Deluxe Corporation. Third Quarter 2008 Analyst Teleconference October 23, 2008

Transcription

1 Deluxe Corporation Third Quarter 2008 Analyst Teleconference October 23,

2 Terry Peterson Vice President, Investor Relations and Chief Accounting Officer 2

3 Today s Presenters Terry Peterson Vice President, Investor Relations and Chief Accounting Officer Lee Schram Chief Executive Officer Rick Greene Senior Vice President and Chief Financial Officer 3

4 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 As such, these comments are subject to risks and uncertainties, which could cause actual future results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those projected are contained in the news release that we issued this morning and in the company's Form 10-K for the year ended December 31, 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 investor relations section of our website, and was furnished to the SEC on the Form 8-K filed this morning. In particular, any non-gaap financial measures are reconciled to the comparable GAAP financial measures in the press release. 4

5 Lee Schram Chief Executive Officer 5

6 Third Quarter 2008 Highlights Solid EPS and cash flow results Continued focus on extending contracts and further stabilizing margins Best quarter ever on new non-check revenue Initiated aggressive implementation actions on additional cost reductions announced in September Continued investing in our future with progress in many revenue growth initiatives Given the the challenging economic environment, we we are are generally pleased with our our performance in in the the quarter 6

7 Rick Greene Chief Financial Officer 7

8 Q3 Results vs. Outlook EPS - Diluted $0.65 Adjusted EPS $0.26 Restructuring $0.12 Asset Impairment $0.27 GAAP EPS 3Q 2008 $0.33 $0.29 Original Outlook Adjusted Outlook 3Q Adjusted Outlook $0.60 $0.56 Diluted EPS of $0.27 Slightly lower than outlook due to unexpected non-cash asset impairment charges of $9.7M Includes $21.9M of expected charges for restructuring-related activities Revenue of $366.2 million Continued softness in Small Business Services, primarily in U.S. distributor and Canadian businesses Slow start to the seasonal holiday card business Excluding impact of the charges, stronger than expected operating margins Favorable shift in product mix Spend reductions Earlier than expected savings from cost initiatives 8

9 Q3 Results vs. Prior Year Operating Cash Flow $ in millions $79 $73 Exceeded expectation by more than $20 million due to timing of contract acquisition payments and favorable working capital initiatives 3Q Q 2007 EPS - Diluted $0.27 $0.62 3Q Q results included: Higher revenue Lower restructuring and asset charges Higher performance-based compensation, and Lower cost savings Adjusting for restructuring and impairment charges in both periods, EPS was comparable 9

10 Q3 Results Consolidated Statements of Income Revenue Declined due to weak economy, primarily in Small Business Services Lower volume in personal check businesses Lower revenue per order in Financial Services Gross Margin Restructuring related charges reduced gross margin 3.5 points Lower pricing in Financial Services October 2008 price increase will help offset recent rate declines SG&A Expense Benefits from cost reduction initiatives Lower performance-based compensation $ in millions Better/ (Worse) Revenue $366.2 $388.6 $(22.4) Restructuring Charges $12.6 $(0.1) $(12.7) Other COGS $140.0 $143.6 $3.6 Gross Margin 58.3% 63.1% (4.8) pts. SG&A Expense $164.6 $182.2 $ % 46.9% 2.0 pts. Restructuring and Asset Impairment $ % $ % $(16.5) (4.5) pts Operating Income $ % $ % $(30.4) (7.3) pts. Net Income $13.8 $32.2 $(18.4) Operating Income decreased due due to to restructuring related costs and and asset impairment charges of of $

11 Q3 Results Business Segments $ in millions Better/(Worse) Revenue Small Business Services Financial Services Direct Checks $ $ $(9.4) (9.2) (3.8) Operating Income Small Business Services Financial Services Direct Checks $ $ $(19.9) (9.6) (0.9) Small Business Services Financial Services Direct Checks Revenue Economic softness, particularly in core checks and forms products Partially offset by contributions from Hostopia acquisition and organic growth in fraud protection services Lower revenue per order due to competitive pricing environment Decline in check order volumes, nearly half from one-time check conversions in 2007 Continued declines in check writing Partially offset by higher revenue per order from recent price increases Op. Income Included $20M of restructuring and impairment charges Reduced operating margin by 9.2 points Included $10.8M of restructuring Reduced operating margin by 10.4 points Included $800K of restructuring Reduced operating margin by 1.8 points 11

12 Q3 Results $ in millions $885 Total Debt $844 Up slightly, versus prior year-end 3Q Q 2007 Cash Provided By Operating Activities - YTD $ in millions $178 $ Decrease due to a higher 2007 related incentive compensation payment earlier this year Lower net income Partially offset by lower income tax payments and progress on working capital initiatives 12

