quarter, we continued to see strong overall new acquisition rates, especially in the credit union space, and our retention rates also remain strong in excess of 90%. We continue to simplify our processes and take complexity out of the business while reducing our cost and expense structure. Starting in early October as planned, we rolled out a regular price increase that will drive both revenue growth and operating income.

The banking crisis is having some impact on our business. We did see softness in WaMu check orders starting in the middle of the quarter, most likely due to the lack of new demand deposit account-holders and current ones leaving as reported externally. But on a positive note, WaMu was purchased by another of our key customers, Chase. Given Chase's solid reputation, we expect this exodus will settle down for WaMu demand deposit account-holders and not have a significant impact on our business going forward.

It is early to understand any potential impacts on Deluxe from Wells Fargo's acquisition of Wachovia, where today we have approximately 35% of Wachovia's check business under a long-term contract and we are focused on continuing to provide exceptional client service. We also believe that as we have become better positioned in community banks and credit unions where it has been reported that more consumers are shifting their deposits, that this trend may have a positive impact on our check business.

In addition to our strong core check revenue, we made progress again in the third quarter in advancing new noncheck revenue growth opportunities. We grew revenue sequentially over the prior quarter and over last year in our noncheck loyally, retention, and fraud monitoring and protection solutions. Building off of the knowledge exchange expo and regional workshops, we introduced six new internet-based offers for financial institutions that have been positively received thus far. Although we continue to see momentum building in these new noncheck revenue initiatives, we also see decisions by financial institutions taking longer, with more approval levels and a focus on spending less. In direct checks, our revenue was basically in line with our expectations, and we had another solid operating margin in the quarter, coming in at 30% excluding restructuring-related items. We continue to look for opportunities to provide accessories and other noncheck products and services to our consumers.

In addition to these actions in each of our segments, here is an update on our cost expense reduction initiatives. The plan has now been increased to target a $250 million reduction through 2010, where $50 million net of the restructuring charges is expected to be realized in 2008, on top of the $105 million already realized from 2006 and 2007. We expect to realize $60 million in savings in 2009 and $35 million in 2010.

Overall, we had another solid quarter, delivering slightly more than expected in the third quarter and we remain on track to deliver the $50 million expected this year. As we have consistently indicated, the 2008 reductions are not linear on a quarterly basis with 40% of the reductions in the first half of the year, 30% in the third quarter, and 30% expected in the fourth quarter excluding the impacts of the restructuring charges. Also, approximately 50% to 60% will fall to the bottom line. The percentage was lower in the first half as we more aggressively invested in new, noncheck revenue solutions in key enablers, but ramped in the third quarter and will continue to ramp in the fourth quarter, although some duplicative costs will be incurred in the fourth quarter of 2008 as well as the first quarter of 2009 as we start to close down and transition three fulfillment centers.

Here are some highlights of the key construction activities for the third quarter and continued areas of opportunity as we move forward. These are in addition to the ongoing savings that are occurring 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 process centralization, simplifying business processes, platform and tool consolidation, and leveraging e-commerce and vertical segmentation capabilities.

During the quarter, we completed the closure and building sale of our Flagstaff call center, and we also completed smaller reductions in several other call center locations. We also announced plans to close another call center in the first quarter of next year. Our externally led review of our call centers mentioned in the first-quarter call with the objective of continuing to improve productivity also continued in the quarter.

For fulfillment, we had a strong quarter with lean productivity improvements and direct spend reductions. We also announced in early September the closure of three fulfillment sites, two of which are targeted to close the end of the first quarter, 2009, and the remaining one late in 2009. We continue to invest in completely automating our flat check package processing, which we expect to have completed by the end of 2009. And 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 continued to make good progress in information technology driven by data center constructions, and other system utilization, networking, and voice communication efficiencies, as well as in finance, human resources, and real estate. For the balance of 2008 and in 2009, we expect to continue to reduce costs in all areas as opportunities exist to centralize, streamline, standardize, and improve efficiencies. In the fourth quarter, we expect the economy to be slightly more challenging than previously anticipated, which is why we have reduced our revenue projections. We expect continued strong execution on our cost reduction initiatives, stability in our core check revenues, more meaningful revenue contributions from new noncheck revenue offers and key enablers, and some revenue growth from our logo, web services, and business networking acquisitions. We are also focused on generating strong operating cash flows.

