Ed Merritt - Treasurer and Vice President, IR Lee Schram - Chief Executive Officer Terry Peterson - Chief Financial Officer.

Tim Klasell - Northland Securities Josh Elving - Feltl Joan Tong - Sidoti & Company Charley Strauzer - CJS Securities.

Good day, ladies and gentlemen and welcome to the Deluxe Corporation Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Ed Merritt, Treasurer and Vice President of Investor Relations. Sir, you may begin..

Thanks, Ben, and welcome everyone to the Deluxe Corporation’s Second Quarter 2015 Earnings Call. I am Ed Merritt, Deluxe’s Treasurer and Vice President of Investor Relations. Joining me on today’s call are Lee Schram, our Chief Executive Officer; and Terry Peterson, our Chief Financial Officer.

At the conclusion of today’s prepared remarks, Lee, Terry and I will take questions if there are any.

I would like to remind you that comments made today regarding financial estimates, projections and management’s intentions and expectations regarding the Company’s future performance are forward-looking in nature, as defined in the Private Securities Litigation Reform Act of 1995.

These comments are subject to risks and uncertainties, which could cause actual results to differ materially from those projected.

Additional information about various factors that could cause actual results to differ from those projected are contained in the press release that we issued this morning, as well as the Company’s Form 10-K for the year ended December 31, 2014.

The financial and statistical information that will be reviewed during this call is addressed in greater detail in today’s press release, which was furnished to the SEC on the Form 8-K filed by the Company this morning. The press release is also posted on our Investor Relations Web site at deluxe.com/investor.

Any references to non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release. Now, I will turn the call over to Lee..

Thank you, Ed, and good morning, everyone. [Technical Difficulty] quarter and we’re well-positioned as we enter the second half of the year to grow revenue 5% to 7% for the year, despite a continued sluggish economic environment. We reported revenue and adjusted earnings per share in the second quarter above the upper end of our outlook.

Revenue grew 7.5% compared with the prior year quarter. Small business services revenue grew over 5% and financial services revenues grew 19%. Checks and forms performed well and marketing solutions and other services revenues grew 31% over the prior year and represented 29% of total second quarter revenue.

Adjusted diluted earnings per share grew 12% from the prior year and we generated strong operating cash flow of $68 million for the quarter. We were drawn $308 million in total on our credit facility and short-term bank loan at quarter end. As expected, we did not repurchase any common share in the quarter.

We continued our brand awareness campaign to help better position our products and services offerings and drive future revenue growth. We also advanced process improvements and slightly over-delivered on our cost reduction expectations in the quarter as we accelerated initiatives.

We also learned in the quarter that we will have the opportunity to ring the opening bell at the New York Stock Exchange on November 23rd, which will be the actual 100-year anniversary day for the Company. In a few minutes, I will discuss more details around our recent progress and next steps, but first Terry will cover our financial performance..

Thank you, Lee. Earlier today, we reported diluted earnings per share for the second quarter of $1.11, which included $0.02 per share for restructuring and transaction related charges. Excluding these costs, adjusted EPS of $1.14 exceeded the upper end of our previous outlook and was 11.9% higher than the $1.01 reported in the second quarter of 2014.

The restructuring and transaction related charges are primarily for employee severance and a small acquisition in the quarter. Revenue for the quarter also exceeded the upper end of our previous outlook at $436 million, an increase of 7.5% over last year or about 2% excluding primarily the impact of the Wausau acquisition.

Small business services revenue of $282 million grew 5.5% versus last year despite a continuing sluggish economic environment and unfavorable foreign exchange rates which negatively impacted revenue growth by 0.9 percentage points in the quarter.

We delivered growth in marketing solutions and other services, checks and in our online Safeguard distributor, major accounts and dealer channels. SBS revenue also benefited from price increases implemented in the first quarter.

Financial services revenue of $113 million grew 19.1% versus the second quarter of last year and would have down less than 1% excluding the Wausau acquisition. Higher marketing solutions and other services revenue driven by Wausau and Deluxe Rewards, price increases and revenue from Zion’s Bank more than offset the impact of lower check orders.

Direct Checks revenue of $41 million was down only 5.1% from last year and ended ahead of our expectations, driven by higher conversion rates from email marketing offers and an improved call center incentive plan.

From a product revenue perspective, checks were $220 million, representing 50% of total revenue; forms, accessories and other business products were $90 million or 21% of total revenue; and marketing solutions and other services were $126 million which was 29% of total revenue.

