Good day ladies and gentlemen and welcome to the second quarter 2008 Deluxe Corporation earnings conference call. My name is [Alicia] and I'll be your coordinator for today. I would now like to turn the presentation over to your host for today's conference, Mr. Terry Peterson, Vice President of Investor Relations and Chief Accounting Officer. Please proceed sir.

Thank you, Alicia. Welcome to Deluxe Corporation's 2008 second quarter earnings call. I'm Terry Peterson, Deluxe's Vice President of Investor Relations and Chief Accounting Officer. Joining me on the call today are Lee Schram, Deluxe's Chief Executive Officer and Rick Greene, Deluxe's Chief Financial Officer. Lee, Rick and I will take questions from analysts after the prepared comments. At that time the operator will instruct you how to ask a question. In accordance with Regulation FD, this call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website. I will provide instructions for accessing the replay at the conclusion of our teleconference. Before I begin, let me make this brief cautionary statement. Comments made today regarding financial estimates and projections and any other statements addressing management's intentions and expectations regarding the company's future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such, these comments are subject to risks and uncertainties which could cause actual 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 31st, 2007. In addition to 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, www.deluxe.com and was furnished to the SEC on the Form 8-K filed this morning. In particular, any non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release. Now, I'll turn the call over to Lee Schram, Deluxe's CEO.

Thank you, Terry and good morning everyone. We are disappointed with our revenue performance in the quarter and the resulting impact on earnings per share. We are not immune from the very challenging economic conditions and the impact that this is having, particularly on our Small Business Services segment. In spite of this, our updated EPS outlook, although reduced because of the weakening economy, still reflects an improving second half over the prior year. There are a tremendous number of positives in the quarter that tend to go unnoticed in challenging economic times and because of these positives, we remain extremely optimistic about the continued transformation of Deluxe. We had a very successful Knowledge Exchange Expo with our financial institutions which has already led to new check and non-check business wins, added several new leaders to our executive and senior management teams, further stabilize margins in our check businesses, continue to deliver on our $225 million cost reduction program and made planned investments in e-commerce, verticalization, merchandising, loyalty, retention and monitoring and protection solutions. At the end of the quarter we released the first version of our new state-of-the-art customer facing e-commerce platform called ShopDeluxe. We also have completed four strategic acquisitions so far this year in the custom full color, logo, web and business networking services spaces. All areas we expect double-digit revenue growth in the future. These acquisitions are also helping reposition Deluxe strategically from not just the leader in printed products but overtime to a leader in higher growth, business services as well. In a few minutes I will discuss in more details around our recent progress, next steps and strategically where we are positioning the company, but first Rick will cover our financial performance.

Thanks, Lee. Earlier today, we reported diluted earnings per share for the second quarter of $0.63 in line with our previously communicated outlook. Revenue for the quarter came in at $367.7 million below our most recent outlook, primarily due to lower than expected volumes in small business services as the challenging economic environment continue to impact this segment. Despite the revenue shortfall in SBS, our core check businesses met our expectations. Solid operating margins for the quarter benefited from continued execution on our cost reduction initiatives with savings inline with our expectations and from a reduction in our performance-based compensation. Operating cash flow in the quarter totaled $37 million, which again was slightly better than our expectation for the quarter. In the second quarter of 2007, we reported diluted earnings per share of $0.69, which included the benefit of higher revenue, partially offset by higher performance-based compensation last year and additional cost savings in the 2008 period. Company-wide revenue in the second quarter totaled $367.7 million down 8.1% from 2007. As noted, one of the primary drivers in this year-over-year decline is lower volumes in our Small Business Services segment, as economic conditions worsen during the quarter and continued to impact several of our core products, including checks and forms. Direct check volume was also down and lower revenue per order affected Financial Services. Gross margin for the quarter was 62% of revenue, down 2.3 points from 2007. Improvements in manufacturing productivity, as a result of lean initiatives and direct spend reductions were more than offset by lower prices in Financial Services, an unfavorable shift in product mix, and higher delivery related costs, mostly from fuel surcharges. Selling, general and administrative expense decreased $23 million in the quarter, and was 45.3% of revenue, compared to 47.4% in the same period…

