Deluxe Corp (DLX) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Deluxe Corporation's second quarter 2015 earnings conference call. (Operator Instructions). I'd no like to turn the conference over to your host for today, Mr. Ed Merritt, Treasurer and Vice President of Investor Relations. Sir, you may begin.

Thanks, Ben, and welcome, everyone to the Deluxe Corporation's second quarter 2015 earnings call. I'm Ed Merritt, Deluxe's Treasurer and Vice President of Investor Relations. Joining me on today's call are Lee Schram, our Chief Executive Officer and Terry Peterson, our Chief Financial Officer. At the conclusion of today's prepared remarks, Lee, Terry and I will take questions, if there are any.

I would like to remind you that comments made today regarding financial estimates, projections and management's intentions and expectations regarding the company's future performance are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. These comments are subject to risks and uncertainties which could cause actual results to differ materially from those are projected.

Additional information about various factors that could cause actual results to differ from those projected are contained in the press release that we issued this morning as well as the Company's Form 10-K for the year ended December 31, 2014. The financial and statistical information that will be reviewed during this call is addressed in greater detail in today's press release, which was furnished to the SEC on the Form 8-K filed by the company this morning.

The press release is also posted on our Investor Relations website at deluxe.com/investor. Any references to 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, Ed, good morning, everyone. Deluxe delivered an outstanding quarter and we are well positioned as we enter the second half of the year to grow revenue 5% to 7% for the year despite a continued sluggish economic environment. We reported revenue and adjusted earnings per share in the second quarter above the upper end of our outlook. Revenue grew 7.5% compared with the prior year quarter.

Small Business services revenue agree over 5% and Financial Services revenues grew 19%. Checks and forms performed well and marketing solutions and other services revenues grew 31% over the prior year and represented 29% of total second quarter revenue.

Adjusted diluted earnings per share grew 12% from the prior year, and we generated strong operating cash flow of $68 million for the quarter. We were drawn $308 million, in total, on our credit facility and short-term bank loan at quarter end. As expected, we did not repurchase any common shares in the quarter. We continued our brand awareness campaign to help better position our products and services offerings and drive future revenue growth.

We also advanced process improvements and slightly overdelivered on our cost reductions expectations in the quarter, as we accelerated initiatives. We also learned in the quarter that we will have the opportunity to ring the opening bell at the New York Stock Exchange on November 23rd, which will be the actual 100 year anniversary day for the company.

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

Thank you, Lee. Earlier today we reported diluted earnings per share for the second quarter of $1.11, which included $0.02 per share for restructuring and transaction-related charges. Excluding these costs, adjusted EPS of $1.13 exceeded the upper end of our previous outlook and was 11.9% higher than the $1.01 reported in the second quarter 2014.

The restructuring and transaction related charges are primarily for employee severance and a small acquisition in the quarter. Revenue for the quarter also exceeded the upper end of our previous outlook at $436 million, an increase of 7.5% over last year, or about 2% excluding primarily the impact of the WASA acquisition.

Small Business services revenue of $282 million grew 5.5% versus last year, despite a continuing sluggish economic environment, an unfavorable foreign exchange rates, which negatively impacted revenue growth by 0.9 percentage points in the quarter. We delivered growth in marketing solutions and other services, checks, and in our online safeguard distributor, major accounts and dealer channels. SBS revenue also benefited from price increases implemented in the first quarter.

Financial Services revenue of $113 million grew 19.1% versus the second quarter of last year and would have been down less than 1% excluding the WASA acquisition. Higher marketing solutions and other services revenue driven by WASA and Deluxe Rewards, price increases and revenue from Zion's Bank more than offset the impacted of lower check orders.

Direct Checks revenue of $41 million was down only 5.1% from last year and ended ahead of our expectations driven by higher conversion rates from e-mail marketing offers and an improved call center incentive plan. From a product revenue perspective, checks were $220 million, representing 50% of total revenue; forms, accessories and other business products were $90 million, or 21% of total revenue; and marketing solutions and other services were $126 million, which was 29% of total revenue.

Gross margin for the quarter was 64.2% of revenue, which was up 0.2 points from 2014. The increase was primarily driven by previous price increases, improvements in the services revenue margin and improvements in manufacturing productivity, partially offset byproduct revenue mix and higher delivery and material costs. SG&A expense increased $16.6 million in the quarter, which was 43.6% of revenue compared to 42.8% of revenue in the same period last year.

