Deluxe Corporation

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 listening on remote. After the speaker presentation, there will be a question and answer session. To ask a question during the session, please press star then one on your touchstone telephone. As a reminder, this conference call is being recorded. I would now 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 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 31, 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 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 EDCUR is currently down for filing SEC documents, but we'll furnish these as soon as their system is 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 continue 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 and 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 close four 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've declared our regular dividend and paid down $100 million on our revolver earlier this month. Our net debt is now at a two-year low. All of this is compelling evidence our one deluxe strategy is working. Now, here are some specifics on the summary. We reported revenue of $410 million. April was the lowest performance at minus 28%. Performance improved materially over the remainder of the quarter, finishing down 16.9%, or $84 million for the quarter. We believe we delivered sales-driven growth again in Q2, excluding COVID impacts. This follows our similar performance in Q1. You will recall prior to Q1, the company had not experienced sales-driven revenue growth in nearly a decade. We also restored adjusted EBITDA margins to 20%, just as we promised to do pre-COVID. We grew cash on hand by $62 million, reducing our net debt to a level not seen in two years. Our payments business grew at 12.6%, And in the first half, achieved our original annual plan despite COVID. Our 12-month sales pipeline expanded double digits to over $50 million. We saw all-time record success in our tele-sales efforts. We accelerated our transformation momentum materially, including closing 20 of 65 locations, or 30% of our real estate footprints. Finally, we did all of this while supporting small business recovery and our communities, particularly our hometown, Minneapolis, St. Paul, in the shadow of the tragic death of George Floyd. We stand strong on racial and social justice and we're committed to being part of the solution. Like many others, given the ongoing economic uncertainty, we will not provide a detailed outlook for the third quarter or the full year today. Now onto deeper details on our encouraging results. Our business began to decline in mid-March and then began to stabilize in early May. That stability and improvement continued into June, although performance remains below pre-COVID levels. We expect total revenue in the second half to slightly improve sequentially from the second quarter, unless there are worsening economic impacts. Before I talk about the segments, I want to share details on our great progress in becoming a sales-driven revenue growth company. I'm very pleased to report that our one deluxe approach is producing strong results despite the current economy. Our chief revenue officer, Chris Thomas, has done a fantastic job with the rest of his team, turning this into a reality. We closed 690 deals with multi-year contracts, already outperforming our pre-COVID sales plans. This includes four of our top 25 targets with several more verbal commitments from our top 25 target list. Some of these wins include Cambridge Financial for promotional solutions, expansion of our AT&T relationship, and signing Optum Bank, importantly signaling our ability to win a new vertical for checks, the insurance industry. We continue to expand our pipeline and have achieved record average order value in our telesale centers. Of course, it will take some time to onboard all of these wins. However, we are very proud that we're expanding our pipeline and closing new business at record rates despite COVID, giving us much optimism for our future. We drove further sales innovation in early July, launching our small business advisory team. A new customer needs-based selling approach focused on helping small business stay at the forefront of their industry. Initially, we focused on selling to healthcare providers, helping accelerate their digital capabilities and streamline operations. In a little over two weeks, this small new team has interacted with 572 small businesses in the healthcare industry, scheduled 182 follow-up discovery meetings, and has already closed sales in each of our four segments. While still early in this effort, we're seeing the power of our One Deluxe sales strategy. In April, we implemented several improvements to our Shop Deluxe e-commerce site focused on simplifying the customer experience and pricing options. These improvements generated increased revenue for checks and promotional solutions. This is another example of sales innovation. All of this demonstrates the speed and agility of the New Deluxe team and success of our one deluxe strategy, neither of which are yet a year old. Now on to our segments. Promotional solutions and cloud solutions continue to experience the greatest COVID-related impacts. Both segments help small businesses directly and indirectly through enterprise customers get started, operate, and grow. As a result of the overall economy, not surprisingly, our cloud solutions segment was most impacted. Promotional Solutions was materially impacted but performed better than we had expected. We continue to expect cloud and promotional revenue profit and margin will significantly lag the recovery. Now, more on cloud solutions specifically. Gary Capers, our new division president, has done a great job aggressively managing costs while positioning for a rebound despite previous underinvestment in these businesses and the accompanying impairments. The part of the cloud business least impacted by the pandemic was our website design and hosting business. We quickly operationalized e-commerce sites for customers to shift their business online, as many brick-and-mortar businesses were significantly impacted by COVID. We also launched a digital signature capability our customers needed to execute online agreements. A great example of rapidly adjusting to the changing COVID environment, Gary and team entered into a new relationship with H&R Block to provide our small business customers with advisory tax preparation and online application for governmental funds. This is another example of how the new deluxe thinks and acts like a tech company, forging partnerships for success, something the old deluxe wouldn't have considered. Incorporation and logo services saw a decline in orders, however, not as much as originally expected, since it appears many unemployed workers have started new businesses or turned hobbyist businesses into full-time jobs. This is consistent with the performance in our web hosting business. In data-driven marketing, we have