13 2008 Outlook Q Revenue $375M to $390M Full Year 2008 $1.490B to $1.505B Continued economic softness in Small Business Services Declines in personal check businesses driven by fewer checks being written Q4 costs of $2M related to restructuring activities Q Diluted EPS $0.64 to $0.74 Full Year 2008 $2.07 to $2.17 Continued execution of $250M cost and expense initiatives, net of investment Effective tax rate of approximately 35% (34% for full-year) 13

14 2008 Outlook (continued) Operating Cash Flow Full Year 2008 $185M to $200M Reflects lower earnings, partially offset by continued progress on working capital initiatives Contract acquisition payments ~$20M Capital expenditures ~$30M Depreciation and amortization ~$65M $26M acquisition related 14

15 Capital Structure Strategy Funded recent acquisitions with current credit facilities Repurchased $7.9M of common stock in Q3 Priorities for cash remain: Organic investment and small to medium sized acquisitions Evaluate other opportunities to create shareholder value millions $350 $300 $250 $200 $150 $100 $50 $0 $225 Libor +100bps Debt Outstanding at 9/30/08 = $885 Million $275 Libor +75bps Available at 9/30 = $379M $300 $275 $ % 5.125% 7.375% '09 '10 '11 '12 '13 '14 '15 Credit Facility Bonds & Notes After these priorities, pay down remaining balance on our credit facilities We We believe we we continue to to have reasonable access to to capital 15

16 Lee Schram Chief Executive Officer 16

17 5 Key Focus Areas to Deliver Strategy Financial Services Maintain check share Grow outside checks in loyalty, retention, market intelligence, and fraud monitoring & protection offers Direct-to-Consumer Grow check share Small Business Core Products Enhanced ecommerce capabilities Improved vertical customer focus Services for Small Businesses Grow logo design, payroll, human resources, business networking, web hosting, and other web services Cost Reductions and Simplification Continue the solid work already underway on our $250M initiative 17

18 Q3 Segment Update Small Business Services Economic softness continued to impact our business Shortfalls late in Q3 driven by imaging and promotional products in the construction, financial services and medical customer segments Slow start to our holiday card season Growth in payroll services, EZ Shield TM check protection services, logo design services and in ecommerce site visitor traffic Business networking members from PartnerUp grew Solid start in web services from Hostopia 18

19 Q3 Segment Update Financial Services Continued to proactively extend several check contracts. All but one large contract extended through 2009 Strong new acquisition rates, especially in the credit union space Retention rates remained strong, in excess of 90% Continued to simplify our processes and take complexity out of the business while reducing our cost and expense structure Rolled out our regular price increase in early October 19

20 Q3 Segment Update Financial Services Banking Crisis WAMU Softness in WAMU check orders starting in the middle of the quarter One of our key customers Chase purchased WAMU WACHOVIA Too early to understand any potential impact on Deluxe Long-term contract with Wachovia CONSUMER SHIFT Better positioned in community banks and credit unions where some consumers are shifting 20

21 Q3 Segment Update Direct Checks Revenue in line with our expectations Another quarter of solid operating margin 30%, excluding restructuring related items Continue to look for opportunities to provide accessories and other non-check products and services to our customers 21

22 Aggressive Cost Reduction Plan Bold items represent greatest sources of savings to date Cumulative Savings ($ ($ in in millions) 1/3 COGS 2/3 SG&A $215 $250 Go-to-Market (Selling, Marketing, Customer Care) Channel optimization Sales / Marketing operations Marketing and analytics integration Call center productivity In Q3 completed closure and sale of Flagstaff call center 25-30% $15 $105 $155 Fulfillment (Manufacturing and Supply Chain) Manufacturing productivity / Lean Indirect spend Strategic supplier sourcing Common manufacturing platform Direct material reductions Freight / Spoilage reductions 35-40% Q3-Q Another solid quarter remain on track to to deliver $50M this year Infrastructure (IT, Finance, HR, Legal, Real Estate) I/T infrastructure Outsourcing relationships Standardization & best practices Aligned Structures Real estate footprint reduction / utilization 30-35% 22

23 Wrap-Up What we expect in Q4... Challenging economy Strong execution on our cost reduction initiatives Stability in our core check revenue More revenue contributions from new non-check revenue offers, key enablers, logo and web services, and business networking acquisitions Focus on generating strong operating cash flows Looking ahead to Better positioned portfolio to deliver sustainable revenue growth opportunities Closely monitoring the marketplace over the next three months before providing a firmer outlook for 2009 Deluxe has has demonstrated its its value as as a disciplined, stable company in in these challenging economic times 23

24 Questions and Answers 24

25 Replay of This Call Audio replay available through October 31 st Dial: Access code: Presentation slides: 25