Gross margin for the quarter was 64.2% of revenue which was up 0.2 points from 2014. The increase was primarily driven by previous price increases, improvements in the services revenue margin, and improvements in manufacturing productivity partially offset by product revenue mix and higher delivery and material costs.

SG&A expense increased $16.6 million in the quarter which was 43.6% of revenue compared to 42.8% of revenue in the same period last year.

Benefits from our continuing cost reduction initiatives in all three segments were more than offset by increased SG&A and financial services associated with the Wausau acquisition and our efforts to grow the small business distributor channel.

Excluding restructuring and transaction related charges, adjusted operating margin for the quarter was 20.8% which was down slightly from the 21.3% generated in 2014. All three segments delivered operating margins at least in line with our expectations.

Small business services adjusted operating margin of 17.6% was down one percentage point driven by higher spend on brand awareness in the quarter. As we previously communicated in the last couple of earnings calls, our highest level of brand spend was planned for the second quarter and we executed to our plan.

Financial services adjusted operating margin of 22.8% was down 1.1 points from 2014, driven by Wausau acquisition amortization expenses and check usage declines, partially offset by the timing of cost reductions.

Although Wausau was accretive to earnings in the second quarter, the financial services adjusted operating margin was negatively impacted 3.8 points from the business.

Direct Checks adjusted operating margin of 37.2%, increased 4.9 points from 2014 and was stronger than we expected, driven by a higher mix of reorders and lower costs which more than offset the lower order volume.

Turning to the balance sheet and cash flow statements, total debt at the end of the quarter was $504 million which was down $50.5 million or 9% from December, 2014. Cash provided by operating activities for the first half was $146 million, a $20.2 million increase compared to the first half of 2014.

The increase was driven primarily by improved operating performance, timing of collections associated with the Wausau business, and lower interest payments partially offset by higher performance based compensation payments.

Capital expenditures for the first six months of 2015 were $19.3 million and depreciation and amortization expense was $35.7 million. We are strengthening our previous consolidated revenue outlook for the full year and now expect it to range from $1.76 billion to $1.78 billion, in spite of a worsening unfavorable impact from foreign exchange rates.

We are raising our expectations for adjusted diluted earnings per share to $4.50 to $4.60.

There are several key factors that contribute to our improved full year outlook including small business services revenue is expected to increase 5% to 6% as volume declines in core business products, lower SEM and SEO revenue from our decision announced in third quarter of 2014 to exit unprofitable business, and unfavorable foreign exchange rates are expected to be more than offset by benefits from our e-commerce investments, price increases, growth in our Safeguard distributor, dealer and major accounts channels and double-digit growth in marketing solutions and other services offerings.

For added clarity, without the SEM and SEO change and unfavorable foreign exchange rates, the growth in small business services is expected to be in line with last year’s organic growth rates.

We expect financial services revenue to increase 12% to 14% driven by continued growth from marketing solutions and other services revenue including Wausau and Deluxe Rewards, higher revenue per order and a full year of Zion’s partially offset by recurring check order declines of approximately 6% and some pricing pressure including the impact of the large customer renewal early in the second quarter of 2014, a Direct Checks revenue decline of 6% to 7% driven by lower check order volume stemming from secular declines in check usage and eliminating marketing expenditures that no longer meet our return criteria, a continued sluggish economy, full year costs and expense reductions of approximately $50 million net of investments, increases in medical expenses, material costs and delivery rates, continued investments in revenue growth opportunities, including brand awareness, marketing solutions and other services offers and enhanced Internet capabilities, lowering interest expense and an effective tax rate of approximately 34%, representing approximately $0.07 of dilution per share compared to 2014’s tax rate.

We expect to continue generating strong operating cash flows and have raised our estimates for the year to a range of $300 million to $310 million in 2015, reflecting stronger operating performance and lower interest payments partially offset by higher tax and performance-based compensation payments.

We continue to expect annual contract acquisition payments to be approximately $15 million. 2015 capital expenditures are expected to be approximately $40 million, about the same as 2014, as we plan to continue to invest in key revenue growth initiatives and make other investments in order fulfillment and IT infrastructure.

Depreciation and amortization expense is expected to be approximately $76 million, including approximately $30 million of acquisition related amortization. For the third quarter of 2015, we expect revenue to range from $439 million to $447 million; adjusted diluted earnings per share is expected to range from a $1.10 to a $1.15.

In comparison to the second quarter, adjusted EPS is expected to be about the same at the mid points of the third quarter range, primarily due to higher MOS revenue and lower brand awareness spend offset by lower financial services and Direct Checks, higher margin check revenue and the resulting flow through to operating income and lower cost reductions.

