Deluxe Corp (DLX) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q3 2012 Deluxe Corporation earnings conference call. My name is Clinton, and I will by your operator for today. (Operator Instructions). I would now turn the call over to today's host, Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations. Please go ahead sir.

Thank you Clinton. Welcome to Deluxe Corporation's 2012 third quarter earnings call. I am 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 callwill 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 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 deluxe.com, and was furnished to the FCC 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 will turn the call over to Lee.

Thank you Jeff, and good morning everyone. We just delivered our third outstanding quarter this year and are well positioned to grow revenue for the full year 6% to 7% despite a continued sluggish economic environment. 2012 would represent the third consecutive year of revenue growth. The last time we achieved three-consecutive years of revenue growth dates back 16 years to 1996. We reported third quarter revenue and adjusted earnings per share well above our outlook. Revenue grew almost 7% over the prior year driven by Small Business Services revenue growth of 14% of which 4% came from the OrangeSoda acquisition Checks and Forms both performed well and Marketing Solutions and Other Services revenue grew 23% over the prior year. Adjusted diluted EPS grew 9% over a strong prior year.

We also generated very strong operating cash flow were not drawn on our credit facility during the quarter, and we have increased our cash position $77 million from last December. Encouragingly, we continue to see stabilization and secular check decline rates with financial institution consumer declines less than 5% in the quarterwhich is the third quarter in a row we have seen significantly lower decline rates. We also continue to invest 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 third quarter of $0.81 which included restructuring costs of $0.04 per share. Excluding these costsadjusted EPS of $0.85 was well above the upper end of our previous outlook and 9% higher than the $0.78reported in the third quarter of 2011.

Drawn Check and Forms revenue and Small Business Services and Financial Services and lower discretionary spend drove better than expected EPS performance. The restructuring charges were primarily for employee severance and infrastructure consolidations. Revenue for the quarter came in at $378 million which was well above the range of our outlook and up 6.5% from 2011. All three of our business segments performed well.

Small Business Services revenue of $244 million grew 14% versus last year on a reported basis of which nearly $8.5 million came from the OrangeSoda acquisition. 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 $83 million declined less than 3% verses the third 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 price increases, the addition of Citizens Financial Group, and higher. non check services revenue. Direct-checks revenue of $51 million was down 8% on a year-over-year basis. Gross margin for the quarter was 65.2% of revenue down 0.3%.

Benefits from price increases, improvements in manufacturing productivity, and other cost reduction initiatives were more then offset by increased delivery rates, material costs, and performance-based compensation expense. SG&A expense increased $8.6 million in the quarter and was 45.3% of revenue compared to 45.8% of revenue in the same period last year.

Increase SG&A associated with commissions on increased revenue, higher performance-based compensation expense, and the OrangeSoda acquisition last quarter was partially offset by benefits from our continuing cost reduction initiatives. Excluding restructuring costs, operating margin for the quarter of 20.0% was up slightly from the 19.9% generated in 2011 and was above our expectations with favorability coming from higher revenue per order and continued cost reductions partially offset by higher performance-based compensation expense and the OrangeSoda acquisition last quarter.

All three segments delivered strong operating margins. Excluding restructuring costs, Small Business Services operating margin of 17.1% was down 0.2 percentagepoints from last year due to expenses associated with the OrangeSoda acquisition, higher performance-based compensation expense, and increased commissions partially offset by continued progress with cost- reduction initiatives and price increases.

Financial Services operating margin of 21.9% wasup 2.7 points from 2011 due to higher revenue from price increases as well as continued progress with cost reductions. Direct Checks operating margin of 31.0% was inline with 2011. Turning to the balance sheet and Cash flow statements, year-to-date we have increased our cash and cash equivalence balance by $77 million despite having paid cash for the OrangeSoda acquisition and the repurchasing $12 million of our common stock to offset expected dilution from employee plans.

