TD Cowen, delighted to have the Deluxe Corporation team with me today, specifically Barry McCarthy and Chip Zint. For those that don't know, Barry McCarthy is the President and CEO. He joined Deluxe in 2018 after a disting uished career at First Data and Wells Fargo in particular, others in there as well. Chip, how long have you been at the company now?
Almost four years.
2020, right? You joined? Yeah. And Chip, you were at NCR for 14 years. You became the CFO at Deluxe just two years ago. B ut we're delighted to have you both. And I thought maybe, Barry, if you wanted to set the stage with an overview and really specifically focus on maybe how you've seen how you've transformed the company or how the company has evolved from what you found five years ago. I mean, it's very different today.
I think that's the place to start, that the company is fundamentally a different company than most people think of. The company is 109 years old, started as a check printer, but we have become a payments and data company. And so over the last handful of years, we've really focused on getting the portfolio optimized to help us in that transformation. In the previous decade or so before I got to the company, the company had made a very large set of acquisitions, very broad in scope, everything from web hosting to custom retail packaging with the notion of trying to sell more things, a supermarket to small businesses or to financial institutions. And we've fundamentally sold big chunks of the business to get us focused on payments and data.
So what the company is today is a print business, which contains the legacy business around check and forms and promotional products. The other part of the business, the other half of the business is around payments and data, where we've got a great data-driven marketing business, we have a B2B payments business, and we have a merchant acquiring business. We're very proud of the progress. The company is in its fourth consecutive year of organic revenue growth, something that hadn't happened here in a long, long time, at least a decade and probably more. We have profit growing faster than revenue. The trajectory for the company over the long term, even intermediate term, to be a payments and data company is very, very clear.
What about the strategy overview at a high level as you talk about the different business segments that you have? How would you describe that to investors?
So I'll start with the fact that the company is in the extraordinary position of having terrific cash flow from the legacy print businesses. And we're investing part of that to grow our payments and data business. But it's not just the cash flow from the print businesses. The print businesses also bring along with them 4,000 bank partners, 4 million small business customers, and a trusted reputation and brand in the marketplace that truly is unparalleled.
Newsweek did a blind survey of 25 ,000 households and identified that Deluxe was one of the most trusted brands in the financial services industry, much higher than big brands that we all know we carry around in our wallets and we use every day. And our brand outscored and outperformed them on trust. And so we're using that trust to help us grow the payments and data business. And it's working.
Then you recently reclassified your reporting segments. How does that improve the situation for stakeholders? Were there operational changes, or was that more strictly a reporting classification change?
So why don't I start with the first half of that, and then I'll let you talk about some of the numbers behind this story. But we wanted to be abundantly clear with investors what the company is and where the company is going. And we wanted to make it very clear that we have a set of print assets, proud of those print assets.
They're about cash generation. But we also have three terrific businesses and great growth markets that we need to provide more transparency on. So by saying, here we have print businesses, and we put two former businesses together, which were the promo business and the check business and the print, to make it clear that we're in the what the print business is about, but also provide a lot more transparency on data-driven marketing, merchant services, and B2B. And it did allow us to unlock some operating synergy, particularly in the print businesses.
That's right. Yeah, the print side, by bringing them together, we're able to run the business a little bit more efficiently. That side of the business is all about maximizing cash flows. The more efficient you can run it, the better it will be. Consolidating that as one segment has really helped us in that space.
Then maybe just to dig in a little bit deeper on the different segments, print versus the growth businesses, would we talk a little bit about how you see the TAM, how you see the addressable market growing, we're contracting, and how Deluxe is positioned to win its fair share or more than its fair share of the business?
Sure. So I'll start and you jump in as well. So in the three businesses where we have great growth prospects, data-driven marketing, merchant services, and B2B, we're unbelievably well positioned in all three. So let me start with the merchant services business. This is a business we acquired in 2021. When we acquired the business, it was a low single-digit revenue grower. They did not have much of a footprint in the higher growth segments around e-commerce. They didn't have great penetration in banks with bank partnerships. And in the three years since we've owned it, we have fundamentally changed that trajectory in that business. We've taken from a low single-digit grower, we reported in Q1, 8%+ revenue growth. And we've done that consistently over the time we've had, of course, on periods higher than others, but consistently changed the trajectory of that business.
