Deluxe at Sidoti Small-Cap Conference: Strategic Growth Insights

On Wednesday, 19 March 2025, Deluxe Corporation (NYSE: DLX) presented its strategic vision and financial outlook at the Sidoti Small-Cap Virtual Conference. The company emphasized its ongoing transformation from legacy print operations to a focus on payments and data businesses. While Deluxe is optimistic about future growth, challenges remain as it navigates market uncertainties and aims for a balance between debt reduction and investment in growth.

Key Takeaways

• Deluxe is shifting from legacy print to focus on payments and data, aiming for low single-digit organic growth.
• The "Northstar" strategic plan targets $130 million in net EBITDA improvement by 2026.
• The company is prioritizing debt reduction to achieve a leverage ratio below three times.
• Deluxe expects to enhance free cash flow conversion, targeting $160 to $180 million by 2026.
• The company maintains a strong presence in financial institutions, state and local governments, and merchant services.

Financial Results

• Annual revenue stands at approximately $2.1 billion, with EBITDA exceeding $400 million.
• Merchant card processing volume reaches $40 billion, while B2B payments total $2 trillion annually.
• Free cash flow is projected to increase from $100 million to $120-140 million.
• Deluxe aims for a $470 million EBITDA target by 2026, with anticipated free cash flow of $160 to $180 million.

Operational Updates

• Deluxe has exited numerous acquired businesses, focusing on core growth areas.
• The acquisition of First American bolsters its merchant acquisition capabilities.
• The company has transitioned its infrastructure to the cloud, enhancing operational efficiency.
• The "One Deluxe" strategy is being implemented to drive cross-selling opportunities.
• Cost initiatives within the Northstar program focus on real estate consolidation, procurement efficiency, and tech stack simplification.

Future Outlook

• Deluxe targets low single-digit organic top-line growth, with EBITDA growth outpacing revenue.
• The company aims to reduce its leverage ratio below three times by 2026.
• Merchant services are expected to grow at a 7-10% CAGR, with margin expansion.
• B2B payments and data businesses are projected to experience mid-single-digit and 6-10% CAGR growth, respectively.
• Print business is expected to see a low to mid-single-digit decline, with stable margins.

Q&A Highlights

• Deluxe is monitoring macroeconomic conditions but remains confident in its resilience.
• Free cash flow generation is expected to continue beyond 2026, supported by reduced restructuring costs and debt paydown.
• The company has limited federal government exposure, focusing on state and local levels.
• A recent win with Fulton Bank highlights Deluxe’s strength in merchant services, driven by superior products and customer service.

The full transcript of Deluxe Corporation’s presentation at the Sidoti Small-Cap Virtual Conference is available for further insights into the company’s strategic direction and financial performance.

Full transcript - Sidoti Small-Cap Virtual Conference:

Unidentified speaker: Were you gonna pull up our presentation first?

Unidentified speaker: Yep. I I am right. I just it’s it’s slipped away on me for a minute. Just one second. Of course.

It’s yep.

Unidentified speaker: Oh, while he pulls that up Yep. We’ll skip to the most exciting page in the deck, which is the cautionary statement. Just as a reminder, some of our projections are forward looking in nature and and obviously inherently our estimates. You can refer to our filings around other factors that matter, but, you know, we’re gonna tell you more about the broader story here, when you can see the presentation, which is here we are.

Barry McCarthy, Deluxe: There we are. So here’s the luck. So I’m guessing for most folks that are listening to this today, you may have known the company at one point in time, but the company we are today is very different than the company you may have known just a few short years ago. So these are the numbers about the scale and scope of the company today. We’re traded on the stock ticker of DLX, of course, and the company generates about $2,100,000,000 of revenue, over $400,000,000 of EBITDA, but it’s a very scaled business.

We’re processing over $40,000,000,000 in merchant card processing, that’s credit cards, debit cards at the point of sale, over $2,000,000,000,000 a year in payment volume through our lockbox operation and B2B business. We generated $100,000,000 of free cash and our dividend has been yielding at six percent. But given the market dynamic we’re in today, we’re trading at our dividend is almost at 8%. You can see the scale of the company. It’s a Fortune 1,000 company and we serve a very diversified portfolio of customers.