Benefits from our continuing cost reduction initiatives in all three segments were more than offset by increased SG&A and Financial Services associated with the WASA acquisition and our efforts to grow the Small Business distributor channel. Excluding restructuring and transaction-related charges, adjusted operating margin for the quarter was 20.8%, which was down slightly from the 21.3% generated in 2014.

All three segments delivered operating margins at least in line with our expectations. Small Business services adjusted operating margin of 17.6% was down one percentage point driven by higher spend on brand awareness in the quarter. As we previously communicated, in the last couple earnings calls, our highest level of brand spend was planned for the second quarter and we executed to our plan.

Financial Services adjusted operating margin of 22.8% was down 1.1 points from 2014, driven by WASA acquisition amortization expenses and check usage declines, partially offset by the timing of cost reductions. Although WASA was accretive to earnings in the second quarter, the Financial Services adjusted operating margin was negatively impacted 3.8 points from the business. Direct Checks adjusted operating margin of 37.2% increased 4.9 points from 2014 and was stronger than we expected, driven by a higher mix of reorders and lower costs, which more than offset the lower order volume.

Turning to the balance sheet and cash flow statement, total debt at the end of the quarter was $504 million, which was down $50.5 million or 9% from December 2014. Cash provided by operating activities for the first half was $146 million, a $20.2 million increase compared to the first half of 2014. The increase was driven primarily by improved operating performance, timing of collections associated with the WASA business, and lower interest payments, partially offset by higher performance-based compensation payments.

Capital expenditures for the first six months of 2015 were $19.3 million and depreciation and amortization expense was $35.7 million. We are strengthening our previous consolidated revenue outlook for the full year, and now expect it to range from $1.76 billion to $1.78 billion, inspite of a worsening, unfavorable impact from foreign exchange rates. We are raising our expectations for adjusted diluted earnings per share to $4.50 to $4.60.

There are several key factors that contribute to our improved full-year outlook, including Small Business services revenue is expected to increase 5% to 6% as volume declines in core business products, lower SEM and SEO revenue from our decision announced in third quarter of 2014 to exit unprofitable business and unfavorable foreign exchange rates are expected to be more than offset by benefits from our eCommerce investments, price increases, growth in our safeguard distributor, dealer and major accounts channels, and double digit growth in marketing solutions and other services offerings.

For added clarity, without the SEM and SEO exchange and unfavorable foreign exchange rates the growth in Small Business services is expected to be in line with last year's organic growth rates. We expect Financial Services revenue to increase 12% to 14%, driven by continued growth from marketing solutions and other services revenue, including WASA and Deluxe Rewards, higher revenue per order, and a full year of Zion's, partially offset by recurring check order declines of approximately 6% and some pricing pressure, including the impact of the large customer renewal early in the second quarter of 2014.

A Direct Checks decline of 6% to 7%, driven by lower check order volume, stemming from secular declines in check usage and eliminating marketing expenditures that no longer meet our return criteria, a continued sluggish economy, full year cost and expense reductions of approximately $50 million net of investments, increases in medical expenses, material costs and delivery rates, continued investments in revenue growth opportunities, including brand awareness, marketing solutions and other services offers, and enhanced Internet capabilities, lowering interest expense and an effective tax rate of approximately 34%, representing approximately $0.07 of delusion per share compared to 2014's tax rate.

We expect to continue generating strong operating cash flows and have raised our estimate for the year to a range of $300 million to $310 million in 2015, reflecting stronger operating performance and lower interest payments, partially offset by higher tax and performance-based compensation payments.

We continue to expect annual contract acquisition payments to be approximately $15 million. 2015 capital expenditures are expected to be approximately $40 million, about the same as 2014, as 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 approximately $76 million, including approximately $30 million of acquisition-related amortization.

For the third quarter of 2015, we expect revenue to range from $439 million to $447 million, adjusted diluted earnings per share is expected to range from $1.10 to $1.15. In comparison to the second quarter, adjusted EPS is expected to be about the same as the midpoint of the third quarter range, primarily due to higher MOS revenue and lower brand awareness spend, offset by lower Financial Services and Direct Checks higher margin check revenue and the resulting flow through to operating income and lower cost reductions. For WASA, we expect the earnings per share contribution to be slightly accretive in the third quarter or about the same as the second quarter.

Shifting to our capital structure, we expect to maintain our balance approach of investing organically and through small to medium-sized acquisitions in order to drive our growth transformation. Additionally, we expect to continue paying a quarterly dividend and repurchase shares in the back half of 2015 to at least offset dilution. We may from time to time consider retiring additional outstanding debt through open market purchases, privately negotiated transactions or other means. We believe our increase in cash flow, strong balance sheet and flexible capital structure position us well to continue advancing our transformation.