Total debt at the quarter same 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 three quarters of the year was $177 million which was $6 million higher than last year and exceeded our expectations driven by stronger operating performance. Compared to last year, stronger operating performance and the discontinuation of our defined contribution pension plan were partially offset by higher income tax payments, a planned contribution to our Viva Trust for future medical cost in the first quarter, and higher contract acquisition payments.

Capital expenditures for the first nine months were $26 million and depreciation and amortization expense was $50 million. Given our strong performance in the third quarter, we are raising our consolidated revenue outlook for the year to a range of $1.508 to $1.515 billion dollars. We are not expecting much improvement 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 $3.43 to $3.50 excluding $0.13 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 account channels 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 very low single-digit range driven by secular check order declines which we expectwill be approximately 5% to 6% in the fourth quarter partially offset by higher revenue per order, the Citizens Financial Group migration, and continued growth from noncheck revenue streams. Direct Checks revenue declines in the mid to high single-digit driven by check volume reductions in a sluggish economy,additional cost and 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 Solution and Other Services offerings, and enhanced Internet capabilities, and an effective tax rate of approximately 33%. We are tightening our operating cash flow outlook to a range between $239 million and $245 million in 2012 reflecting stronger earnings offset by higher income tax and contract acquisition payments and a first quarter contribution to our Viva Trust.

We expect contract acquisitions payments to be approximately $20 million for the year. 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 fourth quarter 2012, we expect revenue to range from $381 million to $388 million adjusted diluted earnings per share is expected to range from $0.85 to $0.92. In comparisonto the third quarter, fourth quarter revenue is expected to be higher due to seasonal holiday and tax form offers and a continued ramp in marketing solutions and other services revenue primarily driven by new customer migration roll-outs and wholesale web services. Adjusted EPS in the fourth quarter is expected to be higher than the third quarter due to the higher revenue level partially offset by an expected increase in brand-awareness spending.

Shifting to our capital structure. We expect to maintain our balanced approach of investing organically and through small to medium size 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. Finally, we plan to pay off the $85 million of notes maturing in December without drawing on our credit facility. We believe our strong cash flow, the 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 in the fourth quarter continues to be on improving sales and marketing backend operation through process centralization, simplification, platform and tool consolidation, and leveraging E-commerce capabilities. We have consolidated our Little Rock and Joppa call centers for custom direct into our Colorado Springs Direct Checks call center in early July. We will continue to improve the mix of paper catalog in online search engine marketing expenditures.

In fulfillment, we expect to continue our lean product standardization, spoilage reduction, in 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 by the end of year our Custom Direct Java printing facility and our SBS Rockford printing facility with all work being consolidated into other Deluxe printing facilities. Finally, for the shared services infrastructure we expect to continue to reduce cost in IT and other areas as more. opportunities exist to improve efficiencies. Now I will turn the call back to Lee.

Thank youTerry. I will continue my comments with an update on our key revenue growth area Marketing Solutions and Other Services, and insights on next steps for improving our brand awareness. I will then highlight progress in each of our three segments including the perspective on what we hope to accomplish in the fourth quarter, and finally provide some context looking forward to 2013. We have significant growth opportunities in Marketing Solutions and Other Services including for small businesses, 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 size acquisition that complement our large customer basis with a focus on Marketing Solutions and Other Services. Here is an update on the four-sub categories 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 rate this year in the high teens. Although expected actual growth rates will be higher this year closer to the mid 30s given the PsPrint acquisition in July 2011. Key growth initiatives include scaling Web-to-print by cross-selling to our customer base and continuing to add new customers through major accounts, distributors, and partners.

Second, web services which includes logo 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 close to 40% driven by the OrangeSoda acquisition. Key growth initiatives and performance drivers include adding wholesale Telco and major accounts, cross-selling to our retail base through bundle presence packages, adding new customers, resellers, and partners, and reducing web design and SEM campaign cycle times and turn rates both of which ended the quarter at record low rates. This category is also our focus area for tuck-in acquisitions with OrangeSoda being a good example.

