Deluxe Corp (DLX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Deluxe Corporation earnings conference call. My name is Jess, and I'll be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations, and you have the floor, sir.

Thank you, Jess. Welcome to Deluxe Corporation's 2011 third quarter earnings call. I'm Jeff Johnson, Deluxe's Treasurer and Vice President of Investor Relations. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer, and Terry Peterson, Deluxe's Chief Financial Officer. Lee, Terry, and I will take questions from analysts after the prepared comments. At that time, the operator will instruct you how to ask a question.

In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website. I will provide instructions for accessing the replay at the conclusion of our teleconference.

Before I 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 in the Company's Form 10-K for the year ended December 31, 2010.

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 News and Investor Relations section of our website, www.deluxe.com, and was 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.

Thank you, Jeff, and good morning, everyone. In the midst of a continued sluggish economy, Deluxe delivered another solid quarter. Revenue grew almost 4% excluding the one-time $25 million contract settlement in the prior year quarter. Small Business Services revenue grew 10% excluding the portion of the contract settlement recorded in this segment in the prior year, and grew over 6% when also excluding PsPrint in the current quarter. This quarterly growth rate is the strongest we have reported since we acquired NEBS in 2004.

Checks and Forms both performed well against our expectations, and Marketing and Other Services revenues grew 26% over the prior year. The revenue shortfall against the high end of our expectations was driven primarily by Financial Services, Customer Acquisition and Regulatory Compliance Services as financial institutions delayed decisions and rollouts, as well as slower acceleration of SBS search engine marketing services.

Adjusted diluted earnings per share from continuing operations exceeded the high end of our outlook driven by favorable product mix and lower average shares outstanding as we opportunistically repurchased $6 million of shares to help offset dilution from employee plans. Excluding the one-time $0.31 per share contract settlement in the prior year quarter, adjusted diluted EPS from continuing operations grew 15% over the prior year.

We continue to invest in brand awareness to help better position our marketing and other services offerings and drive future revenue growth. We also advanced our process improvement in cost reduction initiatives while driving strong operating cash flow as we continue to transform Deluxe.

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

Thanks, Lee. Earlier today we reported diluted earnings per share for the third quarter of $0.71, which included $0.07 per share from restructuring and transaction-related costs. Excluding these costs, adjusted EPS of $0.78 was $0.01 favorable to the upper end of our previous outlook. Favorable product mix and lower average shares outstanding drove better than expected EPS performance.

Restructuring and transaction-related costs were primarily driven by infrastructure consolidations, employee severance charges, and the PsPrint acquisition. EPS from continuing operations in the third quarter of 2010 was $0.99, and included a one-time contract settlement gain of $0.31.

Revenue for the quarter came in at $355 million, and grew almost 3% on a sequential quarterly basis. Versus the prior year, consolidated revenue was up almost 4% excluding the one-time contract settlement gain of $25 million in the prior year.

Small Business Services revenue of $214 million grew 4% versus last year on a reported basis, but grew 10% excluding the portion of the contract settlement recorded in this segment in the prior year. The recently acquired PsPrint business added nearly $8 million of revenue in the quarter.

While we continue to operate in a weak economic environment, we did also deliver growth in Marketing and Other Services, our Safeguard distributor channel, and Canada. SBS revenue also benefited from previous price increases.

Financial Services revenue of $85 million was down 17% versus the third quarter of last year, but down only 5% excluding the portion of the contract settlement recorded in this segment in the prior year. The impact of price increases was more than offset by the contract settlements in the prior year quarter and fewer check orders.

Direct Checks revenue totaled $56 million, which was down 5% on a year-over-year basis.

Gross margin for the quarter was 65.5% of revenue versus 67.0% last year. The one-time contract settlement increased 2010's margin by 2.4 percentage points. Benefits from price increases, improvements in manufacturing productivity and delivery initiatives were partly offset by the increased delivery and material rates in 2011.

SG&A expense increased $5 million in the quarter and was 45.8% of revenue compared to 42.9% of revenue in the same period last year. Increased SG&A associated with acquisitions, brand awareness campaigns, and investments in revenue-generating initiatives were partially offset by further cost reductions.

Excluding restructuring and transaction-related costs, adjusted operating margin for the quarter was 19.9%, and was above our expectations with favorability coming from improved product mix. All three segments delivered strong operating margins compared to expectations. The 2010 adjusted operating margin of 24.1% included a 5.4 percentage point benefit from the one-time contract settlement.

