Deluxe Corp (DLX) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Deluxe Corporation earnings conference call. My name is Tiffany, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to return the call over to Jeff Johnson, Treasurer and Vice President of Investor Relations. Please proceed.

Thank you, Tiffany. Welcome to Deluxe Corporations 2012 second quarter earnings call. I'm Jeff Johnson, Deluxe's Vice President of Investor Relations and Treasurer. 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, 2011.

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. We had another outstanding first quarter performance. We are well positioned, as we enter the second half of the year, to grow revenue for the year in the mid-single digits, despite the continued sluggish economic environment.

We reported second quarter revenue and adjusted earnings per share well above our outlook. Revenue grew 7% over the prior year, driven by Small Business Services revenue growth of 15%, of which 5% came from the PsPrint and OrangeSoda acquisitions. This quarterly growth rate matched the first quarter of 2012 for the strongest we have reported since we acquired NEBS in 2004.

Checks and forms both performed better than our expectations, and marketing solutions and other services revenue grew 30% over the prior year. Adjusted diluted EPS grew 13% over a strong prior year. We also generated solid operating cash flow, were not drawn on our credit facility during the quarter, and we increased our cash position $16 million from last December.

Encouragingly, we continue to see more stabilization than expected in secular check decline rates with financial institution consumer declines less than 5% in the quarter, which is the second quarter in a row we have seen significantly lower decline rates.

We enhanced our marketing solutions and other services, offers and capabilities with the acquisition of OrangeSoda. We also invested more in brand awareness to help better position our marketing solutions and other services offerings, and drive future revenue growth. Further, we extended our process improvement and 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 second quarter of $0.82, which included restructuring and transaction-related costs of $0.03 per share. Excluding these costs, adjusted EPS of $0.85 was well above the upper end of our outlook and 13% higher than the $0.75 reported in the second quarter of 2011. Strong revenues and favorable product mix drove better-than-expected EPS performance and more than offset an increase in variable compensation expense.

The restructuring charges are primarily for employees' severance and infrastructure consolidations while the transaction costs related to the OrangeSoda acquisition.

Revenue for the quarter came in at $371 million, which was well above the range of our outlook and up 7% from 2011. All three of our business segments performed well. Small business services revenue of $233 million included $10.5 million from the PsPrint and OrangeSoda acquisitions and grew 15% versus last year on a reported basis. While we continue to operate in a weak economic environment, we delivered growth in marketing solutions and other services, our Safeguard distributor, dealer and major accounts channels and in checks and forms.

Financial services revenue of $86 million declined only 1% versus the second quarter of last year and reflected a lower-than-expected secular check decline rate of less than 5%. The impact of lower check orders was mostly offset by higher revenue per order, higher non-check services revenue, and the addition of Citizens Financial Group.

Direct checks revenue of $52 million was down 7.4% on a year-over-year basis. Gross margin for the quarter was 65.6% of revenue, up 0.5% points from 2011. Benefits from price increases, improvements in manufacturing productivity, delivery initiatives and product mix were partly offset by increased delivery rates, material costs and performance-based compensation expense.

SG&A expense increased $10.3 million in the quarter and was 45.2% of revenue compared to 45.5% of revenue in the same period last year. Increased SG&A associated with commissions on increased revenue, acquisitions and higher performance-based compensation expense, and investments in revenue-generating initiatives was partially offset by benefits from continuing our cost-reduction initiatives and lower amortization related to previous acquisitions.

Excluding restructuring and transaction-related costs, operating margins for the quarter of 20.5% was up from the 19.9% generated in 2011 and was above our expectations with favorability coming from strong revenue performance, including favorable product mix, which more than offset higher performance-based compensation expense.

All three segments delivered strong operating margins. Excluding restructuring and transaction costs, Small Business Services operating margin of 16.9% was down 1% point from last year due to expenses associated with the PsPrint and OrangeSoda acquisitions, increased commissions and investments in revenue-generating initiatives, which was only partially offset by continued progress with cost reduction initiatives.

Financial services operating margin of 23.7% was up 5.7% points from 2011 due to higher revenue from price increases, as well as continued progress with cost reductions. Direct checks' operating margin of 30.8% increased 0.7% points from 2011 as we continue to realize planned synergies from integrating Custom Direct and lower acquisition-related amortizations.