Looking ahead to 2009, we believe that our portfolio is becoming better positioned to deliver sustainable future revenue growth opportunities through stabilization in the rate of decline in our core check businesses, adding existing organic initiatives such as shop Deluxe and verticalization, and in strategic additions in new business services including payroll services, logo design, web hosting, and business networking services. In a more normal economy, we believe this would position us for a roughly flat top line in 2009, and the 5% to 9% earnings per share growth we initially indicated in our early September press release, and solidly into mid-single-digit revenue growth and double-digit earnings-per-share growth over the medium term.

However, given the weakening economy and still-looming financial crisis right now, we believe it is prudent for us to closely monitor the marketplace over the next three months before providing a firmer, more accurate outlook for 2009. As indicated in my cost reduction update, it is important to realize starting in the fourth quarter of 2008 and through the first quarter of 2009, we will be transitioning and then closing several fulfillment sites, and our costs will actually increase somewhat given in effect duplicative transition work associated with completing these actions. There will also be one less business day in the first quarter of 2009 than the first quarter of 2008.

Right now, we believe Deluxe has demonstrated its value as a discipline and stable company in these challenging economic times and that we have made positive strategic moves to reposition the Company for sustainable, longer term growth, while currently generating strong cash flows and a very attractive dividend. Now, operator, Rick, Terry, and I will open the line for questions.

(OPERATOR INSTRUCTIONS.) And your first question comes from the line of John Kraft from DA Davidson. Please proceed.

Good morning, gentlemen.

Good morning.

Wanted to first ask about your recent mention of WaMu and Chase. Is it your experience that the acquired -- the acquiring institution typically goes out and buys new checks for the acquired customer base?

Yes. Generally what he you'll see lots of times, John, is a repapering that will go on to get the Chase brand in this particular case -- having taken -- before eliminating the WaMu brand, going to the Chase brand. We've had some preliminary discussions with Chase at this point in time. But we haven't really gotten far enough along is probably the best way to frame it.

And typically also when -- these are obviously both big customers of yours, but when customers get bigger, pricing discounts tend to come up. Has that also been in the discussion?

No. We have a firm contract with both Chase and WaMu at this point in time. We haven't had any additional discussions on that at this point.

Okay. And then regarding the contract acquisition payments, it looks like you're expecting a pretty big increase in Q4. You also mentioned that there's just one left as far as contracts that need to be renewed for all of 2008 and 2009. Is that fair to assume that's what's going on there?

Yes. I think you've picked it up right. And John remember, too, some of this is just timing when we lock in these other contracts -- the timing of when those payments occur. Think of it as sometimes when we lock in contracts, the timing of those payments don't all play out at the exact time that we lock in the deal. I think that's the way read it.

Okay. The restructuring charges in Q4, where specifically -- which segment do you expect that $0.03 to fall?

The way I would think about it, John, is most of it is -- since the largest segment is small business services, most of it will fall in the space account on a percentage base.

Okay. Last question -- when you previously talked about the 5% to 9% increase for '09, had that assumed any wins given that there are a handful of larger RFDs out there?

No. At this point in time, the reference to the number of national RFPs that are coming out in the near future, and we confirmed that those are still out there and will come here, probably over the next I'd say, three to four months. No, we did not bake that into that thinking.

Okay. Thanks, guys.

And your next question comes from the line of Charles Strauzer from CJS Securities. Please proceed.

Good morning.

Hi.

Picking up where John left off a little bit. If you talk about the customers and the contract acquisition payments, when you first came on board, Lee, one of the initiatives you had had laid out was seeing if you can get those payments to either go away, spread out over the life of the contract, maybe lessen the cash flow output impact. Have you seen any banks being willing to that with you, or are they still aggressive on that front?

