Deluxe Corporation

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'd 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 Third Quarter 2024 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 of the company's future performance or strategy are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause actual results to differ from projections is set forth in the release we furnished this afternoon in our Form 10-K for the year ended December 31st, 2023, 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 and EBITDA margin, adjusted and comparable adjusted EPS, and free cash flow. In our 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 U.S. GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to comparable adjusted EPS, which may assist with your modeling. And with that, I'll turn it over to Barry.

Thanks, Brian, and good evening, everyone. I'm pleased to report our strong third quarter results. including sustained growth across our core comparable adjusted earnings metrics, continued expansion of free cash flows, and a reduced level of net debt for the enterprise. During the quarter, we drove nearly 7% year-over-year growth in comparable adjusted EBITDA, accompanying a margin expansion of 140 basis points. Our free cash flow also grew 9.5% for the period. As we outlined at our Investor Day last December, The North Star program was designed systematically to accelerate these key profitability metrics. And our third quarter results further demonstrate our ability to consistently expand earnings faster than revenue. During the quarter, we also continue to deliver healthy top line results across our payments operating units. We saw sustained mid single digit growth of more than 6% within merchant services. The B2B payment segment also returned to modest year-over-year growth profile during the period, consistent with our guidance last quarter. The data segment also drove strong sequential improvement. The business exceeded $60 million of revenue during the quarter for the first time this year, versus a strong prior year comparable. On a year-to-date basis through three quarters, the merchant and data segments have seen growth of just over 7% and 6% respectively. I'll cover additional segment revenue highlights in a bit more detail in a few moments. Accompanying this ongoing top-line progress, the continued expansion of our earnings and cash flow results are testament to strong execution across the enterprise on our core capital allocation priorities. We reduced our net debt balance sequentially by $45 million for the second quarter, further demonstrating our commitment to debt reduction as a top priority for the company. Building from the strong third quarter and year-to-date results, tonight we're confirming our existing full-year guidance within a narrower range. Chip will share in more detail during his comments. Now, prior to providing more insight into the quarter, I'd like to highlight progress on our North Star execution plan. As a reminder, our North Star program was designed across 12 work streams to identify $130 million of improvements to our baseline 2023 comparable adjusted EBITDA results over a multi-year horizon. On a net basis, after factoring for impacts from secular decline trends across the print portfolio, these improvements are expected to unlock the targeted $80 million of incremental adjusted EBITDA and $100 million of annualized incremental free cash flow, both by 2026. During the third quarter, we reached a notable North Star milestone. I'm pleased to share the enterprise has now fully scoped and is in the execution or completion stage of projects comprising more than $100 million of the $130 million targeted annualized EBITDA improvements. We're proud of our progress as we mark the first anniversary of the multi-year initiative. This success further increases our confidence in achieving our goals. Importantly, full benefit realization will be reflected over the coming quarters throughout 2025 as our phased execution progresses. As I noted last quarter, one of the clearest ways to see our North Star progress is via the continued improvement of our SG&A expense, particularly within corporate. During the third quarter, overall corporate expenses improved by more than 11% from the prior year period. Additionally, cash restructuring and integration expenses relating to North Star have trended favorably versus our full year estimates. This contributed to our approved year-to-date free cash flow results through the third quarter. Now to provide some additional details about our third quarter performance. As a reminder, and consistent with prior calls, my comments will reflect comparable adjusted results for the quarter and year-to-date periods, which we believe best represent our ongoing business performance. Chip will review both our reported consolidated and comparable adjusted results to provide additional context. For the third quarter, net of exited businesses, revenue was $527 million, which reflected a decline of just under 1% year over year. Total adjusted EBITDA reached $104.5 million, increasing roughly 7% from the third quarter of 2023. This strong EBITDA growth rate matched that of the first quarter this year, and reflected our third consecutive quarter demonstrating robust operating leverage at the enterprise level, as I noted in my opening comments. Adjusted EBITDA margins finished the quarter at just under 20%, reflecting the continuation of our year-to-date sequential expansion trend and growing by 140 basis points versus the prior year. On a year-to-date basis, comparable adjusted EBITDA margins have expanded by a full 100 basis points, while free cash flow has improved by more than $30 million from the year-to-date 2023 figures. We remain particularly pleased with these adjusted EBITDA and cash flow results, further enabling our progress toward our focused capital allocation priorities under North Star. Moving now to our third quarter segment revenue highlights, beginning with merchant services. For the quarter, segment revenue grew just over 6%. While this reflected moderation from our nearly 8% second quarter trajectory, as we signaled on our last call, we remain very pleased with the overall year-to-date trajectory of the merchant business. Total processing volumes remain solid, and we continue to benefit from new wins. As always, we continue to monitor material macroeconomic trends surrounding consumer discretionary spending and sentiment. We leverage recent insights from the card brands, the Fed, and other economic forecast providers, as well as our internal proprietary data sources. While some overall economic uncertainty remains, some trends appear to have largely stabilized during the third quarter. Impacts from recent weather events may pressure growth a bit, but we believe that our diversified portfolio will enable us to continue to deliver healthy growth even as we lapped the major win that went live last November. Shifting to results within the B2B payment segment. As we anticipated, during the third quarter, the B2B segment recovered from the year-over-year decline rates experienced across the first half of 2024. We reported revenue growth of about 1% for the period. This improvement was in line with the commentary we provided during our last call. Consistent with our expectations, we anticipate the B2B revenue growth trajectory will improve sequentially in the fourth quarter. We remain confident in our longer-term growth outlook for these lines of business, given our strong existing pipeline of SaaS opportunities and near-term onboarding of new incremental remittance volumes. Moving now to data solutions, which continue to deliver strong revenue results, expanding sequentially by more than 6% versus the second quarter to just over $61 million. As we signaled during our last call, the core data-driven marketing or DDM business once again lapped a challenging prior year compare during the third quarter, driven by client campaign timing, resulting in a 4.5% revenue decline for this specific period. As we've noted previously, we believe that the best view of data's growth trajectory remains through a multi-quarter lens. On a year-to-date basis through three quarters, revenue growth for data remains strong at more than 6%, reflective of continued demand for customer acquisition marketing activities across both our core FI clients and expanding growth verticals. Shifting finally to our print segments, This business returned to its expected low single-digit revenue decline profile during the quarter. Third quarter revenues finished just over $297 million, declining roughly 2% versus the prior year. Importantly, legacy check revenues have experienced overall declines just under 2% on a year-to-date basis. is aligned to our guidance and better than long-term Fed estimates. To summarize, our overall third quarter results, particularly our continued expansion of earnings, free cash flow, and our management of operating costs demonstrate our ongoing transformation and North Star progress. The enterprise remains diligently focused on execution of our deleveraging path demonstrated within our Q3 net debt reduction, and continuing to deliver robust operating leverage. Finally, before passing this to Chip, I want to take a moment to once again thank my fellow Deluxers. Your consistent commitment to exceeding the needs of our customers and driving continuous improvement is recognized and appreciated every day. You are the Deluxe difference. With that, I'll turn it over to Chip.