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 high single 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. It also includes adding Bankers Dashboard customers as well as adding features for our installed Bankers 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 25% range. A very high percent drive by a small starting revenue base. Key growth initiatives here includeadding new Cornerstone, SwitchAgent, and gift and reward card financial institutions. We expect Marketing Solutions and Other Services revenues to be approximately $285 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 13% and 12% the previous 2 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. Our brand awareness improvements starts with differentiating our offers for small business around a brand platform with a key message that Deluxe is a genuine passionate small business partner that gives them everything they need so they can focus on what they love.

Think of it as Deluxe helping small businesses pursue their unique passion. We have been working closely with a national outside agency while at the same time improving ouronline site architecture, content, integration, and design and our call center experiences. We spent a little less than expected in the third quarter on the brand transformation simply given the timing and building out this new integrated platform.

For the year, we will basically spend what we expected to spend in the second half of the year from our July earnings call guidance, but the timing will be shifted more heavily to the fourth quarter. So what should you expect to see from us? a rollout is expected to begin late in the fourth quarter with television, digital including mobile, and print ads, and we expect to continue this throughout 2013 in three primary bursts weighted more heavily towards the first half of the year. Our whole customer experiencefrom online to our call centers will be improved and integrated into this whole brand transformation experience.

We believe the outcome of our brand transformation will be messaging that is compelling, emotional, humorous, edgy, memorable, and differentiated, but simple. A real rallying cry for our brand and our people. For competitive reasons, we will not disclose the messaging or intended investment levels behind these initiative at this time. But look for our new advertising to begin later this quarter.

We have established return on investment criteria based on the number of impressions, expected site visits, online leads, and calls, and will use results against these metrics to guide us as we progress on this new brand journey. Now shifting to our segments. In Small Business Services, we had strong performance despite a continued sluggish economic climate.. Revenue grew 14%, 4%of which came from the OrangeSoda acquisition.

Checks and Forms performed well. 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 increases from better balance and enriched content in 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 growth in web, SEM, SEO and payroll services. We ended the quarter with approximately 525,000 web hosting customers. We continue to closely monitor the small business market. Optimism enmities declines four of the last five months including slightly in September as we exited the third quarter and remain at historically low levels. Small business spending is more for maintenance then expansion and remains weak, but the outlook for improvement in business conditions over the next six months did improve as we exited the quarter.

Small businesses continued to spend cautiously, scrutinize purchases, and experience tight cash flow. In summary, current optimism enmities have been turning 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 owners number one pingpoint 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 to help small businesses get and keep customers Deluxe is better positioned as that indispensable partner for growth. Our focus for the fourth quarter in core small businesses Checks and Forms is on acquiring new customers, increasing our share 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.

We also expect higher seasonal holiday and tax form revenues. In Marketing Solution 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 Web-to-print marketing services, payroll services, and logo customers, and continue to expand our search engine marketing base.

In Financial Services we saw a third consecutive quarter 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 5% to 6% driven by strength in both the national and community segments. In addition, we benefited from processing checks for Citizens Financial Group in the current quarter.

We had strong overall and new acquisition rate and our retention rates remain strong on deals pending in the current quarter in excess of 90%. Positively. we now have commitments to extend all of our large contracts through the end of 2013. We also continue to work a number of competitive RFPs and expect a decision on one this quarter, and we are somewhat favorably informed not no, but not now on another one. We also simplified our processes and took complexity out of the business while reducing our cost and expense structure. We are planning for check units to be in a decline of around 5% to 6 % for the fourth quarter.

We also expect retention rates in excess of 90% on deals pending in the fourth quarter and with close to 90% of our 2012 Community Bank contract renewals already completed with three quarters of the year behind us, we remain well ahead of last year's pace. We made progress again in the quarter in advancing noncheck marketing solutions and Other Services revenue opportunities. Revenue grew over last year in these noncheck 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 the fourth quarter. In addition to a number of Community Banks that have started to rollout our new SwitchAgent offer, we have initiated branch pilots from four large financial institution including one where we do not produce checks for them. Although it is still early in the rollout of the our offer, we continue to be excited about SwitchAgents opportunity.

