Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2017 Deluxe Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ed Merritt, Treasurer and Vice President of Investor Relations. You may begin.

Thank you, Glenda, and welcome everyone to Deluxe Corporation’s fourth quarter 2017 earnings call. I’m Ed Merritt, Deluxe’s Treasurer and Vice President of Investor Relations. And joining me on this call is 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 would like to remind you that the 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 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 Form 8-K filed by the company this morning. References 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 a solid quarter to close out a strong 2017. Revenue grew 3% over the prior year quarter, driven by Financial Services growth of 11% and Small Business Services growth of 1%. Marketing solutions and other services revenues grew 15% over the prior year and represented 40% of total fourth quarter revenue. Adjusted diluted earnings per share grew 4% over the prior year quarter. We generated strong operating cash flow of $338 million for the year and we were drawn $708 million on our credit facility at year end. We repurchased $15 million in common shares in the quarter and $65 million for the year. 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 $45 million cost-reduction commitment. 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 $495 million, growing 3.1% over last year. Revenue was about $9 million lower than the high end of our range, primarily driven by $6 million from MOS and $3 million in SBS forms and accessories. The $6 million in MOS was comprised of $3 million in data-driven marketing, where a large financial institution decided not to run a previously expected credit card campaign initiative, $2 million in lower fraud, security and operational services revenue and a $1 million each in small business marketing and treasury management solutions. This was partially offset by $1 million more in web services. Organic revenue, which excludes acquisitions, FX, exited businesses and other non-comparable items, was down almost 2% in the quarter. Small Business Services revenue of $322 million grew 1.3% versus last year overall and about the same organic rates, despite a continuing sluggish economic environment. We delivered growth in checks and marketing solutions and other services. From a channel perspective, our online major accounts in Canada grew. Financial Services revenue of $139 million grew 11% versus the fourth quarter last year. Organically, Financial Services revenue declined about 8% for the quarter, impacted by a lower revenue in both checks and MOS. Direct Checks revenue of $33 million was down 8.8% from last year and right in line with our expectations. From a product and services revenue perspective, check revenue was $206 million, representing 42% of total revenue. Marketing solutions and other services was $198 million or about 40% of total revenue. And forms and accessories were $91 million or about 18% of total revenue. Gross margin for the quarter was 61.4% of revenue and was down from 63.2% of revenue in 2016. The impact of acquisitions and higher delivery in material costs were only…

Thank you, Keith. I will continue my comments with the perspective on what we accomplished overall in 2017, look ahead to 2018 and beyond, including framing our pivot for faster growth strategy and review our key revenue growth area, marketing solutions and other services. I will then highlight progress in each of our three segments, including the prospective on what we plan to accomplish in 2018. Deluxe grew revenue in 2017 for the eighth consecutive year for the first time in 21 years. We saw continued stability in our core check and product businesses and improved our mix of faster growing marketing solutions and other services revenues to over 38% of total annual revenue. We acquired RDM, Digital Pacific and Impact Marketing to expand opportunities in higher growth marketing solutions and other services. In addition to our strong print leadership, we continue to invest in our brand, in digital technology and extending our sales, channel reach and in improving our infrastructure. We ended 2017 with 4.4 million small business customers, of which approximately 33% of them are marketing solutions and other services customers. And we now serve approximately 5,600 financial institutions. Operating cash flow grew for the ninth straight year, allowing us to pay our dividend, repurchase shares, refinance our long-term debt and invest in acquisitions. We recognized that there is still a tremendous amount of work to do, but we made great strides in 2017. Looking ahead to 2018 and beyond, we expect to deliver continued growth in MOS and a ninth consecutive year of revenue growth in 2018. It is important to note that 2018 marks the first time in the history of Deluxe that our revenue is expected to exceed $2 billion. Additionally, 2018 represents the first year of our three-year goal through 2020 to pivot for…

Thank you. [Operator Instructions] And our first question comes from the line of Jamie Clement from Macquarie. Your line is now open.

Gentlemen, good morning and thanks for taking my questions.

Hi, Jamie.

So looking at 2018 guides, I think you said organic growth approximately 1%. I just want to make sure I understand what’s assumed in guidance with respect to acquisitions that haven’t been announced yet. So just if I use a pure 1% number, am I right in assuming you got about $80 million to $140 million of incremental revenue from acquisitions that have not been made yet? Is that right?

Yes. The 1% is absolutely the right number that you should use for organic.

Okay.

The way to think about it in the – let me go in the context of what we’ve included in there. So as far as acquisitions, there’s $95 million that’s new acquisitions included and $45 million of carry over from acquisitions last year.