The 180 of the top 200 financial institutions are our customers, millions of small businesses across the country and hundreds of the world’s leading brands are using one or more of our products. It’s a very storied company that has strong economics, and has undergone pretty foundational transformation, which we’ll talk about in the next couple of pages. So if you look at the history, Mark, if you’d advance for me, that would be great. If you look at our history and our timeline, through the February, from the late ’90s to 02/2007 or so, the company was still very focused on its print business with very heavy focus on the check business. In the decade or so before we started our current transformation, the company had gone on a very, very aggressive transformation, the company had gone on a very, very aggressive acquisition campaign buying over 50 different businesses in very disparate different marketplaces, everything from web hosting in Australia to a logo design company in The UK, a payroll processing company in Canada, specialty packaging company in The US called Bags and Boes and many more.

When we started the transformation really early in 2019, we had very focused on building a cohesive foundation for the company, significantly refocused the portfolio, exiting dozens of the businesses that have been acquired previously. The only business that we’ve acquired in this period was First American, which give us a very meaningful footprint in merchant acquire. That’s credit cards, debit cards processing, with great product platforms across the portfolio. We’ve moved everything to the cloud with our infrastructure. So we operate on a modern infrastructure today and we have this great success in going to market as one deluxe, meaning that we’re bringing all of our products and services to the market together, not operating in series of silos.

And that’s proven very helpful for us to drive cross sell across our portfolio. So if you go on to the next page, I think it will give you a really clear vision for what the strategy of this very different company that you knew of before is the legacy print businesses about a billion 2 of revenue that brings with it incredible brand, great relationships with financial institutions, and great distribution through sales and otherwise. And we’re taking some of those assets and investing or those benefits and investing them to grow our payments and data business businesses, which are about $900,000,000 in total. So the businesses on the right that you can see in the red boxes across the top are merchant services, b two b payments and data. And these are the businesses that we’re really investing for growth.

Merchant services is accepting credit cards and debit cards at the point of sale. B2B payments is really about managing accounts receivable and payables. And the data business is we, where we help businesses using data identify who to target for a marketing message to help them grow their business. The economics of both of these businesses are attractive. The legacy print business, has a terrific blended margin of 31%.

Our payments and data businesses in the low 20s. The legacy print business is in slow secular decline and the payments and data businesses are well positioned for growth going forward. So if we move on to the next slide, I’ll have Chip talk a little bit about, actually, I’ll give you I’ll cover this a little bit more and then we’ll have you come right after this. So the check business, this is exactly what you think it is, is printing checks for small businesses and large businesses and consumers. The part of the business that’s pretty sturdy here is around business to business checks, which are still about 40% of all business payments today.

And so we continue to produce checks in that marketplace and win. We are a share gainer in this marketplace, because the chief, arrival in this space, has not invested in their infrastructure and our product is superior as is our financial condition as a company. Promo products is exactly what you’d believe it is. Everything from giveaway promotional products, you might get in a dry cleaner all the way up to extremely customized high end, merchandise apparel for motorsports racing as an example. A double click just for a minute more on merchant services, we’re processing about $40,000,000,000 a year in electronic payments in the B2B space, where we’re managing inbound payments on behalf of mid to large sized businesses.

We’re processing a couple of trillion dollars a year in that space. And in the data business, we’re using AI tools to look into a database, which we believe is the largest data lake that’s been created around consumer and small business marketing. You can see across the bottom, each of these markets has a very large addressable market, which gives us an opportunity for growth. And in the case of the print business gives us a great opportunity to hold on to the cash flow that that business generates going forward. So maybe I pass to you and have you talk next.

Yeah. And so

Unidentified speaker: I’m gonna skip this one, Mark. I’m gonna go do a deep dive into each of the segments and kind of their long term trajectory. Really quick, we’ve put our guidance out there. You guys should already know this, but you can see our guidance range for revenue implies a midpoint growth of approximately 1% on the top line with EBITDA growing faster than that, expansion in DPS line, and most importantly, free cash flow conversion improving this year, a free cash flow range of 120 to 140, which is nice expansion and really helps along our stated capital allocation priorities to delever the P and L, which I’ll get to in a minute. But just fundamentally to move us along, given we wanna save space for q and a, let’s just click ahead real quick, Mark.