Turning to the balance sheet and cash flow statements, year to date, we increased our cash and equivalents balance by $15 million despite having paid cash for the OrangeSoda acquisition and repurchasing $12 million of our common stock to offset expected dilution from employee plans. Total debt at the end of the quarter was $742 million, the same as at the end of 2011.

Cash provided by operating activities for the first half of the year exceeded our expectations at $99.9 million, driven by stronger operating performance. Compared to last year, cash benefits from stronger operating performance and the discontinuation of our defined contribution pension plan were more than offset by higher income tax payments, a planned contribution to our Vivat Trust for future medical costs in first quarter and higher contract acquisitions and interest payments. Capital expenditures for the first six months were $17 million and depreciation and amortization expense was $33 million.

On May 31, we purchased OrangeSoda for approximately $27 million using cash on hand. The acquisition is expected to generate revenue of approximately $15 million during 2012 and be a $0.01 [dilute] up to EPS in the third quarter, as well as the full 2012 year after absorbing acquisition-related amortization expense and transaction costs.

Given our strong performance in the second quarter and the addition of OrangeSoda, we are raising our consolidated revenue outlook for the year to a range of $1.49 billion to $1.51 billion. We are not expecting much improvements in economic conditions for the balance of the year.

Positively, excluding marketing solutions and other services in our outlook range, the underlying core business is actually growing from 2011. Adjusted diluted earnings per share is also expected to increase to a range of $3.30 to $3.45, excluding $0.10 related to restructuring and transaction related costs.

There are several key factors that contribute to our full year outlook versus 2011, including Small Business Services revenue is expected to increase in the low double-digits as declines in core business products are expected to be offset by price increases and growth in our e-commerce distributor, dealer and major accounts channel, plus double-digit growth in marketing solutions and other services offerings, which now include the OrangeSoda acquisition.

We expect financial services revenue to decline in the low single-digits range, driven by secular check order declines, which we expect to be approximately 5% to 6% for the remainder of the year, partially offset by higher revenue per order, the Citizen Financial Group migration and continued growth from non-check revenue stream.

Direct checks revenue declined in the mid to high single digits, driven by check by check volume reductions in a sluggish economy. Additional costs in expense reductions, increases in material and delivery rates, increases in performance-based incentive compensation, continued investments in revenue growth opportunities, including brand awareness, direct response campaigns, marketing solutions and other services offers and enhanced internet capabilities, and an effective tax rate of approximately 33%.

We are tightening our operating cash flow outlook to a range between $235 million and $245 million in 2012, reflecting stronger earnings, offset by higher income tax payments and a first quarter contribution to our Vivat Trust. We expect contract acquisition payments to be approximately $20 million for the year, which is higher than previously guided as we continue to aggressively renew contracts into 2013.

2012 capital expenditures are expected to be approximately $35 million, roughly the same as 2011. We plan to 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 $65 million, including $15 million of acquisition-related amortization.

For the third quarter of 2012, we expect revenue to range from $366 million to $375 million. Adjusted diluted earnings per share is expected to range from $0.76 to $0.81. In comparison to the second quarter, third quarter revenue at the upper end of the range is expected to be higher despite one less business day, which represents approximately $6 million in revenue. In addition, the ongoing secular decline in checks and forms is expected to be more than offset by OrangeSoda revenue and a ramp in marketing solutions and other services revenue, primarily driven by new customer migration rollouts in wholesale web services.

Just as EPS in the third quarter is expected to be lower than the second quarter due to additional investments, including $0.01 of dilution from OrangeSoda acquisition and the previously communicated increase in expected brand awareness spending.

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 and repurchase shares to offset dilution from employee plans, as we did in the second quarter.

To the extent we generate cash well in excess of these priorities, we plan to pay down debt in order to further strengthen our balance sheet. As you saw in the first half of the year, it is possible we accumulate larger investments on our balance sheet in 2012 in anticipation of paying off the $85 million of notes maturing in December. We believe our strong cash, strength in 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 as we delivered on our expected cost and expense reductions towards our $50 million commitment, net of investments, in 2012. Our focus in sales and marketing for 2012 continues to be on improving sales and marketing backend operations through process centralization, simplification, platform and tool consolidation and leveraging e-commerce capabilities.

We consolidated our Little Rock and Joppa call centers for Custom Direct into our Colorado Springs Direct Checks call center in early July. We will also continue to improve the mix of paper catalog and online search engine marketing expenditures.