For Wausau, we expect the earnings per share contribution to be slightly accretive in the third quarter or about the same as the second quarter. Shifting to our capital structure, we expect to maintain our balanced approach of investing organically and through small to medium-sized acquisitions in order to drive our growth transformation.

Additionally, we expect to continue paying a quarterly dividend and repurchase shares in the back half of 2015 to at least offset dilution. We may from time to time consider retiring additional outstanding debt through open market purchases, privately negotiated transactions or other means.

We believe our increasing cash flow, strong balance sheet and flexible capital structure position us well to continue advancing our transformation. I will conclude my comments with an update on our cost and expense reduction initiatives which again are coming from all three business segments.

Overall, we had a solid second quarter as we over-delivered slightly on our expected cost and expense reduction towards our $50 million annual commitment, net of investments.

Approximately 55% of the $50 million in expected reductions will come from sales and marketing, another 40% from fulfillment and the remaining 5% coming from our shared services organizations.

Our focus in sales and marketing for 2015 will be on sales channel optimization, platform and tool consolidation, leveraging sales and marketing efficiencies, including integrations from recent acquisitions.

In fulfillment, we expect to continue our lean, direct and indirect spend reductions, further consolidate our manufacturing technology platforms, drive delivery, technology and process efficiencies, reduce spoilage, further enhance our strategic supplier sourcing arrangements, and continue with other supply chain improvements and efficiencies.

Finally, for shared services infrastructure, we expect to continue to reduce expenses, primarily in IT, but we are also working opportunities in finance and real estate. And now, I’ll turn the call back to Lee..

Thank you, Terry. I will continue my comments with an update on overall focus and then highlight progress in each of our three segments including the perspective on what we hope to accomplish during the balance of 2015 as well as an update on our brand transformation.

Our primary focus in 2015 continues to be profitable revenue growth and increasing the mix of marketing solutions and other services revenues towards our goal of 40% by 2018.

Here we will focus on growing organically as well as continuing to assess potential small to medium-sized acquisitions that complement our large customer base and add new technologies. We have strengthened our channels of small business to include financial institutions, online, retail, wholesale Safeguard distributors, dealers and major accounts.

Deluxe is now more capable of helping small businesses pursue their passion as a trusted provider of a growing suite of products and services a small business needs to market and operate their business and helping financial institutions with customer acquisition, fraud, security and risk management, and commercial and treasury services offers.

Here is an update on our four subcategories framework for marketing solutions and other services. We ended the second quarter right in line with our exceptions in revenue with mix in the four subcategories basically in line with our expectation.

First small business marketing is expected to represent approximately 41% in 2015 with expected growth in the mid-20s this year. Key 2015 growth initiatives include scaling web-to-print by cross-selling to our customer base and continuing to add new customers through distributors, dealers and major accounts.

In addition to the opportunity to penetrate web-to-print, we also seek strong growth opportunities in retail packaging, promotional products, and other marketing solutions. In the second quarter, we grew in the strong double-digits driven by new major account customers that are using our comprehensive marketing solutions offers.

The second category web services, which includes logo and web design, web hosting, SEM, SEO, email marketing, social and payroll services, is expected to represent approximately 21% in 2015, with expected decline rates in the mid-single digits, but low single-digit growth excluding our earlier announced decision to exit some unprofitable revenue in the SEM/SEO space.

Key 2015 growth initiatives and performance drivers include adding wholesale web telco and media resellers and partners, cross-selling to our retail base through bundled presence packages, adding more new customers, resellers and partners, reducing web design, churn rates and adding payroll services customers and features such as time and attendance applications.

This category also is our focus area for tuck-in acquisitions. In the second quarter, we saw a double-digit growth in direct web services offers. We closed the second quarter with approximately 863,000 web hosting customers.

The third category, fraud security, risk management and operational services is expected to be about flat in 2015 and represent approximately 16%. Key initiatives include scaling our program services, including adding new features for both, national and community banks, and fraud and security offers for small businesses and direct to our consumers.

It also includes adding Banker’s Dashboard customers and providing both with tablet and new credit union offers. As a reminder this category also now includes some performance management revenue that was previously reported in small business marketing.

In addition, we expect to scale eChecks more with opportunities ranging from adding eChecks to our distributor, dealer and major account channels to also scaling in many areas where we do not sell paper checks today.