And let’s talk about at the highest level just where where we’re shooting for, what our overarching strategy is, and how we create value. So everything Barry laid out is pointing us towards this trajectory. This is our three year value value creation algorithm. We wanna sustainably, organically grow our top line low single digits with EBITDA growing faster than revenue, paying down debt, increasing free cash flow, bringing our leverage ratio back down below three times, bringing free cash flow conversion back north of 30%. We’re doing that via the growth strategies, which I’ll highlight on the segments in a minute, as well as co mingling that with our North Star plan, which is a fundamental integrated strategic plan we’ve been executing to improve both cash flow and EBITDA out to 2026.

We’re the majority of the way through that journey. We have a little bit more work to do, and we’re starting to realize the benefits in the p and l both now this year and into ’26. We have our dividend, which is Barry already indicated, has a very attractive yield. It’s 30¢ per share per quarter. And all of this combined, as we pay down debt, we accelerate the growth, we return cash to shareholders.

It all leads to very easy math to follow that equates to really solid shareholder returns. So let me quickly try to go through each of these pieces, and then we’ll save time for q and a. So really quick on Northstar. Northstar is a program we launched back in towards the mid to late part of twenty twenty three, And it was really targeted about improving both profitability and cash flow of the business by the time we get to 2026. It’s an integrated plan linking our long term strategy with near term execution.

It covers 12 different work streams. And across targeting these initiatives, we’re we’re working to find about a hundred and $30,000,000 of net of gross EBITDA improvement, a third of that coming from revenue driven initiatives and two thirds coming from cost initiatives. And the reason we’re going after one thirty is that when you build in the secular decline of the business, you can offset those headwinds and we can net the 80. As we do that, we’ll expand cash flow. We’ll help accelerate the debt pay down.

If you keep going, Mark, it’s you can see here a bit of a flavor for the work stream. So blues represent the revenue initiatives, anything from pricing analytics and further revenue capture all the way to thinking about how we further improve the effectiveness of our sales organization or our marketing investments. But you can see the heavy focus on spend, whether it’s through real estate consolidation, procurement efficiency, working our processes, thinking about how we deliver service to the customers, and ultimately simplifying our tech stack. And starting with org design, we did at the beginning of the project. Two thirds of this program is all about costs, and we’re executing well.

And we’re in the near ending stages to finish all the remaining initiatives this year and drive value in the full run rate value in 2026. Mark, if you click ahead, this is kind of the fundamental, architecture of the program. So we launched this program at the end of twenty twenty three. At the time, our comparable adjusted or organic EBITDA, not factoring in divestitures, was roughly $390,000,000 We’re shooting to grow EBITDA to $470,000,000 in 2026. That’s that net 80 improvement.

And you can see between the Northstar program, realizing 01/20 between those two pillars and 10 we had already realized before we did this, you can see kind of the math to get us there. And as we go through and do it, as I mentioned, it’s not just about the EBITDA, it’s also about the free cash flow expansion. So, Mark, on the next tab, you guys will see the anticipated improvement in cash flows we’re expecting to see. So as we improve profitability, as we pay down debt and lower our interest expense, as we bring restructuring down, even assuming conservative offsets for things like taxes, other changes in working capital, we see a nice trajectory to improve free cash flow by a hundred million. At the time we put this guidance out there, our our current guide was 60 to 80.

So we’ve we’ve strongly signaled a 60 to a hundred and $80,000,000 worth of free cash flow for next year in 2026, which will improve that conversion ratio as I indicated. And if you click ahead, Mark, will lead to accelerated debt pay down. So we’re trying to get our leverage ratio back below back below three times. We’re on a trajectory to do that here by the end of twenty twenty six. Our guidance for 2025 implies we’re gonna split the difference between where we are now and where we need to be next year.

