Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 Deluxe Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ed Merritt. Sir, you may begin.

Thank you, and welcome to the Deluxe second quarter 2020 earnings call. I’m Ed Merritt, Vice President of Corporate Finance and Treasurer. And joining me on today’s call is Barry McCarthy, our President and Chief Executive Officer; Keith Bush, our Chief Financial Officer; and Jane Elliott, our Chief Communications and HR Officer. At the end of today’s prepared remarks, Barry, Keith, Jane and I will take questions. I would like to remind you that comments made today regarding management’s intentions, projections, financial estimates or expectations about the company’s future strategy or performance are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. These comments are subject to risks and uncertainties, including risks related to COVID-19, which could cause our actual results to differ materially from our projections. Additional information about factors that might cause our actual results to differ from projections is contained in the press release issued today, in the company’s Form 10-K for the year ended December 31st, 2019, the Form 10-Q, which will be released in conjunction with our second quarter earnings release shortly, as well as other SEC filings. Portions of the statistical and financial information that will be reported today, it will be addressed in more detail in today’s press release, which is posted on our Investor Relations website at deluxe.com. This information will be furnished to the SEC on the Form 8-K filed by the company this afternoon. I’m told that EDGAR is currently down for filing SEC documents, but we’ll furnish these as soon as their systems back up. 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. Like last quarter, we continued to work remotely from different locations today and remain committed to safety and health-related protocols in order to keep our employer owners safe. Please bear with us should we experience any technical difficulties during this call, given our virtual status. Now, I’ll turn the call over to Barry.

Thanks, Ed and good afternoon, everyone. Before we begin, I’d like to share with you, this will be Ed’s last earnings call as he’ll be retiring at the end of the year and will serve as a special advisor to Keith during that time. Ed has made many contributions to Deluxe over the past seven years, and we thank him for his leadership and dedication and wish him all the best in his retirement. Also on the call with us today is Jane Elliott, Chief Communications and Human Resources Officer. Jane will lead Investor Relations, which will be integrated with all of our communications capabilities. Many of you have known Jane for many years, given her two decades of successful experience running IR at Global Payments, then earlier at First Data. We’re in the process of conducting national searches for a permanent Head of Investor Relations and a new Treasurer, both roles currently filled by Ed. Keith, Jane, our new IR leader and a new Treasurer, will work together with me to deliver meaningful insight into our performance. We’re proud of our strong performance in the second quarter in context of the pandemic. We delivered stronger than expected results with free cash flow exceeding last year. We delivered stronger than expected results with cash reserves. We restored margins into our target range just as we promised we would do. We estimate we delivered sales-driven growth, excluding COVID impacts, for the second consecutive quarter. We won new business at an accelerated rate and closed 4 of our top 25 targets, and we materially adjusted our company’s infrastructure to position us to drive sustainable growth over the long-term. We’re so confident in our financial strength, we declared our regular dividend and paid down $100 million on our revolver earlier this month. Our…

Thanks, Barry. Good afternoon, everyone and congratulations and thank you to Ed for your past leadership. Also congratulations to Jane. I look forward to deepening our strong working relationship. As Barry noted, our One Deluxe strategy is working, and we continue to be proud of how our teams have rallied to become more innovative and agile than ever before. Given the challenging economic environment, we delivered stronger than expected results for the second quarter. We’ve also solidified our financial position, while advancing our business transformation. For the second quarter, total revenue declined 16.9% or $84 million to $410.4 million as compared to the same period last year. While we benefited from sales-driven growth, it wasn’t sufficient to overcome the impacts of COVID. The pandemic impact was most acutely felt in Cloud Solutions, Promotional Solutions and Checks. Importantly, we took assertive actions in the quarter to address the loss of revenue and change in mix. These actions improved adjusted EBITDA margins by 330 basis points sequentially over the first quarter results to 20.4%. I will cover this in more detail shortly. The second quarter revenue decline was partially offset by new wins. The reduction in revenue and change in mix did affect our results. Gross profit margin for the quarter improved 150 basis points from the prior year with a loss of lower-margin Promotional revenue. SG&A expense as a percentage of revenue increased 340 basis points. While SG&A reductions of $23.9 million were achieved during the quarter, these reductions did not match the pace of COVID-related revenue declines. In addition, we made the prudent decision to continue spending to onboard new client wins. Together, these changes reduced operating income by $27.5 million to $24.3 million for the quarter. Also included in our results are a number of actions we took to…

Thanks, Keith. I want to build on your comments about our strength and reiterate a remarkable two – second quarter achievements. Importantly, our One Deluxe strategy is working. We’re delivering sales-driven revenue growth and becoming a trusted business technology company. Our customers are engaging with us more deeply as we help customers of all sizes grow and navigate their new reality. Continued transformative actions taken to streamline our operations and footprint also drive benefits in the years ahead. Our financial position and ability to generate cash flow is strong. As a result, our confidence in our ability to achieve our long-term goals is unchanged by this crisis, even if the time line has been extended. While we’re not providing outlook for 2023, we continue to believe we will be a company over the long-term with mid- single-digit revenue growth and margins in the low to mid-20s. We’re proud of our progress, and we’re confident in our bright future. Before we get to Q&A, I want to recognize the exceptional contribution of my fellow Deluxers. The team has risen to the unprecedented challenges of COVID and continue to deliver for our clients without interruption. While others may have focused on their difficulties, our team just went to work. That is the character of a Deluxer, living our purpose, values and ownership culture every day because we’re all shareholders too. Now Keith, Ed, Jane and I will open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Charlie Strauzer of CJS. Your line is open.