Perfect.

So $140 million is the way to think about it, $45 million carryover, $95 million new.

And with respect to acquisition intangibles, I think you called out an estimated $92 million for 2018. It’s obviously, that’s non-cash. What was the number in the fourth quarter? I don’t think you have that in your earnings release, I think we’d have to wait for the K, but if you have it, I’d appreciate it.

I don’t have it. Keith, do you have it in front of you?

We don’t have it in front of us, Jamie.

Okay. But as the year goes by and you announced these deals, I mean, you’ve got it – you feel you have enough of a cushion in your non-GAAP, in your EPS numbers, your EPS guidance to account for any kind of near-term dilution you may see from those deals to get you the additional $95 million of revenue?

Yes. Let me – in the comments, again, we made a comment that we – from what we originally guided back in October to where we’re guiding today, because we elevated the overall amount of revenue that we expect from acquisitions, we’ve also taken some dilutive – additional dilutive impact into consideration. So yes, we expect based on – this is always your best shot, Jamie, when you’re out with the companies, but we believe that we have that covered in the guidance we’re providing.

Okay. Okay, great. I appreciate it. And I wonder just – I’ll back in the queue after this. But on tax reform, what are you looking for in terms of chatter from your many, many, many small business customers that would suggest that they may consider spending an extra couple of thousand dollars in 2018 on redesigning a website or e-mail marketing campaign or something like that. What are you looking for?

Yes, right now, again, I think the thing that we put out in the prepared comments is that, I think, as I said, one of the competitors did a really nice job on the survey. It’s what we’re seeing right now, it’s like everybody right now. We watched everybody that’s gone before us and what are they doing with tax reform. We’ve kept our eye on that. And we’re going through and looking at is where do we want to do, what do we think the right things that we need. And small businesses are doing the same thing. How much am I going to get back to my employees? How much of my going to reinvest in my business? How much am I going to go spend and putting to the economy, so to speak or putting them new offers, my new services, whatever. We’re hearing small businesses that we talked to going through those same decisions. And we don’t have perfect clarity, which is why we put the words that we put in our prepared remarks. But I’d tell you this, we do see and feel there is more bullishness out there. And because of that, we’ve also raised our revenue growth, I think we could finish the year about 3.5% or 3.7% last year, and we expect 4% to 5% this year. So we feel it, we see it. And again, if it gets more clarity, could that be even stronger? It could be. But right now, we will see.

Right, okay. I’ll get back in queue. Thank you so much for your time.

You’re welcome.

Thank you. [Operator Instructions] And our next question comes from the line of Charlie Strauzer from CJS Securities. Your line is now open.

Hi, good morning.

Hi, Charlie.

So a couple of questions on guidance and if you think about the tax savings you’re going to have, it sounds like you’re reinvesting a fair amount of that back into the business, as you mentioned. And first of all, can you talk about the difference between the $8 million of reinvestment versus the $10 million of investments spend that you – you called it things like bonuses, et cetera? What are the kind of key differences there between the two buckets? And why is one being adjusted and one is not being adjusted?

Yes, let me give you the framework that I know you want to know and other investors are going to want to know as well. So just clear the air right now. So if you think about what we put out in October, we said that we expected a 2% to 4% revenue growth, which is now 5% to 7%. And we expect a 3% to 6% adjusted EPS growth. If you purely go out and you plugged it into your models as well as other investors today and you adjust the tax rate from the 32% to the 25%, it’s about 15% to 16%, that we could have to say, just – that’s the number. What we’ve done and you can do the math on this, Charlie, as well as other investors can, is take that $10 million that we’ve decided to invest, and I’ll give you some clarity around what that is. And take the dilutive impact from the deals that were – we’ve now added, and that would take you down to the high end of the – I’m using the high end here, that gets you right – lands the plane right at 10%. It’s crystal clear, that that’s the math, that’s what we’ve decided to do. Now as far as what all the pieces are, the way to think about it is the $8 million is onetime integration and activities. And they range from things like, and I mentioned this on the last call, Charlie, they range from things like getting everybody that’s in treasury management from the four acquisitions that we’ve done, all integrated in same technology, same platforms that they communicate with, location, considerations that we’ve taken and about things like that, that are onetime in nature, more integration related. We’ve actually started…

That’s very helpful. That give us a lot of information to process in a short period of time. So thank you for that. And then I know you don’t want to get into the specifics in the 2020 goal of 50% MOS revenue and starting at 1% guided – organic growth guidance for this year. How should we think kind of bigger picture about what organic growth might look like if you achieve those goals by the end of 2020?