So we’re gonna be in though that low kind of three three three two level by the end of this year, which is showing some really good progress. You click ahead, Mark. We are very focused on very clear capital allocation priorities. So our number one priority right now is strengthening balance sheet, paying down debt, getting the leverage ratio back below three times. That’s a function of the expanded free cash flow that I already mentioned, as well as growing EBITDA.

Both both those things are are enabled by the Northstar plan, and we remain very focused on that as the top priority, improving the balance sheet, getting leverage back below three times. We believe we can do that while balancing the next two things. We can continue to invest profitably in our growth businesses. We spend roughly $90.90 to a hundred million dollars a year in CapEx. The majority of that has rotated itself towards growth related investments over the last few years now that we’ve fixed the underlying infrastructure.

We’re very disciplined stewards of that capital. We look for projects with north of a 15% IRR. We annually and quarterly pressure test how things are going, and we make sure we’re getting the right returns there. But we believe while we’re paying down the debt on our trajectory to three times, we can continue to invest smartly in profitable growth while maintaining the dividend. So as Barry mentioned, very, very, attractive yield, roughly 30¢ per share per year.

It equates to 55 or so million dollars of annual cash flows. We can manage that with spinning off the cash flow we are overall, paying down debt, investing inside that number. We can, we believe, maintain the dividend for now and and expand our overall performance and have the yield come down because the business is improving. Mark, if you click ahead, if you think about the capital structure itself, we just went to work and redid this late last year. So we refinanced our debt.

We now have, $500,000,000 term loan a maturing in 2029 with very manageable lower near term amortization payments throughout the ’25 through ’28 time frame. We we have a $400,000,000 revolver, which as you can see on the far right side, we have nearly full available liquidity underneath it, very, very little outstanding at the end of the year. And we have two bonds due out in 2029, a $475,000,000 8 percent unsecured note and a $450,000,000 8 and an eighth secured note that we just did as part of this exercise. So a lot of flexibility in our debt stack. No near term maturities.

We’re roughly 60% fixed rate debt, 40% floating, which gives us a ton of flexibility as interest rates hopefully continue to come down, gives us a lot of prepayable debt in the near term, and then we’re in a space with call ladders where we can start to work on our twenty twenty nine unsecured notes, to give us even more flexibility here in the next twelve months or so. So we feel good about where we are, refinancing behind us, a lot of access to liquidity, tons of flexibility moving forward. So lastly, just to land the overall page, then we can get to, questions. Let’s just do a quick double click into each of the businesses. Barry talked about the market opportunity, the right to win, why we’re excited.

Here’s kind of the trajectory for each. So on the merchant services business, we see this business growing roughly seven to 10% on a CAGR basis over this near term horizon. As it does that, we do see margin expansion. We have our own platform, which gives us scale. So as we onboard more volumes, we innovate, we integrate with ISV partners, find more volume, grow the revenue, we should be at margins of scale, be able to expand margin rates, and so move from kind of the low twenties up a base a hundred basis points or so towards the 22% to 23% range, get margin expansion, and continue to grow this business to kind of that upper single digit level over the near term horizon.

On the b two b side, similar story, a lot more margin potential here. So over the horizon, we see this business growing mid single digits, if not slightly better. This is a business going through a business model journey, leveraging legacy like lockbox operations, moving itself to a subscription based digital AR and AP business. What really gets us excited here is the chance for significant margin expansion. As we rotate more into the SaaS based side of the world, high fixed or relatively fixed cost structure there, it gives us room for margin expansion.

So we would expect what’s a low 20% blended margin business today, expanding to that mid-20s over the next few years. On the data side, data is our fastest growing segment currently. It it grew, just a little bit north of 10% last year, and that’s in a lot that’s the upper end of our three year CAGR with a 6% to 10% range. Relatively stable margins there that we we would expect and just continuing to gain more scale, get new logos, continue to help our clients find their clients. And then lastly, as Barry said, the print business, a very predictable, very sustainable, low to mid single digit top line decline with margins remaining stable in those low thirties.

