Good day, ladies and gentlemen and welcome to the Q2 2019 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, today's conference is being recorded. I would now like to introduce your host for today's call Mr. Ed Merritt, Treasurer and Vice President of Investor Relations. Mr. Merritt, you may begin.

All right. Thank you, Sherry, and welcome everyone to Deluxe Corporation's Second Quarter 2019 Earnings Call. I'm Ed Merritt, Treasurer and Vice President of Investor Relations. Joining me on today's call is Barry McCarthy, our President and Chief Executive Officer; and Keith Bush, our Chief Financial Officer. At the end of today's prepared remarks, Barry, Keith and I will take questions. I would like to remind you that comments made today regarding projections, financial estimates, management's intentions or expectations regarding the company's future performance and strategy, are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. These comments are subject to risks and uncertainties which could cause our actual results to differ materially from our projections. Additional information about factors that might cause actual results to differ from projections is contained in the press release issued this morning, as well as in the company's Form 10-K for the year December 31, 2018, and other filings we make with the SEC. Portions of the financial and statistical information will be discussed during this call are addressed in more detail in today's press release which is posted on our Investor Relations website at deluxe.com. This information is also furnished to the SEC on Form 8-K filed by the company this morning. Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release or as part of our presentation during this call. Now, I'll turn the call to Barry.

Thanks, Ed, and good morning, everyone. This morning we're going to provide you with our second quarter financial results and provide a third quarter outlook. We're tightening our revenue outlook and reaffirming our full year adjusted EPS outlook. We'll also update you on the exciting progress we're making in our transformation to restore organic revenue growth and strengthen our position as a trusted tech-enabled solutions company. We'll include details of our new more focused strategy. We'll provide a status on filling key leadership roles and update on how our new team is delivering on our commitments and an outline of our infrastructure investments and expected benefits. While still early our momentum is clearly beginning to build. Similar to our last call, we had an unusual amount to cover today, so let's get started with highlights from our second quarter. Revenue grew 1.2% year-over-year, ending at $494 million, well within our guidance range, but we are not satisfied with our organic growth. Addressing organic growth is at the core of our new strategy. We delivered diluted earnings per share of $0.75 and adjusted diluted earnings per share of $1.64. Adjusted diluted earnings per share ended at the top end of our outlook. Overall, we delivered a solid second quarter, hitting the financial targets we've set for the business, while making significant progress on the transformation. More on that in a few minutes. But first, let me turn the call over to Keith for more on quarterly results.

Thanks, Barry. Compared to our guide, we delivered a solid second quarter financial performance. We produced strong operating cash flow to enable investment in our business, including making substantial progress in our transformation investments. Total revenue was $494 million a 1.2% increase year-over-year. While overall revenue was within our outlook as Barry noted, we're not satisfied with our organic revenue performance, a decrease of about 3%. As we outlined last quarter, we plan to resegment how we operate and report our business later this year, as part of our overall strategy to drive organic growth. For now, we're continuing to operate and report results in the current segment structure. Small Business Services revenue was $308.5 million and declined about 2.9% in total, or about 3.4% organically. Financial Services revenue was $156.1 million. It grew nearly 12.1% in total, but declined about 1.6% organically. Direct Checks revenue was $29.4 million, declining 5.8% year-over-year, but performed slightly better than our expectations. Currently, our largest group of products is marketing solutions and other services or MOS. For the quarter, MOS ended at $215 million, growing to 43.6% of total revenue. Checks ended the quarter at $196 million or 39.8% of total revenue. And forms and accessories was $82 million or about 16.6% of total revenue. Diluted earnings per share for the second quarter was $0.75 and includes aggregate non-GAAP adjustments of $0.89 per share. When excluding these adjustments, adjusted diluted EPS was $1.64 per share at the high-end of our outlook. Last year adjusted diluted EPS was $1.67 per share. A reconciliation from diluted EPS to adjusted diluted EPS is included in our earnings release. The fundamental health of the enterprise is strong, and we continue to deliver substantial adjusted EBITDA and free cash flow, allowing us to reinvest earnings back into the…