Absolutely, Charlie. We're seeing them willing to do that. The way I would look at it, we're forecasting $20 million.

With all the deals that we've now locked ourselves up so to speak, and I think the number last year was somewhere around $15 million, so it's still a -- we're still able to work with the financial institutions and in many cases, and be able to try to come up with more creative ways to not have that up-front payment. I wouldn't read this as anything signaling a new trend or anything. I think this is -- some of it is -- we're continuing to have these and moving along. And there is some -- there's just some timing issues with how the payments play out.

Charlie, by contrast, that number actually peaked in excess of $70 million in 2005.

Got it. It's come down significantly. Got it. Lee, on the cost center side, I know that you've been paring that down a bit. Where would you that leave when you close down the facilities you're closing down. With how many facilities you've got open, do you think you have ample capacity to continue to provide that high level of support service to your banking customers and reach out more proactively on the new generation side? Are you -- do you have the adequate staffing that you think going forward?

Absolutely, Charlie. We've been planning and one of the great things that Deluxe has done, long before I got here, is they are absolutely incredible at looking at capacity and productivity. I've been fortunate enough with Rick to just -- in that piece of the cost restructuring to jump in there and follow their lead so to speak. I think we're doing a great job at looking at that, staying ahead of it and being as aggressive as we can.

But we never take our eyes off the customer and making sure that that is -- servicing the client with exceptional support is what Deluxe is all about. I think we're doing a great job on that. We would not do anything that would damage the relationships that we have customers, but we also believe that this is critically important as you see the secular decline in checks.

You asked how many that will leave us with. That will leave us with probably 11 or 12 when this last one gets closed.

11 or 12 --

For call centers.

Yes. Got it. Rick, one small housekeeping questions. Maybe you've got the answer. If you look at the $0.65 as adjusted number for the quarter, what implied tax rate are you assuming in there to get back to those expenses?

Just about a little over 32%. There is a big benefit that came with the size of the restructuring impairment charges that brought that down and diluted some of our one-time items.

Got it. If you go to that 32%, you get back to the number.

Charlie, what's important there though, is we expected to get -- we had indicated on our last quarter call that we expected a lower rate in the third quarter. Not just from the restructuring, we didn't know that when we put the third-quarter guidance out in July. But we did expect the rate to be lower in the third quarter overall. It wasn't like this was a big surprise for us.

Yes. A little over 32% was -- pretty much in line with our expectations for the quarter.

Right. That's -- trying to figure out the tweak on that. That's great. Thank you very much.

And your next question comes from the line of Jamie Clement from Sidoti. Please proceed.

Lee, Rick, Terry, good morning.

Good morning.

Lee, can you give us a little color in terms of the acquisitions that you guys have closed this year. What integration activities you accomplished during the third quarter, what work you still have to do for the rest of the year.

Let me start with the Logo Mojo acquisition, because we got this done the end of April. I am really pleased with this. We are starting to see what I call the synergistic revenue ramp. Giving our customers access to Logo Mojo's design services and we are -- every month in the quarter, we saw more revenue, synergistic revenue coming our way. These are still small numbers at this point. But the -- what it's telling us is that the momentum we're looking for as we go through the third quarter and head into the fourth quarter is on track with what we wanted when we decided it was a prudent thing for us to acquire here.

The second one I'll comment on is -- since we get it done next is Partner Up. I would tell you that the last probably three weeks or so, the momentum and the energy -- we've got to know each other. We actually took and brought their group which was on the other side of the twin cities into the building. And the ability for us now to see a ramp in members, and that's key for us now, the more we can get members -- small business members into that business networking environment, is key for us.

The last three weeks have just been a significant increase compared to the first three weeks when they were with us. I'm very encouraged by that. And again, it's a normal honeymoon period you go through and get to know people so to speak on both sides.

And finally Hostopia. Again, I made some comment in here. They did a terrific job again, delivering double-digit growth against what would be their prior-year period if you look at them on a fiscal Q3 basis. What we've got now in place, Jamie, is a good synergistic plan for how to bring their services into our customer base. And it took a few -- I would say it took several weeks to just work with each other to try to figure out how best do we do that. But now, I think we've got a cohesive game plan. We are already to see our customers buying Hostopia web services.