I will include my comments with an update on our cost and expense reduction initiatives, which, again, are coming from all three business segments. Overall, we had a solid second quarter, as we overdelivered slightly on our expected cost and expense reductions towards our $15 million annual commitment net of investments.

Approximately 55% of the $50 million in expected reductions, will come from sales and marketing. Another 40% from fulfillment and the remaining 5% coming from our shared services organizations. Our focus in sales and marketing for 2015 will be on sales channel optimization, platform and tool consolidation, leveraging sales and marketing efficiencies, including integration from recent acquisitions.

In fulfillments, we expect to continue our lean, direct, and indirect spend reductions, further consolidate our manufacturing technology platforms, drive delivery technology and process efficiencies, reduce spoilage, further enhance our strategic supplier sourcing arrangements and continue with other supply chain improvements and efficiencies.

Finally, for shared services infrastructure, we expect to continue to reduce expenses primarily in IT, but we are also working opportunities in finance and real estate. Now I'll turn the call back to Lee.

Thank you, Terry. I will continue my comments with an update on our overall focus and then highlight progress in each of our three segments, including a perspective on what we hope to accomplish during the balance of 2015, as well as an update on our brand transformation.

Our primary focus in 2015 continues to be profitable revenue growth and increasing the mix of marketing solutions and other services revenues towards our goal of 40% by 2018. Here we will focus on growing organically, as well continuing to assess potential small to medium sized acquisition that compliment our large customer base and add new technologies.

We have strengthened our channels in Small Business to include financial institutions, online, retail, wholesale, safeguard distributors, dealers and major accounts. Deluxe is now more capable of helping Small Businesses pursue their passion as a trusted provider of a growing suite of products and services a Small Business needs to market and operate their business and helping financial institutions with customer acquisition, fraud, security, and risk management and commercial and treasury services offers.

Here is an update on our four subcategories framework for marketing solutions and other services. We ended the second quarter right in line with our expectations and revenue, with mix in the four subcategories, basically, in line with our expectations. First, Small Business marketing is expected to represent approximately 41% in 2015, with expected growth in the mid-20s this year. Key 2015 growth initiatives include scaling web do print by cross-selling to our customer base and continuing to add new customers through distributors, dealers and major accounts.

In addition to the opportunity to penetrate web to print, we also see strong growth opportunities in retail packaging, promotional products and other marketing solutions. In the second quarter we grew in the strong double digits, driven by new major account customers that are using our comprehensive marketing solutions offers.

The second category, web services, which includes logo and web design, web hosting, SEM, SEO, e-mail marketing, social, and payroll services, is expected to represent approximately 21% in 2015, with expect decline rates in the mid-single digits, but low single digit growth, excluding our early announced decision to exit some unprofitable revenue in the SEM/SEO space. Key 2015 growth initiatives and performance drivers include adding wholesale web telco and media resellers and partners, cross-selling to our retail base through bundled presence packages, adding more new customers, resellers and partners, reducing web-designed churn rates and adding payroll services customers and features such as time and attendance applications.

This category also is our focus area for tuck and acquisitions. In the second quarter, we saw double digit growth in direct web services offers. We closed the second quarter with approximately 863,000 web-hosting customers. The third category, fraud, security, risk management and operational services, is expected to be about flat in 2015 and represent approximately 16%.

Key initiatives include scaling our program services, including adding new features 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 and providing both a tablet and new credit union offers.

As a reminder, this category also now includes some performance-management revenue that was previously reported in Small Business marketing. In addition, we expect to scale eChecks more with opportunities ranging from adding eChecks to our distributor, dealer, and major account channels to also scaling in many areas where we do not sell paper checks today.

Deluxe eChecks had its best revenue quarter ever and we have opportunities with larger financial institutions, paper rebate, medical and insurance clearinghouses and other document-management and payment-solution companies. 20% of all eCheck customers are new customers who have not purchased a paper check from Deluxe in the last six years.

Finally, other financial institution services are expected to represent approximately 22% in 2015, with expected growth rates in the very strong double digits. Key growth initiatives here including adding new financial institution customers and targeting and campaign services, switch agent online account opening and anchoring and scaling Deluxe Rewards and WASA Financial Services.

We expect marketing solutions and other services revenues to be approximately $525 million to $535 million in 2015, up from $427 million in 2014, with organic growth in the low double digits. If achieved, this performance would translate to a total revenue mix of around 30% of revenue, up from almost 26% in 2014 and 22% and 19% the previous two years.

