Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Quarterly Earnings Conference Call. All participants are currently in a listen-only mode. And today's call is being recorded. At this time, I would like to turn the conference over to your host, Vice President of Strategy and Investor Relations, Brian Anderson. Please go ahead.

Thank you, operator, and welcome to the Deluxe fourth quarter and full year 2023 earnings call. Joining me on today's call are Barry McCarthy, our President and Chief Executive Officer; and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin, and as seen on the current slide, I'd like to remind everyone that comments made today regarding management's intentions, projections, financial estimates and 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. Additional information about factors that may cause our actual results to differ from projection is set forth in the press release we furnished today and our Form 10-K for the year ended December 31, 2022, and in other company SEC filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA, adjusted and comparable adjusted EBITDA margin, adjusted EPS and free cash flow. In our press release, today's presentation and our filings with the SEC, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to adjusted EPS, which may assist with your modeling. Now, I will turn it over to Barry.

Thanks, Brian, and good morning, everyone. I'm pleased to report our strong results, growing comparable adjusted EBITDA dollars, expanding comparable adjusted EBITDA margins and driving robust operating leverage for both the fourth quarter and full year 2023. Importantly, these results also accompanied improved free cash flows, and they further demonstrate the strength of our focused portfolio of offerings. This provides us a strong foundation for continued growth and the execution via North Star as we progress into 2024. Before reviewing the 2023 results in more detail, I'd like to first provide five key highlights from the past year. First, the enterprise achieved its third consecutive year of organic revenue growth. And this year, we also leveraged our scale to grow profits faster than revenue. We have clearly changed the company's trajectory. Second, we launched the enterprise-wide North Star initiative, which will nearly double our current cash flow run rate and add $80 million of incremental run rate adjusted EBITDA by 2026. During 2023, we took actions to unlock $40 million of annualized incremental adjusted EBITDA toward these goals. We will continue to execute additional value-creating initiatives within the program, unlocking further opportunity throughout 2024 and beyond. I'll provide more details about our North Star progress in a bit. Third, we expanded profits, growing comparable adjusted EBITDA by more than 3% compared to 2022, enabling us to improve our net debt position by more than $80 million versus the prior year-end levels. This was a $140 million improvement from our peak 2023 level at the end of the first quarter. As we've discussed, lowering our net debt while simultaneously investing for growth and maintaining our dividend remain our clear capital allocation priorities. We're well positioned for continued improvement of our overall leverage ratio as we begin 2024 and execute against our…

Thank you, Barry, and good morning, everyone. As Barry noted, we were very pleased with our overall Q4 and full year 2023 progress, particularly our strong cash flow generation and the improvement of our leverage ratio during the year. I'll begin today reviewing some of the consolidated highlights for the year before moving on to the operating segment results and reaffirmation of the 2024 guidance we provided at our recent Investor Day event. For the full year, on a reported basis, we posted total revenue of $2.192 billion, down 2%, driven by the impact of our recent divestitures, but increasing 0.3% year-over-year on a comparable adjusted basis. We reported full year GAAP net income of $26 million or $0.59 per share for the year, down from $65 million or $1.50 per share in 2022. This reduction was primarily driven by higher interest cost and the impact from the Hosting business exit. Full year adjusted EBITDA was $417 million, up $13 million or 3.2% on a comparable adjusted basis from last year. Adjusted EBITDA margins were 19%, improving 50 basis points on a comparable adjusted basis. Total adjusted EBITDA dollars, reflecting prior-year comparison, inclusive of our focused business exits, declined 0.2% for the year, while EBITDA margins improved 30 basis points. Full year adjusted EPS came in at $3.32, down from $4.08 in 2022, primarily driven by impacts from our 2022 and 2023 in-year business exits, increased interest expense and changes to taxes, depreciation and amortization. Now, turning to our operating segment details, beginning with our Payments and Data Solution segment. Payments grew fourth quarter revenue by 2% year-over-year to $175 million, with Merchant Services growing 8.7% year-over-year, as Barry noted. The balance of the segment saw declines of 5.1% during the quarter as we lapped some one-time receivable hardware revenues…

[Operator Instructions] Your first question comes from the line of Lance Vitanza from TD Cowen. Please go ahead.

