Good day, ladies and gentlemen and welcome to the Q2 2017 Deluxe Corporation Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Ed Merritt, Treasurer and Vice President of Investor Relations. Sir?

Thank you, Vince and welcome everyone to Deluxe Corporation's Second Quarter 2017 Earnings Call. I'm Ed Merritt, Deluxe's Treasurer and Vice President of Investor Relations and joining me on today's call are, Lee Schram, our Chief Executive Officer; and Keith Bush, our Chief Financial Officer. At the conclusion of today's prepared remarks, Lee, Keith and I will take questions. I'd 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. 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 projections are contained in the press release that we issued this morning as well as in the company's Form 10-K for the year ended December 31, 2016. Portions of the financial and statistical information that will be reviewed during this call are addressed in more detail in today's press release which is posted on our Investor Relations website at deluxe.com/investor. This information was also furnished to the SEC on the Form 8-K filed by the company this morning. Any reference to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release or as part of this presentation. Now I'll turn the call over to Lee.

Thank you, Ed and good morning, everyone. Deluxe delivered our second very strong quarter of the year. We reported revenue and adjusted earnings per share above the upper range of our outlook in spite of a continued sluggish economy. Revenue grew 8% over the prior year quarter, driven by Financial Services growth of 19% and Small Business Services growth of 5%. Marketing solutions and other services revenues grew over 26% over the prior year and represented over 38% of total second quarter revenue. Adjusted diluted earnings per share grew almost 8% over the prior year quarter. We generated strong operating cash flow of $152 million for the first half of the year and we've withdrawn about $719 million on our credit facility at the end of the quarter. We repurchased $15 million in 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 delivered on our cost-reduction commitment for the quarter. In a few minutes, I will discuss more details around our recent progress and next steps. But first, Keith will cover our financial performance.

Thanks, Lee. Revenue for the quarter came in at $485 million, growing 7.7% over We delivered growth in checks and marketing solutions and other services. And from a channel perspective, our online, major accounts and Canada grew. Financial Services revenue of $148 million grew 18.9% versus the second quarter of last year. Organically, Financial Services revenue declined about 3% for the quarter. Higher growth in marketing solutions and other services revenue more than offset the impact of lower check orders. Direct Checks revenue of $35 million was down 9.4% from last year and right in line with our expectations. From a product and services revenue perspective, check revenue was $212 million, representing 44% of total revenue. Marketing solutions and other services was $185 million or about 38% of total revenue. And forms and accessories were $88 million or about 18% of total revenue. Gross margin for the quarter was 63.1% of revenue and was down from 64.5% of revenue in 2016. The impact of acquisitions and higher delivery material costs and a favorable environmental reserve adjustment in the second quarter of 2016 were only partially offset by the benefits of previous price increases and improvements in manufacturing productivity. SG&A expense increased 4.8% in the quarter and as a percentage of revenue, was well leveraged, ending at 42.9% compared to 44.1% last year. Benefits from our continuing cost-reduction initiatives in all 3 segments and lower brand awareness spend were more than offset by increased SG&A associated with recent acquisitions. Excluding restructuring, transaction-related and asset impairment charges, adjusted operating margin for the quarter was 20.3% which was slightly lower than the 20.5% generated from 2016. Small Business Services adjusted operating margin was very strong at 19.3% and 2 points better than the prior year, driven by price increases, cost reductions, favorable product…