Excluding restructuring and transaction-related costs, Small Business Services operating margin of 17.3% was down 4.6 percentage points over last year. The contract settlement generated 4.9 points of margin last year which more than offset price increases and continued progress with cost reduction initiatives.

Financial Services operating margin of 19.2% was down 7.4 percentage points from 2010 due to the favorable contract settlement in 2010 and lower volume, as well as higher investment spending in 2011. Operating margin in this segment did improve from both the first two quarters of 2011.

Direct Checks operating margin of 31% increased 3.4 percentage points from 2010 as we continued to realize plan synergies from integrating Custom Direct and as acquisition-related amortization begins to roll off.

Turning to the balance sheet and cash flow statement. Total debt at the end of the quarter was $776 million compared to $755 million at the end of 2010. This increase was primarily driven by the 2011 acquisitions of Banker's Dashboard and PsPrint for a combined $81 million, and $24 million of share repurchases, $6 million of which occurred in the third quarter to further offset dilution from employee plans.

Cash provided by operating activities through the first nine months of the year was $171 million. Slight increase from last year was due to benefits from our cost reduction initiatives, price increases, and lower income tax and severance payments, which more than offset the one-time contract settlement collected in 2010, and higher interest payments in 2011.

Capital expenditures for the first nine months were $28 million, and depreciation and amortization expense was $57 million.

In early July, we purchased PsPrint for approximately $45 million cash, which was funded with a draw on our credit facility. The acquisition is expected to generate revenue of approximately $15 million during the last half of 2011 and be EPS-neutral in 2011 after absorbing transaction costs and acquisition-related amortization expense.

Looking ahead to the fourth quarter, we are tightening our consolidated revenue outlook to a range of $359 million to $369 million, which even without the benefit of the PsPrint acquisition is another quarter of low single digit growth. We expect this growth despite the start of a new, large financial institution win we previously reported being delayed until early 2012, and foreign exchange rates moving against us.

In line with what we experienced in the third quarter, we also expect a slower ramp in FS, customer acquisition and regulatory compliance services, and we are being a little more cautious about the upcoming holiday season.

Adjusted diluted earnings per share are expected to range from $0.77 to $0.84. On a full year basis, this results in a consolidated revenue outlook range of $1.41 billion to $1.42 billion. Adjusted diluted earnings per share from continuing operations are expected to range from $3.05 to $3.12.

There are several key factors that contribute to our total year outlook in comparison to 2010, including Small Business Services revenue, including the PsPrint acquisition, is expected to increase in the mid to upper single digits as volume declines in core business products are expected to be offset by benefits from price increases, growth in our Safeguard distributor channel, our e-commerce investments, double-digit growth in our Marketing and Other Services offerings, which includes revenue from the PsPrint acquisition.

We expect Financial Services revenues to decline in the low double digits or high single digits excluding the contract settlement last year, with check order declines of approximately 7% to 8% and lower revenue per order. These decreases will be partially offset by increasing contributions from non-check revenue streams including those from Banker's Dashboard.

Direct Checks revenue is expected to increase in the mid single digits driven by a full year impact of the Custom Direct acquisition partially offset by check declines; additional cost and expense reductions; employee merit increases, which we reinstated in the first quarter of this year after a two-year freeze; increases in material and delivery rates; continued investments in revenue growth opportunities including Marketing and Other Services, brand awareness, Direct Response campaigns, Web-to-print and enhanced Internet capabilities; an increase in interest expense of $0.05 per diluted share primarily due to the March refinancing of $195 million; a 5% note due next year, with $200 million of new 7% notes not due until 2019; an effective tax rate of approximately 32%; and higher average shares outstanding.

We expect to continue generating strong operating cash flows ranging between $224 million and $230 million in 2011, driven by stronger earnings and lower contract acquisition payments, which we now expect to be approximately $15 million. 2011 capital expenditures are expected to be approximately $35 million, down 20% from 2010.

We continue to invest in key revenue growth initiatives and make other investments in order fulfillment and IT infrastructure.

Depreciation and amortization expense is expected to be $73 million, including $20 million of acquisition-related amortization.

Shifting to our capital structure, we expect to maintain our balanced approach of investing organically and through small- to medium-sized acquisitions in order to drive our growth transformation. We also expect to maintain our current dividend level.

To the extent we generate cash flow in excess of these priorities, we plan to pay down debt in order to further strengthen our balance sheet. We believe our strong cash flow, strengthened balance sheet, and flexible capital structure position us well to continue advancing our transformation.