The great news is they're doing what they've done all along, and that is getting more of the telecos, more of the cable companies, and signing more of those up. We had a nice-size win here in Europe in the quarter again, that will pay dividends as we get into the 2009 timeframe. We're real excited. These people are everything we said they were when we acquired them and we commented on them in the last call. And I'm just real proud of Colin and all the Hostopia people. It's just been a great start.

And Lee -- there is a related followup question. The ShopDeluxe.com site that you all have -- to me, looks a lot more robust than it did six months ago. And I know you have some banners there that are linking one some of your acquisitions and that sort of thing. Can you talk a little bit about the business plan of that platform specifically? What you hope to accomplish. Because there are some -- there's some similar services out there for small businesses. And yours is different. I'm curious how as you've had a little bit of time with acquisitions under your belt and refined your strategy. What is does that strategy exactly look like? What should we expect the next couple of years there?

I think the way to think about it is we are -- I mentioned in my comments that we are working on getting more content and more capability into ShopDeluxe right now. What I also would tell you in the quarter that happened, Jamie, is we absolutely got what I called button down between the our small business segment and our IT shop. We have dates on when we need to get things in, in terms of adding content, adding capability.

Our desire is to get all of our -- basically our internet, e-commerce capability in ShopDeluxe. We don't have that all today. As we get into the balance of the fourth quarter, into the first half of next year, we'll be adding more and more content in there. What we'll also be doing is adding more, what we call personalization capability. Bringing all of -- yes, others have a lot of this.

But what we think that we have that is unique is bringing that Hostopia, Logo Mojo, Partner Up, and then the personalization capability that we'll be incorporating into that site, as well. We think it does make what we're doing unique. In terms of not only a lot of offers that we can offer for our small businesses and business networking capability, but also the ability to do a lot more personalization which is what separates small businesses from other small businesses. I think that's the way to think about it, Jamie, as we move forward.

Okay. Final question, just on the cost savings trend. I know there were some comments in your prepared remarks.

Am I to interpret those remarks as saying that as you -- you have two facilities if I'm not mistake that are closing in the first quarter. One in the second quarter. It sounds to me like in terms of bringing margins to the "Next Level" -- whatever that level is and obviously, leaving out the vagaries of the economy that this is one of those things where it's -- the next level may come second half of 2009, not first half of 2009. Am I interpreting that right?

A couple comments back, we're going to close two in the end of the first quarter and one will not be in the second quarter, will probably be in the latter half of the year.

Okay. My bad. Sorry.

Yes. I think the way you should think about is -- I want to make sure that we're clear in that as these -- this work gets done to get the transitions done and then closed down that, yes, I would expect -- we haven't quarterized out the $60 million next year at this point. We're working through that. But yes, I think it's fair to assume that there's going to be a ramp that will be later in the year rather than at the beginning of the year.

Yes. The reason I'm asking is because it sound like with what happened with guidance when you reported your fourth quarter of 2007 earlier here in 2008, it sounds like there maybe a similar phenomenon that -- with respect to how the cost savings balance out in the year. It sounded like you were trying to make that clear. I wanted to make sure I was hearing properly with some of the confusion that we had heard earlier.

You read that very well. It doesn't mean that we're not going to get costs out in Q1, Jamie.

Sure.

It means that, yes, from a timing standpoint we're going to -- it doesn't mean that it's not going to be seeing improvement in each quarter so to speak. You're right, more in the back half of '09 than the front half.

Sure. No problem. I appreciate the clarification just so that three months from now, there isn't a whole heck of a lot of confusion. I do appreciate that. Thank you very much.

Bye, Jamie.

And your next question comes from the line of Adam Shulman from PPM America. Please proceed.

Thanks for taking the call. And thanks for all the detail as usual. When we look at the revenue trends, can you help us out with how big Hostopia was in this quarter? I know you commented that the growth rates have been pretty good there.

