First Quarter Earnings Call
May 7, 2020
© 2020 Deluxe Corporation. Proprietary and Confidential.
Ed Merritt
VICE PRESIDENT OF CORPORATE FINANCE AND TREASURER
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Todays Presenters
Barry McCarthy | Keith Bush | Ed Merritt |
President and | Chief Financial Officer and | Vice President of Corporate Finance and |
Chief Executive Officer | Senior Vice President | Treasurer |
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Cautionary Statement
Comments made today regarding management's intentions, projections, financial estimates or expectations
about the company's future strategy or 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, 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 31st, 2019, 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 the 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.
Barry, Keith and I are working remotely from different locations today, as are over 3,000 of our fellow Deluxers. For the first time, we are not sitting together for this call. While we believe we have all the logistics for this event well planned, please bear with us in case we experience any technical difficulties. Thanks in advance.
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Barry McCarthy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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Agenda Today
First Quarter Results
- Solid first quarter in light of unprecedented COVID-19impact
- Significant COVID-19 decline in revenue late in March
- Immediate action to mitigate the impact and secure company
- Confident in our strategy
Other Topics
- Payments 18% growth in Q1
- COVID-19impacts
- Results in new segment structure
- Sales-drivengrowth strategy success
- What all of this means for Deluxe
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First Quarter Summary
- Revenue declined 2.5% for the first quarter, including COVID impact
- Sales driven revenue growth for the first time in nearly a decade
- Pre-COVID
- new leadership team
- New structure and 4 new segments
- Payments grew 18%
- New strategy is working
- protecting company today
- positioning company for tomorrow
- Not providing guidance
- macro-economicuncertainty
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Small Business Optimism Deteriorated
- Dramatic and sudden decrease in SMB optimism
- Sudden deceleration in pace of new business opening
- Business closures, temporary contraction and hibernation impacting economy and DLX revenue
- Government stimulus may impact sentiment
SMB Optimism
SMB's outlook for revenue
2% | 4% | ||
Much Better | 8% | ||
34% | |||
32% | |||
Somewhat Better | 34% | ||
Same | 17% | 55% | |
Somewhat Worse | 11% | ||
Much Worse | 5% |
Pre COVID-19 | Post COVID-19 |
Almost 90% of SMBs now
expecting worse revenues
Source: PYMNTS.com
1) Results were prior to government passing stimulus package
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Q1 2020 Segment Details
- Promotional Solutions - Tom Riccio
- Down as much as 45% in some categories
- Northeast region most impacted
- PPE, a new market for Deluxe is showing strong opportunity
- Cloud Solutions - Garry Capers
- Solutions with the greatest impact, products helping new businesses start or find new customers
- DDM, incorporation services, logo design, web design and hosting
- Checks - Tracey Englehardt
- Unusual decline in March, mitigation efforts to manage costs in line with revenue
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Q1 2020 Segment Details (cont'd)
- Payments - Mike Reed
- Shining Star
- Revenue increased 18%
- Winning new business
- Competitive takeaways
- DLX financial strength compelling competitive advantage
- Implemented Key Wins:
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The Medical Payment Exchange (MPX)
Delivering efficient electronic payments to health care providers. These payments account
for 40% of all medical claim payment transactions and 88% of dental claim payments
Send electronic payment | PROVIDER | |
and explanation of | ||
HEALTH PLAN SENDER | payment (EOP) | Electronically notified and has |
simultaneously | ||
multiple choices to receive funds | ||
Upload check batch files (no change to existing payment processes)
Virtual Card | ACH | Check |
Medical PaymentExchange
Nearly $1B | 40K+ | 600K |
in 2019 payment volume | Providers paid in | Forecasted providers paid in |
network in 2019 | network within next 12 months | |
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Protecting Employee-Owners
- Work From Home (WFH)
- ~3,000 of our 6,500 employees
- Technology investment in 2019 enabled rapid move to WFH
- Limited or no disruption in customer experience
- Production Facilities
- Daily temperature readings in certain sites
- Frequent deep cleaning
- Hand sanitizers
- Protective gear like masks (PPE)
- Expanded social distancing procedures
- "Hero" pay: incremental hourly pay for production teams
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Protecting Deluxe Financially
- Liquidity
- Increased borrowing on revolver - holding ~$300M cash/short-terminstruments
- Compensation & Benefits
- Reduced salaried employee's base pay and Directors cash by 20%
- Canceled 2020 merit pay adjustments
- Suspended our 401(k) match contributions
- Workforce Optimization
- Furloughs in production facilities and salaried team too
- Reduced schedules, reassign labor as needed
- Capital expenditures and projects delayed
- Deferred most of external consultants spending
- Leadership
- daily exec calls; weekly Board of Directors status call
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Keith Bush
CHIEF FINANCIAL OFFICER AND SENIOR VICE PRESIDENT
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First Quarter Performance
- Solid performance overall
- Despite COVID impacts
- Full quarter, Company revenue declined by 2.5%
- Continued driving business transformation
- Sales-drivenrevenue growth
- January and February, pre-COVID
- First time in nearly a decade
- COVID impact began in March
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First Quarter New Segments
Q1 '20 | Q1 '19 | Better/ | |||||
$ in millions except EPS data | (Worse) | ||||||
Revenue: | $77.0 | $65.2 | $11.8 | ||||
Payments | |||||||