I will conclude my comments with an update on our cost and expense reduction initiatives. Overall, we had another solid quarter executing against our initiatives. We are on track to deliver gross savings for 2011 of approximately $70 million, but higher restructuring charges will result in net reductions for the year of approximately $60 million. Our investments in 2011 not only enable us to deliver cost reductions in the current year, but also add cost reductions for 2012.

Our focus in sales and marketing for the fourth quarter will continue to be on improving sales and marketing back-end operations through process centralization, simplification, platform and tool consolidation, and leveraging e-commerce capabilities. As expected, we completed the closure of our Phoenix call center in the third quarter. We will also continue to improve the mix of paper catalog and online search engine marketing.

In fulfillment, we expect to continue our lean product standardization, spoilage reduction, and direct and indirect spend reduction initiatives, plus further consolidate our manufacturing technology platforms, enhance our strategic supplier sourcing arrangements, and continue with other supply chain improvements and efficiencies.

We also expect to realize a full year's worth of savings from our proprietary flat check packaging system, the last installation of which was completed in the fourth quarter of 2010.

Finally, for the shared services infrastructure, we expect to continue to reduce costs in all areas as more opportunities exist to centralize, streamline, standardize, and improve efficiencies. Now I'll turn the call back to Lee.

Thank you, Terry. I will continue my comments with an update on what we are focused on overall and then highlight progress in each of our three segments. I will also include throughout a perspective on what we hope to accomplish in the fourth quarter, and finally provide some context looking forward to 2012 and beyond.

Our primary focus continues to be on revenue growth. In the third quarter we had strong check performance with continued high demand for our new high security checks, NSBS, and better revenue per order rates in Direct Checks from improving our sales of additional accessories in Custom Direct.

For Business Products, we continue to enhance our Internet and segmentation capabilities, and we grew revenue in the Internet and distributor channels.

In Marketing and Other Services, we are off to a solid start with our PsPrint acquisition, delivering nearly $8 million in revenue. We also continued to invest organically in the third quarter in Marketing and Other Services for our Small Business and Financial Institution customers, including our recently introduced SwitchAgent service and regulatory compliance offers.

In the quarter, we did a tremendous amount of work including gaining insight from a significant number of current and potential investors to thoroughly assess how we describe our products and services. Investors are advocating that we provide better clarity around three primary offers -- Checks, Forms, and Marketing and Other Services.

Based on our assessment and external input, we concluded that certain marketing solutions such as promotional products and apparel are better classified as Marketing Solutions. These products were previously classified as Business Products despite being growing parts of our business.

The result is we now have a more comprehensive and complete view of all Marketing and Other Services. Marketing and Other Services revenue grew 26% in the third quarter. We now expect to generate approximately $225 million in Marketing and Other Services revenue in 2011, up from $186 million in 2010, and $159 million in 2009. If achieved, this performance would translate to a total revenue mix of around 16% of revenue towards our goal of achieving 25% mix over the strategic period, and up from the 12% to 13% level over the last two years.

Going forward, we expect to continue to assess potential small to medium-sized acquisitions that complement our large customer bases with focus on the Marketing and Other Services space. In addition to our strong print leadership expertise, we also made progress in the third quarter in improving our talent and bench strength in Marketing and Other Services spaces with the additions of new talent in Web services, social media, e-commerce, search engine marketing, regulatory compliance, and Web-to-print.

We also continued to invest more in brand awareness and positioning targeted at the Marketing and Other Services spaces primarily through network and National Public Radio and through entrepreneur.com, Martha Stewart, cnnmoney.com, fastcompany.com, and others.

Now, shifting to our segments. In Small Business Services, as expected, we did not see any notable improvements as the economic climate for small businesses remains sluggish. We had strong performance, however, as revenue grew 6% excluding the contract settlement last year and the PsPrint acquisition in the current year, the strongest rate we have reported since acquiring NEBS in 2004.

Checks and Forms performed well against our expectations. Our results from targeted customer segmentation in the call center improved. We increased new customers from our Financial Institution Deluxe Business Advantage Referral Program and through our Direct Response campaigns.

Response rates increased from better balance in the rich content in online and print-based spend. Average order value and conversion rates remain strong. Our Safeguard distributor channel and Canada grew revenue over the prior year.

We also saw strong growth in Web, search engine marketing and payroll services. In the quarter, we added EarthLink as a significant partner in the Web services space. We now have 500,000 Web hosting customers.

We continue to closely monitor the small business market. Optimism indices have declined six of the last seven months and remain in recessionary territory. We are not seeing the surge that should lead to economic growth. Small businesses are only slowly hiring and they remain cautious in making any investments.