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 are also working to close our Joppa printing facility for Custom Direct and consolidate the work into another deluxe printing facility by early 2013.

Finally, for the shared services infrastructure, we expect to continue to reduce costs in IT and other areas as more opportunities exist to improve efficiencies.

Now, I'll turn the call back to Lee.

Thank you, Terry. I will continue my comments with an update on our key revenue growth area, marketing solutions and other services, including perspectives on our recent OrangeSoda acquisition and insights on the next steps for improving our brand awareness. I will then highlight progress in each of our three segments, including a perspective on what we hope to accomplish during the balance of 2012.

We have significant growth opportunities in marketing solutions and other services, including for small businesses, (inaudible) design, web services, social media, web to print, search engine marketing and optimization, payroll and fraud and security services. And for financial institutions, customer acquisition, risk management and profitability offers.

We will continue to assess potential small to medium-sized acquisitions that complement our large customer bases with a focus on marketing solutions and other services. Here is an update on the four subcategories framework we introduced on our first quarter call for marketing solutions and other services.

First, small business marketing is expected to represent approximately 41% of total marketing solutions and other services revenue, with expected organic growth rates this year in the high teens, although expected actual growth rates will be higher this year, closer to the upper 30%s given the PsPrint acquisition in July of 2011. Key growth initiatives including scaling web to print by cross selling to our customer base and adding new customers through major accounts, distributors and partners.

Second, web services, which includes global and web design, web hosting, SEM, SEO, e-mail marketing, social and payroll services is expected to represent approximately 30% of total marketing solutions and other services revenue, with expected growth rates this year in the 40% range driven by the OrangeSoda acquisition. Key growth initiatives include adding wholesale telco and major accounts, cross selling to our retail base through bundled present packages and adding new customers.

This category also is our focus area for tuck-in acquisitions, with OrangeSoda being a good example. OrangeSoda provides internet marketing services for small and midsized business, including online and mobile ads, social medial marketing, SEO, SEM pay per click, reporting and analytics, including call and conversion tracking. They directly support over 5,000 high RPU customers, as well as 20 channel customers with strong, scalable product offerings and processes, a low churn rate and a seasoned Management team.

We expect to leverage our retail and wholesale customer bases by significantly expanding our existing SEM and SEO capabilities. We also have added a scalable frontend to backend delivery production systems able to support volume expansions while adding campaign building, production and analytics capabilities.

Third, fraud, security and risk management services are expected to represent approximately 24% of total marketing solutions and other services revenue in 2012, with expected growth rates this year in the low double digits. Key growth initiatives include scaling our program services for both national and community banks and fraud and security offers for small businesses and direct to our consumers.

As an example, we initiated two large FI Provent rollouts in the second quarter that will ramp through the balance of the year. It also includes adding Banker's Dashboard customers as well as adding features for our installed Banker's Dashboard base.

Finally, other financial institution services are expected to represent approximately 5% of total marketing solutions and other services revenue, with expected growth rates this year in the 30% range, a very high percent driven by a small starting revenue base. Key growth initiatives here include adding new Cornerstone, SwitchAgent and gift and reward card financial institutions. We expect marketing solutions and other services revenues to be approximately $280 million to $290 million in 2012, up from $223 million in 2011 with organic growth in the mid teens. If achieved, this performance would translate to a total revenue mix of around 19% of revenue towards our goal of achieving a 25% mix over the strategic period and up from 16% in 2011 and 12% to 13% the previous three years.

In addition to the items just mentioned, in order to accelerate revenue growth, we are continuing to invest more in brand awareness and positioning. We continue to refine our branding strategy and expect to increase spending more from the second quarter to third and fourth quarters. Our brand awareness improvement includes differentiating our offers for small businesses around a brand platform with a key message that Deluxe is a small business's genuine, passionate partner that gives them everything they need, so they can focus on what they love. Think of it as helping small businesses pursue their unique passion while Deluxe assists them in this pursuit.

We will highlight more specifics here on our third quarter earnings call after the creative and key messaging platform is introduced into the marketplace.

Now shifting to our segments. In small businesses services, we have strong performance despite a continued sluggish economic environment. Revenue grew 15%, 5% of which came from the PsPrint and OrangeSoda acquisitions, and matched the first quarter for the strongest rate we have reported since acquiring NEBS in 2004.