Thank you Rick. I will continue my comments with an updated clarified perspective and where we are strategically positioning the company, then highlight each of our three segments and close with the progress updates on our cost takeout program. At the enterprise level, our strategic intent remains the same, becoming the best at helping small businesses and financial institutions grow. We will continue to target three customer segments, including small business, financial services and consumers where we plan to offer a suite of lifecycle driven solutions including personalized printed products and a growing suite of business services, including logo design, payroll, and other human resources services, all designed to help our customers run their business. Fraud monitoring and security solutions to protect our business partners and their customers and hosting web services, promotional, loyalty, market intelligence, business networking and e-commerce services to help our customers grow their business. Our growth will come from fulfilling underserved needs by leading with higher growth business services, using a scalable, unified web enabled platform acquired through Hostopia, as a cornerstone of our strategy to drive a greater portion of revenue from annuity-based services. With this unified services delivery platform, we are better positioned to provide a pull-through for printed products, including checks, forms, business cards, full color, digital web-to-print, imaging and other printed products. We will also be in a position to provide our financial institution and small business customers with market intelligence, Collaborative forms and private-label business networks to improve customer connections, loyalty and retention. We look to provide simple, easy to use, complete, innovative solutions, focused on fulfilling customer needs while using continuous improvement principles to operate on a daily basis. Repositioning Deluxe's brand continues to be an important growth enabler. Also critical to our growth is the key intersection between financial…

(Operator Instructions) Your first question comes from the line of Charles Strauzer with CJS Securities. Please proceed.

Hi, good morning.

Hi, Charlie.

If we can talk a little bit about, simplifying a lot of information that you just gave out on the acquisitions and the game plan, when you think about your 4 million plus small business customers and the Hostopia and how that fits in. What is the real simple kind of attack plan for introducing those 4 million customers to these new services?

Charlie, this is what we are really excited about. I think the first thing you have to remember is that Hostopia brings their own, more telco wholesale model where they get their small businesses today. So they bring that. We don't think there is a significant same customer base there. So we first of all get that. The second thing that we get is right away out, next week, as we officially get this transaction closed, we are ready to go with basically being able to introduce our customers into the Hostopia platform. We already have a process that we've built with Hostopia to be able to do that. So, we open up right away to what we saw is demand for web services from the partnership that we had started. Now we see, not only what we created with that partnership but really being able to expand, because what Hostopia brings is a tremendous platform, not just hosting as I said, they bring web services, e-mail marketing, they purchased a mobile company so they bring that They have a fax to e-mail capability. So all the services we see coming to our small business customers and they are asking for these services. So I think that is important. The other thing really critical for us is, there is a lot of the hosting companies are out there gobbling up other web services companies and they have all these despair platforms. What the Hostopia team has done is they have created just a fantastic unified platform. They have some patentable technology that they have got in terms of what they've created and it is a single platform. We see the ability to really add-on a lot of the other acquisitions and other services that we have already and just creating an easy go-to market and a simple go-to market platform for our customers. So, there is a lot here, Charlie as you have said and as we get more overtime and being able to explain more and more of this, I think you will start to sense the same excitement that we have about the Hostopia play.

Got it. Then when you look at the lowered guidance and when you look at the back half of this year, specifically Q4, you are looking at a pretty meaningful jump year-over-year in margins when you backend to the numbers. Can you give us a little bit more color into what gives you the confidence that you can continue to achieve those margin expansion goals?

Charlie, I think you got to look back to what Rick and I talked about in our comments, there is a lot there. First of all, you have got some seasonality in our small business segment around the holiday greeting card lines and around the stored value gift cards. That brings us a natural, positive spike in the fourth quarter. Even in tough economic times, we still believe there is going to be, our small businesses out there that will clearly have plays in that space. We start to get late in the quarter to some tax form ramp as well and then we also have the ramps that we talked about. We saw success with the EZShield fraud solution in the second quarter. We believe we're going to see that ramp continue and get even stronger as we get into the fourth quarter. We saw distributors shoot up through the Safeguard plays that we have made. We also believe that the continued content and capability that we are adding to the initial release of ShopDeluxe is going to help, as well as a lot of that verticalization targets in focus that we have as well. I don't want to underestimate. A lot of people say was it there all along? It was there all along that we did have a planned price increase in the check area early in the fourth quarter and that obviously will bring us positive revenue and operating income play. Then the other thing you have to remember, Charlie as I said in the script is that we also have the cost takeout, which not only is more in the third and fourth quarter, but it's also where we expect more to actually stick to the bottomline. So, I think those are the big pieces that you need to think about which is why we have some confidence, even with the reduced guidance that reduced forecast that we think we are in good shape.