Capital spending, although improving, remains low. They continue to spend less, scrutinize purchases more, and experience tight cash flow. Small businesses' outlook that business conditions will improve over the next six months fell sharply in the third quarter.

In summary, current optimism indices have been trending downward and are still below end of 2007 levels. The good news is that increasing sales continues to be a small business owner's number one pain point, and we now offer many products and services to help them here. As the economy recovers, with the transformative changes we are making to deliver more services offerings that help small businesses get and keep customers, Deluxe is better positioned as that indispensible partner for growth.

Our focus for the balance of 2011 is on acquiring new customers, increasing our share of wallet through our enhanced Shop Deluxe e-commerce site, growing distributor and channel partners, and improving segmentation. We will continue to improve the efficiency and effectiveness of our inbound, outbound and online customer touch points to maximize revenue scale capabilities.

In Marketing and Other Services, we expect to continue to gain new customers through our telco focused wholesale Web services model, add customers and services in our retail model, add marketing services, payroll services and logo customers, and continue to expand our search engine marketing customer base.

We also expect to drive PsPrint revenue through additional customer acquisition programs and tactical improvement initiatives within the existing platform.

In Financial Services, we saw the rate of decline of checks performed right in line with our forecasted decline range of around 7% to 8%. We had strong overall new acquisition rates and our retention rates remain strong on deals pending in the current quarter in excess of 90%.

We are extremely pleased to report the signing of a new contract with Citizens Financial Group, and are working on check migration plans plus marketing and other services opportunities. We now expect to begin check production for Citizens Financial Group in late January 2012.

We also responded to another very large national competitive RFP, and expect a decision before year end. And there are still several more RFPs we anticipate receiving yet this year with decisions expected in 2012.

We also simplified our processes and took complexity out of the business while reducing our cost and expense structure including, as planned, closing our Phoenix call center in the third quarter.

We made progress again in the quarter in advancing non-check Marketing and Other Services revenue opportunities. Although revenue grew over both last quarter and year in these non-check services, which include Customer Acquisition, Regulatory Compliance, Value-Added Services, Rewards Checking, and other profitability offers, revenue came in below our expectations at the high end of our range, primarily in the Customer Acquisition and Regulatory Compliance spaces.

In Customer Acquisition and specifically with our Cornerstone Direct Marketing Analytics offer, we are winning deals and adding new financial institutions, but not at the pace we expected, as decisions are taking longer or being delayed as financial institutions focus more on spending controls.

Positively, in the Customer Acquisition space in mid-October we released at BAI our automated SwitchAgent service. This proprietary new service allows consumers to easily, in an automated way, switch from one financial institution to another. Even with the offer just released, we already have 15 financial institutions signed up for the service and a significant number in the pipeline.

In Regulatory Compliance, we have received nine bank association endorsements for our offer. But as with Customer Acquisition, we are seeing decisions take longer by financial institutions as they sort through Dodd-Frank and implications on their community bank compliance programs. Positively, we have 23 trial offers in the market and anticipate many of these will become paying customers in 2012.

The Banker's Dashboard acquisition continues to perform well. In September, we had our highest number of new financial institution wins since the April acquisition. As you can see, although not as fast as we had hoped, momentum continues to build in these non-check revenue initiatives.

In Direct Checks, revenue was in line with our expectations driven by accelerated reorder rates and strong Customs Direct accessories revenue. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers.

The lion's share of the Custom Direct integration is complete, but we are still working on a number of initiatives to create an integrated, best-in-class, direct-to-consumer check experience. We continue to see a ramp in revenue enhancement synergies through our call center scripting and up-sell capabilities.

In addition, cost reduction activities continue with savings accruing in material procurement, delivery, media and marketing expense leverage, and other SG&A. We expect continued revenue enhancements and cost reductions in the fourth quarter.

For 2011, we expect revenue growth in the mid-single digits driven by Custom Direct and accelerated reorder curves partially offset by declines in consumer usage in a continued weak economy.

We expect to reduce our manufacturing costs and SG&A in the segment, and drive our operating margins close to 30% including acquisition-related amortization while generating strong cash flow.

As we exit the third quarter on the heels of another solid quarterly performance in a continued challenging economy, we have made good progress again in transforming Deluxe. We still have a lot of work and opportunities ahead of us. We are continuing to prudently plan that the economic climate will not improve in the fourth quarter, and we are also now being a little more cautious about the upcoming holiday season.

Our primary focus right now is on revenue growth, and we continue to invest in our future with better product and services offers, and supporting brand awareness and direct response campaigns. We expect to continue the trend of low single-digit revenue growth excluding PsPrint in the fourth quarter. We are gaining confidence that we can grow revenue in SBS even in a challenging economy.