Hi. Good afternoon.

Hey, Charlie.

Hey, I just want to say thanks to Ed and for it’s been a pleasure working with you over the years and wish you the very best in retirement, sir. And with that, just a couple of questions for you guys. When you look at the kind of progressive improvement you made since April, you know how much do you think that’s attributable to some of the stimulus actions that are out there you know from the government? And you know should your stimulus kind of fall short next week as the Senate in-house kind of wrangle back and forth. Do you think that could be you know another speed bump along the way here to recovery? Or do you think that’s something that you can kind of work through?

So, Charlie, you know we can’t precisely measure the impact of stimulus. But two points for you. One, we have seen across our business, you know improving stability, which gives us confidence about the future and the remainder of the year. Clearly, the stimulus has had some impact. But again, it’s difficult for us to be able to measure specifically what that direct impact was on the business. But we’re very confident that if there’s you know additional shock from the back half of the year, you know we got a playbook that’s tried and true, and we have option to keep the company healthy.

That makes sense, thank you very much. And then, Keith, maybe for you on the breakdown on the revenue growth or declines in the quarter. Can you share with us the organic numbers as well?

So think of all of it is, we aren’t reporting organic any longer. So it’s all sales-driven revenue is how we think about it. So none of it is, there’s no acquisitions in there. So that’s I would take that as organic contraction.

Excellent, that’s helpful. Thank you very much on that. And then, you know, Barry when you look at just some of the recent success you’ve had in the Payments side, winning business there, what are kind of the factors driving your wins there? And is it – you know do you think it’s a share gain thing where you just have been more competitive and have a more compelling offering? Or do you think as you know it’s your competitors maybe saying that you know what, it’s a business they don’t want to be involved anymore depending on the scale that you have?

You know what, actually, I think it’s three things, which I’ll tell you the strength of our company and the work we’ve done already. First, we believe we have the strongest product offering in the marketplace. On a side-by-side comparison, we win and we know we’re winning business because the quality of our product and the level of service we provide. Second, we do believe we are winning share, not because people are not interested in the space. We have plenty of other competitors in the space, but our product is better, and we’ve ramped up our sales organization. So we’re just having more conversations with people than ever before. And so that leads us to additional sales results. And the third thing that I would tell you is that, this crisis has highlighted, is that the value of this and the strength of our balance sheet is a compelling value proposition in addition to the quality of our product is helping us win business. So I believe we have the best product. You know we have a strong balance sheet, and we have a sales organization out there now selling. So we’re pretty confident we’re winning share. And again, as I said earlier, the reason we think that’s so important is strategically, the more people we bring on to our platform is you know the bigger base we have to sell additional product and service as this migration continues toward you know automation of order to cash and receivables. So we think we’re incredibly well positioned there. And by winning more market share here you know it really helps us both near-term, right, with immediate income, but also for the long-term, giving us a bigger and bigger market share in the – to go chase and deliver additional product and service.

Great, thank you very much.

Thank you. [Operator Instructions] We have a question from Chris McGinnis of Sidoti & Company. Your line is open.

Afternoon. Thanks for taking my questions and very nice quarter –

Hey, Chris.

And congrats. Could we maybe just give keep you know in the last question, just kind of keep on that. Just has the competitive dynamic changed at all? I mean, it sounds like, you know obviously, you know you’ve taken a lot of steps to transform the business and really drive growth. You know is the competitive landscape may be tempered because of COVID and you’re just really executing at a higher level and taking advantage of that? Can you just maybe talk a little bit about that across the industry or across all different segments?

Yeah, I’d be happy to talk about it. You know what, you know we see all the same players in the marketplace that we saw before October. So we have continued to advance our product, and we did that some of last year. We continue to make enhancements this year, and we are better able to tell that story to our customers, because we now have a sales organization that’s fully engaged and ready with tools to go tell our story to customers and really take the fight to the Street, where we can go win. So I think we are doing a much better job, telling our story and showing the competitive differentiation we can offer to our clients, part one. And part two in many parts of our business, where customers are thinking about long-term relationships. It is a huge advantage to partner with Deluxe, given the strength of our balance sheet and you know the cash flow we have and the quality of the product. So not only do we have a better product, we’re able to bring that product to market and explain our story better than ever. And we put icing on the cake by having an incredible balance sheet and great financial stability, which we think gives us an additional and material competitive advantage.