And we did it by fulfilling the promise of what we thought we had at Deluxe, which was incredible distribution, incredible brand, and incredible reach. We've more than tripled the number of bank partnerships we would close in any individual quarter. We just closed and we announced and boarded in November of last year the largest single relationship that the acquired company had ever achieved with a midsize bank. And it's running through our business today. And the numbers look terrific. So we're very proud of the merchant business, very strong in a couple of key verticals where we're particularly well positioned: auto repair, not-for-profit, government. We love those sectors because they're sticky. You have a fair price, and the customers stay for a long period of time. In our B2B business, we have a really remarkable opportunity, and our footprint is so large in B2B payments.
So in B2B, we do two fundamental things. One part is we help businesses accept payments through lockbox and other means. The other side of the business is software to help businesses manage their receivables. In a lockbox business, most major banks run our software, or we run it on their behalf, as do most major billers, which means we have thousands of customers using one of our products or services. We're processing on an order of magnitude about $3 trillion a year in volume.
Trillion with a T.
Trillion with a T, roughly 15% of the U.S. GDP. Most people think about Deluxe as just a check printer. But obviously, with a large merchant business and a material B2B business, hopefully people start to have a different opinion. But so we've got this nice lockbox business, which is a business that gets us reach and scope and scale. And we have a complementary software business that allows businesses to manage their receivables in an integrated way, integrated receivables. And the newest platform product that we launched is called RC360+ , or Receivables360+ , which allows a business to look on a 360 basis of their receivables. So it shows you what's happening in your lockbox, what's happening in remote deposit capture, what's happening in disputes, what's happening in settlements.
And it pulls data from multiple sources and provides it together in an integrated view for a business. And the reason we're so optimistic about our future here is, of all the things that a business would want to look at, we operate eight of the core modules that many businesses use. And our new tool allows you to sign on with a single sign-on to have access to all eight. So if you're using all eight, great for you. If you're not, you'll have this ability to log into the platform. And it'll be easy to cross-sell the other modules that are already embedded in the platform to give us an opportunity for growth going forward. And the last business here is the data-driven marketing business. And very quietly, we have built what we're pretty sure is the largest data lake in the industry.
We have more information about consumers and small businesses by aggregating over 100 different data sources, along with our own proprietary data. So we know more about you as an individual or as a small to midsize business really than anyone in the industry. We put on top of that very sophisticated AI tools, and we use that bundle to help businesses find their next customer. Banks hire us to find low-cost deposits or new credit card holders or to sell lines or loans or mortgages or auto loans.
Telcos help us hire to help them find new wireless customers. Home security companies help us ask us to help them find new customers. Property and casualty insurers hire us to do the same. And we do it at massive scale and better really than anyone. And that's why that business is growing. We just had an extraordinary quarter in Q1. The business grew almost 40%. We feel very confident that is a solid mid-single or higher grower over the long term.
Super helpful. Just a couple of unless you want to.
Do you want to add anything else?
Well, I was going to address the TAMs specifically. So all three are in very nice growing target markets. And so to break it down, merchant, we size our piece of the pie at around $25 billion. And again, we play in the big, meaty mid-markets. So we aren't up at the very top end going after high volume, low margin. We're not at the lower level where the micro merchants are. We're in the middle where real kind of brick and mortar small businesses exist. And so we view that as a $25 billion target market for us. And we've signaled over a three-year period that's going to grow high single digits. And we expect margin expansion to the tune of 200-300 basis points in profitability as we grow over that three-year period.