Checks and forms performed better than 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 increase from better balance, (inaudible) rich content and online and print-based spend. Average order value and conversion rates remain strong.

Our Safeguard distributor, dealer and major accounts channels grew revenue over the prior year. We also saw strong growth in logo, web, SEM, SEO and payroll services.

We ended the quarter with approximately 500,000 web-hosting customers. We continue to closely monitor the small business market. Optimism indices declined as we exited the second quarter and remain at historically low levels. Small business spending is more for maintenance than expansion, and the outlook for improvements in sales and business conditions dropped to the lowest level of the year in June. Small businesses continue to spend cautiously, scrutinize purchases and experience tight cash flow.

In summary, current optimism indices have been churning downward, and the outlook is not conducive for new spending or hiring. The good news is that increasing sales continues to be a small business owner's number one pain point, and our portfolio is significantly more robust now, with many offers to help them here. As the economy recovers, with the transformative changes we are making to deliver more services offerings that helps small businesses get and keep customers, Deluxe is better positioned as that indispensible partner for growth.

Our focus for 2012 in core small business checks and forms is on acquiring new customers, increasing our share of wallet through our enhanced Shop Deluxe e-commerce site, growing distributor and dealer partners, adding new and cross selling more in major accounts 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 capability.

In marketing solutions 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 by selling bundled web presence packages, add other marketing services, payroll services and logo customers, and continue to expand our search engine marketing customer base.

For web to print, we are creating a single best-in-class integrated platform that combines organic investments we have already made and a frontend customer experience with PsPrint's strong backend processes and scale web-to-print offers for our small businesses customers.

In financial services, we saw a second quarter in a row of a better-than-expected secular check decline rate, with an actual decline of less than 5%, which was better than our forecasted decline range of 7% to 8%, driven by strength in both the national and community segments. In addition, we benefited from processing checks for Citizens Financial Group in the current year quarter.

We had strong overall new acquisition rates and our retention rates remained strong on yields pending in the current quarter in excess of 90%. Positively, we now have all our large contracts extended through the end of 2013, except one, which is being worked, and we have confidence we will also extend.

We also continue to work a number of competitive RFPs, none of which are included in our outlook for 2012. We also simplified our processes and took complexity out of the business, while reducing our cost and expense structures. We are planning for check units to be in a decline range of around 5% to 6% for the balance of the year. We also expect retention rates in excess of 90% on deals pending this year. And with about 70% of our 2012 community bank contract renewals already completed at the halfway point in the year, we are well ahead of last year's pace.

We made progress again in the quarter in advance non-checks marketing solutions and other services revenue opportunities. Revenue grew over last year in these non-check services, which include customer acquisition, risk management and other profitability offers. In customer acquisition and specifically our cornerstone direct marketing analytics offer, we saw continued growth in new financial institutions that will rollout in 2012.

In addition to a number of community banks that have started to roll out our new SwitchAgent offer, we have commitments in the second half of the year for branch pilots from four larger financial institutions, including one where we do not produce checks for them. Although still early in the rollout of our offer, we continue to be excited about SwitchAgent opportunities. The recent Javelin Strategy and Research report indicated about 11% of respondents indicated they were very likely or likely to switch financial institutions in the next 12 months, and the survey also indicated that these respondents had average deposits 30% higher than customers who have no intention of leaving.

Banker's Dashboard also continued to perform well in the second quarter as we had the highest number of new quarter financial institution wins since closing the acquisition. As you can see, although not as fast as we had hoped in some areas, momentum continues to build, and we expect strong double-digit growth in marketing solutions and other services in 2012.

In Direct Checks, revenue was in line with our expectations driven by strong revenue per order and strong Custom Direct accessories revenue. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers. Although we have made significant progress with the Custom Direct integration, we are still working on a number of initiatives to create an integrated best-in-class direct-to-consumer check experience. One key initiative is the key integration of our Little Rock and Joppa custom direct call centers into our Colorado Direct Checks call center, which was just completed in early July.

We continue to see a ramp in revenue enhancement synergies through our call center scripting and upsell capabilities, as well as synergistic costs and expense reductions. For 2012, we expect Direct Checks revenue to decline in the mid to high single digits, driven by continued declines in consumer usage and a weak economy. We expect to reduce our manufacturing costs and SG&A in this segment and drive our operating margins in the 30% range, while generating strong operating cash flow.