If the economy improves in the fourth quarter, we should have upside in Small Business Services revenue. At the same time, we will not take our eyes off of cost reductions and process improvements, and we expect to continue to generate strong cash flows and provide a very attractive dividend.

Looking ahead to 2012, our portfolio continues to become better positioned to deliver sustainable future revenue growth. The expected on-boarding of Citizens Financial Group starting in the first quarter, extension of all but a few smaller, large financial institution contracts through at least 2012, and approximately 15% fewer community bank contract dollars up for renewal in 2012 compared to 2011, should help us to stabilize core checks, plus we have more competitive opportunities coming due through 2012. This is products we expect to expand, existing organic initiatives including Shop Deluxe and Canada, and to add Safeguard distributors, dealers and national accounts.

We are building out a more formalized national accounts business, which should allow us to reach small business owners in a one-to-many model similar to how we reach some of our small businesses today in our wholesale Hostopia telco model.

For example, we have recently created or expanded relationships with Humana, Costco Canada, Benjamin Moore, the National YMCA, Howard Johnson, Knights Inn, and others that we expect to ramp in 2012, plus add new relationships.

In Marketing and Other Services, we expect double-digit revenue growth with a full year of PsPrint and Banker's Dashboard, and expected growth in Web services, search engine marketing, logo, payroll, and other marketing services.

We also expect to create a single best-in-class integrated Web-to-print platform that combines organic investments we have already made in a front-end customer experience with PsPrint's strong backend processes and scale Web-to-print offers for our combined Small Business customers.

In a more normal economy, we believe this could position us for solid mid-single-digit revenue growth and strong low double-digit adjusted diluted earnings per share growth. However, given the continuing uncertain economic climate and lack of directional clarity, it is more prudent for us right now to expect the increase in 2012 revenue to be in the very low single digits compared to 2011, which is expected to produce adjusted diluted earnings per share ranging from low to mid-single-digit growth.

As part of these estimates, we expect to continue to prudently invest more in brand awareness and direct response campaigns, but at the same time continue our cost and expense reduction initiatives. However, we believe it is extremely important for us to closely monitor the marketplace over the next three months before providing a more specific outlook for 2012.

Finally, I would like to provide a perspective on the potential time frame for achieving our targeted 25% of Marketing and Other Services revenue to total revenue objective. As I indicated earlier, our current outlook for 2011 would get us to 16% of revenue. We see this improving to approximately 18% to 20% in 2012, in a continued sluggish economic climate. It may be possible to reach 21% to 23% in 2013, and if we get any improvement in the economy plus some stated potential tuck-in acquisitions, we could potentially achieve the 25% target in 2013.

So, going forward into 2012, we therefore expect organic growth from Marketing and Other Services revenue to equate to approximately a mid-teens growth rate.

As to specifically how we believe we will be able to improve the mix, as we discussed in our last call, for small businesses, it starts online with branding, promoting, hosting, website, mobile, and lead capture capabilities. We can then help small businesses get found online and get social through list management and social media capabilities.

Next, we are able to work with them to acquire customers online with marketing and promotional services as well as through search engine optimization and e-mail marketing. After that, we can help them manage their marketing spend online through search engine marketing.

Finally, we can help them be efficient by pulling all these services together and providing educational collateral, content, best practices, and access to their peer networks. All of this breadth and depth with the best personalized customer experience to help them measure their results and manage their business.

On top of this, in Financial Services, we believe our customer acquisition, value-added services, regulatory compliance and profitability offers will help financial institutions get and keep customers, manage themselves in a more heightened regulatory environment, and run their banks more profitably.

And, now, Jess, we are going to open the line for questions.

All right. Thank you very much. (Operator Instructions) Our first question comes from the line of Charlie Strauzer with CJS Securities. Please proceed, sir.

Good morning. Hey, a couple questions. One, a clarification, Lee. I think you said Small Business Services growth including PsPrint would be double digits; is that correct?

Small Business growth including which time frame?

For Q4, I think you said?

Think of it for the year we put out $225 million now in the compare for everything, compared to the $186 million now for the prior year. And what I said, Charlie, is we expect double-digit growth next year, and the way to think about it is think of organic growth in the mid-teens.

Got it, okay. And more specifically I was talking about on the Small Business Services segment, you had said --

Yes, we expect double-digit growth, yes.

Got it. Okay, great. And then the one large customer that hasn't yet signed that's been kind of pushed off a few quarters there, can you give a little bit more color as to what is maybe causing delay and maybe kind of update us a little bit more there?