Thanks, Keith. I'm so proud of the accomplishments our team has made since I joined Deluxe late last year and I'm glad to be able to walk you through some of the details on those efforts and accomplishments today. I've asked much from the team and they've delivered. While still early, we can feel our momentum beginning to build. I've had the opportunity to meet even more employee owners across our fine company and their enthusiasm and their dedication to Deluxe is inspiring. I also had the opportunity to meet with a number of investors during the second quarter and I'm grateful for the overwhelming investor support for our new more focused strategy. I heard many of you ask for additional details about our strategy and our execution plan and I'll provide you more today. I want to be clear upfront. Previously, the company strategy was about diversification and using the company's great cash flow to buy inorganic growth. The company was very successful for a time on this pathway and now we're ready as a company to realize the potential of those acquisitions. However, as Keith highlighted earlier the acquisitions have not yet yielded the organic growth the company expected. In 2018 prior to my arrival the company repeatedly adjusted revenue guidance downward primarily due to acquisition delays and acquisition underperformance. As you can see from our New Day investments, we're now making the necessary investments to integrate these acquisitions then move the company to a modern technology platform. I understand the company had often discussed cross-selling and organic growth, but had not made the investments in the systems, processes, talent or culture to drive that growth. For example, the company has not had had a sale for over a decade. We're addressing each of these head on now.…

Thank you. [Operator Instructions] Our first question comes from Charlie Strauzer with CJS Securities.

Hi, good morning.

Hi Charlie.

Please can we just have a little discussion about the New Day investments and I appreciate giving some more clarity there, but maybe drill down a little bit more for us if you could and explain the split there of the $35 million to $40 million in terms of expense versus CapEx. And -- or is the CapEx on top of that amount? And how should that progress through the back half of this year as well?

Sure. So, this is Keith. Thanks Charlie. That guidance was for expense. So, there is capital in addition to that amount, but we were able to reprioritize what was already in our capital plan to accommodate for that.

Got it. So, basically, I know you're not spending any additional CapEx, but is there a breakout of the CapEx of what the -- what's related to New Day?

We didn't break that out specifically. As we move forward and look at the ERP platform I think there's more of an opportunity for capital treatment, but in these, no.

Got it. And do you plan to call that $35 million to $40 million as kind of your one-time non-GAAP expenses in -- when you calculate the adjusted EBITDA?

So Charlie, that's for this year. But I didn't hear the full part of your question.

No. I was just saying like when you back out things for adjusted EBITDA will you be backing out that -- these investments as well?

Yes, exactly. That's included since we took out the $75 million.

Got it. And how should we think about the progression of that $35 million to $40 million at the back half of the year in your Q3 versus Q4?

So, probably about two-thirds in the rest of the year.

Got it. Okay. Thank you very much.

Thank you. And our next question comes from Jamie Clement with Buckingham.

Hey. Good morning, gentlemen.

Hey, Jamie.

Good morning. Barry, as you all think about enterprise selling, what are some of the initial high priority, high potential verticals that you all think you're going to be focusing on?

Great question. And we've been very public that we -- our two primary markets are small business and financial services or financial institutions. But we think there are other enterprise classes, where we think we have a special right to win, which include healthcare, real estate and construction. We already had a great footprint in those markets, and our products seem to have great take up there and we think there's great growth prospects for us. But I want to be clear Jamie, we're -- that's where we're starting. There's others. For example, we had a nice total rating in automotive as another sector. And as we dig deeper here and as Chris goes longer, he's been here for three days now, I think we'll find additional market verticals. And clearly part of our strategy will be to deliver solutions that are targeting specific market verticals.

Okay. Thanks very much, Barry. Just a couple just independent questions, if I look at the checks business, page 14, 4% to 5% decline you have in the checks column. I think typically the company has guided to declines that are a couple of hundred basis points higher than that, greater than that. I think in the quarter, you were maybe --checks revenue, I think based in your chart was maybe down 8%, but like Direct Checks was actually surprisingly strong, I think compared to where it's been. So, can you help me kind of give the -- can you give us some updated thoughts on the checks business in going forward and projected rates of decline and that sort of thing?

Hey, Jamie. It's Ed. Yes. So, we've seen a couple of quarters where Direct Checks has been a little stronger than what we've expected. Where I think the difference is maybe in the past is we make sure first of all we're guiding to check revenue or check units so you got to make sure which one we're talking through. But the pricing is really where we are seeing a little bit of competition. I think we've seen checks performed fairly well, that we said in the last couple of calls even that it's tougher to raise prices in the check space, but the business is solid. We still see it continue to -- it's still declining, but it's declining to a pretty measurable rate and we're able to forecast it fairly well.

Yeah. No, Ed. What I'm just kind of getting at is I think that -- like I just -- I did the math quickly here, and I think your checks revenue was down 8.4% only during the quarter. Why on the chart on page 14 is the rate only 4% to 5%?

You know what? I was looking at it. I'm not sure if that's a good question.