As we exit the second quarter on the heels of an exceptionally strong quarterly performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us in 2012. Our outstanding first half performance positions us well to grow revenue in 2012 for our third consecutive year. We are conservatively not expecting the economic climate to improve throughout the balance of the year. If the economy improves, we should have upside in revenue.

Positively, excluding marketing solutions and other services in our outlook range, our underlying core business is stabilizing, actually growing from 2011. Marketing solutions and other services are expected to grow 26% to 30% this year. At the same time, we will not take our eyes off the cost reductions, process improvements and accelerating brand awareness, and we expect to continue to generate strong cash flows and provide a very attractive dividend.

Now, Tiffany, I'll let you open the line for questions.

Okay. (Operator Instructions) And it looks like your first question will actually be coming from the line of a Charles Strauzer from CJS Securities.

Thanks. Good morning.

Hi, Charlie.

Hi, Charlie.

Hey, if we could just delve into the check decline rates being better a little bit more, get a little more color there, just as you talk to the banks and stuff, what do you think is kind of driving that? It's been a couple of quarters now where it's been a few hundred basis points better than you expected. What do you think the drivers are behind that?

I think the thing that happened this quarter, as we mentioned in the comments, Charlie, is we actually saw -- in the first quarter, if you remember, we actually saw the community banks perform a little bit better than the nationals, although they were both lower than our expectations. This quarter they were more in line with each other. So you think about that less than 5%, that was pretty consistent with both of them.

So what we know in pockets, there are -- in the nationals, for example, we know some of our large customers are opening new branches, and because we're opening new branches, we're seeing some actual growth in pockets that we haven't seen historically. We also know that in the case of the community business, community FIs, that we've seen kind of more consistency across the various what we call regions of the United States. So some of those were areas, again, the Southeast, the West, the Northeast that were probably most hardest hit by the recession.

So we're seeing more consistency there. We're constantly talking to our banks about how and why we see the trends. We actually seem to have a lot of insight ourselves on the trends that we're seeing. We're trying to work through those. But at this point, Charlie, that's what we know, and that's kind of the perspective that we have at this point. Obviously very encouraging for us.

Yes, the other thing I would add, Charlie, too is the housing numbers have been better from the first half of the years, and that typically will drive some check orders as well.

Excellent. And if we can shift a little bit more longer-term view and something we talk about from time to time is the ability to cross sell some of these new services across various platforms. Where do you kind of stand in your cross-selling abilities? I know it was kind of a -- it's always been a work in process, and you thought you weren't there yet, but are you making progress on that front too?

Yes, we're clearly making progress. I mean, one of the exciting things is that we introduced -- I'll give you an example. We introduced the OrangeSoda Blend product into our retail call centers just actually this week, and we already have small business owners that are signed up for the Blend offer.

So yes, we are working our tails off to try to get as many of these offers that we have that we've added to that marketing solutions and other services into our platform and trying to get those out. What I would tell you, honestly, Charlie, is it's a work in progress. We've got a lot of work to go here to get where we want to be. And you can look at that as a shortcoming. I look at it as a huge opportunity for the Company. We're getting better. We're performing better, and we have an opportunity to do better on bringing these services that we have out to our small business customers.

And one of the things that we think is going to help, and I really would like to just give a little color on the brand, like I gave in the script, and not really spend a lot more on that until it hits the market here in the third quarter. But we are really -- our belief is that the better we can do with bringing that brand -- improved brand perspective and putting that out in front of small businesses, we think that's also going to help with how we cross sell and the -- and our ability there.

And obviously the proof will be as look at this and measure it from there, but I'd like to think we're improving, and yet I'd like to also think that we got a lot of opportunity yet here

Great. Thank you very much.

You're welcome, Charlie.

Okay. And it looks like your next question will be from John Kraft from D.A. Davidson.

Hey, guys, congrats on the progress, especially given the environment.

Thank you, John.

Thank you, John.

I wanted to just talk about a few of the cost side of the equation here, a few things. First of all, Terry, you said something about closing a custom direct printing facility. When did you say that was going to happen?

We're targeting to have that completed sometime by early 2013.

Okay. And then on the increased delivery expenses, can you remind me again the percent of your FIs are using the flat packaging?

The percent of our FIs is 100%.