Great, thank you very much.

Thanks, Charlie.

Your next question comes from the line of John Kraft with D.A. Davidson. Please proceed.

Good morning, gentlemen.

Hi.

Can I just follow up on that last question if I could? I don't want to beat a dead horse here, but as you talk about or as you think about your guidance and you come up with your forecast, presumably you talked to various division groups and salespeople and sort of take a guesstimate at what they think they can do. And maybe you discounted by a certain percent out of conservative, is this current guidance maybe discounted even more or I guess maybe you can talk about your methodology for coming up with that range?

John, here is the basic bottomline. I think what we saw as Q2 matured, we started to see more of depth in the small business segment and what they were buying. By the way, sometimes you say it was more retail targeted, it was more across the board. So, we are always trying to get better at our forecasting in all of our segments, but yes, we sit down with our team and we have a very thorough and very rich process where we do a build-up. We look at all sorts of indicators from mail drops to traffic coming through our call centers, to traffic coming through our e-commerce sites and we sit down and we assess it. Basically, given the trends that we saw in the second quarter, and the expectation that everything out there that you read because we've gone later this quarter than about a week that we normally do, just wrap in the acquisition stuff. You've read it everywhere. We are seeing it and because of the trends that we've seen, we just said, look, this is where we see things right now. In spite of all the good initiatives that we have and that we believe in and I believe it will help us tremendously as we move forward, that was our best view and our best visibility that we had. So, that was the way we thought through it in the process that we took.

Okay, that is fair enough. Lee, on the four acquisitions you specifically mentioned expecting that there should be double-digit growth rates in the future, what would be a ballpark estimate for what all four of those are doing right now?

Well, I think if you go back to the market information that we put out there, and we've been asked to everywhere Rick and I and Terry seem to go, give more color on that. So that is what we tried to do here. So, I think the way to think about it is, Hostopia on their own put out about a 20% to 24% in their fiscal year for '09 which ends in March of next year and we said about 22% was the market. So I think that is probably a good way to think about that one right now. As far as the business networking, it's such an entry play right now. We think it is such a great strategic opportunity for us and just the ad market alone, we believe is growing north of 20% and logo is clearly growing, probably a little lower than that, but growing at a tremendous double-digit rate as well. Then again I mentioned full color, the digital, and the small acquisition we did earlier in the year that added to the Johnson Group play, we see growing in the 10% to 15% space.

Okay, so not really expecting particular acceleration. Sounds good. Then Rick, maybe I missed, I didn't hear you specifically when you were talking of uses of cash. I didn't hear you mention the dividend. Has there been talk about what you might do with that?

Well, John, the dividend is something that we review with our board on a quarterly basis in looking at that as a possibility for use of cash. At this point in time, we do not anticipate changing our dividend policy. We are certainly continue to focus on our main priorities around investing organically, as well as small to medium sized acquisitions to augment growth, and we've executed on that here in the quarter and continue to focus on that and then look at other potential opportunities like share repurchase and the dividend, but at this point in time, we do not anticipate changing our dividend policy.

Okay. Then last question, the contract acquisition payments I think you said $20 million for the year, that's a tick-up from certainly what you've been doing so far. Is that ramp already spoken for? Or are you just keeping that ready for some of these larger national accounts that you mentioned, Lee?

It's really based upon the fact that we have had some success here in the first half of the year in extending some of our large accounts and locking those up for a longer period of time that is creating that small uptick here for the year.

So if you are able to win some of these national accounts that could even be bigger?

Yes, we wouldn't see that until maybe early '09.