On the B2B side, even larger, we size it north of $30 billion for the market size. Now, because of the legacy lockbox and the transition we're in, that's more of a mid-single digit growth trajectory for us, somewhere in the 3%-7% over the three-year period. But we see significant margin expansion there. We're in mor e of the high teens EBITDA margins right now. And we see that growing to more 25%, mid-20%, so multiple hundred basis points of expansion capability there. And then on the data side, still large, $18 billion target market, growing again, high single digits. And we think margins will be very stable there in the low 20%. So all three growing very large. And we're positioned really well with the core competencies we bring that Barry covered.
Excellent. And so just a couple of follow-ups, mostly for you, but then I think some for you too, Chip. But on the B2B side, this 15% of GDP, that's a huge number. How sticky is that? How did the company amass such a big position? How do you maintain that big position?
So the company acquired a series of assets over time. And we really spent a lot of time in the last few years putting those assets together in a meaningful way. And the way we are winning there is that our software is superior. We can show it. That's why the market is adopting it at the rate that it is. Second, our service level is great. And the third is that we have a strong balance sheet.
The other players in the space are not able to do all three of those things. We are able to grow market share pretty significantly and post significant wins that is helping us maintain and grow that business.
And then I have another question for you on the data side, but maybe just to stick first with B2B. You mentioned the big margin expansion opportunity. Very interesting. What are the drivers of that?
It's a number of things. So I'd say on the legacy lockbox side, and it goes to what Barry just said, it hasn't come without its cost. But we've been smartly investing in our business. And specifically on the lockbox, it's been in stabilizing the business to allow us to run it more efficiently. So think about new facilities, modern platforms, really putting a nice foundation on that business, which is allow us to perform better, take on more market share. And it's allowing us to expand profitability in that space.
On the other side of the business, investing in these new SaaS-based solutions, as we amass the volume and we get the recurring revenue stream growing, that's going to naturally it's got a very relatively fixed cost base, which is going to allow us to gain scale as revenue grows. So those two components of that business is what gives me confidence that B2B is going to expand its margins.
Great. And then on the data side, you mentioned, Barry, the AI tools. And I'm wondering, to what extent are those internally owned and controlled and/or proprietary? Or are you outsourcing that? Is there anything?
No, it's proprietary. And so part of the reason we win is that those tools, like any Generative AI solution, they get better and smarter every time you use them. And so it's an enormous competitive advantage that we're already running so many programs. So the programs get better and better and better. And that's why when we go head-to-head, whether with a bank or another business that runs their own program and our program, we're getting better on hundreds or thousands of programs every year. And any individual institution might be running a few dozen. So the gap between our performance and what other people can deliver is expanding over time. And it shows up when we do head-to-head competition.
You mentioned a recent customer win or recent contract win. But I'm wondering if we could talk a little bit more about those. I feel like over the past year, you've had several. Can you maybe sort of give us a synopsis of some of the more important wins?
Sure. Let me start, though, first by talking about how we go to market, which is a really fundamental change for how the company has gone to market. Previously, as I'd mentioned earlier, the company had made dozens of acquisitions, more than 50 in the previous decade. They were all run as independent silos. There were no integrations. There was no real attempt to bring the power of the company together to help a customer solve problems. We have a program we call One Deluxe. It's not even a program. It's a philosophy, which is that we always try to bring the best of the entire company to help a customer succeed. That means that the organization is broadly trained about all the different things that we do. Not everyone is expert on everything. They don't have to be.
But they have to understand all the different things we do and how we can help a business succeed. And that has helped us. And I'll give you some examples. So in the merchant business, recall, we acquired this June 1st of 2021. So in just two days, it'll be the third anniversary. Yeah, First American, right? And we immediately got the organization to understand the capabilities of that business and take it into the banking channel. And we've said very publicly, we've more than tripled the rate of sale of new banks into using the First American, now Deluxe Merchant Services, versus what they were able to do alone. And that happened not because the product is any different. It happened because they have the Deluxe brand, the One Deluxe philosophy. They have the trusted relationship that already exists.