A lot of the investments we’ve made to drive efficiency helped variableize our cost structure. The cost out we’re doing as part of Northstar, that’s helping here. We feel really good about the ability to hold on to those margins, deliver cash flow for the organization, leverage the brand, the reputation, the cross sell capabilities to, again, use this to help grow the other side of the business. So you put it all in a nutshell. We’re delivering guidance towards that value curation we showed, delivering an overall low single digit CAGR top line over this multiyear period with margins growing faster than revenue, all heading towards that $470,000,000 overall target for 2026, which Mark on the last page is directly in line and in sync with our three year value creation formula.

So hopefully, that was a really quick spin through the company, where we’re at, and we’d welcome, questions that are out there.

Unidentified speaker: Excellent. And as a reminder, folks, if you would like to ask a question, just click on the QA button at the bottom of your screen and, we will be able to get to, as many of those as we possibly can as I shift it back into into endless mode. As we, one of the things that we’ve sort of noticed just to start and, before we jump into the the QA that’s that’s come in, I guess the main question of the day is is certainly been around, sharing thoughts and views as to what we’ve seen, from a macroeconomic and political view of of how how things have been since the beginning of the year, what you’re hearing from your clients and and and type of feedback that that folks are sharing, giving the, you know, the the landscape that we’re we’re we’re in currently. I was wondering if you could share if there’s any things that you’d heard from clients or, any thoughts that that, of how it might fit for Deluxe going forward.

Barry McCarthy, Deluxe: So in our fourth quarter earnings call, we talked a bit about, the everyday consumer being under pressure. And we are aware, we read all the same headlines that everyone on this call does around, the uncertainty that’s being created in the marketplace on a number of fronts, whether it’s tariffs or otherwise. The good news that we makes Deluxe, we think, a particularly attractive company is that in just about any economy, Deluxe does fine or better because what we do is central to commerce in general. So if there’s a consumer that’s using a credit card to buy something at the point of sale, we’re there. If they’re paying a bill, and they’re mailing a payment in or otherwise receiving making a payment, we have a chance to make a profit there.

Even in our check business, it’s a function of the economy moving. And when the economy moves, our money moves, we have a real play there. Similarly, when the when the customers are trying to find additional customers, we have a play there as well. So I don’t know that we have particularly new insight that people haven’t seen as well in the headlines today. We track it very closely.

And we, we, you know, express concern about a bit of concern about consumer, the everyday consumer, but I don’t think we have any new news that we haven’t shared before.

Unidentified speaker: Okay. And then one of the questions came in regarding free cash flow generation, in terms of the the hundred and 60, hundred and $80,000,000 of free cash flow that you’re pointing toward. Do you think that there’s an opportunity for that trajectory to continue beyond 2026, or at some point does that sort of level up, if you think, in in as far as free cash flow generation in the future?

Unidentified speaker: No. We do. I mean, expanding free cash flow conversion remains a top priority of ours, so we’re we’re on our way. We delivered a hundred million last year. The guidance this year is 120 to 140, so we’re making significant progress towards that 160 to 180.

But, obviously, I would expect we can continue to make progress. The restructuring will be behind us. The amount of cash flow out the back door going to restructuring related initiatives should should effectively go to zero, if not an extremely immaterial amount. We can continue to pay down debt, which will bring down our interests, our debt service costs. At some point, we’ll be able to level off the capital investment to something more in the 80 to 90 range.

So there’s levers there, and we’re gonna continue to work to optimize working capital. So, you know, my long term strategy would be to get free cash flow conversion back north of 50%, which gives us a lot of room to drive this number past the $1.60 1 day one eighty well up towards 200 or beyond over the next horizon. So I think it’s an area that delivers a lot of upside to our valuation and our ability to rapidly bring down debt and give ourselves room to grow.

Unidentified speaker: Okay. And then in the, as part of the the presentation included in the information, on your views of the growth, opportunities and growth rates within the second segments. And maybe you could talk a little bit about some of the contributions there, maybe from, maybe how you see pricing as potentially being part of that equation or operating leverage as well for particularly within merchant services and B2B payments and data.