Okay. And I guess just with the new wins on the larger side in some of the enterprise clients, is that more cross-promotion or cross-selling you know capabilities that you’re adding? You know what’s been the change in approach to driving the new customer wins, especially the larger ones that you’ve won later?

You know what, this is one of the most exciting things about our transformation among many exciting things. Because we, in the middle of the COVID crisis, we not only sold new enterprise-class deals. We sold in market verticals we’ve not sold before. We created products, got them lost in-market, booked $26 million of revenue in record time and really in no time, all within the same quarter. But the wins are both new to the company, but they are also cross-selling to existing customers. So I mentioned earlier that we sold additional service to AT&T. They are a longstanding client of ours, an important client of ours, and we’re able to expand the relationship. And there are number of other wins where we have an existing relationship, and we’ve actually been able to expand the relationship. That’s one of the things we said we were going to do last year, and we’re actually doing it where we have existing customers by going to the customer and telling the whole Deluxe story, that’s the whole point of our One Deluxe strategy going to the customer, telling the whole story, but more importantly, listening to what their needs are, we can help solve their problem. So what might have been a sales opportunity for one product turns into a sales opportunity for multiple products, simply because we can tell the whole story, and we are training our teams to better listen to what the customer needs are so we can help solve problems. You know it sounds very simple, but it’s very fundamental at how we’ve changed the go-to-market approach here. And it’s a pretty massive change. We have a sales organization that’s now trained across the entirety of our product suite. They can get to the second base in a…

Great and I appreciate that color. And I guess just around the small business with that new team you were talking about was kind of largely focused on healthcare. Is that going to move to other verticals or other kind of markets going forward? And how long is that team been in place? And can you just provide a little bit more color? It sounds like an interesting opportunity.

Yeah. So you know think about this is our first step towards having you know market vertical specialization. And we thought that we saw an opportunity. We intended to go down this path. We saw an opportunity immediately at healthcare we set up a small team. And we got pretty immediate results, which I shared with you. And so we’re very optimistic that, that pathway will continue to bear fruit and healthcare where it’s aimed today, but proving that successful, we think that there’s no reason that can’t expand and we get even more vertical focused in our sales organization going forward. So we’ll be able to bring the best of our product with a very specific focus on a type of customer. And again, we should be able to do even better than by showing understanding what a typical group of customers’ needs might be and showing how our products can help them solve common problems. It is sort of the next step of the evolution of becoming you know a world-class sales organization.

Okay. Sounds like an exciting opportunity. Just a couple more, I apologize. Just on the small business side, are you heavily weighed on and one kind of vertical itself? Or is it pretty widespread? If you don’t mind just highlighting that real quick.

Well you know with 4.5 million small businesses, of course, we have a very, very broad distribution of customers. And in our small business portfolio, we certainly have some concentration, but I don’t think about us having you know overconcentration in any one of them. Certainly different levels of penetration by you know segment or vertical. But you know we don’t think we see anything in our portfolio that says we’re over – extremely overweighted to one place or another.

Great and I appreciate that. And then – just a question around, one, the margin profile for maybe I don’t know if you can talk a little bit about next quarter. It sounds like some costs are coming in with the new business wins. And then maybe just on the SG&A levels of you know in relation, I guess, if you think about from Q2 you know upwardly as we head into Q3 and the back half of the year? Any color you can provide on?

Yeah. You know what, unfortunately, given the uncertainty in the market around COVID, we can’t give specific guidance. In my comments, I gave general direction about what I thought would happen, which we think that Cloud and Promo will lag the recovery. We think that Checks will largely follow recovery, maybe slightly slower. And we have a lot of optimism for the growth continuing in Payments. And I think we showed in the second quarter, our ability as a leadership team. And just I know you know this, but it’s a new leadership team. The team didn’t exist in its current state until Thanksgiving of last year. And then we can manage the expense really well, and we expanded margins 330 basis points sequentially from Q1. So I feel pretty good about our ability to you know manage margin. Obviously, in this marketplace, it’s very hard to predict. But we, based on what we can see now, you know, we told you how we feel slight improvement sequentially from the second quarter going forward.

Okay, that’s fair enough. Thank you very much for the time. And again, great quarter and good luck in Q3.

Thanks.

[Operator Instructions] I’m showing no further questions at this time. I’d like to turn the call back over to Jane Elliott for any closing remarks.

Thanks, operator. This is Jane Elliott. Let me wish Ed well in his retirement, and I look forward to continued partnership and the transition, and I look forward to working again with so many new and existing friends on this call and in the future. Before we conclude today’s call, I’d like to mention the following conferences in the third quarter where management will be participating. On September 16th, we will be virtually participating in the CL King 18th Annual Best Ideas Conference. And on September 23rd or 24th, not exactly decided yet, we’ll be at the virtual Sidoti 2020 Conference. Thank you, everyone for joining us on our Deluxe second quarter 2020 earnings call. We look forward to sharing more good news about our accelerating transformation next time. And in the meantime, stay healthy and safe.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may all disconnect. Have a great day.