Deluxe Corporation

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 Deluxe Earnings Conference Call. At this time, all participants are on listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. If you require any further assistance, please press star 0. I would now like to turn the conference over to your speaker for today, Mr. Ed Merritt.

Thank you and welcome to Deluxe Corporation's first 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, and Keith Bush, our Chief Financial Officer. At the end of today's prepared remarks, Barry, Keith, and I will take questions. I'd like to remind you that comments made today regarding management's intentions and projections, financial estimates, or expectations about the future strategy or performance of the company 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 projections. Additional information about factors that might cause our actual results to differ from projections is outlined in the press release today. in the company's Form 10-K for the year ended December 31, 2019, and the Form 10-Q, which will be released in conjunction with our first quarter 2020 earnings, as well as other SEC filings. Portions of the financial and statistical information that 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 was also furnished to the SEC on Form 8-K filed by the company this afternoon. 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, Barry Keith and I are working remotely from different locations today, as are over 3,000 of our fellow delectors, supporting our commitment to safety and social distancing. For the first time, we're not sitting together for this call. While we believe we have all of the logistics for this event well planned, please bear with us in case we experience any technical difficulties. Thanks in advance, and now I'll turn the call over to Barry.

Thanks, Ed, and good afternoon, everyone. I'm pleased to be with you today to share our first quarter 2020 results. Despite the unprecedented COVID-19 situation, we delivered a solid first quarter, and we've made meaningful progress implementing our One Deluxe strategy. Late in the first quarter, we saw a significant decline in revenue, We took immediate action to address revenue and related expenses, and as a result, we remain confident in our strategy, which we communicated previously. This afternoon, we'll provide you with details of our first quarter operating performance, including the impressive 18% growth on our payments business, an overview of how COVID-19 has impacted our business, the actions we've taken to mitigate related risks, and how we're planning for future growth. the progress we've made on our historic transformation into a trusted business technology company with four segments, payments, cloud solutions, promotional solutions, and checks, an update on our One Deluxe approach to become a sales-driven revenue growth company, no longer solely dependent upon acquisitions for growth, and I'll end today with my perspective of what we believe all of this means for Deluxe going forward. Throughout this call, we intend to provide plenty of perspective, but given the uncertainty in the macro economy, we needed to stop short of providing a detailed outlook either for the second quarter or full year, just as we announced on our press release on March 25, 2020. This is the first quarter that we operated and reported results in our four new segments, which is an exciting milestone in our transformation journey. During our Investor Day event in February, we shared with you the details of our new strategy. I'm pleased to report our strategy is not only protecting the company in this time of uncertainty, but positioning us to deliver consistent long-term revenue growth. We told you a year ago about some of the investments we're making in our business, and some of those investments allowed us to transition to work from home seamlessly. More on that later. First, let's overview our business performance. For the full quarter, our revenue declined 2.5%. However, through January and February, total company revenue was running strong toward the top end of our internal expectations and, importantly, delivering sales-driven revenue growth. I cannot overemphasize the importance of this growth. We committed and we are delivering sales driven revenue growth for the first time in nearly a decade in January and February pre COVID-19. We think this is clear affirmation that our strategy can deliver long-term results for our shareholders. More importantly, The result was achieved just a few months after building out our new leadership team and launching our new sales efforts. Our payment segment was a particular standout during the quarter, delivering new wins and showing year-over-year revenue growth of 18%. At the total company level, our revenue momentum turned downward in March when we saw a gradual, then significant decline in orders from the impact of COVID-19, The impact continued in April. We're starting to see the beginning of stabilization in the first days of May, suggesting the third and fourth quarters might see modest volume improvements from second quarter lows. But we continue to expect our results are likely to remain well below pre-COVID-19 levels through year end. We've spoken with leading economists, and I've engaged with dozens of CEOs, and experts seeking additional perspective. Our conclusion is that our results seem consistent with what others are seeing, and no one agrees on the shape or timing of a recovery. During the first quarter, we were not surprised that promotional solutions and cloud solutions experienced the greatest COVID-19 impacts. Both segments helped businesses get started, operate, and grow, and since many businesses closed, significantly downsized their operations, or simply went into hibernation, these segments were materially impacted. In addition to small businesses, we also provide discretionary products to large companies, and they canceled planned conferences, they canceled orders for those support products that we create for those conferences. In promotional solutions, Tom Riccio is doing excellent work adjusting the cost base in line with lower revenue levels and being opportunistic to adjust product offerings to existing customers. We saw a very sharp decrease in promotional revenue in the middle of March by certain categories declining as much as 45% from plan. By geography, we saw the most prominent declines in the northeast region of the country. We expect promotional revenue to be materially impacted in the second quarter at a higher rate than the macro economy decline rate. And we expect to see only modest improvement as we move into the third and fourth quarters. On a positive note, our promo team has identified some new opportunities offering PPE solutions and branded wrappers kitted for use in the real estate industry. The silver lining in all of this is that at the segment level, promotional solutions generates the lowest adjusted EBITDA margins of all