Cloud Solutions | 76.0 | 78.3 | (2.3) | ||||
Promotional Solutions | 142.8 | 155.8 | (13) | ||||
Checks | 190.6 | 199.8 | (9.2) | ||||
$499.1 | |||||||
Consolidated | $486.4 | $(12.7) | |||||
SG&A Expense | $237.2 | $230.1 | $(7.1) | ||||
48.8% | 46.1% | (2.7%) | |||||
Diluted EPS | ($1.45) | $0.93 | $(2.38) | ||||
Adjusted Diluted EPS | $1.08 | $1.54 | ($0.46) | ||||
Adjusted EBITDA | $83.3 | $113.7 | $(30.4) | ||||
Net (loss) Income | ($60.1) | $41.2 | $(101.3) | ||||
(12.4%) | 8.3% | (245.9%) | |||||
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Other Items
Non-cash impairment charges totaled $90.3 million
- Non-cash,COVID-19 related
- $85.3.3 million total
- Promotional Solutions: $63.3 million goodwill/partial impairment
- Cloud Solutions: $4.3 million goodwill (full impairment of Web Hosting) with $17.7 impairment of certain intangible assets
- Non-cash,Assets Held for Sale & Customer List
- $5.0 million assets held for sale and the write-down of a
customer list
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Balance Sheet
- ~$300M cash/short-term investments on balance sheet
- Net debt:
3/31/2020 12/31/2019 Change | |||||
$ | 829.9 | $ | 809.9 | $ | 20.0 |
- Total debt increased by $256M
- proactive draw on credit facility further strengthened liquidity
- accordion allows expansion to $285M above $1.140B, pending expected approval
- Access to other capital markets opportunistically
- Government stimulus
- deferring tax payments allowing us to improve near-term cash flow
- have not accessed any government loan programs
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Cash Flow
- Revenue mix changes/COVID-19
- Previously announced transformation investments
Free Cash Flow | ||||
$ in millions | ||||
(Cash provided by operating activities, less capital expenditures) | ||||
Quarter | ||||
Ended Mar 31 | ||||
2020 | 2019 | |||
Cash Provided by Operating Activities | $18.6 | $45.4 | ||
Less Capital Expenditures | (6.4) | (14.6) | ||
Free Cash Flow | $12.2 | $30.8 | ||
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Maintaining Liquidity
- Share buybacks
- Repurchased $14M in Q1
- Paused additional stock repurchases in Q2
- Financial priority is to maintain strong liquidity
- significant cash balance; cushion company from any other shock
- pause some capital projects in the near-term
- minimize working capital requirements
- extending our payment terms on our payables
- delaying non-essential spending
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Summary
- Delivered a solid Q1
- Strategy is working
- Sales-drivenrevenue growth in January and February
- First time in a nearly a decade
- Well positioned for the economic recovery to come
- Strong balance sheet, great leadership and a committed workforce
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Barry McCarthy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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Key Q1 Accomplishments
- First-evercompany-wide sales kick-offmeeting
- Largest customer event in the history of Deluxe
- Sales-drivenorganization is delivering results
- Won 4 of the largest 10 deals of past decade in last two quarters
- Strategy working = well prepared for eventual recovery
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Deluxe Strategy Across Lifecycle
Deluxe offers products and services across the business lifecycle that can also be used by both small and large business customers and financial institutions
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Payments - "The Shining Star"
Enterprise and Small Business | Health Insurers | ||||
How we Sell | ▪ | Property & Casualty Insurers | ▪ | Joint venture with Echo Health | |
▪ | Enterprises & Banks | ▪ | Sell to Insurers & Third-Party Administrators |
What is the
Job to be
Done
Our
Solutions
- Payer sends digital payments without accounting process changes, only needs payee email
- Payee chooses how they want to receive funds; Push to Debit, Check and ACH and PayPal
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New Products and Solutions
Personnel Protective Equipment
- Sourcing PPE products across the globe
- Rapidly creating collateral and training
- $millions in orders and growing daily
Appointment Scheduling
- Selling new partner developed branch appointment scheduling solution
- Pilot customer has already received 29 appointments in 2 days
- Extremely positive feedback
Deluxe Payment Exchange
- Work-from-homechanges driving a business need for remote payments
- Demand generation team is capitalizing on these changes with prominent digital placement of Deluxe Payment Exchange
- SMB orders up +24%
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Capital Allocation & Summary
Capital Allocation
- preserving strong liquidity, cash conservation and management
- may consider opportunities to further enhance capital structure
- announced first quarter dividend
- suspended Q2 share repurchases
Summary
- delivered a solid first quarter and our strategy is working
- we believe Deluxe will exit this crisis a better, stronger company
- believe Payments and Cloud will grow revenue
- Deluxe team is doing incredible work, delivering for shareholder and driving a bright future for Deluxe
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Question & Answers
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Key Takeaways
- Deluxe is financially strong
- Taken the necessary steps to secure our future
- Solid first quarter
- Strategy is working
- Sales driven revenue growth for the first time in a decade, pre-COVID
- Payments grew 18 percent
- 4 of top 10 deals in last decade in last 2 quarters …. Only just begun
- We will recover
- Financial wherewithal to sustain our business to recovery
- Confident in our recovery over time
- Deluxe has led through crisis for 105 years
- Great team & values
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Future Management Presentations
DATE | EVENT |
May 20 | Needham Technology & Media Conference |
June 3-4 | Baird 2020 Global Consumer, Technology and Services |
Conference | |
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Disclaimer
Deluxe Corporation published this content on 07 May 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 May 2020 15:02:01 UTC