For the first time ever we recently presented at Synovate's Fall Showspecifically showcasing our SwitchAgent offer. The positive customer and media responses we have seen from this event are very encouraging.

Bankers Dashboard also continued to perform well in the quarter. As you can see although not as fast as we hoped in some areas, momentum continues to build, and we expect strong double-digit growth in these 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 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. We completed the integration of our Little Rock and Joppa custom-direct call centers into our Colorado Springs direct-checks call center in July, and are now working on integrating Joppa custom direct fulfillment into a Deluxe fulfillment site which we expect to complete by the end of 2012. We continue to see a ramp in revenue enhancements synergies through our call center scripting and upsale capabilities as well as synergistic cost and expense reductions. For 2013, we expect Direct Checks revenue to decline in the mid to high single digits driven by continued declines in consumer usage in a weak economy.

We expect to reduce our manufacturing cost and SG&A in this segment and drive our operating margins in the 30% range while generating strong operating cash flow. As we exist the third quarter on the heels of another outstanding quarterly performance in an continued challenging economy, we made good progress again in transforming Deluxe, but 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. Our primarily focus continues to be on revenue growth, especially in Marketing Solution and Other Services, and on our new brand positioning.

We expect to continue the trend of revenue growth in the fourth quarter with solid mid single digit growth. If the economy improves in the fourth quarter, we should have some 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 2013, our portfolio continues to become better positioned to deliver continued sustainable revenue growth. We are planning for what we expect to be a fourth consecutive year of revenue growth.

Given the continuing sluggish economic climate, we believe it is prudent right now to expect the increase in 2013 revenue to be approximately 2% to 4% compared to 2012which is expected to produce adjusted diluted earnings per share growth ranging from approximately 3% to 6%. with the assumption that we will be spending more on brand awareness and also have a higher tax rate in 2013 compared to 2012. To give some more color on our revenue thinking, we are planning on consumer checks through financial institutions to decline 5% to 6%.

On top of this positively as we indicated earlier, we have extended all large financial institution contracts through at least 2013. We have approximately 15% fewer Community Bank contract dollars up for renewal in 2013 compared to 2012. So these should help to stabilize core checks, plus we have more competitive opportunities coming through due through 2013. In Business Products, we expect to expand existing organic initiatives including shop Deluxe and Canada, and to add Safeguard distributors, dealers, and major accounts.

In Marketing Solutions and other services we expect organic mid teens revenue growth. To give some more color on our thinking here, if we annualize 2012 expected revenue including adjusting for a full year of OrangeSoda and organically grow in the mid teens, this would imply a targeted Marketing Solutions and Other Services revenue to total revenue mix of approximately 22% for the year. While we expect to exit the fourth quarter of 2013 closer to a 25% mix. We are excited about our progress here and with the more cooperative economy and continued possible additional tuckin acquisitions as catalysts, we could potentially grow Marketing Solutions and Other Services revenue even faster.

We also expect our cost and expense reduction initiatives to continue in 2013. A couple of extremely important housekeeping items to consider for the first quarter 2013. First, there are actually two less business days in the first quarter 2013 compared to 2012 which will represent approximately $12 million less in revenue year-over-year resulting in a lower profit.

Along with an expected higher tax rate and expected higher brand spend in year-over-year as well in the first quarter, this in all likelihood will drive a decline in EPS in the first quarter of 2013 mostly due to the timing of two less business days. Only one of the business days comes back in the year in the third quarter, and therefore, we have one less business day in 2013 than in 2012 for the full year. It is also extremely important for us to see how the fourth quarter progresses and to closely monitor the market place and the economy over the next three months before providing more specific outlook details for 2013. Now Terry, Jeff and I will open the line for questions.

(Operator Instructions). your first question comes from inline of Charles Strauzer from CJS Securities. Please go ahead.

Hi, Good morning.

Hi, Charlie.

Couple of questions. Obviously, with the check decline still at a pretty low rate here kind of any better handle on the dynamic or causes behind that?