Okay. No problem. We can move on. Sorry. Barry, other big picture kind of question about kind of multi-year targets and what you laid out on this call was potentially $2.3 billion of revenue low to mid-20% margins. I want to bring this up, because this question has come up to me. Simple math. If one were to take a theoretical 2023 of $2.3 billion and multiply that by 22.5%, you get to about $518 million of adjusted EBITDA. That's not far from where you all were in 2017 and 2018. And given the momentum that you're seeing and all the initiatives that you guys are undertaking, are you really trying to send a message that like goal scenario three years from now that your EBITDA is only going to be flat versus where it was last year? Because that doesn't sound to me like what you're saying, you sound much more optimistic than that.

I think we are much more optimistic. I mean our message -- we're trying to be very clear that we think that we will deliver net of check declines an incremental $300 million of profitable revenue to the company in calendar year 2023. So the company outperformed that. We're optimistic and hopeful, but we also want to be realistic in setting expectations that we're just at the beginning of our transformation. Our new sales leader has been here three days and we are starting to go forward. And we are -- the reason we're focusing the two segments that we've highlighted which are payments and cloud because not only do they have strong secular growth, if we can just plant our flag and stand in the intersection which we believe we have a right to do and a bigger basis than we have the day we win because those sectors grow. So sectors also have a terrific margins and we think that combination gives us the fuel to deliver what we think is a reasonable promise.

Okay. That's very fair. And I totally get that, it's early. I just -- it's like if people just do the simple math based on those bullet points it's not like a massively compelling number versus all the opportunities that you can have in the momentum you're building. That's the reason why I was pointing it out.

I get it, Jamie. And they're -- we've been very purposeful at targeting these markets because they give us great opportunity. We're early so we're in the business of meeting or beating expectations, so we don't want to set outside of the expectations too early.

Okay, that’s very fair. And appreciate the time.

Thank you. Our next question comes from Chris McGinnis with Sidoti & Company.

Good morning, thanks for taking my question. I guess just thinking about the organic growth -- coming along at some point here. A lot is happening with integration and changes within the business itself. I guess how long do you think you should see organic growth return to the model? Since seemingly the company was close to it at some point and you referenced that obviously earlier and with -- there's some headwinds there. But now that you have everything in place, it's going to take some time to implement all these initiatives. But when do you see or think the expectation of organic growth returning to the model, so?

Yes. Thanks for the question. I think there's actually two parts for that question. I want to answer both of them. The first part of the question is, and it was a follow-up question from the last time we were all together about our company's ability to execute against our technology initiatives. I hope you heard very, very clearly from us today that we are exceeding or on-track or exceeding our expectations and our own schedules and doing better than budget on each of the technology platforms that we are investing in. So we are doing exactly what we said we were going to do on exactly the schedule we were going to do it on exactly the price points we said we were going to deliver it. So that part of the execution, I think we feel very, very confident about. Much of the work will be completed this year. We told you several of the initiatives will be completed in this calendar year with go live dates at the first of the year. We feel very confident about that. Second which is when to expect organic growth and when does this deliver for organic growth? Again Chris has been here now three days. But even before Chris got here, we started working on initiatives to drive organic revenue growth and cross-sell in our telesales center, as well as in parts of our sales organization. And I'm optimistic that that will start yielding some early results next year. I can't give you any forecast about how much or how fast, but we would expect to see some fruit from that labor next year. And I think as we get closer next year Chris gets more established and has better visibility and insight into the pipeline. We will give you updates as this unfolds.

I appreciate that. And then just one more -- a follow-up question. You mentioned partnerships in some of the meetings we had. I was just wondering how does that look going forward? And how do you -- I didn't hear it today off end maybe I missed it in your commentary, but can you just talk a little bit about that and how the opportunity is for you?

Yes. Well, I mean I think the first one I point at is Ingram Micro. So Ingram Micro becomes a customer of ours. So really they're a partner where they're going to take our products. They're going to replace existing products they have in their suite and replace them with our products and then we become essentially marketing partners to deliver our solution to their customer. We love that model, because we're able to leverage the great relationship and the terrific brand that companies like Ingram has -- the relationships they have with our customers and we have great products and service and solutions delivery and we make partners. Coming soon, we'll be able to tell you more about the data deal that I announced which is also about a partnership. But we also think there's many -- one of the distinctions between I think the old strategy of the company and the new strategy is the old strategy was very focused on having to own and control an asset in order for it to yield value. In the new strategy, we really look at partners as a way to go much faster to generate new revenue, leveraging the best of what is available combining it with we have which is an unbelievable unmatched customer reach. I'm going to remind everybody 5 million small businesses, 4,800 financial institutions, 4 million plus websites that are hosted on our platform. Nobody, I mean -- and there is no one that has this type of scale and reach that we have. So, by packaging our products together, putting them together in compelling solutions and offerings along with those partners that we will be building over time, we think we've got a great distribution channel and a great way to reach small businesses and financial institutions with more products and services.