Deluxe eChecks had its best revenue quarter ever and we have opportunities with larger financial institutions, paper rebate, medical and insurance clearing houses and other document management and payment solution companies. 20% of all eCheck customers are new customers who have not purchased a paper check from Deluxe in the last six years.

Finally, other financial institution services are expected to represent approximately 22% in 2015, with expected growth rates in very strong double-digits.

Key growth initiatives here include adding new financial institution customers and targeting and campaign services, SwitchAgent online account opening and anchoring, and scaling Deluxe Rewards and Wausau financial services.

We expect marketing solutions and other services revenues to be approximately $525 million to $535 million in 2015, up from $427 million in 2014, with organic growth in the low double digits.

If achieved, this performance would translate to a total revenue mix of around 30% of revenue, up from almost 26% in 2014 and 22% and 19% the previous two years.

We continue to target growing marketing solutions and other services as a percent of total company revenue to approximately 40% by 2018, with checks expected to represent approximately 40% of revenue and business products expected to represent approximately 20% of revenue. Here is an update on our brand transformation.

Our intent for 2015 is to continue to raise brand awareness by leveraging our 100-year anniversary through a purposeful content-based campaign. To celebrate our 100th year, we are telling the stories of 100 small businesses across the country through our documentary and photo essay series.

These stories will be released throughout the year via our social channels and live on SmallBusinessRevolution.org. We have now released six mini documentaries and 51 photo essays through the first half of the year.

The reaction has been very positive and has resulted in quite a bit of earned media attention with over 920 million impressions and 245 new stories on radio, television and print. Social media is an important part of this campaign by virally spreading the stories and is responsible for 20% of the traffic to SmallBusinessRevolution.org.

We also had a very successful partnership with ABC, and specifically Good Morning America and Shark Tank primarily in the month of May focused around small business suite. Both of these properties allowed us to utilize national and local television, which reinforced our national and local PR approach.

Robert Herjavec from Shark Tank joined us in the small business revolution and will be an expert in our full-length documentary to be released this fall along with other small business industry experts. Our goal is to stretch our spend with impactful content and reach, yielding earned media attention to raise brand awareness.

In the second half of the year, we will continue to release monthly documentaries including a full-length one in late September.

Introduced surprise and delight for the love of small business recognition events refreshed our respective SBS and FS brands and link our efforts with our 100-year company anniversary culminating with our ringing the bell to open the day at the New York Stock Exchange on November 23rd.

We will continue to provide quarterly updates on our progress during our earning release calls. Now, shifting to our segments, in small business services in the quarter, as expected, we did not see any notable improvements as the economic climate for small businesses remains sluggish and foreign exchange rates remain unfavorable.

We had solid performance however as revenue grew over 5%. Checks and forms met our expectations. Results from targeted customer segmentation in the call center improved. New customers from our financial institution Deluxe Business Advantage referral program and our direct response campaigns remained strong.

Average order value and conversion rates increased. Our online Safeguard distributor, dealer and major accounts channels grew revenue over the prior year. We also saw growth in small business marketing solutions, web and payroll services, while SEM/SEO services declined in line with our earlier decision to exit some unprofitable channels.

Again, we ended the quarter with approximately $863,000 web hosting customers. We continue to closely monitor the small business market and so far the economic indexes appear to be consistent with our previous expectations and what we planned into our outlook.

Optimism indices increased to start the quarter in April and continued to improve in May, but declined dramatically to close out the quarter in June ending at the lowest point since March 2014. Optimism momentum in the fourth quarter 2014 that shifted downward in the first quarter continued to shift further downward in the second quarter.

The outlook on business conditions expectations fell to the lowest level in a year. The percentage of small businesses planning capital outlays over the next three to six months fell to a weak 23% reading. In summary, current optimism indices remain sluggish and actually trended down further in the second quarter.

The good news is that other than taxes and regulation, increasing sales continues to be a small business owner’s number one pain point and our portfolio is significantly more robust now with many offers to help them here.

As the economy recovers with the transformative changes we are making to deliver more services offerings that help small businesses get and keep customers, Deluxe is better positioned as that indispensable partner for growth.

Our focus for 2015 is on profitably growing marketing solutions and other services revenue with key drivers including accelerating our brand transformation and significantly improving overall market awareness while institutionalizing our brand promise for our customers, delivering an effective end-to-end integrated technology customer experience, effectively acquiring and retaining customers and optimizing sales channel effectiveness and channel marketing capabilities.