Charlie, what we are doing is that we are continuing to get smarter and smarter looking out and looking at what the check rate of declines are, and as I said in my prepared comments, the nice thing this quarter is we saw both the Community and the national accounts perform better then we expected. So it is consistent now. We have seen that now for several quarters. What I would also tell you is we are trying to get smarter and smarter every day looking at what are the driver of the decline rates.

I will give you some examples of things we are working on. We are still going through the rigor of this, but when we look at things such as housing stock and automatic bill pay, credit card payments, branches that are opening and closing, we are just getting smarter and smarter about being able to try to be more productive about where we expect the decline rates to go. We are not ready to claim victory are on this, but we know it is important. We know investor are wanting us to try to get more information to be smarter and smarter about our projections and our rates of decline. What we are trying to do is work hard at looking at all these variable factors and trying to figure out how we can get more predictive. The nice thing that we have seen is the consistency both in the National and Community bank space right now.

Very good. You talked about some of the RFPs that are pending, I thought you said one was not no, but not now. Maybe is you can clarify that a little more. Does that mean it is potentially an award, or it one where they are saying we are just going to delay a decision? Help us clarify a little bit there.

The simple answer is that they told us we are not ready to make a move, but it is not a long term decision. As you know, most oaf these contracts whether they are competitive one or they ours are generally three to five- year contracts. The Best I can leave with you is we were told not no, but not know.

Okay. Very good. Lastly, when you look at the October NFIB small business optimism numbers they weren't very great, but kind of ticked downward again. In general, what are you seeing from when you talk to the small businesses out there, and just the general sense seems like the uncertainty around the election is still holding people back. Is that what you are seeing as well?

I said in my prepared comments, Charlie. It is tough out there. I think we are meeting more and more - - we actually even spent more time this quarter with small businesses at large because of our testing on the brand and the work we are doing on the brand. What I would tell you is yes, we think it is challenging out there.

As I also said in my prepared comments what we like about what we what we are doing Charlie, and we did some more work with some outside parties in the quarter, and we continue to see that the number one pain point is revenue growth for small businesses. And again we believe the work we have been doing and that we are doing as we go forward to get our offers including the new services offers that help small businesses get and keep and help them grow with their customers is really on the mark, and that is why we are excited about where we are going directionally. With would we like a better economy? Sure. But we are going to work with the hand we are dealt and try to improve the Company as much as we can.

Thank you very much.

Your welcome Charlie.

(Operator Instructions). your next question comes from the line of John Kraft from D.A. Davidson. Please go ahead.

Good morning gentlemen.

Hi John.

Congrats first of all. Couple for each of you. Lee you said you were keeping an eye out for tuckin acquisitions on the SBS side. Are there any particular products you feel like your missing or any particular focus you might be looking for?

As I said we are focused primarily on the Marketing Solution and the Other Services space and more in the Services piece of that, John. We are trying to continue to assess what I would call the evolution of how a small business owner evolves as a business.

When it is early on and they are trying to figure out how to brand themselves and get online and then move to promote themselves, and then to really get more customers, there are several areas that we are continuing to look at to see if it makes sense for us to dig deeper and get more offers or get more depth and capabilities in those spaces. I am not prepared to give you anymore color other than that. That is how we are looking at it. One of the things I want to highlight again that I think is really important is the work we are doing to bring the brand together with the continuity into our call centers into our online offers content capability. We come out with this later thin fourth quarter.

We think this is going to be a powerfully positive formula for us as well. What we are doing is trying to validate what that is going to bring and what pieces that we think we might need to be looking at more closely to round out, I will call it a tool kit for that small business owner. So that is how we are looking at it right now.

That is helpful thanks Lee. Just a clarification on the guidance. That assumes no new acquisitions in there or competitive REP wins?

Correct.

A couple for you Terry. You mentioned a consolidating a couple of check centers, and I was wondering about a timeline there was that early 2013?

The two printing facilities that we are consolidated will be done later this year. One is a check-free facility in the Direct Check space. The other is a printing center in Small Businesses and does not produce checks.

