Q3 2020 Deluxe Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Deluxe third quarter 2020, <unk> earnings Conference call.

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After the speaker presentation, there will be a question and answer session.

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I would not only to hand, the conference over to your Speaker, Chief Communications and HR Officer Jane Elliott. Please go ahead.

Thank you and welcome to the <unk> third quarter 2020 earnings call.

Welcome Heather Davis to deluxe as our new head of Investor Relations.

Some of you may know her from her I our roles a tech driven companies like Groupon, and Lawson software and from Buffalo Wild wings.

<unk>, Jane and I look forward to working with her.

We're pleased to have delivered improve third quarter results. Despite continued pandemic related economic pressures and pleading nearly 300 basis points improvement and adjusted EBITDA margin.

We continue to make meaningful progress on executing our overall transformation to one of the box.

As discussed last quarter, we began to see an improvement in the latter part of our second quarter, which continued into the third quarter.

We see our sequential improvement of top line revenue gap AD adjusted EBITDA margins as clear evidence of our continued momentum.

By our estimates, we deliberate sales driven growth exclude covid related impacts for the third consecutive quarter.

We continue to win new business at an accelerated rate and were successfully cross selling our products and services.

We're pleased to have the financial strength and flexibility to support a longterm growth potential of the business.

We've restored some of our investments in the company's overall infrastructure, including technology upgrades continued real estate consolidations streamlined organization design talent enhancements and more after slowing a bit in queue too.

Importantly, we remain confidence in our financial strength as demonstrated by declaring a regular quarterly dividend.

Our next that is now at its lowest in more than two years.

I continue to believe this is all compelling evidence or one deluxe strategy is working.

Here are some specifics.

We deliver 23.3% adjusted EBITDA margins, a 290 basis point sequential improvement from last quarter.

Better improvement than we expected.

We reported revenue of $439 million, improving over 600 basis points sequentially over second quarter.

With revenue down, 11% or $54 million versus last year.

Also better improvement than we expected.

Our sales driven performance continues we built cash reserve. Some operations are cute three that that is now the lowest level and more than two years.

We fully repaid our covid related draw on the revolver in October demonstrating the strength of our business.

Over the last seven months of the pandemic, we continue to generate cash from operations naturally improve and our liquidity and eliminating the need for any additional cushion.

Our financial position continues to serve as a competitive advantage, helping us win across all our segments.

Some of our key wins for the quarter include securing a contract with empty bank for our Treasury management services.

We expanded our relationship with re Max to provide national marketing branded print and promotional solutions to their 65000 the agents. This.

This is an excellent example of us growing share and moving from a transactional vendor. So were recurring revenue managed services partner.

And our MPX and BPX solutions at a delta dental an albertsons as customers too.

Our tele sales centers continue to cross sell delivering record average order value.

The revenue and profit growth to lagged the recovery due to reduced discretionary spending.

And cloud this impact is visible a data driven marketing revenue, we're mainly financial institutions have differed campaign spend.

We believe the financial institution spend will return.

And in fact, we saw increased demand in two three versus last year's quarter.

We've also side, new financial institution customers as well.

While our corporation our website services have experienced we can demand we continue to focus on adding new relationships to deliver our incorporation of the words website services, including the Hartford and F I B.

Promotional solutions delivered sequential quarterly improvement in revenue, while driving significant benefit to adjusted EBITDA margins.

While we did not repeat the benefit we saw from P. P E and two three.

We did experienced positive sequential growth and what we call our business essentials product area forms and more that businesses used to operate.

We also five several new customers focused on our manners brand services program, giving us more confidence in our future profitable growth.

Not a lot of checks as anticipated the secular decline in the checks business sequentially improved during the third quarter consistent with a pattern of previous economic downturns.

We continue to see an increase a new check customer, resulting from new business startup.

Or encouraged to see self service at digital order volume acceleration in the third quarter proving our digital strategy works.

Comparatively where when a new check customers at a rate faster than before and we renew the top five check customer.

Our financial strength is a key factor here too just like in payments.

The uncertainty of the pandemic continues and as such we will not provide detailed outlook for the fourth quarter are full year 2021 today.

Keith will provide some detail on our future expectations, which reflect today's environment.

The macro environment remains challenged as we're in the midst of a second wave of Cobra.

Most importantly, given the work we've accomplished and the results we've delivered despite the ongoing challenges I feel good about a relative position on the market and we continue to believe total company adjusted EBITDA margins will remain at our long term target of 20% or better.

Lastly, I want to emphasize our team has delivered better than expected performance again, despite the pandemic.

Deluxe remains financially sound.

We expanded margins almost 300 basis points.

Paid our dividend paid a revolver down for the pre covid level have the lowest net debt and more than two years and our sales engine is working.

Here's Keith.

Thanks, very good afternoon, everyone and welcome Heather.

Is very noted our strategy is working and we're seeing the results.

We delivered strong sequential performance in the third quarter. Despite the continued challenging environment, we've strengthened our financial position, while simultaneously advancing our business transformation.

Q3, total revenue declined 11% or.

$454.1 million to $439.5 million as compared to the same period last year.

This is a sequential improvement of 600 basis points from the queue to decline right.

While we did benefit from sales driven grove, it wasn't sufficient to overcome the impacts of the pandemic.

Importantly, and similarly to last quarter, we took a sort of actions in the quarter to address the loss of revenue and changing mix.

These expand factions improved adjusted EBITDA marches by 290 basis points sequentially to 23.3%.