Barry McCarthy, Deluxe: So pricing is absolutely part of our formula. And because the quality of the services that we have and that we deliver, we have the ability to regularly put forward responsible pricing actions. In the merchant business in particular, we serve a handful, we serve multiple different market segments, but we have particular specialization in four or so that, we, what we offer is a very differentiated service along with better customer service that allows us to win. And we’re particularly focused in the markets around state and local government, not for profits. Specialty retail are areas that are really great places for us to compete and win.

It’s also great because it gives us opportunity across the spectrum to earn revenue and grow our business. Similarly, in our B2B business, we have similar capability to grow revenue there by not only delivering new products to market, like our product we call Receivables three sixty plus that integrates all of the things that a treasurer would need to do to manage their receivables all in a great user experience on their desktop, along with the payment processing in the back end around lockbox, where we have the ability to price for that service as well.

Unidentified speaker: Okay. Great. And then, let’s see. There’s one question, I guess, and this is pretty commonplace, but, regarding government exposure, maybe you could spend a little bit of time on, federal I guess, I’m I’m assuming there’s some federal government exposure on, B2B or the check segment standpoint and maybe your views on, what exposure you may have there to federal spend and how those may or may not impact that.

Barry McCarthy, Deluxe: So we we have pretty limited exposure at the federal level. Our payments businesses are primarily focused at state and local level. And so we don’t we don’t expect that DOGE directly is going to have impact for us. But if those did have the outcome of moving more responsibility towards the states, that could end up being a positive for us. If the states collect more in taxes or have to receive more payments to help run the states, if, for example, there were less federal support.

But it’s way premature to be able to understand what would really happen there. But I think for the folks listening, we don’t have much federal exposure so that we that’s not going to be a particular direct challenge to us. Right.

Unidentified speaker: And then just wondering if you could talk a little bit about, the industry verticals of your of your customers and and sort of how you’re seeing their activity, maybe how they finished last year, if there were any particular industry verticals that you think stood out as far as, you know, activity levels or or, maybe sort of growth driven initiatives, if you will?

Barry McCarthy, Deluxe: We continue to have a great foothold and strength in financial institutions. And by the way, I should have commented on that in the merchant business as well, which I did not. But we deliver our products and services through financial institutions. It’s a terrific channel of distribution for us. In our B2B business, they distribute our product often branded with the bank’s brand.

Also when, the merchant business, we have banks distributing our merchant product branded often for the bank. Of course, they distribute our check product, and they’re a big customer for our data driven marketing solutions. And the reason we have such a great position with financial institutions, of course, is the company’s legacy, but also we deliver differentiated service and we provide quality product, at a fair and competitive price. And that’s allowed us to gain market share across all of these businesses over the last couple of years with notable wins in each business we have with financial institutions. I’ll just highlight one since I didn’t talk about it in the merchant business, but we acquired First American.

It’s now Deluxe Merchant Services and a regional bank in Southern Pennsylvania over into the Mid Atlantic region called Fulton Bank selected us to take over management of their ongoing merchant portfolio, merchant business. It was the single largest sale in the Deluxe Merchant Service history, and we won that business in two ways. First of all, we had an existing relationship with Fulton Bank because of our check business. Second, we had a superior product to what their customer, their cart party partner was providing to them with much more flexibility. And third, we could prove that we can deliver much better customer service and support.

And if you’re a regional bank, delivering great service to your customer is a primary point of differentiation versus other big banks in your market, and we could deliver on that. So it helped us win the Fulton Bank deal, and we’ve had many other bank wins in merchant as a result of those relationships we’ve had for a long time, and we expect that to continue.

Unidentified speaker: Excellent. And so we’ve reached pretty much the end of our time together. I just wanted to turn the call back over to you for any closing remarks.

Barry McCarthy, Deluxe: Remarks. So here’s what I would wrap up with, where we started at the beginning. If you have not paid attention to our story in the recent past, you don’t I would encourage you to think again about our company because it’s a very different company, really different economics and different sources of revenue and growth trajectory than you’ve seen before. And we think the value algorithm for return for great returns for shareholders is very clear.

Unidentified speaker: And

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