Thanks, guys, and good job on the quarter. You gave a lot of information about the fourth quarter. So, maybe, just to sort of focus on the upcoming first quarter. And Chip, I did hear your comments regarding the seasonality in terms of free cash flow, but could you maybe talk about the impact of seasonality on the operating segments themselves in -- the typical seasonality that you'd expect from 4Q to 1Q, and how you think that might translate into not only revenue performance in the quarter -- in the first quarter, but sort of what we should be thinking about for margins? And then, I've got one other question as well. Thanks.

Good morning. So, keeping in mind, we don't guide quarterly, I will try my best to help you because I realize we have a lot going on, especially with rolling in more forecasted exits this year. So, let me start at the highest level and then I can give you a little bit of color by segment. So, the easiest way to think about it is, the seasonality change from the fourth quarter we just reported until what to expect in the first quarter. And so, if you look over the last few years, we typically would step down about 3% in total revenues from the fourth quarter into the first. And so, that would be how I would think about the overall baseline resetting to reflect the seasonality. And the most material seasonality item we have is within the Promo business, which has tax forms and other seasonal items. So, I would start out with my guidance. Again, we don't guide directly, but my assumption to you would be take that fourth quarter revenue result, haircut it by about 3% to get to kind of the baseline starting point for the year. And then off of that, it's a question of how much growth will we drive relative to our full year guidance range. So that will be towards the lower end of our 0% to 2% range. So at the highest level, I think a haircut of 2% off of what we just did in the fourth quarter is a solid place to reflect the enterprise. And that will help factor in the seasonal change of the Data business. The Data business isn't necessarily seasonal as we've said, but it's got the campaign-oriented flexibility across the quarters. And of course, we had a lower quarter in the fourth…

Very helpful. And then just a final question for Barry regarding the Payments segment. We noticed the Michael Reed departure. Could you remind me, was he one of the guys that you brought into Deluxe as part of the new wave of leadership? And in any case, could you comment on why he left? Who's taking over for him? Did the transition -- I know he's still serving as, I believe -- or the plan is for him to be an adviser to the company. But did the transition perhaps impact results in the fourth quarter? Might it impact results in 2024 and so forth? Thank you.

Lance, the first thing I'd want to say is to highlight the great performance in the Merchant business. That business continues to outperform our expectation, and you saw the great performance in Q4 as a result of the big win we had announced earlier. We think it's real evidence of the cross-sell ability of the company to help grow that business. On the B2B side of the business, we're increasingly moving that business towards the Software-as-a-Service aspect of the business. And we are investing there while we are continuing to win market share on the lockbox side of the business. And the lockbox business was a little bit softer this period, and we didn't have some of the recurring things that we saw in Q4 of last year. Very grateful for all the great things that Mike did to help get the company and the B2B business moving in the right direction. And he is continuing as an adviser to help us on the transition. That business is reporting to me today while we find a successor. And specifically, we're looking to sort of add more capabilities to the team around the growth area, which is Software-as-a-Service. So, we're grateful for all that Mike did. We are really optimistic about the future of that business and Payments in general.

Thanks. And maybe just one quick follow-up, if I could, regarding lockbox? Would you describe -- I mean I think in the past, right, you've described that business as in somewhat of a long-term secular decline. And I'm just wondering, I mean, should we expect -- shouldn't we expect that business to kind of be industry-wide, that business to be sort of down mid-single digits from here on out? And I'm wondering when you talk about a little bit of softness, was it softness relative to that? Or do I have it wrong, and that's a business that in a better period would be flat or perhaps even growing?