I don't know, it would probably be this year, by the '09. Yes, we would have to look at obviously where we are heading as we get into 2009. And if we locked up, John, as we've said, [all but two] and we got that in our runway here, in terms of being to look at it, we would have to rethink of a restart as you get into 2009.

Got you. Okay, thank guys.

Thanks, John.

Your next question comes from the line of Jamie Clement with Sidoti. Please proceed.

Good morning, gentlemen.

Hi, Jamie.

Good morning.

Most of my questions have actually been asked and answered. One thing that I did want to ask you about is, this has come up on the last several conference calls, it is always the income statement balance of your moving costs and reinvesting for the future and that sort of thing. Obviously, it sounded as if the first half of 2008 was going to be one where the balance was probably going to be a little bit more weighted on the reinvestment side. As you look out a couple of years, and I know you have these acquisitions that you made. I know that you need to support the plans that you have, I mean are there costs that you see that you are spending this year that are going to be out of the system at some point in 2010, 2011, whatever the right timeframe is as you get more efficient. What is the right way to think about the balance here?

I think you've got to go back to what we committed on the 225, Jamie. So, the 105 through '06, '07 and the 70 this year, the 50 next year, and then clearly in the prepared remarks that we said is that we've got some other areas that we're now going to get after as well. Some of which we think can start giving us benefit in '09 as well. So I think that is the runway that I am comfortable with giving.

Right. Lee, obviously the stocks have been down, and it is down an awful lot today. I got to tell you I think maybe I'll just offer you the opportunity to respond to this. When the cost savings were announced, the base Deluxe business was kicking off x $100 million of EBITDA. Obviously economic conditions have gotten tough and we understand that, but even if the investment spending balance was balanced with the cost savings. I think what probably scares investors here is, you are talking about a potentially a huge organic decline that has occurred over the last 18 months. From where I sit, I don't think that is necessarily the case. It seems to me like there are costs here that related to reinvestment that are not necessarily going to be with you guys for the long-term.

Yeah, I think the way you need to look at it, there is a tremendous positive base right now on the core check business. I love the aggressiveness of what our sales teams have been doing in working with the financial, and aggressiveness around not more price reductions but just getting out there and getting in front of our financial institution accounts offering not only great check program, but also a great non-check additional services. So I think that is really big. I think that is being missed by a lot of people right now to your point. I think that clearly the economic piece is biting us and obviously you guys can look at what it is doing to others as well. Yes, I think the plays that we got, the articulation of where we are now going in terms of bringing the services out, the ability to take market information and then add to that with initiatives that we already have underway today and being able to see some sustainable opportunities to get some revenue growth. And then, yes, on a better overall cost structure to what you're really getting that as we move forward. Absolutely that is the play without getting into '09 and 2010.

Right.

That's the way to think about it.

A follow up question to one of Charlie's and I think you addressed it. Really specifically from Hostopia perspective, but as you have these acquisitions, can you talk a little more Your response to Charlie seem that it was a little more near-term. Longer term, how do you aggregate the new service offerings and really bring them to your customers? Can you give us a sense of what the master marketing plan is down the road?

What we are trying to do right now is bringing them altogether. We are trying to make sure that the play that we have is around using Hostopia is that core master unified platform from a technology standpoint, we believe we've sorted out how we get the linkage to the ShopDeluxe e-commerce platform and we've got some really smart people that we've brought into the company that have built that all up, and then think of it as being able to both on PartnerUp and Logo Mojo and some of the other service offerings that we have organically and then other areas that we're continuing to look at. Bringing that altogether and then driving more and more revenue per unit thinking off of a very stable fixed cost based platform that is not complicated, simple again, easy, for our customers to be able to use and easy for us to be able to administer and running creates that annuity stream. So I think that's the best I can give you right now until we get more into all the acquisitions and how we're trying to bring all those things in. Again Jamie that's relatively new at this point.

No, that's very fair. Let me just ask one last question. You guys offer a lot of printed products to small businesses, but you don't offer everything and from what I gather, you've got no desire to offer everything. When you think about the kinds of products that you don't offer that might be a little bit more commoditized, might be a situation where you have ramped overcapacity in the printing industry, you've talked about partnerships, are there opportunities for you to expand via partners that hold the assets, basically the distribution in more printed products. You got lot more services. You got a ton of customers. You don't necessarily offer anything. Is there an opportunity for that down the road?