One of the things you have to remember is we have seen this and been through this many times in the history of our Company, is that it, for whatever reason, I found it interesting when I first joined, you would think that combined between Deluxe and the financial institution a process of signing on and getting into and migrating to a new relationship would go quickly. Sometimes it just doesn't go as fast as all of us would like.

But what I can tell you is both sides are extremely enthusiastic about the opportunity, and we think we can serve them and their clients not only through the check programs but also through other Marketing and Other Services initiatives.

So, I would just liken it to, again, sometimes it just takes longer to work through the process, but we are thrilled about it and thrilled about the opportunity to really work with this new financial institution.

Lee, once that's all wrapped up and kind of underway, will you be able to announce who the customer is?

Yes, Charlie, we actually announced it. We announced it today. It's Citizens Financial Group.

Oh, that's the same one we're talking about, okay, got it.

That's it.

I thought that was an additional customer, I'm sorry.

No, that's the customer.

Got it, okay, great. And then did the -- in the Direct Checks side, the margins have been tweaking up very nicely over the last few quarters. What's kind of driving that? Is it really just the flat packaging or is it just a combination of that and efficiencies, or does Custom Direct bring anything to the table that maybe helped you get more efficient on your side, or vice-versa?

Yes, the way to think about it is we had lower margins when we first completed the acquisition, and we expected the margins to improve with all the initiatives that we're actually driving. And the way I would describe it, Charlie, is think of this best-in-class, direct-to-consumer experience. There were wonderful things that we brought to the table, but there were wonderful things that Custom Direct brought to the table. We are continuing to get better and better and more and more efficient everywhere, not only on the revenue-generating side, but also on the cost side, also on the SG&A side.

So, the combination of all those are helping us, and then you also have to remember we said it previously on the call, we're also getting some of the acquisition amortization behind us as well. So, it's a lot of hard work and a lot of initiatives across-the-board that is really helping us here.

And do you think those kind of margin rates are kind of sustainable kind of going forward, at least in the near term, you know, 29% to 30% kind of range? As we look into next year, is that something that you think is kind of sustainable there?

The way I would look at it is, obviously I'm not giving you specific guidance into next year, but my comment was for the year this year we should expect the margins to approximate for the total year the 30% range. But, yes, I am confident that if we can continue to do the hard work that we're doing and keep the integration going, that we should be able to stay in that range, again, Charlie, without being more specific with guidance for next year yet.

No, that's perfect. Thank you very much. Just one kind of more broader picture question for you. When you look at all the different pieces in Marketing Services that you have now, from Web hosting to social media, etc., and you talk about helping a business kind of do all of that in-house now at Deluxe, is the sales side of it, is that kind of where you want it to be in terms of being able to kind of reach out to a small business and say, hey, we're Deluxe, but did you know we can do all these things now, or is it still kind of a work in progress?

It's becoming a clearer and clearer story for people. We have wonderful customers now that start with us and do everything from a logo to getting their website, to hosting it, to then providing e-mail marketing, providing search engine optimization, wrapping ourselves around their social -- what they're doing in the social media space, all the way up to doing search engine marketing and then managing that whole thing for them.

So, Charlie, the way I would describe it is it's a work in process. We have the suite of services that we think are important, and we'll partner in places where we don't. And, again, if there's things that we think we need to add, we'll do some tuck-in work as we -- you know, acquisition work. But we have a lot of those now, it's just continuing to get that story out clearer and clearer and show the wonderful customer base that we have that we can actually do this.

And I think that clearly the excitement we have and the belief we have is we can continue to grow that revenue base because we can get more and more customers that will buy more and more of the products and services that we have and will offer them.

Great. Thank you very much, Lee.

You're welcome, Charlie.

Our next question comes from the line of John Kraft at D.A. Davidson. Please proceed.

Good morning, gentlemen. Congrats on the progress so far. I guess I just wanted to clarify first a couple things. I'm sorry for maybe this bit of a repeat here. So, the Citizens contract was the contract that is delayed into Q1, and that's the reason why the contract acquisition payments have been reduced for 2011. But where does that leave us with the SunTrust migration?

SunTrust migration, that was really completed last year. We brought them on and are producing all of their checks effective really the midpoint of last year.

Okay. So, I guess I'm getting mixed up with some of these RFPs that are out there, then. Is there any others that were part of that group that you had been talking about for the last couple quarters?

Yes, John. Here is the way to think about it right now, but to answer your other question, yes, the contract acquisition payments we brought down this year in part due to delay of the final implementation of Citizens.