But it hasn't been adopted across all of them? Is that --

Yes, all of our FIs are -- have the flat package and have for several years at this point. There are -- sometimes we do send out -- if a customer orders several boxes of checks, we might put that in a box and send that out UPS, but for single and double, all the FIs have adopted the flat packaging.

Oh, interesting. Okay. I hadn't realized that. And then on the small business side of things, you said that impacting the quarter there was some PsPrint acquisition expenses and some higher sales commission. I guess where do you see the margin on that segment trending in the near term? And do you have a longer-term target?

You know, we're still pretty good in terms of revenue and the margin and margin potential in that business. We still invest quite a bit into the small business segment, and we -- we still target that upper teens as kind of where we see that margin for not only just the short term here, but I'd say in the midterm as well.

And John, it's always going to be a little lumpy here. I mean, when we -- obviously the performance we've had, we've made some comments around arranging or increasing our performance incentive compensation. And so we have to put that in. And we allocate everything out, as you know, to our segments. We don't keep anything at the corporate level. So you're going to see -- you're also going to see some spikes when we make decisions to spend a little bit more in the brand area. But I think Terry said it well. We expect high teens and the performance is exactly in line with where we expect at this point in time. We're actually very pleased with the small business margins and where they're at and where they're going.

Great. That's helpful. That's all I've got, guys. Thanks.

You're welcome, John.

Okay. (Operator Instructions) Okay. And it looks like your next question is from Jamie Clement with Sidoti & Company.

Good morning, gentlemen.

Hi, Jamie.

Was wondering if I -- if you might give a little bit more clarity in terms of the allocation of CapEx and how that's changed over the last couple of years as you've built your services offerings? Are those businesses -- I mean, obviously they're tremendously different than a print manufacturing business, but how much capital are those businesses requiring as kind of a percentage of a total over the course of the year? I mean, do you have a rough number you can give us?

Here is the way I would think about strategically how we'd position in capital. If you think about the marketing solutions in other services, where we're getting -- I mentioned in the script, Jamie, that we're going to have some bigger rollouts in the second half of the year in the wholesale area, so that's an area we've had to put some more server capacity in in order to really be able to ramp those rollouts. We look at those as a very positive use of capital.

We also have capital that we've mentioned in the web to print area, if you think about getting to that -- what I call that best-in-class opportunity there, we're spending dollars on that. We're spending dollars on e-commerce and capital. That -- and those are -- they were more on putting the flat packaging several years ago. They're now shifting more toward to what I would call more revenue generating opportunities.

Yes, and Lee, that's what I was asking was more the shift, that's what I was curious about. Because your capital spending has been pretty stable.

And I also would add that as we continue -- as we integrate and continue to get cost out, and especially in the fulfillment area, there are some other capital plays that we have there, but that is clearly to a lesser degree than what we've historically done. So much more of the capital is going towards revenue generating plays than not.

Terry, anything you want to add?

Yes, the other thing that I would add can relate it to this, but beyond a bit of capital, is that when we invest in new products that are being developed organically that might require, say, technology investments, typically because we don't know how successful they will be in the marketplace, we actually expense those. So there's (inaudible) capital types of expenditures that are actually expensed. So many of our initiatives don't even show up in the capital bucket.

Understood. And just last question just to follow up on Charlie's, the rate of check decline or check usage being sub 5%, was that excluding Citizens? And that was excluding price? That was just pure unit?

Yes, that's a -- you know, to use a retail, from my retail days at NCR, that is a same-store sales approach. So that's the way to think about it, and that's how we look at the business. So, yes, it excludes -- that's unit decline.

Yes, volume only. No price consideration there.

Right, and no Citizens.

Okay. Well done. Thank you very much.

You're welcome.

Okay. And so there are no more questions. I'd like to now turn the call back over to Lee Schram for closing remarks.

I just want to thank everybody for your participation and thanks for the questions that we got today. And as I consistently kind of say each quarter, we're going to get back to work now, and we look forward to providing a positive progress report on our next earnings call. And I'll turn it over to Jeff for the wrap-up.

Thank you, Lee. This is a reminder that a replay of this call will be available until August 2 by dialing 888-286-8010. When instructed, provide the access code 59901479. The accompanying slides are archived in the News and Investor Relations section of Deluxe's website at deluxe.com. Again, thank you for joining us. Have a good afternoon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.