For 2015, we expect marketing solutions and other services revenue for the small business services segment to represent over 30% of segment revenue, driven by small business marketing solutions and web services with the balance being fraud, security and operational services.

In financial services, we saw the rate of decline of checks perform about 7%, however June came in closer to 6%. We continue to expect the unit decline rate for the year will be about 6%. We had strong overall new acquisition rates and our retention rates remain strong on deals pending in the current quarter.

We simplified our processes and took complexity out of the business while reducing our cost and expense structure. We have now extended all our large contracts through at least the third quarter of 2015, with the exception of one which we are working to retain. We also continue to work a number of competitive RFPs.

We made progress again in the quarter in advancing non-check marketing solutions and other services revenue opportunities. Wausau revenue was approximately $19 million, which met our expectations and we had strong bookings in the quarter, helping us build backlog that will begin to roll out over the balance of the year.

Deluxe Rewards continued to perform very well in the second quarter including achieving double-digit operating margins.

For 2015, we expect non-check marketing solutions and other services revenues to be approximately 36% of total FS revenue, driven by Wausau revenue of approximately $75 million; fraud, security risk management and operational services revenue of approximately $40 million; Deluxe Rewards revenue of approximately $30 million; and targeting campaign and activation services revenue of approximately $15 million.

Overall, we continue to be pleased with the Wausau acquisition. Wausau was almost a penny accretive to EPS in the second quarter and we expect it to be slightly accretive in the third and fourth quarters and now slightly accretive to earnings per share for the full year.

In Direct Checks, revenue was higher than our expectations, driven by better email marketing conversion rates and an improved call center incentive plan.

We continue to look for opportunities to provide accessories and other check-related products and services to our consumers as well as work a number of initiatives to create an integrated best-in-class direct-to-consumer check experience.

We continue to see a ramp in revenue enhancement synergies through our call center scripting and up-sell capabilities as well as synergistic cost and expense reductions. Our Direct Checks expectations for the year are better.

Previously, we guided to a decline of 8% but now we believe the decline will be 6% to 7%, driven by continued declines in consumer usage in a sluggish economy. We anticipate that marketing solutions and other services revenue, which is primarily fraud and security offers for this segment, to be about 10% of Direct Checks revenue.

We expect to reduce our manufacturing and -- manufacturing cost and SG&A in this segment and continue to deliver operating margins in the low to mid 30% range while generating strong operating cash flow.

As we exit the second quarter on the heels of an outstanding performance in a continued sluggish economy, we have made tremendous progress in transforming Deluxe, but we still have many opportunities ahead of us in 2015. We believe, we are well positioned in 2015 for our sixth consecutive year of revenue growth.

Our breadth of offers and financial discipline has enabled us to position ourselves for sustainable revenue growth while continuing to improve profitability and operating cash flow.

Our technologies and sales channels are stronger; our digital technology services offers are more mature; our infrastructure is better; and our management talent is deeper and aligned to grow revenue.

We know it is critical for us to be able to grow revenue again in 2015 and improve the mix of our marketing solutions and other services revenue and we are well positioned to make this happen.

We have developed a strong platform for long-term growth with the objective of transforming Deluxe to more of a growth services provider from primarily a check printer, thereby changing our product mix and resulting stock price multiple. Now, Ben, we will open the call up for questions..

[Operator Instructions] And our first question comes from line of Tim Klasell of Northland Securities. Your line is open. Please go ahead..

Just a few quick questions here, first, eChecks continues to do -- had its best quarter ever; how are you guys feeling about the margin contribution of each eChecks versus the traditional Direct Checks?.

This will be better..

That’s simple and fast like that.

And then the check declines of 6% to 7% versus the initial expectations of an 8% decline, is that a little bit more on -- is there any particular market segment that is doing better that you can talk to or is it sort of broadly speaking a bit better than expectation?.

Yes, Tim, first of all, we guided 6; we’ve been consistent on 6. We did see about 7 in the quarter but we saw 6 in June and we’re sticking to 6 for the year. It is the way to think about it. And that’s really again from a financial services perspective where we were stronger was that we expected was in the Direct Checks area.

And a couple of reasons, as we alluded the last couple of quarters, we’ve been trying to get smarter and smarter about how we’re spending our marketing dollars to get to those consumers, both for new orders and then for reorders.

And we just got better and better at how we’re converting what we call our email marketing where we’re reaching out to our base.

And then believe it or not, we made a change in our -- we’re always looking at how we script our call center and how we work our call center, but we made an incentive change and that incentive has positively surprised us and it’s started early in the quarter as well. So that’s the way that I would think about it.