Great. Thanks for the color. Really appreciate it. Thanks for all the color and your commentary earlier.

Thank you. And our next question comes from Charlie Strauzer with CJS securities.

Hey, just a quick follow-up. Just on the FS segment. The recent acquisitions of FMCG and Datamyx have been challenged and it's the way that I guess to put it from last year. I just want to see if there's any progress kind of going -- kind of an update there, and how that's progressing back hopefully towards the right way.

Yeah. So -- I mean, I would take them separately, but what I would tell you is overall that we are pleased with the progress that we're making with those assets. Those assets were disappointing in their performance in 2018. FMCG specifically grew -- it just didn't grow at the rate that the company, I think, had expected to. And specific to Datamyx as interest rates continue to decline, we believe that positions Datamyx for nice growth acceleration, because of the position we have and the quality of the service we provide and the relationships we have with those mortgage lenders. So, we expect to see steady improvements and growth in those businesses as we go forward.

Great. And then REMITCO, the recent acquisition, how has that been performing since you had your hands on it so to speak?

REMITCO, I think is doing fine. And what really like about the REMITCO assets combined with our WAUSAU software, it really puts us in a truly unique position in the marketplace. WAUSAU, as you know, is the leading software that many billers the de facto leader for financial institutions and other billers that are managing lockbox operations and receivables. It is the standard that is what most people use. So, now in addition to having the industry standard software we're actually able to bolt-on services with that. We're actually able to operate lockboxes on behalf of clients. We see a nice opportunity here to grow market share as financial institutions look to outsource that solution to a third-party that's got more scale and honestly can do it at a better rate, as well as the billers that are looking for efficiencies. So, we think the combination of having the software and the services to deliver that gives us a great opportunity going forward. And then of course, that becomes our launch pad for the future of integrated receivables, which is not just lockbox operation or taking check payments, but it's all the things around accepting recurring payments et cetera. And we think it gives us a great position for we think is coming next. So great near-term and growing share as we win some outsourcing business. And we think it gives us great positioning for the future for where things come next throughout integrated receivables.

Excellent. Thank you. That’s helpful.

Speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Mr. Barry McCarthy for any further remarks.

Well thank you everyone for participating on the call and for your questions. So, in summary, here's where I'd like to leave us. First, our momentum is building. Our sales culture is starting to show initial signs of success. We have a new sales leader, key wins to announce shortly, a growing pipeline, a new and improving telesales model and a nice treasury management backlog awaiting implementation. Two, our new strategy is focused on payments, cloud, promotional products and check and we have material business in each area already and a right to win in each. Three, we're changing our go-to-market strategy to drive organic growth by investing in the systems, processes, talents and culture. We're on track and on budget rolling out our new enablement technologies. Four, we began to rationalize our realistic footprints and reduce the complexity and layers of our organizational structure, so it could be more nimble and move forward much faster than previously possible and drive more organic revenue growth. In closing, I'd like to thank our exceptional Deluxe employee owners who give their all every day to deliver for our customers and shareholders. I'm grateful for their commitments and together, we will unlock the incredible potential to become the new Deluxe, a trusted tech-enabled solutions company. Now I will turn the call back to Ed for some final comments.

Thanks, Barry. Jamie, you had a question. I do want to respond to that. I think you were asking about the 4% to 5% decline in checks. When we've got the slide in the investor deck and in the presentation here that shows long-term we expect that market in the check space to go down 4% to 5%. I think what you're looking at is a quarterly result which by quarter, we have promotional activity, we've got client wins, we've got pricing. So by quarter, you can see the check revenue decline more or less than the ongoing rate. But I think the answer to your question is, you're comparing it quarterly at an estimate to what we expect the market to do over the long term. If that's not it, we can chat about it later. But in closing, I just want to let everybody know, we've got some conferences coming up. We were at the conference in New York City. CJS Securities have their 19th annual New Ideas Conference. And we attended that, so thank you for that. On September 19, we'll be in New York at the CL King 17th Annual Best Ideas conference. And while not a third quarter event, we do hope that you can join us at our Investor Day in February 2020. And we plan to provide you some more details in the coming months regarding the timing and the location of that exciting event. Thank you all for joining us and that concludes the Deluxe second quarter 2019 earnings call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.