We continue to target growing marketing solutions and other services as a percent of total company revenue to approximately 40% by 2018, with checks expected to represent approximately 40% of revenue and business products expected to represent approximately 20% of revenue. Here is an update on our brand transformation. Our intent for 2015 is to continue to raise brand awareness by leveraging our 100-year anniversary through a purposeful content-based campaign.

To celebrate our 100th yeah, we are telling the stories of 100 Small Businesses across the country through a documentary and photo essay series. These stories will be released throughout the year via our social channels and live on SmallBusinessRevolution.org. We have now released six mini documentaries and 51 photo essays through the first half of the year.

The reaction has been very positive and has resulted in quite a bit of earned media attention with over 920 million impressions and 245 new stories on radio, television, and print. Social media is an important part of this campaign by virally spreading the stories and is responsible for 20% of the traffic to SmallBusinessRevolution.org.

We also had a very successful partnership with ABC and specifically Good Morning America and Shark Tank, primarily in the month of May, focused around Small Business week. Both of these properties allowed us to utilize national and local television, which reinforced our national and local PR approach. Robert Herjavec, from Shark Tank, joined us in this Small Business Revolution and will be an expert in our full-length documentary to be released this fall, along with other Small Business industry experts.

Our goal is to stretch our spend with impactful content and reach, yielding earned media attention to raise brand awareness. In the second half of the year, we will continue to release monthly documentaries, including a full-length one in late September, introduce surprise and delight for the love of Small Business recognition events; refresh our expected SBS and FS brands, and link our efforts with our 100-year company anniversary, culminating with our ringing the bell to open the day at the New York Stock Exchange on November 23rd. We will continue to provide quarterly updates on our progress during our earnings release calls. Now shifting to our segments.

In Small Business services in the quarter, as expected, we did not see any notable improvements as the economic climate for Small Businesses remained sluggish and foreign exchange rates remain unfavorable. We have solid performance, however, as revenue grew over 5%, checks and forms met our expectations, results from targeted customer segmentation in the conference call improved, new customers from our financial institution, Deluxe business advantage referral program, and our direct response campaigns remain strong.

Average order value and conversion rates increased. Our online safeguard distributor, dealer and major accounts channels grew revenue over the prior year. We also saw growth in Small Business marketing solutions, web and payroll services, while SEM/SOE services declined in line with our earlier decision to exit some unprofitable channels. Again, we ended the quarter with approximately 863,000 web-hosting customers.

We continue to closely monitor the Small Business market and so far the economic indexes appear to be consistent with our previous expectations and what we planned into our outlook. Optimism (inaudible) increased to start the quarter in April and continue to improve in May but declined dramatically to close out the quarter in June, ending at the lowest point since March 2014.

Optimism momentum in the fourth quarter 2014 that shifted downward in the first quarter continued to shift further downward in the second quarter. The outlook on business conditions expectations fell to the lowest level in a year. The percentage of Small Businesses planning capital outlays over the next three to six months fell to a weak 23% reading.

In summary, current optimism (inaudible) remain sluggish and actually trended down further in the second quarter. The good news is, other than taxes and regulation, 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 help Small Businesses get and keep customers. Deluxe is better positioned as an indispensable partner for growth.

Our focus for 2015 is on profitably growing marketing solutions and other services revenue, with key drivers including accelerating our brand transformation and significantly improving overall marketing awareness while institutionalizing our brand promise for our customers, delivering an effective end to end integrated technology customer experience, effectively acquiring and retaining customers, and optimizing sales channel effectiveness and channel marketing capabilities.

For 2015, we expect marketing solutions and other services revenue for the Small Business services segment to represent over 30% of segment revenue, driven by Small Business marketing solutions and web services, with the balance being fraud, security, and operational services. In Financial Services, we saw the rate of decline of checks perform about 7%. However, June came in closer to 6%. We continue to expect the unit decline rate for the year will be about 6%.

We had strong overall new acquisition rates and our retention rates remain strong on deal spending in the current quarter. We simplified our processes and took complexity out of the business while reducing our cost and expense structure. We have now extended all our large contracts through at least the third quarter of 2015, with the exception of one, which we are working to retain. We also continue to work a number of competitive RFPs.

We made progress again on the quarter in advancing non-check marketing solutions and other services revenue opportunities. WASA revenue was approximately $19 million, which met our expectations, and we had strong bookings in the quarter, helping us build backlog that will begin to roll out over the balance of the year. Deluxe Rewards continued to perform very well in the second quarter, including achieving double digit operating margins.