We're always looking for ways that we can solidify both, the core small business products base and we talked about that without trying to get too far into this, I think the biggest play is, how do we get stronger at that focused on verticalization and bringing more to those vertical retail contractors, professional services markets and then how do we play the ShopDeluxe and the e-commerce better end of that. That doesn't necessarily mean it's all our stuff, is that what you are alluding at, that's just bringing more content to the small business.

No, that's exactly what I was talking about. Thank you very much for your time.

Thanks.

Good morning.

Hey, Mike.

Just wondering if you could give the year-over-year change in incentive expense in the second quarter?

Mike, this is Terry. We don't actually publish that number precisely, but we do list that as certainly a contributing factor in the results for year-over-year. So it is a significant contributor, but we don't actually publish that number.

Would you be able to isolate what costs you've laid out in your gross initiatives year-to-date?

No, we haven't done that either, Mike. The way I would frame it is we spent money on all the programs that I mentioned around verticalization and ShopDeluxe and the financial institutions spaces around non-check in the loyalty retention and in the fraud and security space but we've not given a specific number. The way to think about it is, we spent more in the first half of the year than we're planning on spending in the second half of the year.

I would also add, Mike, that on a year-to-date basis we've spent $15 million in capital expenditures. A good portion of that has been in support of a number of the growth initiatives, particularly our e-commerce platform that we're continuing to invest in and some of the other growth initiatives there.

Then last one, I assume on direct, given the changes in the search engine that you drop some market share in direct in the quarter. What opportunities do you have to be able to respond to that?

We already have jumped on this thing and I think we got through the New York affiliate issue pretty quickly here. So we don't expect that to have any impact in the balance of the year. We expect some additional impact in the search engine decisions but we think we've been able to figure out a clear and a new way to be able to work our way through that, which will basically, we believe will impact us favorably again, or get us back to where we were in the fourth quarter.

Thanks very much.

Thanks, Mike.

Your next question comes from the line of Atin Agrawal with Longbow Research. Please proceed.

Good morning, guys.

Good morning, Atin.

I think most of my questions have been answered, but I just have one question for you. Apart from the recent acquisitions that you've made, I know that you've done other investments in e-commerce area. Would you be able to provide some color as what kind of revenue benefits would you expect in the second half of the year from the other e-commerce initiative.

We haven't provided that yet at this point in time and we won't at this point. I think the words that Rick used in the script where we expect some modest contributions from verticalization and the new ShopDeluxe focus. But it's too early at this point in time to really get into where we see this all playing out, and especially given in this market and this economy right now. I think as we get out further in '09 and overtime and this thing starts coming we will be able to give you a little better color around that. For now, it's not something that we're going to disclose.

Okay. Well, thanks. That is all the questions I had.

Your next question comes from the line of Beth Lilly with Gabelli. Please proceed.

Good morning, Lee, Rick and Terry.

Hi, Beth. Good morning.

I wanted just to talk for a minute about the acquisitions you've made, and if you could provide a little insight into what you paid for them as a multiple. Then who is the competition that you are up against in terms of these businesses that you bought? Who you considered to be the other players in the market?

I think Hostopia, you can go out and do the math around if we paid net of 100 and the forecast that Hostopia put out for their fiscal 2009, we paid about three times revenue. There is one way to look at it. There are double-digit EBITDA returns that they're driving that they put out. You can look at that. We looked at it from what is the drive with and without synergies on hurdle rates, and cost of capitals and all that. What I would tell you is without any synergies, this gets above our internal hurdle rates, and then when we get the synergies it's just plays on it at even more. So I think that's the biggest one out there. I mean there is not a lot out there right now in the business networking space. I mean we think we found a company that is probably at the forefront of being targeted at the small business, social or business networking space. So I don't think there is a lot out there to frame that one. As far as the logos, there are other logo companies out there today and other businesses that are bringing that on, but I think the way to think about it is that forget the other competitors, I'll let you figure out who those all are. It's what our customers are really asking from us. They are asking us not only to be a great personalized printed products provider, Beth, but they're also asking us, you got to help us grow our business. In order to help them grow, the way get out of small business is through their brand, their logo, their website, and then their ability to sale web services or drive revenue. So, we started listening, and the other thing we started hearing is there are opportunities in the human resources area, not only in the payroll services space. We're going to test this employee background screening and in other areas. So I think that's the way we're looking at it is we've got to bring more of what our customers are asking us and more of what we think we need to be providing and obviously there are areas in the market that are growing as well, which is obviously exciting for us.