So, first of all, I think it's important to talk about the complexion of the B2B business in total. And it's roughly split between the lockbox business and the growing Software-as-a-Service business. And so, on the lockbox side of the business, yes, there are secular headwinds in that space. But what you've seen us do over the last couple of years is that we have significant market share gains or we have win new business, and then that helps mitigate the decline there. And we've had some very significant wins there. And then you saw, of course, in the fourth quarter of last year where we took on volume from a competitor that had an outage, that helped us deliver a really terrific result in Q4 of last year. We have got a big pipeline. And we think we'll continue to add clients on the lockbox to provide some stability. But to be clear, we're focusing more and more on the Software-as-a-Service side of the business, because we see that as the future. We had a successful launch of our new receivables product, and we've got an opportunity next week to be in front of hundreds of customers at our annual customer event, where we'll be sharing more details, expect to build more leads and help that side of the business accelerate.

I would just add that you're right, Lance, that the lockbox business, in aggregate, is generally in decline, like the rest of the paper parts of our business. We continue ourselves to innovate in different ways to move it to more digital. We're really focused on the efficiency of that business and improving the margins and profitability, which as you heard in our prepared remarks, we did a lot of that this year through site consolidation and other efficiency initiatives. Even despite the softness, the volume challenges we had, we were able to expand margins there, which is really a testament to the opportunity we have to, not only continue to look for opportunities to partner with customers and take on more volume, but we continue to run those operations in a more efficient way and expand the EBITDA margins for that business as well as B2B in totality.

Super helpful. Thanks, guys. Congrats again.

Your next question comes from the line of Charlie Strauzer from CJS. Please go ahead.

Hi, good morning, and thanks for taking my questions. Just if we could focus a little bit on the free cash flow guidance, the $60 million to $80 million that you provided there? Coming off with a pretty strong in '23, looking at the guidance, what are the drivers and assumptions built into that guidance range? And then, what could potentially [indiscernible] you from exceeding that range?

Yeah. Thank you, Charlie, and good morning. Thank you for joining us. I think I want to first acknowledge the obvious that I did lower that free cash flow guidance range on the Q3 call from our original full year guidance of $80 million to $100 million for 2023, down to $60 million to $80 million. And I did that based off two factors. As you'll recall, I did that based off where we were year-to-date through the third quarter, as well as through the introduction of North Star, adding more potential cash restructuring charges as we set the company up. It was the responsible and wise thing to do to reset that range at the time. Now, however, we didn't change our internal focus on running hard at cash flow and continuing to optimize things across the portfolio. So, when you look at our final result coming in way ahead of where I reset guidance to, that was really a function of the incredible work the team has done to really work on working capital efficiency. I was very impressed with how the team worked inventory down as the year progressed. As an example, as soon as we got through the ERP upgrade, the team worked very hard working through all of the challenges we had dealt with around inventory, starting back in 2021. You think about supply chain disruptions, inflation, as well as the ERP project, we finally got the chance to work through and really bring that down, which was a great working capital efficiency for us. We were also very efficient on our DSO and other levers. So, I do want to acknowledge that this beat is a great thing and I'm very pleased with what the team did. As I look ahead, I'm holding the…

Great. And just, segue into the balance sheet, if rates were to come down, are there opportunities potentially to refi some of the debt or do some swaps, whatever to reduce your interest expense?

Yeah. So, keep in mind right now, with the swaps we did throughout the last five quarters, effectively we're at approximately 75% fixed rate, which removes a lot of the current volatility in the markets. As we plan this year, we are planning no change in the interest rates. We, of course, are remaining very cognizant of what the Fed is doing and staying really in tune with what their updates are. But the way we put our guidance out, we're assuming no change in the rates. And obviously, if they start to come down, that would be a reason why we would go into the lower end of our $120 million to $125 million range. We don't see them going up. The reason we would drift upwards would be if free cash flow timing across the year was a little bit more back-end loaded and we had to draw down on revolving debt earlier in the year and just drive more incremental cash costs. To your direct question about just the refinancing side, what I would say is, we still sit here with ample time. So, our next major maturity on our credit facility, our Term Loan A and our revolver is not until the end of June of 2026. We will obviously not let that debt go current. So that gives us effectively the better part of the year to just start to get educated on what the market situation is, see what our alternatives are, and really leverage our bank group for advice and guidance and a perspective on what we should do. So, we don't have a crystal ball on what interest rates will be come that period of time a year from now, or what the market will look like from a capital markets perspective. But rest assured, we're going to get working on it early so that we address that well ahead of that debt becoming current. And obviously, the hope would be that we can do that in a way that our weighted average interest rate cost comes down. But if not, we'll continue to delever and bring the debt balance down and continue to bring our debt costs down over time.