But, yes, there are, as I said in my comments, there are other RFPs, competitive RFPs. We responded to another one and we are expecting a decision the fourth quarter, and there are several others that we are expecting to yet get this year. That, we expect, will be decisions that will be made in the 2012 time frame.

By the way, a helpful point of clarity for the whole audience out there is what we talked about in terms of the directional perspective I provided for 2012. Citizens, again, is in there, I mentioned that. Nothing else is in there.

And Citizens was the one that you didn't mention specifically by name but discussed on the last call?

Yes.

Okay. And then as far as, Lee, you provided some high level growth guidance on the SBS segment for 2012. Did I miss it? Did you give some targets for the Financial Services group?

I provided Company overall guidance for next year. I didn't provide specific other than to say that Marketing and Other Services overall for the Company will grow double digits. And the way to think about it is think organic growth in the mid-teens.

Gotcha, okay. So, the targets that you provided were across-the-board, okay. And then just lastly I did see your switch kit at BAI this year, it looks great, and I guess my question is how are you going to price that? Is that a per-click or per-switch?

Yes, the way it works is it's not the end consumer that pays for any of this. The bank pays for it, and there are -- think of it as there is a setup fee arrangement depending on the size of the financial institution, and then there is a per-switch charge that we charge the bank.

Gotcha. They made it sound like, the folks I talked to, that it takes an average of, I think they said three phone calls and they do some of that leg work for the customer.

What we're actually finding out right now on the 15 that we're working through is the process is actually working quite well. And there is a call to get initiated, but the whole switch is automated and then there's generally a closure call with the consumer. But we are really excited about this and it is something that we're -- obviously showcased very well, and you had a chance to see it at BAI as well.

Gotcha. Thanks, guys.

Our next question comes from the line of Jamie Clement with Sidoti. Please proceed.

Lee, Terry, Jeff, good morning. Lee, I was wondering, if you look back, I don't know, four or five years, or whatever it is, you know the way that Deluxe generated a new small business customer is different than it is today. And you have a lot more tools, or a lot more services with which to attract customers.

Have you all internally kind of attempted to quantify or kind of put into baskets where your new customer generation is really kind of coming from right now? And can you give us any color on kind of how you're thinking about that, particularly as you all have spent more in terms of marketing and refined the business strategy over the last two years?

Yes, Jamie, let me put it into a channel focus for you here. The way to think about it, as I mentioned in my prepared comments, we continue to get new customers from the Deluxe Business Advantage Program, where we work with the financial institutions.

Sure.

That is a growing channel for us. We also continue to get new customers through the online world of getting out there through Shop Deluxe and our e-commerce sites. We also are getting them through the brands that we have, that have been out there through the acquisition work that we've done. We are also getting them through the Safeguard distributor channel.

Uh-huh.

We're getting them through the dealer channel.

Uh-huh.

And I mentioned today that's really the start of it, that we're starting to get more customers through this one-to-many, as we call it, relationships, by going to a Benjamin Moore, who has 5500 Benjamin Moore stores that are basically small businesses. And if you think of it that way, and we provide marketing products and services for them, that's another way of getting increased customers, small business customers as well.

So, our world right now is, our reach -- to your point, I think is what your premise was, is that our reach is getting better and better across the online, the direct face-to-face through our distributor channel, through our dealer channel, through the brands that we brought in. So, it's across-the-board, Jamie, the way to think about it.

Yes, and I guess what I'm kind of getting at, Lee, is there historically has been, even really if you go to kind of mid-2008, there has been a lot of focus on big bank, small business lending, and if that channel is not open for a while, then Deluxe is going to have problems. And it seems like your results over the last two years show otherwise.

Our reach is now stronger in terms of the access points we have and the channels we have.

And just one follow-up, if I can. How is PartnerUp fitting into some of this? That's kind of one area that I don't quite -- I mean, I see how it fits in, but it's not clear to me if that is something that is ancillary to some of the other, kind of more direct revenue-generating services. Can you just kind of give us a little color on that?

Sure. I think it's interesting. I would say it is ancillary. There's things that we're now doing with small businesses in the social area to help them with how they use Facebook, how they use Twitter, how they use LinkedIn, and then how they can communicate with their -- in a peer-to-peer network. And so that's when PartnerUp absolutely is -- and, again, I would call it an ancillary tool, as you said, for the small business owner.

Yes.

The other thing that is interesting, though, is we actually are using it for our regulatory compliance offer as well. So, we have an automated online compliance offer, and if a financial institution wants to talk to another financial institution about something in the regulatory space that they're all dealing with, not a bank trade secret so-to-speak, but something they're all dealing with, we are using the PartnerUp network capability there as well. So, we have extended our reach with that out of just the small business world and now into the financial institution world.