So what happens to the margins as you're transitioning the business model for these faster growing businesses or you're adding them? Now, you've got a $1.5 billion revenue base, and these are small in the scheme of things. But what happened to your margin structure?

I think what you will see overtime, where Jamie was heading is, as we these things in, build the revenue base and platform over the chart that we put out, as we're doing the prepared comments today. I think we would be able to see that growing. Then, being able, as I said in my prepared remarks to drive with our cost takeout and where we're going to be able to drive improved operating income and improved operating cash flow as we go forward.

Okay, so will your margins expand?

The bottomline is I think we expect revenue to grow, and I think we expect some margin expansion, but I don't want to put an exact numbers out there at this point in time. Yes, we expect it to improve. Yes, we expect operating cash flow to improve as we get these things in and integrate it into the company and into our selling process and integrate it with our customers.

Okay, and Lee, longer term you talked about, it's a flat topline growth company. Then with better marketing and improving your offerings, you're going to see mid single-digit growth, correct?

Yes, here is the way I would look at. What we try to do is frame, if you just look at what the market or rates of growth are declining on our portfolio mix today that would get you to that plus or minus 2%. What we've talked about is initiatives that we're driving, and then higher response rates and penetration as we integrate and get synergies here that's when you get into this idea of being able to get mid single-digit growth.

Okay, and is that something you envision for 2009?

I think the way we place it out there, is medium term. What we've got to do, is some of the themes behind the questions that we're getting here today, and the good ones are as you bring these acquisitions and bring all of these pieces together, what we've got to do and we're going to work hard on the second half of the year, Beth, as bringing them in, expanding them as far as what we think the synergistic capabilities are in bringing them all along. And obviously, we would not have done them if we don't think that these things are going to help us a lot, which they will. Just to get the pace and the flow, then look back at what is going on with the economic situation, as we work through the second half of the year and give us a lot more clarity. Yes, we absolutely believe sooner rather than later, strategically, Beth that we can start getting some topline growth.

Yes, because it is interesting, for this quarter your revenues declined 8% and on a year-to-date basis they're down 7%. So you're talking about a pretty dramatic reversal.

Fair enough.

And to Jamie's point, I think that's part of the problem with the market today. It sees a dramatic decline. You're telling us that you think longer term you can grow mid single-digit. So, we are having a hard time bridging that gap.

Again, I think you've got the look at that. I would really study that chart. I would study that chart and say if this is their mix today which it is and this is what the market is expected to do. This gets you into a flattish opportunity plus or minus 2%. As you mature, the synergistic capabilities that we talked about, get better response rates, add in the richer ShopDeluxe and verticalization play, add in some other services capability, or extensions on some of these testing things that we're doing, there is clearly an opportunity. We understand we've got to go deliver on that. We understand that that's something that we've got to execute to. We think it's something that we do very well. We've got to go to work and get that done, Beth. It is the best way I can describe it.

Okay, that is great. Thank you very much.

You're welcome.

I would now like to turn the call over to Mr. Schram for closing remarks.

Let me just close by saying while we're disappointed with our revenue performance in the second quarter, we remained aggressive with our cost reduction initiatives, and also made several positive strategic moves to better position Deluxe for revenue growth in the future, which we are extremely enthusiastic about. I thank you for your participation and questions today. We're going to get back to work and we look forward to providing a positive progress report on our next earnings call.

This is a reminder that a replay of this call will be available until August 7 by dialing 888-286-8010. When instructed, provide the access code 74753746. The company slides are archived in the Investor Relations section of Deluxe's website at www.deluxe.com. Again, thank you for joining us and have a good afternoon.

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