continued to experience significant pandemic-related challenges, as financial institutions push customer and small business marketing later into the year and into next. We have optimism for the ultimate rebound year and expect to see some additional revenue toward the end of the year as our customers plan to launch 2021 successfully. Now on to our promotional business. We have good news here. Tom Riccio, our division president of promotional solutions, radically cut costs, and found a way to partially offset the volume decline with record speed. Tom and team introduced a new product line in a new market literally overnight. Tom saw an obvious opportunity with personal protective equipment, or PPE, but in mid-April, he had no market intelligence, customers, or product supply. Tom quickly identified key customer targets, secured and leveraged our supply chain partners, and equipped the sales organization to sell into our existing distribution channels. The result? We sold and shipped $26 million of new revenue during Q2 in a market we previously did not even know. This demonstrates the new innovative thinking and speed of action in the new deluxe. It also highlights the incredible power of our distribution reach and our new sales model, and our newly integrated supply chain. None of these capabilities existed just six months ago. One of my favorite client success stories is what we did to help REMAX, an existing promotional products customer. REMAX was looking for a solution to help sellers and buyers feel safe at property showings. We created REMAX branded PPE kits for agents and clients. to enable showings and sales. REMAC sent the kit information out to 65,000 retailers and quickly had orders for more than 90,000 kits. Now on to checks. As anticipated, the secular decline in the check business accelerated during the quarter as a result of the recessionary impact of COVID. Tracy Englehart, our checks division president, and Pete Godich, our chief of operations, have done an excellent job scaling our plant operating expenses to match current volumes. On a positive note, based on internal customer survey, over 50% of new check customers order checks as a result of opening an account tied to a new business startup. While this is anecdotal, it does give us confidence that we're seeing some early economic rebound in new business formation. Further good news, We have seen an acceleration in self-service digital order volume in the second quarter, driving improved profitability. Importantly, we are competitively winning new check customers. Our financial strength is a key factor in our accelerating sales success. We continue to expect check volume to partially track with the recovery in the second half of 2020 and ultimately return to traditional secular trends in 2021, consistent with how the business has recovered from previous recessions. I want to pause and affirm the strategic importance of check to our business. In addition to outstanding margins and cash flow, our check client relationships are strategic, providing us with a robust and low-cost cross-sell opportunity. Now on to payments. Our payments business continues to shine brightly. even amidst COVID. Mike Reed, our new payments division president, continues to drive double-digit revenue growth and in the second quarter delivered 12.6% growth. This segment continues to benefit from previously announced wins with Synchrony Financial and Fiserv, as well as from other new business we've signed. The payments business is on original plan for the first half of the year. Delivering this well amidst the pandemic gives us much confidence in our long-term opportunities. Importantly, our overall financial health is helping us win new payments opportunities too. We see new and long-standing customers shifting volume to the safety of the deluxe balance sheets and our rock-solid service levels. We've quietly become a significant player in the receivables as a service ecosystem. Our receivables as a service platform is based on our robust industry-leading software, which plays a central role in the order-to-cash application cycle, including remote deposit capture, traditional lockbox processing, and electronic bill pay and presentment. Clients use our platform on-premise, hosted on our servers, or we can manage on their behalf on a fully outsourced basis. Our platform already has massive scale. As I told you at Investor Day, our platform processes approximately $2.8 trillion a year in annual payment volume, equivalent to 13% of the U.S. GDP. And the U.S. Federal Reserve relies upon our platform for payments reconciliation, too. And we still have plenty of room for growth. none of this is wishful thinking over half of our receivables as a service revenue comes from the platform itself on a recurring revenue basis by investing in our platform for growth deluxe has introduced automation which our customers utilize to reconcile their payments for example using ai technologies and product extensions like electronic invoice presentment and matching we can digitize the process and reduce manual intervention by over 85%. Our continued deliberate market share gains in the traditional lockbox space is actually quite strategic. Each of these newly acquired customers will operate on our platform and have immediate access to all our current and future innovations. With every customer joining our platform, we extend our reach more deeply into major billers, financial institutions, and fintechs. This gives us a clear leadership pathway in the emerging high-growth automation of order-to-cash application process. Consistent with this strategy, during the second quarter, we added several new financial institutions and new verticals, including nonprofit, insurance, and education, and multi-year deals for one or more of our receivables as a service platform products. We also advance our capabilities with our disbursements products and platform, which include deluxe payroll services and the new deluxe payment exchange that we call DPX. Bottom line, our recurring revenue platform is robust. We're trusted, we have significant scale, and we have significant growth potential. Not surprisingly, we expect payments revenue to continue to outperform macroeconomic conditions in the third quarter and likely throughout the year. Next, let me brief you on the health and safety of our team. As I reported during our first quarter call, we continue to protect our employee owners and our business by continuing to promote health and safety related protocols for our employee owners that are required to be physically present to deliver services to our customers. For over 3,000 of our employees' owners, we continue to work from home and will continue to do so through at least early September. Before I pass this on to Keith for more detail, I want to reiterate our team made tremendous progress in the second quarter. Deluxe is financially solid, our sales engine is working, and we have a bright future ahead. Now I'll turn it over to Keith.