four segments. As a result, weakness in this segment has a lower impact on our profitability and operating cash flow. We experienced a similar COVID-19 impact in the cloud solution segment, and Gary Capers, too, is doing great work, managing costs and positioning his business for a rebound. The businesses most impacted in the cloud solution segment, were data-driven marketing, incorporation services, logo design, web design, and web hosting. In data-driven marketing, we've seen some financial institutions temporarily suspend marketing to consumers and small businesses. We expect cloud revenue to be significantly impacted in the second quarter at a higher decline than the macro economy decline rate, but we believe we will see some rebound in the third and fourth quarters. We've developed new cloud scheduling technology for the banking industry to help banks better support their customers. And we've had particular optimism in data-driven marketing and have engaged with some financial institution clients in the design of recovery marketing programs for later in the year. Checks continued their secular decline in January and February, and a steeper decline began to accelerate in March, continuing into April. Tracy Englehart, our checks leader, and Pete Godich, our chief of operations, have done a great job scaling down our plant operating expenses. We expect check volume to track with macroeconomic conditions, recovering to a more standard secular decline rate sometime in the fourth quarter. Now, a few comments on payments, which continues to be our shining star. Ma... Mike Reed joined us in late November last year and is already delivering impressive results. We're all very proud of the standout performance for payments. In the first quarter, payments grew 18%. This segment is benefiting from previously announced wins with Synchrony Financial and Fiserv, as well as some other new business we've signed. In the current environment, we continue to find new opportunities in payments, With many new and long-standing customers, reporting our financial strength provides them with an additional level of comfort. Many of our competitors do not have this advantage. We also announced a recently formed medical payment exchange we call MPX. Through a joint venture with Echo Health, we solve a large-scale payment challenge. how to effectively and efficiently manage medical payments and disbursements. Our solution allows the explanation of benefits, or the EOB, to travel with the digital payment through email. The email contains a secure check that can be printed and deposited like any other check, converted instantly for a digital ACH deposit, or applied to many different payment types like debit cards, PayPal, and more. Correlating the EOB with the digital payment solves the intractable problem that has forced non-recurring payments to remain on paper and reliant upon the postal service. Without an EOB connected to the digital payment, the cash application along with final settlement and reconciliation are nearly impossible. MPX has solved that problem and we're now uniquely positioned to to digitize this multi-billion dollar market. Based on what we see now, we expect to see continued strength in payments, and we expect to outperform macroeconomic conditions in the second quarter and likely throughout the year. Next, I want to share with you what we're doing to protect our employees and our business. In order to continue our support for our customers and operate the business, we've implemented work-from-home practices for all employees whose roles allow, including most of our customer contact center owner employees. We estimate more than 3,000 of our 6,500 employee owners are now working from home. To do this, we're utilizing one of the six new technologies we invested in last year to facilitate collaboration and communication. We told you last April that we were investing in our infrastructure, and as a result of those investments and new related technology, we were able to move to a work-from-home model in a matter of days for many of our employees, remarkably including our contact centers. Had we not made these investments in our formerly antiquated infrastructure, it would have been considerably more difficult for us to transition to a work-from-home model and our customers would almost certainly have experienced disruption impacting our revenue. Here again, we're showing how our strategy and investments are yielding a return. For deluxers working in one of our facilities deemed critical to the U.S. payments industry, we have implemented additional protections, including employee wellness screening and increased facility cleanings. We've provided hand sanitizers and other protective gear, such as face masks, and have implemented new social distancing procedures and incremental hourly pay increases as part of our hero pay compensation. In short, I cannot be more proud of how the team has pulled together. It's nothing less than remarkable. In March, we announced actions we had implemented to help counter the impact of COVID-19. Since then, we've taken further actions. Collectively, these actions include reducing salary to employees' base by 20%, which included mine, together with the balance of the executive leadership team and the cash compensation payable to our board of directors. Canceling 2020 merit pay adjustments and suspended our 401k match contributions. Delaying some capital expenditure projects deferring most of our external consulting spend, and the furlough of deluxers and facilities that lack product demand to remain open. In mid-April, we expanded our furlough program to address some of our fixed operating and SG&A costs to better align our business with lower volume. Fortunately, deluxe entered this disruption very strong financially, with low net debt. In late March, as soon as we saw the initial declines in our business, we took action to enhance our financial flexibility, and we increased our borrowings on our evolving credit facility to $1.14 billion. While our net debt remains unchanged, we're now holding cash of about $300 million, and our quick expense actions have resulted in sustaining our cash balances through the month of April. Our leadership team holds daily status calls to review operations that take measures to ensure employees are safe, and we continue to deliver the same high quality of solutions and services to our customers. We're in frequent contact with our board of directors and hold weekly status calls to keep the price of our challenges, progress, and wins. We're doing so much more than what I just covered, but I think this gives you a flavor for the actions our leadership team is taking to to steer us through uncharted waters while taking great care of our employee owners and our customers. Now I'll turn it over to Keith, who will provide the details of our first quarter financial results. But I'll come back and share my thoughts on our strategy and how we're positioning ourselves for the recovery.