For 2015, we expect non-check marketing solutions and other services revenue to be approximately 36% of total FS revenue, driven by WASA revenue of approximately $75 million, fraud, security, risk management, non-operational services revenue of approximately $40 million, Deluxe Rewards revenue of approximately $30 million, and targeting, campaign, and activation services revenue of approximately $15 million. Overall, we continue to be pleased with the WASA acquisition. WASA was almost a penny accretive to EPS in the second quarter, and we expect it to be slightly accretive in the third and fourth quarters and now slightly accretive to earnings per share for the full year.

In Direct Checks, revenue was higher than our expectations driven by better e-mail marketing conversion rates and an improved call incentive plan. We continue to look for opportunities to provide accessories and other check-related products and services to our consumers, as well as work 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 conference call scripting and upsell capabilities, as well synergistic cost and expense reduction. Our Direct Checks expectations for the year are better. Previously we guided to a decline of 8%, but now we believe the decline will be 6% to 7%, driven by continued declines in consumer usage and a sluggish economy.

We anticipate that marketing solutions and other services revenue, which is primarily fraud and security offers for this segment, to be about 10% of Direct Checks revenue. We expect to reduce our manufacturing and manufacturing costs and SG&A in this segment and continue to deliver operating margins in the low to mid 30% range, while generating strong operating cash flow. As we exit the second quarter on the heels of an outstanding performance and a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us in 2015.

We believe we are well-positioned in 2015 for our sixth consecutive year of revenue growth. Our breadth of offers in financial discipline has enabled us to position ourselves for sustainable revenue growth while continuing to improve profitability and operating cash flow. Our technologies and sales channels are stronger. Our digital technology services offers are more mature. Our infrastructure is better. And our management talent is deeper and aligned to grow revenue.

We know it is critical for us to be able to grow revenue again in 2015 and improve the mix of our marketing solutions and other services revenue, and we are well-positioned to make this happen. We have developed a strong platform for long-term growth with the objective of transforming Deluxe to more of a growth-services provider from primarily a check printer, thereby changing our product mix and resulting stock price multiple. Now Ben will open the call up for questions.

(Operator Instructions). And our first question comes from Tim Klasell of Northland Securities. Your line is open. Please go ahead.

Hey, guys, congratulations on the great quarter. Just a real few quick questions here. First, eChecks continues to do, had its best quarter ever. How are you guys feeling about the margin contribution of eChecks versus the traditional Direct Checks?

It will be better.

That's simple and fast. I like that. Then check declines of, you know, 6%, 7% versus the initial expectations of an 8% decline, is that a little bit more on, is there any particular market segment that's doing better that you can talk to, or is it just sort of broadly speaking a bit better than expectations?

Yes, Tim, first of all, we guided 6% we've been consistent on 6%. We did see about 7% in the quarter we saw 6% in June and we're sticking to 6% for the year, it is the way to think about it. And that's really from a, you know, again from a Financial Services perspective.

Where we were stronger was, than we expected, was in the Direct Checks area. And a couple of reasons. As we alluded, the last couple of quarters, we've been trying to get smarter and smarter about how we're spending our marketing dollars, you know, to get to those consumers, both for new orders and then for reorders. And we've just got better and better at how we're convert what we call e-mail marketing, when we're reaching out to, you know, our base.

And then, believe it or not, we made a change in our, we're always looking at how we script our conference call and how we work or call center, but we made an incentive and that incentive positively surprised us and it started early in the quarter as well. So that's the way that I would think about it. Back to the banking channel for just a minute, I would say we've seen consistency from the national through the community banks. So not, you know, like national is declining faster or communities are declining faster. It's pretty consistent across the FI landscape.

Great. You have one large account yet to renew on the Financial Services side. Once that decision is made, positively or negatively, how long of a gap do we have for the next big renewal?

We have, we feel positive about that, first of all, and that we'll get it renewed. And the next biggest one we have is not until 2016, and we actually feel positive about renewing that one and the process that we're going through right now on that.

Hopefully we'll be able to report on our next call that we have all of our major, you know, major deals closed, not only through 2015 but also through 2016 as well.

Okay. And then one little accounting detail. You mentioned FX a few times. How big was the impact on FX least wise on revenues and earnings? Can you give us some exact numbers?

Yes, if you compare back to our original guidance that we came into the year with, the FX rate has deteriorated and it's about $5 million of revenue for the full year. And on a year over year comparison though it's closer to $10 million. So it's sizable, but, you know, again, we're absorbing that within, you know, the outlook outranges that we have provided and have not lowered guidance for that.