Thank you, Keith. I'll continue my comments with a quick reminder of our strategic focus areas, an update on our MOS revenue and then highlight progress in each of our 3 segments using our 4 strategic focus areas for a perspective on how we progressed in the second quarter and then what we expect to accomplish during the balance of 2017. In 2017, our primary focus continues to be profitable revenue growth for an eighth consecutive year and increasing the mix of marketing solutions and other services revenue. We continue to focus on 4 strategic areas for 2017, including 2 each for Financial Services and Small Business Services that we will provide regular updates through the balance of 2017. I will review each of the 4 focus areas in a few minutes during the segment updates. Here is an update on our 5 subcategories framework for marketing solutions and other services. We ended the quarter about $4 million better than the top-end of our previous expectations, driven primarily by strength in small business marketing solutions. We continue to provide a directional annual EBITDA margin profile in total and for each of the 5 MOS categories and an annual recurring revenue perspective. Note that we want to be cautious given the extremely competitive landscape in not providing a more precise EBITDA margin profile, but we want investors to understand that as our MOS business approaches 40% of total revenue, our MOS EBITDA margins are also now approaching our overall company average. We estimate that approximately 70% of the MOS revenue is recurring with some of the MOS categories recurring at a rate closer to 95%. In many MOS products and services, we have multiyear customer contracts similar to our FI check contracts, annual maintenance services contracts, recurring monthly fees and long-standing…

[Operator Instructions]. Our first question is from Jamie Clement of Macquarie.

Lee, in terms of terminology, I'm just not familiar with. Your referenced variable printed checks and remote checks, what exactly does that mean?

What we're doing is we're working through how do we take an electronic check that we have and basically process it through the remote deposit capture. We actually have to print the check out and then truncate the check. And that's a -- think of it as using variable printing to be able to do that, Jamie, is pretty much simply what it is. So we think that the technology we got, first with the WAUSAU acquisition and enhanced it with the RDM acquisition is just going to allow us to be able to do this as electronification of check becomes an option for our customers.

Got it. And with respect to the eCheck pilot that you mentioned, can you give us a little bit more flavor of what that's going to look like? Are they going to target towards consumers? Are they going to target towards businesses, a mix of both? What is your initial sense of what that's going to look like?

Think of it this way. What we've learned over the last year or so, we've got it deeply entrenched over a lot of these providers, Jamie. What's going on today is let's say that you go to the doctor and you make your co-pay, hopefully you're paying by check or it will be wonderful for us. But as you do that and then as you get the services from your physician, what happens is there is a paper check transfer between your insurance company and your and the physician. And what we've learned this there's million of checks, paper checks that gets disbursed today to do this. There are handful of companies that are involved in doing this today. And what we're doing is we're working with several of them to actually take the paper check and replace that paper check with any check. And that provides -- if we can get this going, Jamie, it provides 2 things for us, number 1, a completely new stream for us that we don't plan today; and number 2 obviously, a nice revenue stream for us. And so that's what we're working and it's going to start with a pilot because that's how the company that we're working with and we're not at liberty to reduce -- to give you the name yet but that's the work that's going to go on.

Okay, okay. And then last one and then I'll get back in queue. With respect to the FI segment operating margin going forward, is a high teen rate kind of where you are now, a little bit below 20%? Is that the right way to think about this going forward based on the asset mix now, in the acquisitions that you've done? Or over time, do you think you can kind of get back to that low 20% kind of number?

Yes, yes. So you've got it what. And a simple math, I think we've provided this in the last call but I'll do it as a reminder for you and then for all other investors. If you think about the $80 million to $85 million that we've got out there for First Manhattan, you'd think about the $0.02 dilution that we've continue to -- we mentioned that we contained the forecast. And Jamie, if you that just do the math on that and take it out on last year and you start backing your way in pretty much to that high teens operating margin for the segment right now. And that's -- and there's going to be timing things depending on when we roll something out, that's a treasury management versus a data-driven marketing and all that. That is -- you're absolutely thinking about it the right way. Do we expect this to improve over time? Yes, we do. We think as we scale our MOS offers in that space that we will improve the operating margin performance of the segment over time as well. Whether it will get back up to the low 20s, exactly where -- I haven't mapped that out, I got it, committed to that, but yes, that should be the expectations, as we're improving from that, that leap-up point that we have this year.

Our next question is from Joan Tong of Sidoti & Company.

