DELUXE CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Barry McCarthy highlighted strong third quarter results with sustained growth in comparable adjusted earnings metrics, expanded free cash flows, and reduced net debt. The North Star program is driving profitability improvements, with $100 million of the $130 million targeted annualized EBITDA improvements in execution or completion.
• SG&A expenses, particularly in corporate, improved by over 11% year-over-year. Free cash flow grew 9.5% for the quarter, and net debt was reduced by $45 million sequentially.
• Chip Zint discussed consolidated highlights, including reported revenue of $528.4 million (down 1.7% reported, 0.7% comparable adjusted). Balance sheet showed net debt of $1.49 billion, improving from prior periods. Free cash flow for the quarter was $46.7 million, with year-to-date at $64.3 million.

Segment Performance

• Merchant Services: Q3 segment revenue grew just over 6%, with year-to-date growth of over 7%. Q3 revenue was $93.5 million, up 6.3% year-over-year, and year-to-date growth is 7.4%. Segment adjusted EBITDA was $17.8 million, up 2.3% year-over-year, with margins at 19%.
• B2B Payments: Q3 segment revenue was $75.1 million, up 0.7% year-over-year. Year-to-date, it's expected to have low-single digit revenue decline. Adjusted EBITDA was $15.3 million, down 5%, with margins at 20.4%.
• Data Solutions: Q3 revenue was $61.1 million, down 4.5% year-over-year but up 6.4% sequentially. Adjusted EBITDA was $17.5 million, up 14.4% year-over-year, with margins at 28.6%.
• Print: Q3 revenue was $297.3 million, down 2.3% year-over-year. Legacy check revenues have declined just under 2% year-to-date.

Guidance

• Full year 2024 guidance narrowed: revenue $2.12 billion to $2.14 billion (decline 1% to flat comparable adjusted growth), adjusted EBITDA $405 million to $415 million (4%-6% comparable adjusted growth), adjusted EPS $3.20 to $3.35 (6%-11% comparable adjusted growth), and free cash flow $90 million to $100 million. The guidance assumes interest expense of $120 million, adjusted tax rate of 26%, etc.

Risks

• Macroeconomic uncertainty, including impacts of weather events and consumer discretionary spending trends.
• Interest rate environment, labor supply issues, inflation, and the impact of divestitures on financial performance.

Question and Answer

• Q: Lance Vitanza asked about 2025 consolidated revenue growth and long-term growth expectations. A: Barry McCarthy noted progress in B2B, Merchant, and Data segments, with B2B expected to grow in mid-single digits, Merchant in upper-single digits, and Data in upper-single digits. Chip Zint mentioned lower end of 1%-2% growth initially, based on current trajectory.
• Q: Charlie Strauzer inquired about EBITDA margin drivers and Data margins. A: Barry McCarthy cited operating efficiency improvements, especially in corporate spending. Chip Zint highlighted North Star initiatives driving margin expansion, with Data business performing well and expected to maintain low-20s to mid-20s margins.
• Q: Will Brunemann asked about competitive environment in Merchant business and impact of bank M&A on check business. A: Barry McCarthy stated Merchant business benefits from durable market segments and strong service levels. Chip Zint added bank consolidations create opportunities for wallet share gain, with Deluxe's product and service helping win business in any environment.
• Q: Marc Riddick inquired about North Star program progress. A: Barry McCarthy and Chip Zint discussed North Star progress, with $100 million of $130 million EBITDA improvements in execution, and restructuring spend under budget, leading to improved free cash flow and returns on the program.