The Rockford. Okay. Separately on the tax increase in 2013. You suggested it might move up a little bit. Right now you are saying 33% are we thinking 35%? What is the best guess at this point?

We have not put out specific guidance on that yet. So I will not give a specific number right now. We have had really over the past couple of years we have had some benefits throughout several of the quarters that have been more onetime in nature, and we expect the delta between this year and next year to be attributed to fewer of those onetime benefit.

Okay. Is that fair. Good job guys. Looking for forward to hearing and seeing those ads.

Thank you John.

Thank you. Your next question comes from James Clement with Sidoti. Please go ahead.

Lee , Terry, Jeff, good morning.

Hi good morning, Jaime.

Most have been asked and answered, but I wanted to ask you Financial Services and Direct Checks. Obviously, significant majority portion of margin being derived by Checks in those segments. Margins continue to be very strong this year. As you look out over the next 12 to 24 months would you expect some natural erosion in those markets with the erosion in volume overtime, or do you think you have enough in the way of taking costs out to be able to keep them at these levels?

Jaime, Let me deal with Direct Checks because it is easier to give some color on that. We expect to stay tight to that 30% range. I have used language when I put it out usuallyat the beginng of the year. It is usually plus or minus a couple points around 30. I think Terry and I expect that to be the case as we go forward.

In the case of- - again without trying to be too specific in the case of Financial Services, I want you to remember that we are beginning to invest more in the noncheck services areas, and as we make investments and we started to make those investments in the third quarter. We are making some more investment in the fourth quarter more investments. As we head into 2013 to come out with offers we think are going to hit the mark primarily for Community Banks, but even into some of our larger customers there. We are going to make some investments there. Yes, That will have some implications potentially for margin.

We know it is important to keep the margin profile strong in our check businesses. Also, you probably heard my comment about we will continue our cost and expense reduction initiatives in 2013. we are not prepared to give a specific number right now for that. But we are staying after it. The real question, Jaime is gong come down to how do we balance that exactly in the margin profile and implications for that Financial Services business. That is the way I think you should think about it for modeling purposes.

Great. Last question if I may. Can you talk about the importance of search engine marketing and search engine optimization on your small business customers. How mobile is impacting- -I would imagine you are getting as many questions at Deluxe as you were asking to your own customers. I am curious for your thoughts just considering that market has evolved a lot since this year even began.

We are extremely thrilled with the OrangeSoda acquisition. It has done a number of things for us. In addition to bringing us a nice revenue stream and bunch of smart people and just an unbelievably positive culture. They are teaching us how to look at channels and customers and bring those search results to our small business customer. I will just make a comment because this is very interesting. I am going to have an update with the key leaders of the Company this afternoon.

We are going to show a video of a spa owner in Connecticut. It is a testimonial, and I watched it yesterday for the first time, and I told my small business leader, this is just incredibly tremendous. She talks very eloquently and very clearly about how we brought search engine marketing and optimization to our spa, and how she is using that, Jaime to really build her customer network. We are just really excited about it. We are seeing strong results so far, and we are obviously expecting to be able to build on that. We are also learning about churn, and how to deal with better with churn from just a great group of people that we have at OrangeSoda So that is the way I would think about it and look at it right now.

Thank you. Very much as always for your time.

Your welcome.

Thank you. Now I would like to turn the call over to Lee Schram for closing remarks.

I just want to thank everybody again for their participation and the questions that we got today. As I normally say, we are going to get back to work. We have a lot left to do, and we look forward to providing some more positive progress on our next earnings call. I am going to turn it over to Jeff for some closing housekeeping comments.

Thank you Lee. This is a reminder that a reply of this call will be available November 1st by dialing when 888-286-8010when instructed provide the access code 46672795. The accompanying slides are archived in the news and Investor Relations section Deluxes website at deluxe.com. Again thank you for joining us. Have a great afternoon.

Thank you for joining today's conference. This concludes your presentation. You may now disconnect, and have a good day.