The way I would think about it, Adam, is it's -- they're roughly -- if you take a full year, they're roughly a $30 million business. We were -- you could see that in terms of what they were looking like when they were a public company. If you divide that by four and then divide that by that -- take two-thirds of that number for the quarter because we had them for almost two months, that's the way to think about the math.

Okay. It was pretty small in this quarter actually. Okay.

It will ramp more because in the fourth quarter because we'll have them for a full quarter.

Okay. And just -- looking at the -- at a very high level, looking at the revenue change and the third quarter, somewhere around, say, down 6%. Then looking at your guidance, maybe somewhere down, say, 6% to 8%, around that level. In what we're hearing from the other companies about small businesses and all of the economic and confidence -- consumer confidence issues all over the newspapers. Is there any reason to think or what makes you guys think that top-line rates won't be similar to what we've see in the fourth quarter for 2009?

I think several things here. First of all, and again, I'm not going to get into 2009 at this point in time. I think the way to think about 2008 is if you look at the prepared comments we had, a lot of what small businesses still are out there buying is checks and forms. And they need to invoice to customers, they need to do tax forms. There's some -- I call them less than nondiscretionary items. There's discretionary items which are causing more of the problems for us right now with the holiday greeting cards and the imaging and apparel and proposal-type products. That's the way that we try to look at our forecast and the trends, and where things are headed at this point.

If you go into next year, to my comment about why in a more normal economy would we expect a flattish top line, we have the ramp that's going to occur from having all these acquisitions under our belt for a full year. When you look at Logo Mojo and Partner Up and Hostopia, as well as the continued ramp in the Johnson Group and Full Color, those start to help us in the year-over-year comparison. That's the way you need to think about it as you go forward.

In the way we're forecasting it, and we're staying very tight with this now. We're watching trends literally every day to the extent that we can. We're giving you the best view we can at this point.

Have you seen any change in bad debt trends on the small business side?

We have -- we were commenting on this as a team a couple of days -- last couple of days, we have our -- continue to have our strongest DSOs that we've ever had. We are very focused on this right now. Yes, you have parts of small businesses -- sometimes when you see -- and then probably a little bit more blip here. But I would tell you, it's nothing that's alarming at this point. Our DSOs continue to be very strong.

Great. And then do you have the color -- on the financial institutions is very helpful. How much of the Chase business do you have?

All of it.

All of it. Okay. And then -- somebody had mentioned some RFPs. I had missed. That is that for the large checks or for other business?

Checks.

Okay. And have you seen -- on the core financial institution check business, have you seen any different -- in the competitive landscape now that it's really just the two of you guys have so much of the market?

Different as far as?

as there been any different approaches in terms of what the Harlan Clark business has been doing, post their merger?

I would ask you to talk to Harlan Clark about that.

Okay. Just so I understand your cost reduction slide, basically what -- is the way to read that that the incremental -- the difference between each of those successive years is what we should think about rolling into the current year?

You read it right. That's correct.

Okay. And -- then finally, just on the strategy, you've obviously -- you guys have made some acquisitions this year, and you've -- it sounds like continuation of that strategy next year. Are there things out there that you think are interesting and the right size? You feel like valuations have gotten more attractive?

Yes. I think I've been pretty consistent on -- we continue to look for ways to get stronger in our company. There are opportunities out there that we're continuing to work -- should always be looking at ways to organically as well as [ineqivocably] grow your company. I would tell you that we have not -- we don't want to do things that are foolish. And we won't do that. But we are prudently continuing to look at opportunities, and we will continue to do that as we move forward.

All right. Final question just on free cash flow in the balance sheet. I think what you said was if there's cash left over after all this other stuff, you would probably look at repaying the revolver. Obviously you have -- you guys have a strong balance sheet.

However, it's a pretty wild world out there. A lot of companies' debt is trading at stress levels. How do you look at that? Do you think there's any opportunity to buy bonds back in the open market? Or how do you look at -- I think you have one of your revolvers matures in 2009 or 2010. Have you thought about that at all?