A couple of questions you. First of all, he asked you about syntax. Obviously, they are contributing a bigger piece of the pie now. You talked about 16% of your revenues from fintech. I just want -- and within that segment and you have digital -- you have data analytics as well as treasury management, just once you get your view in terms of how we see like M&A going forward, would that be in these two areas since like your carved out these two areas to focus on? And that's one question. And then the next one is related to specifically, the treasury and management side. You talked about there's some near term lengthening in contract cycle. I just want to drill down there a little bit more.

Yes. So Joan, the first question, if you think about where we're targeting acquisitions, we've said clearly 3 areas, web services and you saw that we announced today another small tuck-in there; the second the space is data-driven marketing; and the third the space is treasury management. And so the last one as you know, we did there was actually in the quarter, April, we announced it previously but that would be the RDM deal. So those are going to be the continued 3 primary focus areas as we think about our tuck-in acquisitions as we move forward. And then you saw that we, when we went through it here, that we reduced our revenue and treasury management and by no means are we at all, down on this at all. We're very positive on it, but what we've seen is -- and we announced a couple of deals today, they are nice-sized wins but they're in the outsourcing space. And what's happening is that banks are taking longer to decide, do I want to put my solution for treasury management into my FI or do I want you to do it for me in an outsourced environment. And what's happening is it's slowing down the decisions -- we're not losing deals, it's just a slowing down the decisions from how we originally planned it. But once they go to the outsourcing, it will create a really wonderful annuity stream for us as we go forward. So a lot of this is, the work through a timing as a place out this year and the next several years. And ultimately, Joan, we actually like that better but it puts us in a position where it reduces what we expected to be at the revenue this year a little bit versus the trade-off of getting the annuity stream going forward. So as the classic that I could eat the fish for the day or I can teach you how to fish for a lifetime and that's how kind of how we've been talking about it internally inside the company.

Okay, got it, got it. And then just looking out a little bit longer term because you gave out that 3-years plan a couple of years ago, 40% of the revenue is going to come from MOS by 2018. And next year, we have there and you're at 38% right now, sitting at 38% right now, making some very nice progress there. So at this point, you think about maybe in the near term, you would provide another 3-year plan, like looking out? And I just want to get your thoughts on that.

Yes, it's a great question and we've been getting this question more from investors. And the answer that we've been providing them, Joan, is that we have our annual strategic plan review with the board coming up here. And we want to take the board through all of our strategic work. And once we do that, I -- my expectation in all likelihood is we'll probably come out in the -- when we do the third quarter release and put a new mark out there. I think our people are getting more and more confident that, that 40% is going to happen next year and therefore, not only that, but where are you heading. And obviously goal here, Joan, is to continue to increase the mix and that's probably the best that I can leave you with the right now. We want to get our strategic work through with the board and get on everybody unified inside the company and then with our board before we would do that. But that's kind of what my thinking is right now and that's what Keith and I have talked about.

Okay. And then quickly finally, the Australian-based web hosting acquisition. Do you mentioned it's $9 million revenue for this year, so the annual revenue base is $20 million?

Yes.

Okay. And then you paid about $40 million for that and closed on July 4, right?

Yes. I know it's a strange day, but remember in Australia, they don't celebrate it. So yes, we closed it on July 4.

And our last question is Charlie Strauzer of CJS Securities.

Just picking up on Jamie's conversation about the eChecks and just -- it's really an intriguing topic because I think that's essentially it's a whole new payment avenue but just your thoughts initially on talking to somebody, FIs out there about this offering and whether you're seeing acceptance versus pushbacks. What was driving the pushback and what's driving the acceptance of maybe trying some of these things?