Excellent. Thank you for taking my questions.

[Operator Instructions] Your next question comes from the line of Marc Riddick from Sidoti. Please go ahead.

Hey, good morning, everyone.

Hi, Marc.

So, you actually covered a great deal of where I was going to go with the last answer. So, I do appreciate that. I was sort of curious as to maybe, if you could give us a quick reminder and update us to the timing of some of the tech spend, or any -- if there's anything lumpy that we should be thinking about for the first half of the year as far as the spending needs?

Let me just start by giving a sort of framework on how '24 is different than the last couple of years. So, we have completed all of our investments in modernizing our infrastructure. So recall, last year at this time, we went live with our ERP, which was the last piece of that infrastructure spending. So we're complete with that now, fully modernized all of our core operating systems, moving them into the cloud. So this year, we are spending less on those infrastructure items and focusing more on investing in the businesses where we can generate growth, specifically in Payments and Data. So, while Chip said that we expect to slow down the spending a bit, we also expect slightly less on restructuring expense. I think the big point to note here is that the spending is shifting towards things that are going to drive more growth rather than simply stabilizing and improving our -- and modernizing our infrastructure. What do you want to add on?

Yeah, Marc, I think your question, there's multiple layers to it, so I'll try my best to predict where you're going and just clarify if I'm not getting it there. But on the CapEx side, we guided $100 million. As Barry just said, we've really moved through, obviously the ERP. We've moved mostly through the site consolidation. So, we're really starting to anchor on true prod dev software development. So, I don't really think that $100 million is going to be very lumpy. I think it's going to be relatively linear across the period. You're going to see us continue to invest on the right high-return growth initiatives there. If your question is getting towards more of the restructuring charges, Barry alluded to a little bit, last year, our overall restructuring charges were $90 million. And keep in mind, that was doing a number of things. ERP at the front end of the year, site consolidation, as well as the lockbox optimization in the middle, and then the launch of North Star towards the end. As we've said before and we still believe that's kind of the peak of overall restructuring spending for us. Start to see it coming down. I could see the range of restructuring spending this year somewhere between $60 million to $80 million. Again, you can't really perfectly estimate it with the nature of it, but that's really all North Star. And so, in the $90 million we spent last year, roughly $45 million of that was North Star related. We have guided to you guys that overall North Star spend would be between $115 million to $135 million. So, spending around $60 million to $80 million this year puts us near job there through the end of this year, with obviously, the remaining charges to occur in the early 2025 timeframe. So, hopefully, that overall perspective gives you what you're looking for.

No, that's perfect. I appreciate that. Thank you. And then, I know it's early, but I was wondering if it was too early to see if there was any insights or any feedback that you're receiving from clients as far as planning or if there's anything that maybe has changed as far as general views, as far as client activity since the Investor Day? Thanks.

So, a couple sort of top-line things for you there. We continue to be pleased with how our pipeline is expanding across all of our businesses, and we're continuing to see benefits from our ability to cross-sell the whole One Deluxe model that we've talked about previously. I think we're also seeing a decent consumer spending. It's obviously early, but so far early indications seem encouraging. And we've got pretty good line of sight in the DDM business because we have understanding of how clients will be rolling out their programs across the rest of the year. And so, what I would tell you is, we think what we're seeing today is very consistent with what we shared at Investor Day, which gives us confidence to affirm the guidance we provided you back in December. And we believe we're going to have a really solid year and moving our transformation forward.

Great. Thank you very much.

We have no further questions in our queue at this time. I will turn the call back to Brian Anderson for closing remarks.

Thank you, Krista. Before we conclude, I'd like to share that management will be participating at the JPMorgan Global High Yield and Leveraged Finance Conference on February 26th and 27th, and at the Wolfe Fintech Forum on March 13th and 14th during the quarter. Thanks again for joining us today, and we look forward to speaking with you all again in May as we share our first quarter 2024 results.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.