Back to the banking channel for just a minute, I would say we’ve seen consistency from the national through the community banks. So not -- like national is declining faster, communities declining faster, it’s pretty consistent across the FI landscape..

We have one large account yet to renew on the financial services side, once that decision is made positively or negatively, how long of a gap do we have for the next big renewal?.

We feel positive about that first of all and that will get it renewed and the next the biggest one we have is national 2016 and we actually feel positive about renewing that one in the process that we’re going through right now on that.

Hopefully we’ll be able to report on our next call that we have all of our major deals closed not only through ‘15 but also through ‘16 as well..

And then one little accounting detail.

You’ve mentioned FX a few times; how big was the impact on FX least wise on revenues and earnings, can you give us some exact number?.

If you compare that our original guidance that we came into the year with, the FX rate has deteriorated and it’s about $5 million of revenue for the full year and on a year-over-year comparison that was closer to $10 million.

So it’s a sizable but again we’re absorbing that within the outlook ranges that we have provided and have not lowered guidance for that..

And the profit profile on that Tim is right in line with our operating margins, so in that low 20% range..

Thank you. Our next question comes from line of Josh Elving of Feltl. Your line is open. Please go ahead..

I had a question on the financial services operating margin. If I just look at the past few quarters, I know that there was a significant impact in the first quarter due to the drag of Wausau to the tune of call it 5%.

Did I hear you correctly and that there was still a 3.8% drag this quarter?.

Yes, that business did lower that margin by 3.8 points correct..

And so, if I am just looking -- I am sorry?.

Here’s the way to think about Wausau right now. So what we’ve guided and I think we’ve tried to be as transparent as we can here. If the revenues for the year are $75 million and we expect it to be slightly accretive for the year and we were slightly accretive for the quarter and we had $19 million of revenue.

If you would make those adjustments, you’re going to need to adjust every quarter as you kind of roll through the balance of the year. When we get into the fourth quarter, we had told to the Street that we did about $17 million last year in the fourth quarter. So, you will get that full lapping will actually happen in the fourth quarter here.

So we’re trying to be as transparent as we can. One of the things that we alluded to on the call, both in my comments at the beginning and Terry got into more details. We had a better quarter on cost reductions.

We just got more initiatives earlier and we also said we expect there to be therefore lower cost reductions relative to how we originally planned a year in the third quarter. That benefit really helped us in the financial services segment in the second quarter.

A lot of that work is -- some of it is the Wausau stuff as well as other efficiencies that we got both in our SG&A as well as in our manufacturing facilities. So that’s really why we had the stronger performance in terms of margin when you adjust for Wausau in FS. So, hopefully that makes sense for you..

I think so and I think you gave a lot of information. So, I appreciate that. I guess I was trying to get a sense for if I were comparing year-over-year theoretically without making the adjustments to the operating margin. If I look at the 22.6% in the second quarter here at 3.5% or 3.8%, the year-over-year comparison looks significant.

And then extrapolating from there, what the back half looks like if you’re going to see significant improvements year-over-year then going forward..

Yes, Josh and that’s where you are seeing kind of the timing of some of those cost reduction benefits coming through more in second quarter, less expected in second quarter in particular with this segment. So, I wouldn’t take a straight extrapolation of what you saw in second quarter and setting that up to the balance of the year..

Looking at the interest expense line, I don’t know if there were some different balances, debt balances into quarter but it looks like a nice improvement there.

Is that just due to a relatively lower cost of debt in the quarter and how do we think about that line going forward, because there are relatively significant?.

Throughout the second quarter it was pretty stable from beginning to end. What’s really driving the big difference when you compare year-over-year, or even second quarter versus first quarter, it’s a couple of things.

The average interest rate is down significantly because we paid-off a higher rate debt back in October of last year and then we refinanced a higher rate debt again in first quarter of this year. So it’s slightly coming down in first quarter but second quarter is that rate came to where the new normal level is going to be for the full quarter.

And that average rate is less than 3% on a combined basis for all of the debt that’s outstanding. And then second but still important as well is our average debt level has come down. So, lower interest rate on a lower debt level has produced roughly about $5 million of savings in the quarter..

So, is that a fixed or relatively fixed rate or is that float?.

That is all floating. What we have on the balance sheet today is all floating. Definitely we have a credit facility and a small bank loan. And then we have fixed rate debt due in 2020 to the tune of $200 million but we’ve hedged that. So it is actually floating as well..