Yes. Charlie, it's really interesting right now. As you would expect, the large banks and the small business owners that do their banking to the large banks are the ones that are using more of the eChecks today and what's interesting is one market for us that we're filing -- we're finding pretty interesting is that there are large financial institutions and I'm not going to name them, but you know who we have and we don't have from a check, paper check standpoint that are actually having customers are using eChecks today. You say, well, how does that happen? Well, I cut somebody that they're working within a small business, send it to them and said, hey, what is this? I said this is kind of interesting and they start using them. And there's also some of our paper check banks that are large, that are still working through. I call it the compliance and is this really a check and it is a check and we have white papers written by experts on it. They're just trying to work through all this and honestly, the humorous thing with all this is while they're doing that, we keep reminding them that their small business owners are using eChecks. What we announced today is one, that is committed and they're going to roll out with the pilot of top 100 in their branches. You'll see it -- and we're seeing some of the work with there, how they're going to promote it. And we've got a second one that were finalizing the master service agreement with. So we're starting to see FIs and as well as what I mentioned earlier, on the on some of these other -- the medical payments companies that is more and more intrigued and starting to move on this. I know we've been talking about it for a while but we like this and we think there's lots of potential opportunity here. It's not material today but as of these things start to play out, Charlie our hope is that these start to become a bigger part of our revenue stream.

Excellent. And then I know Keith mentioned a lot about kind of lower brand spend in the coming quarter and the rest of the year. Just thoughts on what's driving the lower spend, is it just the timing of the -- some of the marketing expenses that's out there?

Just think of it this way. The way it simply works is when do we go in and do the work of picking the time we're going to make over and then once the production done, when's the advertising that's going to go on, the web series. And I wish I could tell you that they're all time, every quarter, every year, we do the same way, with the same dollars or whatever. It just doesn't work that way. We time things differently, depending on when small business week is, depending on when we can get into the town, get the production behind it, do the actual taping. And so it's just happens to bump up and down and as you know, believe it or not, as that moves around a bit, it allows the quarters, the earnings per shares within those quarters to move around a bit as well. But that's all it is and that's when we -- we like to reference it because we think it's a fair reference when you consider movement between the quarters on earnings per share. And so that's why we have -- Keith and I believe some quarter for out.

Right. So it's just basically timing, that you're not going to get return or you're canceling things.

No, no. We've been feeling like we said in the prepared comments, we feel good about what we're doing. And it's just merely timing quarter-over quarter and what we did last year in the quarter versus this year. Some quarters, we're doing more of this year than last year. Some quarters we're doing less this year than last year. It was just kind of how it's mapping itself out.

Got it. And then just lastly, just thinking about the guidance, the organic growth in the quarter was down, roughly 1%, is that kind of a good kind of assumption to is the back half of the year as well, kind of continued working the growth a modest decline there?

We said in the last update and then we published before Keith and I went on the road in the second quarter, that we expect this year's organic growth to be roughly flat. So if you think about the first half of the year down in probably the 1% to 2% range, we would expect the second half of the year to start getting closer to 0 to probably even showing a little bit of growth and getting the fattening roughly flat number for the year, Charlie. So that's the way you should think about it. We're focal very focused on this right now.

At this time, there's no other questions in queue. alternate to Mr. Schram for closing remarks.

I just like to thank everybody for your participation to the sell side as for questions today. I would just like to summarize the quarter and as follows, we delivered a very strong second quarter. Second market solutions and other service revenue grew 26% and our mix improved to 38% of total company revenue towards our goal of the 38% this year and 40% next year. And we have established a solid baseline first half of the year and we believe propels us towards revenue growth again in 2017 for an eighth consecutive year. We're now going to roll up our sleeves, we're going to get back to what and we look forward to providing a positive progress report on our next call. I'm going to turn it over to Ed for just some final housekeeping comments.

Thanks, Lee. Before we conclude the call today and like to mention that Deluxe management will be participating in the following conferences in the third quarter where you can hear more about our transformation. On September 14, we will be at the CL King Best Ideas Conference in New York. Thanks for joining us and that concludes the Deluxe second quarter 2017 earnings call.