Deluxe's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Deluxe Corporation (DLX)

Q1 2012 Earnings Call

April 26, 2012, 11:00 a.m. ET

Executives

Jeff Johnson – Treasurer and P of IR

Lee J. Schram – CEO

Terry D. Peterson – CFO

Analysts

Charles Strauzer – CJS Securities

John Kraft – D. A. Davidson & Co.

James Clement – Sidoti & Company, LLC

Ben Glaze – Apollo

Presentation

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2012 Deluxe Corporation earnings conference call. My name is Stacey and I’ll be your conference moderator for today. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Jeff Johnson, Treasurer and Vice President of Investor Relations. Please proceed.

Jeff Johnson

Thank you, Stacey. Welcome to Deluxe Corporation’s 2012 first quarter earnings call. I am 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 by a 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 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 form10-K for the year ended December 31st, 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 at www.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’ll turn the call over to Lee.

Lee Schram

Thank you Jeff and good morning everyone. To use a baseball analogy, which is timely as the season is just underway, we hit a home run in the quarter and are off to a fantastic start to the year despite a continued sluggish economic environment. We reported revenue and adjusted earnings per share well above our expected ranges. Revenue grew 8% over the prior year, driven by small business services revenue growth of 15%, of which 4% came from the PsPrint acquisition. This quarterly growth rate was the strongest we have reported since we acquired NEBS in 2004. Financial services revenue grew 3% over the prior year. Checks and forms both performed well against our expectations, and marketing solutions and other revenues grew 35% over the prior year and solidly in the mid-teens on an organic basis. Adjusted diluted EPS grew 17% over a strong prior year. We generated solid operating cash flow and we were not drawn on our credit facility during the quarter, actually improving our balance sheet cash position $30 million from last December. We continued to invest in brand awareness, to help better position our marketing solutions and other services offerings, and drive future revenue growth. We also extended our process improvement and cost reduction initiatives (inaudible) operating cash flow, as we continued 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.

Terry Peterson

Thank you Lee. Earlier today we reported diluted earnings per share for the first quarter of $.86, which included restructuring costs of $.02 per share. Excluding these costs, adjusted EPS from continuing operations of $.88 was well above the upper end of our previous outlook, and 17% higher than the $.55 reported in the first quarter of 2011. Strong revenues and favorable product mix drove better (inaudible). The restructuring charges are primarily for employee severance and infrastructure consolidations. Revenue for the quarter came in at $378 million, which is well above the range of our previous outlook. Revenue was up 8% from 2011, and up 3% on a sequential quarterly basis. All three of our business segments performed well and benefited from one extra business day in the quarter. (inaudible) revenue of $230 million grew at 15% versus last year on a reported basis, of which 4% came from the PsPrint acquisition.

While we continue to operate in a weak operating environment, we delivered growth in marketing solutions and other services, our safeguard distributor and dealer channels, and in checks and forms. Our core business also benefited from a routine price increase. Financial services revenue of $91 million grew 3% versus the first quarter of last year, and reflected a lower than expected secular check decline rate of just over 5%. The impact of lower check orders was more than offset by (inaudible) order, higher non-check services revenue and the migration of Citizens Financial Group. Direct checks revenue of $58 was down 6.5% on a year-over-year basis. Gross margin for the quarter was 66.3% of revenue, up 0.7 percentage points from 2011. (inaudible) benefit from price increases, improvements in manufacturing productivity, delivery initiatives and product mix were partly offset by increased delivery and material costs. SG&A expense increased $11.2 million in the quarter, and was 45.5% of revenue, compared to 45.9% of revenue in the same period last year. Increased SG&A associated with commissions on increased revenue, 2011 acquisitions, investments in revenue-generating initiatives and higher performance-based compensation expense was partially offset by benefits from continuing to execute against our cost-reduction initiatives and lower amortization related to previous acquisitions.

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