Yes. As we continue to really remain focused on generating strong cash flow and as I laid out in my prepared comments there that our priorities for uses of cash remain investing organically and in potentially some of the small to medium-sized acquisitions to augment growth there. Beyond that, we will remain focused on paying down our credit facility with the modest draw that we have on that there. You're correct that we do have a maturity in the credit facility coming up in mid-2009. As we get closer to that time period, we're considering all options there in terms of how we move forward with the credit facility and the amount of the size of the facility that we'll need going forward.

Beyond that, we have no long-term maturities coming until 2012. We feel we've really created the right financial flexibility with certainly with reasonable access to capital to execute our growth strategies going forward. Our focus is on driving growth for the Company. Looking at open market purchases on the longer term maturities is not something that we're considering right now.

Okay.

Adam, we've got to let some other caller get on here.

Right. Thank you very much.

You're welcome.

And your next question comes from the line of Mike Hamilton from RBC. Please proceed.

Good morning.

Good morning, Mike.

A couple of small ones first. Could you comment at all on the Canadian dollar, foreign exchange, in terms of anything you do hedgewise and how to think about that.

We don't hedge, Mike, basically. You think of what's happened here -- the end of the quarter, for September or for July when we put the guidance out. It was at 0.97. This morning trading at 0.80. It's actually a bigger impact than you think. We have not historically hedged because we haven't seen these significant spikes or movement in the US to the Canadian or vice-versa.

Right. On the tradename writedowns in the quarter, can we infer from that that your annual review of goodwill has taken place here?

Yes. We do that in third quarter of each year.

What we've seen there, we are done for '08?

Yes. Unless there are triggering events going forward. We normally -- yes, the annual review is completed.

Right. Thanks. Could you be -- you mentioned a couple of verticals where you've seen particular weakness in small business in the environment we're in. Could you walk through how you look at the business in terms of industry sectors that you serve and what you're seeing this the trends there?

Mike, the comments that I made were specific to the distributor sector, okay. When I made the comments about the construction and the medical and the financial services, that was for -- that was specific to that distributor sector. General what he we do, Mike, is we look at retailing, and we look at obviously financial services. We look at manufacturing, wholesalers. We look at contractors. We look at professional services, physicians offices, dentists, so on and so forth.

That's how we try to look at it. We try give some color on where were we seeing the distributor issues just to give more clarity because generally you guys like that kind of stuff. When we have it and we're clear -- we've got clear trends and we see -- we try to put that out there. That's the best I can probably give you at this point.

No, thanks. I appreciate it. A follow-on to that, how do you think about new customer additions and customers falling off in small business from 30,000 feet? How do you track that and -- and to the degree that you comment trends you're seeing there?

We haven't gotten clever enough yet, I guess the best word to put around it, to see the comments that we're getting back. The feedback we're seeing from many different avenues that we get, whether it's published information or information we get from our call centers and so on and so forth. But we haven't yet taken down to say, well, it's happening faster, Mike, in retailing than it is in contractors than it is in other areas. I can just honestly tell you, we're not that good yet to be able to give you that kind of clarity.

Sounds like a project for Terry to head up.

He's smiling.

Thanks, Mike.

Yes. Thanks. Appreciate the help.

Okay, Mike.

And your next question comes from the line of Atin Agrawal from Longbow Research.

Good morning. Guys, can you give us a sense of how much was the price increases in financial services, and were those implemented this month?

The best I can tell you is that -- this was asked last time. We can't give you an overall view. Here is why. Wach contract that we have literally with all of our banks has different clauses and different parameters around what we can and can't do. I can't say on average it's X or Y because it doesn't really work that way. The best I can give you is that we've done all the diligence we can within our contracts, and it's really across the product scope as well as the delivery scope.

Okay. That's fair enough. My second question is given the environment that we are in, do you see opportunities to gain market share in some specific products?

As far as which segment or -- ?

Yes. Specifically if you see -- you can go more aggressive on some of your segments and some of the product line just because of the economic slowdown.