And then I guess it kind of ties into I guess my last question that has to do with capital allocation. I know that you suggested that you may buy back some stock. I know that Company suggested that there is some tuck-in acquisitions you would like to do.

Do you currently have the appropriate debt level for your case; what you do with -- how do you I guess prioritize way to do with your capital generation, your cash flow?.

We’re not at all concerned about the debt level that we have. We don’t necessarily manage -- at the low level that we have today we’re not really aggressively managing to a specific number because our credit metrics are still incredibly strong. We’re really focused on that transformation.

And our capital allocation priorities really kind of zero-in on that transformation. So again, we will spend money first and foremost on organic investments that help that transformation move along, small to medium size acquisitions is right up to the top of that list as well.

And then secondarily, we got a dividend that we are committed to continuing to pay. We’ll do some share back generally to offset dilution and then maybe in some years a little bit more depending on what the M&A needs for capital hour.

And then last but not least, to the extent that excess cash flow is left over, it comes through in the form of debt reduction like in a period we’re not adverse taking debt up from one quarter to the next quarter by driving more on a credit facility..

Thank you. Our next question comes from the line of Joan Tong of Sidoti & Company. Your line is open. Please go ahead..

A couple of questions here, regarding Wausau, it seems like it’s doing a little bit better. And then also Lee, you mentioned that the booking is getting stronger and it seems like things are improving.

Is it a right characterization because it seems like last quarter -- in the last quarter it was little bit late? Are we seeing things improving now and how sustainable it’s going to be going forward?.

You heard that comment Joan exactly right. We had a really nice quarter. We delivered the revenue that we expected but our bookings were stronger than we expected and obviously that supports us well for the balance of the year and getting to that $75 million. But we’re also looking forward and we want to get this thing to grow for us as well.

And so what we’re hopeful is that not only the backlog that will be converted in the second half of the year will be on that 75, but hopefully helps us to build backlog as we continue to roll the business out in 2016.

So yes, you read it right and we did a little better on -- we predicated a breakeven EPS neutral for the quarter; we did a little better than that and that helped our total company profitability; it also helped the operating margins in FS. So, you read it well..

And then Lee, how about the major account wins that you had on the small, medium size business in the first quarter; how the account wins activities in the second quarter, any major uptake or is kind of at the same pace? Any color you can give will be appreciated..

We slightly raised, if you go back and look at the MOS, small business marketing that four way breakout, we guided for the first -- end of the first quarter, what we guided end of the second quarter, we raised it in the first quarter but we raised it again a little bit. We tightened the range and then we raised the high-end of that.

What we’re signaling is that we continue to see a very strong uptake and I’ll give you an example what we’re talking about. We’re reaching into what we call major accounts but then a factor they act like small businesses, so there are opportunities with financial advisory firms as an example.

And they’re buying business cards and they’re buying marketing brochures and full color materials. Well what’s exciting for us and we’re also starting to introduce what we think our smart other cross-sell place.

For example and one of the financial advisors we just introduced email marketing, so they can stay in touch with their clients and learn to stay in touch with them.

One of the things that we’ve learned over the history of our small business and throwing products and services at them is make sure that they can swallow or absorb them smartly at the right time.

And so, we think this is an area that we’re going to now test into that not only brings more and more of those marketing and product and some service only things, but now starts to bring in things like email marketing in the equation.

So, yes, we’re bullish and we got I would say a little more bullish here Joan in the second quarter, based on what we’re seeing..

And then Lee, you continue to talk about like your long-term goal is to grow marketing solutions, get the product mix more favorable going forward and continue to drive top-line but I haven’t heard you talk about operating margin expansion.

I am just wondering your top-line growth is very nice this quarter and your operating income actually grew nicely compared to the first quarter, it was down a little bit, is it one of your target or a long-term goal going forward is to bring that top-line to operating leverage to the bottom-line?.

I think here’s what you’re going to see and I think we’ve been consistent with every time we’re out and every time we’re talking with investors on this. If you’re interested in the stock, we’re not going to improve the EBITDA. We always say EBITDA margins but you can think of it as operating margins as well.

Our operating margins in the 21% range, our EBITDA margins in the 25% range, what we expect to happen is we will grow the dollars of operating income and grow the dollars of EBITDA and based on the fact that we’re growing revenue.

We believe that we will improve and continue to improve the MOS margins while probably we continue to always feel a bit pressure in the more commoditized core print products.

And that will lever out to that maybe slightly improving overall operating margin or EBITDA margin profile and yet driving more dollars and therefore more dollars of cash flow and that’s how we’re thinking about it because we also want to be investing smartly in the Company as we move forward as well.