And the profit profile on that, Tim, is right in line with our operating margins, so, you know, on the low 20% range.

Okay, great. Thank you very much. Appreciate it.

You're welcome. You're welcome, Tim.

Thank you. Our next question comes from the line of Josh Elving of Feltl. Your line is open. Please go ahead.

Hi, good morning.

Hi, Josh.

Hi, Josh.

Hi. I had a question on the Financial Services operating margin. As I, if I just look at the past few quarters, I know that there was a significant impact in the first quarter due to the drag of WASA to the tune of, call it 5%. Did I hear you correctly, in that there was still a 3.8% drag this quarter?

Yeah. That business did lower that margin by 3.8 points, correct.

And so I'm just looking, I'm sorry?

Josh, here's the way to think about WASA right now. So what we've guided and we try to be as transparent as we can here. If the revenues for the year are $75 million and we expect to be slightly accretive for the year and we were slightly accretive for the quarter, and we had $19 million of revenue, you know, if you would make those adjustments you're going to need to adjust every quarter as you kind of roll through the balance of the year.

When we get into the fourth quarks we had told the street that we did about $17 million last year in the fourth quarter, so you'll get that full lapping will actually happen in the fourth quarter this year. So we're trying to be as transparent as we can. One of the things that we alluded to on the call, both in my comments at the beginning and then Terry got into more details, we had a better quarter on cost reductions.

We just got more initiatives earlier and we also said we expect there to be therefore lower cost reductions relative to how we originally planned the year in the third quarter. That benefit really helped us in the Financial Services segment in the second quarter.

A lot of that work is the, some of it is the WASA stuff, as well as other efficiencies that we got both in our SG&A, as well as in our manufacturing, you know, facilities. So that's really why we had the stronger performance, you know, in terms of margin, when you adjust for WASA if S. So hopefully all that makes sense. Make sense for you?

Yes, I think so and I think you give a lot of information so I appreciate that. I guess I was just trying to get a sense for if I were comparing year over year, theoretically, you know, without making the adjustments to the operating margin, you know, if I look at the 22.6% in the second quarter here and add 3.5% or 3.8%, you know, the year over year comparison looks significant and then, you know, extrapolating from there what, you know, the back half looks like, if, you know, you're going to see significant improvement year over year then going forward.

Yeah, Josh. That's where you're really seeing kind of the timing of some of those cost reduction benefits coming through more.

Okay.

Or in second quarter, less expected in the second quarter, in particular with this segment. So, yeah, I wouldn't take a straight extrapolation of what you saw in second quarter and carry that out through the balance of the year.

Got it, okay. That's helpful.

We'll see that normally.

Another question quick, yes, no, that's good, that's helpful. Looking at the interest expense line, you know,

Yes.

I don't know if there were some different balances, debt balances inter-quarter but it looks like a nice improvement there. Is that just due to a relatively lower, you know, cost of debt in the quarter and how do we think about that going forward because that's relatively significant.

Yes. Throughout the second quarter it was pretty stable from beginning to end. What's really driving the big difference, though, when you compare year over year or even second quarter versus first quarter it's a couple of things. The average interest rate is down significantly because we paid off a higher rate debt back in October last year.

Right, yes.

And then we refinanced a higher rate debt, again, in first quarter of this year. So it started coming down in first quarter but second quarter, it, that rate kind of came to where the new normal level is going to be for the full quarter. And that average rate is less than 3% on a combined basis for all of the debt that's outstanding. And then, second but still important as well is our average debt level has come down so a lower interest rate on a lower debt level has produced, you know, roughly about $5 million of savings in the quarter.

And so is that a fix, relatively fixed rate, or is that float?

That is off-loading, what we have on the balance sheet today is off-loading. It's debt that we have in a credit facility and a small bank loan.

Okay.

And then we have fixed rate debt due in 2020 to the tune of $200 million but we have hedged that so it is actually floating as well.

Okay. And then I guess, you know, that kind of ties into I guess my last question. That has to do with, you know, capital allocation, and I know that you suggested you may buy back some stock. I know that the company suggested, you know, there's some talk of acquisitions you'd like to do. Do you currently have the appropriate debt level for your, you know, for your taste? You know, what do you do with, you know, how do you, I guess, prioritize what you do with your, you know, your capital generation, your cash flow?

Yeah. You know, we're not at all concerned about the debt level that we have. We don't necessarily manage, you know, at the low level that we have today, we're not really aggressively managing to a specific number because, you know, our credit metrics are so incredibly strong.