Yes, and I just wanted to clarify. I was not asking that question out of any kind of criticism, it's just that the world of social networking seems to be evolving on a week-to-week basis, and that's really why I was asking the question.

And I think that hopefully I answered it well for you.

Absolutely. Absolutely.

Okay.

Thanks very much for your time.

Thank you, Jamie.

(Operator Instructions) Up next we have Ben Glaze with Stone Tower Capital. Please proceed.

Hi. I had a quick question. I guess your primary competitor in a recent proxy filing kind of changed their view on the forecast for the total check volumes in the industry and became more negative. I think they said kind of low double digits, and it sounds like you guys disagree with that.

I was just curious if that is the case, that you disagree, and if you would attribute maybe that view to anything secularly changing and how you view kind of the impacts of the Durbin Amendment and maybe banks reducing incentives to have rewards checking in general, and things like that.

Ben, what I said in my prepared comments is we, in the third quarter, once again -- and we've probably been at this, Terry, four or five quarters now, where we've been in that 7% to 8% range, and that is what we're seeing and that's what we've been consistently public about. You'll have to talk to the other player to get more clarity.

Okay. And on some of these kind of competitive bids and renewals or extensions of your existing customers that you have experienced, I'm just curious how has all-in pricing been looking forward, especially on kind of the more profitable mid size and small size institutions?

Here is the way that I think you should look at any large competitive opportunity. The approach that we have taken is Deluxe -- and I've been public about this as well, is that Deluxe is taking a technology wrapped around the call center approach to what we do. Best digital presses that we can get. Best automated flats, processing, packaging technology we can get. Best automated online tools to help a financial institution run their check program all wrapped around the best client experience with our great call center agents. So, that is how we are approaching it.

I would tell you, sure, price is always going to be out there and is going to be competitive, but it's a lot more than price. It's all of the things that we think we can differentiate and bring to the table, and that's how we are out trying to compete in the marketplace.

Okay, thanks. And on the kind of existing smaller institutions, is that pretty competitive or is the pricing trying to change?

Again, it's always been competitive, Ben, and, again, I would continue to believe it will always be competitive as we move forward as well.

Okay. And just kind of a housekeeping question for modeling purposes. I guess just given the capital structure, it seems like you have a fair amount of refinancing to do over the next couple years. It looks like maybe $500 million between 2012 and 2015. Just curious what your view is on kind of addressing that and timing, and whether you are comfortable waiting to address some of the '14 and '15 maturities for a couple more years?

Yes, Ben, this is Jeff. You know, we're feeling pretty comfortable with our capital structure right now. We took care of the 2012 near-term maturities, we kick off a lot of cash on an annual basis, so I think right now we're feeling pretty comfortable coming into the '14s and the '15s.

Okay. And, I'm sorry, one final just housekeeping question. I want to understand that change you guys made to the way you are disclosing Marketing and Other Services. What exactly was the revenue that you add to the prior period? And then I think you said $225 million is the expectation for 2011; is that right?

Yes, the way I would think about it is, again, what we did is we went back and just did a thorough assessment, and when we produce our K for the year you'll be able to get further support for everything. But basically what we've now done is said $159 million has become $186 million and become now for this year $220 million, $225 million. So, '09, '10 and '11, that's the way to think about it.

Okay. So, would that imply, actually, that your expected growth rate in that segment has declined if you didn't make that change, or not? Because I think you said $175 million before.

Well, you've got to consider all -- first of all, your base is bigger, and all the product, the Marketing and Other Services that are now in there, and they are moving -- some of them move at different growth rates than others, but it's still, again, what I can give you in terms of support for your modeling and everybody is expect an organic mid-teens growth is the way you should think about it.

All right, thank you.

You're welcome.

Ladies and gentlemen, that will conclude the question-and-answer portion of our call. I'd now like to turn the event back over to Mr. Lee Schram for closing remarks.

Again, everybody, I'd just like to thank you for your participation and your questions and your continued support and interest in Deluxe. And as I normally say, we are going to get back to work now and we look forward to providing another positive progress report on our next call. And I'll turn it over to Jeff for some closing housekeeping comments.

Right. Thank you, Lee. This is a reminder that a replay of this call will be available until November 10 by dialing 888-286-8010. When instructed, provide the access code 61870952. The accompanying slides are archived in the News and Investor Relations section of Deluxe's website at www.deluxe.com. Again, thank you for joining us. Have a good afternoon.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.