So that’s the way to think about what we’re trying to do..

And then one last question is regarding foreign exchange. I think Terry you gave guidance regarding the top line, how foreign exchange would affect the top line over for the full year.

How about the bottom line and also you’ve mentioned that higher tax rate, what is the EPS impact for this year from foreign exchange and higher tax rate, can you just give me that number?.

Yes, the impact on foreign exchange rate carries a pretty normalized profit or loss margin, but that’s I think the operating income impact to be in the 20ish percentage of the revenue numbers that I did provide.

And then slightly higher tax rate this year is 34% on a year-over-year basis for the full year that will drive a negative EPS impact of about $0.07 per share..

Thank you. And we do have time for one final question from the line of Charley Strauzer of CJS Securities. Your line is open. Please go ahead..

Couple of questions, going back to the Direct Check segment really quick and kind of help me reconciling the strength in the operating margins, 37%ish in the quarter versus the guidance for low to mid 30s going forward. I know you’ve seen some success like you said with the call centers. You’re dialing back some of the spend there.

So, why wouldn’t that be more sustainable in kind of mid to upper 30s kind of going forward through the year?.

Because we pulled some of the cost reductions in, most of them Charley were in the FS space that had the largest impact but there was some impact in the Direct Check segment as well..

We also Charley mentioned in the prepared remarks too that we do have a higher mix of reorders, certainly versus expectations too. And the profit profile on reorders as opposed to initials or introductory offers is quite a bit stronger. So we saw a really good strength in the reorder side of that that really lifted that operating margin.

And the period of time in which we’re seeing that strength is just really not long enough for us to kind of declare any trend here..

Right.

So that could be an upward lever for you going forward as that continues?.

Yes, we love to see that mix and that strength continue but again it’s too early to make that call..

And then just if you look at the MOS slide in your presentation, kind of the mix breakup between small business marketing and other FI services.

I noticed that for last couple of calls now, you’ve seen kind of the small business marketing mix ticking up a couple of percentage points and other FI kind of ticking down a couple of percentage points, anything driving one way or the other those two buckets?.

No, I think it’s just exactly what we just answered to Joan on the small business marketing that solutions that first category the four-way break Charley just continues to get stronger with SB.

And what we are seeing a little bit of is while Wausau was very strong, some of the targeting campaign services offers are -- got a little bit slower, nothing that we’re alarmed about that got a little bit slower in the quarter. I mean this is some small tweaking.

The problem we have we keep giving you guys more and more information if it moves by $1 million, you guys start thinking there is something alarming. I wouldn’t think that way; I think that’s just a framework. And I’m not alarmed by that at all..

Nor am I. Thank you for that. And then just lastly, on the cash flow statement, this looks like you spent roughly $28 million on acquisitions in the quarter, anymore color you can give there? Thanks..

Again, part of what you have to remember and we don’t always pay for the acquisitions all at one time. So, when we do a deal, we have a tendency to do hold backs. And depending on how the hold backs operator, the dollar amount of the hold backs, they can spike up within a quarter or whenever that hold back payment is due.

So that’s why you saw a more of spike this quarter overall than what you would traditionally see..

Thank you. And that does conclude our Q&A period for today. I’d like to turn the conference back over to Mr. Lee Schram for any closing remarks..

Let me just thank everybody for your participation and for all the questions. I wanted to summarize in four points.

First, we delivered an outstanding second quarter; second, we exceeded both our revenue and earnings outlook; third, marketing solutions and other services revenues grew over 31% and the mix improved towards our goal of 30% of total company revenue in 2015 and 40% in 2018; and four, we had a very strong first half of the year which we believe propels us towards revenue growth again in 2015 for the sixth consecutive year.

We’re now going to roll up our sleeves, get back to work and we look forward to providing a positive progress report on our next earnings call. I’m going to turn it over to Ed for some final housekeeping..

Thanks, Lee. Before we conclude today’s call, I’d just like to mention that Deluxe management will be participating in a few upcoming events in the third quarter where you can hear more about our transformation.

On August 4th, we will be in Boston at the UBS Midcap Conference; on August 5th, we will be in New York at the Needham & Company Interconnect Conference; and we will also be at the Minneapolis Investment Conference on August 5th; and on September 10th, we’ll be in New York City at the CL King Conference. Thank you for joining us.

And that concludes the Deluxe second quarter 2015 earnings call..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may all disconnect. Have a great rest of your day..