We're really focused on that transformation and our capital allocation priorities really kind of zero in on that transformation. So, again, it's, we will spend money first and foremost on organic investments that help that transmission work along, small to medium sized acquisitions is at the top of that list as well.

And then secondly, we've got a dividend we are very committed to, to continuing to pay. We'll do some share backs generally to offset dilution and maybe in some years a little bit more, depending on what the M&A needs for capital are. And then last but not least, to the extent that excess cash flow is leftover, it comes through in the form of debt reduction. Likewise, too, in a period, you know, we're not adverse to taking debt up from one quarter to the next quarter by drawing more on our credit facility.

Okay. All right, great. Thank you very much. Nice quarter.

Thank you, Josh.

Thank you. Our next question comes from the line of Joan Tong of Sidoti and Company. Your line is open, please go ahead.

Thank you. Good morning. A couple of questions here. Regarding WASA, it seems like it's doing a little bit better and then also, Lee, you mentioned that like the booking, it's getting stronger and it seems like things are improving. Is it a right characterization? Because it seems like last quarter, in the March quarter it was a little bit light. Are we seeing things improving now? And how sustainable is it going to be going forward?

Yeah, you read the comments, Joan, exactly right. We had a really nice quarter. We delivered a revenue that we expected, but our bookings were stronger than we expected and what, obviously that support, we think supports us well for the balance of the year and getting to that $75 million now but we're also looking forward.

We want to get this thing to grow for us as well, so somewhat we're hopeful, is that not only, the backlog that will be converted in the second half of the year will be on that $75 million, but hopefully helps us to build backlog as we continue to roll the business out into 2016. So, yeah, you read it right, and we did a little better on, we predicted a break-even EPS neutral for the quarter. We did a little better than that and that helps, you know, our total company profitability, it also helps the operating margins in FS so you read it well.

Okay. And then, Lee, how about the major account wins that, you know, that you had on the small/medium sized business in the first quarter? How is the account wins activities in the second quarter? Any major uptake or is it kind of at the same pace? Any color you can give will be appreciated?

Yeah. If you, we slightly raised. If you go back and look at the MOS Small Business marketing, you know, that four-way break-out, we guided for the, at the end of the first quarter, what we guided the end of the second quarter, we raised it in the first quarter but we raised it again a little bit. We tightened the range and then we raised the high end of that.

Where we're signaling is that we continue to see a very strong uptake and just, and I'll give you an example of what we're talking about. We are reaching into what we call major accounts, but in effect they act like Small Businesses. So there are opportunities with financial advisory firms, as an example. And they're being business cards and they're buying marketing brochures and full-color materials. Well, what's exciting for us is we're also starting to introduce what we think are smart other cross-sell plays.

For example, on one of the financial advisors we just introduced e-mail marketing, so they can stay in touch with their clients and learn to stay in touch with them. One of the things that we've learned over the history of our Small Business and throwing products and services at them is make sure that they can swallow and absorb them smartly at the right times.

And so we think this is an area that we're going to now test into that's not only brings more and more of those, you know, more marketing and product and some service-oriented things but now it starts to bring in things like e-mail marketing into the equation. So, yeah, we are bullish and we got, I would say, a little more bullish, here, Joan, in the second quarter, based on what we're seeing.

Okay. And then, Lee, you continue to talk about, like, your long-term goal is to grow marketing solutions, get the product mix more favorable going forward and continue to drive top line. But I haven't heard you talk about operating margin extension.

I'm just wondering, like, you know, your top line growth is very nice this quarter and your operating income actually grew nicely compared to the first quarter. It was down a little bit. Is it one of your targets or long-term goals going forward, is to bring that top line to operating leverage to the bottom line?

I think, here's what you're going to see, and I think we've been consistent with every time we're out and every time we're talking with investor on this, if you're interested in the stock, we're not going to improve the EBITDA, we always say EBITDA margins but you can think of it as operating margins as well.

Don't, you know, our operating margins in the 21% range, our EBITDA margin is in the 25% range. What we expect to happen is we will grow the dollars of operating income and grow the dollars of EBITDA and based on the fact that we're growing revenue.

We believe that we will improve and continue to improve the MOS margins while probably continuing to always see a little bit more pressure in the more commoditized core print products and that will lever out to that, may be slightly improving overall operating margin or EBITDA margin profile and yet driving more dollars and, therefore, more dollars and cash flow and that's how we're thinking about it because we also want to be investing smartly in the company as we move forward as well. So that's the way to think about what we're trying to do.