Some of this improvement will not repeat in queue for but we do expect margins to remain in our longterm range upgrade within 20 per cent.

The third quarter revenue decline was partially offset by new and cross Selwyn.

The reduction in revenue and the change in mix did affect our results.

Gross profit margin for the quarter improved 160 basis points from the prior year with the loss of lower margin revenue in our promotional and cloud segments.

SG&A expense declined $14.4 million due primarily to lower commissions personnel accepts 401k match suspensions and restructuring actions.

Interest expense declined $3.6 million due to lower interest rates on higher borrowing levels compared to last year.

All this together increased operating income to $44.4 million.

Net income of $29.4 million increase from amount loss of $318.5 million in Q3 2019.

29 team as well as expected cobot related client implementation delays.

Cloud solutions revenue declined 20.3% to $63.8 million from last year.

Data driven marketing solutions revenue sequentially improved from last quarter as.

As financial institutions slowly reactivated their marketing campaign.

Oregon decreased to 48.3% as a result of higher commissions on referrals and technology investments in support of our one deluxe strategy.

Check recovery rates in Q3 likely benefited from some delayed Q2 volume and we expect revenue recovery to be slightly lower in queue for compared to Q3 is general economic activity continues to improve.

This performance is consistent with the recovery from previous economic slowdowns.

Year to date cash from operating activities was $166.8 million and capital expenditures were $42.7 million.

Within our long term target range.

As Barry noted, we remain cautious about the pace of the recovery given the uncertainties ahead and the cobot resurgence.

Revolver.

We declared our regular dividend our payments business grew 16% and we're confident will be a double digit grower over the long term.

Our one Bill luck sales strategy is working by our estimates we better sales driven growth company for three consecutive quarters the.

That Q2, none.

Number and then secondly was there any sort of pull forward from Q4 into Q3 that saw some of the outperform.

So Charlie we are not providing specific guidance, but let me let me just give you a little color there and you know we did say at Q2 that we expected to three to be a little bit better and we feel like the numbers hold out that we did better than a little bit better we saw some some nice.

[noise] improvement.

Our business is that you know what Charlie you read the same things, we do and I don't have a crystal ball.

But we do you know I guess, the offset from any small business closures that are happening as we do feel pretty encouraged.

Because we do see it you know.

Nice improvements in new business starts in parts of our business to help businesses incorporate and of course in our tech business, where we're seeing significant increase in new customers from new business formation. So while yes, we're exposed to small businesses.

We also think we have sort of a natural hedge on that because we help new businesses expand and get started and we said we think there are some better balance there.

Summing up the only question will be you know what they do they actually hit the button to send to some the the marketing materials out.

That's fair. Thank you very much for taking my questions.

So congrats on the hardware.

I guess, if you wouldn't mind just.

Business no longer term once we get past bogot.

Maybe there is a benefit for a little bit.

Yes.

As you'd expect we look at this pretty carefully.

But here's here's watertight.

The trajectory and the pathway the shape of the curve.

This economic downturn looks a lot like the shape of the curve and every other downturns, we should go back and look at history.

And that is that when the economy slows theres just less commerce.

And much of that Commerce is conducted via check so that of commerce slows down there's just less usage of check.

Not because the use case for checks has changed but because the amount of commerce conducting change. So let's think about you know.

You're paying into an envelope with the stamp and take him to the post office and wait for it to be reconciled our system is digital and to and where that explanation of benefits or reconciliation statement travels with an electronic version of attract them that that accounts receivable personally can put the check.

And deposit if that's their methodology with all the other tracks are converted real time, it's a C H or other electronic means and be able to do the reconciliation in real time, all in a very simple E mailable format.

And so you know we think that that that product still has great great potential and we were pleased with the progress.

Great.

And then the release you you mentioned or the recent news around the new headquarters and also the innovation Center.

I think it really so and assistance coffin potential seems to talk about those two initiatives and and what it does for you no changing your position in those in those markets.

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Yeah, let's let's start.

Just with the call back the money.

And we think both of these moves were actually pretty savvy.

And you know it was an example of US taking advantage of market opportunity.

We said we were going to do it and we did it.

And we're going to concentrate you know more talent in these hub locations of Minneapolis of course headquarters, Atlanta, Tac and Kansas City really offer operation subs up operations hub.

I appreciate that and one last question on that at the moment I apologize just around the opinion exchanges that you've talked about can you just talk about any progress you are seeing I know, it's a difficult environment, but it seems like a pickup.

Yes, I mean, the underlying product that's in the exchanges.

Our.

Digital check this E check product.

And you know we said we had a couple of nice wins that we can announce it had more of them that we can announce of course, but you know we announced that Albertsons and Delta dental were joining you know is going to be using that solution and we think thats really great. Because it tells you that the platform has great use obviously health care, which we've been.

Give us for a while but also the broader market what do you see that with Albertsons.

So we continue to see progress on adoption there.

And we think we're incredibly well positioned as this.

You know as coven really passes for that digital acceleration.

Great.

Thanks for taking all my questions and good luck in Q4.

Thank you.

Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to Ms. Heather Davis for any further remarks.

Thank you operator.

I'll be here after luck during this exciting transformation and I look forward to working with our analysts and investors shortly.

Before we conclude I'd like to mention the following components.

Management will present in mid January 2021, we will be virtually participating and the Needham 23rd annual virtual growth conference. Thank you for joining income next time stay healthy and safe.

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