Yes, we mentioned in the prepared comments, Charlie, we’re looking at 3% in both 2019 and 2020 as that – those numbers.

Got it. That’s perfect. And then Keith, what should we be using for interest rate assumption in 2018.

Yes, this is Ed actually. Probably right now, rates are around 3%. Now if there are more fed hike increases, obviously that flows through, but right now rates for us are right around 3% all in.

So how should we think about it, the expense for the full year? Up slightly from last year?

Well, you need to build – probably, yes. Year-on-year they’re definitely going to be up. But you’ll need to make your own assumption, I guess, as to whether there are going to be some more hikes in the rates from that.

Got it. And what do you basically assuming in your calculations?

I mean, we’re assuming that there are some hikes in there. We don’t give a detailed number on what the interest expense assumptions are, but are assuming rates are going to up this year.

And then one more housekeeping, just share count assumption for the year. Do you have a range for that?

Yes, but we don’t talk about share buybacks. So, I mean, if we buy back a little bit of stock, I think share counts could be flat, flattish maybe. But we don’t usually preannounce what kind of share buyback activity we’re going to have.

Got it. Okay, thank you very much.

You’re welcome.

Thank you. And we have a follow-up question from the line of Jamie Clement from Macquarie. Your line is now open.

Hey, Lee. You called out for, with respect to the fourth quarter, a little bit of a shortfall versus budget-related to you on FY that didn’t go through. I think you said with the credit card solicitation kind of campaign. Was that the right? Did I hear that properly?

Yes. And this is – we actually called it in October that we’re going to see some of this go on. And what we saw last year is we had more get done in the first quarter in First Manhattan than we thought. And it was either the second or third quarter we saw the same thing. Well, lo and behold in the fourth quarter, when – and the way I think about it, Jamie, is all these FIs they line up all these campaigns that they’re going to do. And there’s a lot of them. And one of our – one large institution decided, I don’t want to now do a credit card campaign. It doesn’t mean we didn’t have – by the way, one of the things I’ll put out there as well is our First Manhattan revenue ended up being almost $91 million last year. So when we called $80 million to $85 million at the beginning of the year, we ended up doing better than we thought. So our challenge is we’re going to see a little of this lumpiness go on. And yet, when you look at the whole year, the team in First Manhattan just did a super job. So that’s what happened.

Well the reason that I bring it up was even if you listen to new stuff that comes out of the U.S. Postal Service, it seems that credit card solicitation in general actually started declining earlier on in the year when you are actually seeing some strength in the first quarter. And have been kind of a little bit sluggish over the last couple of quarters, but it sounds like there is a little bit of an optimism that there may be a turnaround in that in 2018. So I just wanted to make sure how much your business was leveraged to that kind of process? That’s why I’m asking the question.

If you think about First Manhattan, credit card is not the first thing that generally we’re out working with FIs on.

Yes, I didn’t think so.

Yes, it’s generally – let’s go back to make sure we stay grounded. This is generally going to be consumer deposit and consumer loan-related and business deposit and business loans. But we do, do credit card things.

Okay.

And customer that we’re talking about here, we do all those other things with. So this is a super customer. And they wanted to do this and then they just – the CMO just decided not to do it.

Okay. Got it. Yes, because I’ve heard some optimism around that with respect to the next couple of quarters. And who knows if they’ll play out that way, but it sounds like sort of this time, this year, is that a little bit better with respect to forward-looking than maybe this time last year on that subject. But who knows will be right. But thank you.

You’re welcome.

Thank you. And that concludes the question-and-answer session today. I would like to turn the call back over to Lee Schram, Chief Executive Officer for closing remarks.

So just thank you, everybody, for participating. And Charlie and Jamie for your questions. And I just want to leave you with three things. We delivered a strong 2017 financial performance, we delivered our eighth consecutive year of revenue growth and we are pivoting for even faster growth in the future, starting in 2018, with expected revenue growth again in 2018 for the ninth consecutive year. We’re now going to roll up our sleeves, we’re going to get back to work and we look forward to providing a positive progress report on our next earnings call. And I’m going to turn it over to Ed for some final housekeeping.

Thanks, Lee. So before we conclude this call today, I just want to mention that Deluxe management will be participating at the following conferences in the first quarter, where you can hear more about our transformation. On March 14, we’ll be at the Susquehanna Seventh Annual Technology Conference in New York; and on March 20, we’ll be attending the Telsey Advisory Group’s Spring Conference in New York. Thanks for joining us, and that concludes the Deluxe Fourth Quarter 2017 Earnings Call.