The way I would look at it is we -- again, in the prepared comments, we are absolutely in the financial services segment focused on continuing to lock down deals that we have, extend those contracts, and go win competitive accounts that are out there. And we're not -- we're also trying to make sure that we win those nonprice. We want -- it's always important. Look, this is the business we're in. But we're trying to win them with wrapping around the -- everything that Deluxe can bring to the table.

We bring all of our loyalty, our retention, our fraud, our security, our small business initiatives and wrap those around the financial institution. We're trying to do that. In the small business space, we're trying to add content and capability that our customers are asking us for -- around the logo design, the web design, the web hosting, and so on and so forth. Absolutely, we're focused on being out there and competitively being a big player in those in those particular spaces. In addition to winning the checks and the forms and the promotional products, and apparel and so on and so forth where we've always been focused.

Okay. Great. That's all the questions I had. Thank you.

Thank you, Atin.

And your next question comes from the line of Todd Morgan from Oppenheimer and Company. Please proceed.

Hi, this is grant [Grant Andy] for Todd Martin.

Hi, Grant.

Hi. With the financial services price increase, if I could ask a different way. Do you expect the increase to offset the decline in revenue? There was a decline in volumes, but will the price increase offset that?

The way that you need to look at this is -- we believe that there will be a continual decline in the percentage of checks written, and we continue to believe that using that 4% to 5% is a good metric for that. We also believe that the concession rates or the discounting rates will continue over -- as you go forward, as well. It's just the nature of being in this kind of business.

Will they completely offset? Can't predict that, Grant, in terms of whether that will all happen and how the timing of when that will all happen. I think you have lots of different parameters that you have to look at as as well as the -- believe it or not the mix of checks is important, as well. Because depending on what consumers buy and the different checks, there's different price points on those, as well. It's not as easy as you think and saying, well, these all completely offset or will they or will they not? I think that's the way you've got to think through it.

Okay. And then as far as Direct Checks goes, it looks like you've locked up contracts for all but one of your bigger contracts in 2009. What percentage of the one contract that hasn't been extended, what percentage is that?

First of all, it's for the financial services segment. We would not tell you the percentage of any individual contract. It's just not information we would share.

We don't have any customers in that segment that are even approaching 10% of revenue in that segment. So --

These aren't big -- these aren't huge numbers.

Okay. That's helpful. Thank you.

You're welcome.

Your last question comes from the line of Beth Lilly from Gabelli. Please proceed.

Good morning, Rick, Lee, and Terry.

Good morning.

I wanted to get clarification on one thing. Lee, you talked about the cost savings or the cost reductions of $250 million through 2010, okay. I wanted to understand, the $60 million in 2009 and the $35 million in 2010, what percent of that is going to flow through to the bottom line? Is it 50% to 60%?

We haven't given you an indication of that yet for 2009, 2010, Beth. We haven't yet finalized all of our planning and our thinking by quarter and when we -- what all is going to be there to offset it. What I would tell you to use right now, a good -- continue to use a good rule of thumb -- so far that's worked well for us has been the 50% to 60%.

Okay. Great. That's my only question. Thanks much.

You're welcome.

Thank you.

I would now like to turn the call over Lee Schram for closing remarks.

Thank you, Madge. We believe that we are solidly positioned to weather the weakening economy and banking crisis by extending our large national contracts through 2009 and by aggressively implementing our $250 million cost reduction program.

While small business products revenue is becoming increasingly difficult to predict given the challenging economy, we are seeing increased e-commerce visitors. We have also made several positive strategic acquisitions to better position Deluxe for revenue growth in the future. Appreciate your participating and your questions today. We'll get back to work, and we look forward to a positive progress report on our next earnings call.

A replay will be available until October 31 by dialing 888-286-8010. When instructed, provide the access code 40695023. The Company's slides are archived in the investor relations section of the Company's web sites at www.Deluxe.com. Again, thank you for joining us. Have a good afternoon.

Thank you for your participation in this conference. This will conclude the presentation. You may now disconnect. Good day.