Okay. That's fair. Then one last question is regarding foreign exchange. I think, Terry, you gave guidance regarding the top line, how foreign exchange would effect the top line over, for the full year. How about the bottom line and, also, you mentioned that higher tax rate. What is the EPS impact for this year from foreign exchange and higher tax rates? Can you just give me that number?

Yeah. The impact on foreign exchange rate carries a pretty normalized profit of our loss margin with that, too,, so I think, you know, the operating income impact to be in the 20ish percent of the revenue numbers that I did provide. And then the slightly higher tax rate, this year, 34% on a year over year basis for the full year, that will drive a negative EPS impact of about $0.07 per share.

Okay, great. Thank you.

You're welcome.

Thank you. And we do have final for one final question from the line of Charlie Strauzer of CJS Securities. Your line is open, please go ahead/

Hi, good morning.

Hi, Charlie.

Couple questions, going back to the Direct Checks segment really quick, I kind of need help reconciling the strength in the operating margins, you know, 37 percentish in the quarter versus the guidance for kind of low to mid-30s going forward. I know you've seen some success in like you said with the call centers, dialing back some of the spend there. So why wouldn't this be more sustainable in kind of the mid to upper 30s kind of going forward through the year?

Because we polled some of the cost reductions in. Most of them, Charlie, were in the FS space that had the largest impact, but there was some impact in the Direct Checks segment as well.

We also, Charlie, mentioned in the prepared remarks too, that we do have a higher mix of reorders, certainly versus expectations too. And the profit profile on reorders as opposed to initials or introductory offers is quite a bit stronger. So we saw a really good strength in the reorder side of that really lifted that operating margin and the period of time in which we've seen that strength is just really not long enough for us to kind of declare a new trend here.

Right. So could be in the upper lever for you if that continues.

Yes, we'd love to see that mix and strength continue but, again, it's too early to make that call.

That's helpful, thank you. And then, if you look at the MOS slide in your presentation, kind of the mixed breakup between Small Business marking and other FI services, I've notice the last couple of calls now you've seen the small business marketing mix ticking up a couple percentage points and other FI kind of ticking down a couple percentage points, anything driving one way or the other, those two buckets?

No, I think it's just that it's exactly what we just answered with Joan on the Small Business marketing, you know, solutions, that first category of the four-way break, Charlie, this continues to get stronger with SB. And what we are seeing a little bit of is while WASA was very strong, some of the targeting campaign services offers are, got a little bit slower. Nothing that I'm, you know, we're alarmed about, but got a little bit slower in the quarter. This is just some small tweaking.

The problem we have when we keep giving you guys more and more information, if it moves by $1 million you guys start thinking there's something alarming there. I wouldn't think that way. I think that's just the framework, and I'm not alarmed by that at all.

Nor am I. Thank you fourth. Just lastly, I look on the cash flow statement, it looks like you spent roughly $28 million on acquisitions in the quarter. Any more color you can give there? Thanks.

No. Again, part of what you have to remember and we don't always pay for the acquisitions all at one time. So, you know, when we do a deal, we have a tendency to do holdbacks and depending on how the holdbacks operate or the dollar amount of the holdbacks, they can spike up, you know, within a quarter, whenever that holdback payment is due. So that's why you saw more of a, you know, more of a spike this quarter overall than what, you know, you would traditionally see.

Great. Thank you very much.

You're welcome.

Thank you. And that does conclude our Q&A period for today. I'd like to turn the conference back over to Mr. Lee Schram for any closing remarks.

Let me just thank everybody for your participation and for all the questions. I want to just summarize in four points. First, we delivered an outstanding second quarter. Second, we exceeded both our revenue and earnings outlook. Third, marketing solutions and other services revenues grew over 31%, and the mix improved towards our goal of 30% of total company revenue in 2015 and 40% in 2018.

And, fourth, we had a very strong first half of the year which we believe propels us towards revenue growth again in 2015 for the sixth consecutive year. We're now going to roll up our sleeves, get back to work, and we look forward to providing a positive progress report on our next earnings call. I'm going to turn it over to Ed for some final housekeeping.

Thanks, Lee. Before we conclude today's call I'd just like to mention that Deluxe Management will be participating in a few upcoming events in the third quarter where you can hear more about our transformation. On August fourth we'll be in Boston at the UBS SMID Cap Conference, on August fifth we'll be in New York at the Needham and Company Interconnect Conference and we'll also be at the Minneapolis Investment Conference on August fifth. And on September tenth we'll be in New York City at the CL King Conference. Thank you for joining us and that concludes the Deluxe second quarter 2015 earnings call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the programming and you may all disconnect. Have a great rest of your day.