And that's helped First American, or now Deluxe Merchant Services, grow. It's also helped them move up market. So previously, they would have served banks at the lower end of the market, community banks. And now they have moved to the middle market. And that happened, again, because of the scale and scope of what Deluxe can bring to help the business succeed. But the same is true in our data business. Our data business is, as we talked very publicly, that PNC is a customer of the data business. And PNC became the largest single sale in the company's 109-year history, not because we sold them a lot more data. We did sell them more data to more divisions of the bank. We also expanded that to use some of our print capabilities to actually deliver a marketing offer to a customer.
So it's an example of how some of the parts are more valuable than the parts individually, because data helped sell some print product. Check is enormously helpful in opening doors for merchant. Merchant is helpful in opening doors for lockbox. And so the pieces really do complement each other. And we've pruned the portfolio, heavily pruned the portfolio, to something that's logical, makes sense, and the different businesses help each other.
That's a good segue into North Star. I guess, really, my first question is, just talk about sort of the back history that went into sort of formulating that plan, the philosophy, if you will, behind it, and really what your goals are. Then we can talk into get into more of the specifics of what you've accomplished and what's still to come.
I would say it's been evolving over a period of a few years. So it started with First American, making this strategic acquisition, levering the balance sheet up to 4.3x, and starting this journey of having more scale of the growth businesses to rival the print businesses and how we drive this sustainable organic growth trajectory, which is harder to do than said, right? And so it started there. I would say the next phase was finishing our swing on all of our technology upgrades. So we implemented an ERP. We implemented all six major technology platforms. So we had to get the foundation of the company right. So once we got through that, we were a year and a half into the First American acquisition. The time was ripe to say, in order to continue the strategy, we have to further accelerate our deleveraging, improve the balance sheet.
We've got to leverage the modern infrastructure we now have to run the company in the most efficient way possible. How do we put a coordinated strategy together to go do all of those things simultaneously to set the company up for the next strategic set of options? And so I would say it was kind of all those things coming together over a per iod of a few years that drove us to the point of, it's time to run an integrated program.
It's time to put very firm goals out there that we, as an organization, rally behind and we go after to drive. And so that's where North Star morphed out of. North Star has very clear goals to add $100 million of run rate annual free cash flows by 2026, $80 million of annual EBITDA by 2026, and to help us get our leverage back near or below 3x.
I guess the point I would like to make is that it wasn't a reaction to a negative set of consequences. I know sometimes companies find themselves in a situation where they have no choice but to announce a major restructuring. This feels like it was more the culmination of you getting your feet under you in terms of the transformation of the business.
I totally think that that's right. We have been on this transformation journey. The company was already growing organically. Profit was growing and expanding organically. But we want to step on the accelerator. This is how we step on the accelerator and make the company go faster, which means we have to work on all the different aspects of the company and how they work together. It's not just about cost. It wasn't just about people. We've reorganized. There are 12 distinct work streams th at we are chasing. Each of them are in flight. We've already, I think, completed about two-thirds of the work to be done. That will start showing benefits over the coming quarters. As we roll through 2025, you'll be able to see it all. It's absolutely an accelerant to the transformation of the company.
So you mentioned two-thirds sort of have been done, one-third still to come. You also mentioned that it's revenue as well as cost. But can you help kind of quantify, I mean, just even qualitatively, I suppose, how you'd sort of break the $80 million of EBITDA?
$80 million of EBITDA on $100 million.
How you would break that out between incremental revenue, strategic revenue growth, cost cutting, et cetera?
It's really about the total program value, which is $130 million. So of the $130 million, two-thirds of it is cost-focused, with a third of it focused on revenue. Think pricing, sales effectiveness, marketing effectiveness. The reason we're targeting the full $130 million is we still h ave pieces of our business with secular decline, the print business. We know we have to drive $130 million of gross EBITDA improvement in order to net the $80 million that we're targeting by 2026.
Although I don't think that your legacy businesses have shed anything like that over the past three years. So I guess you're building in a significant level of conservatism into that $50 million EBITDA? Or has some of that been delayed from the past few years? I mean, I know the checks business, for example, has held up much, much better than we would have expected, certainly.
It has. But it's because we're very thoughtful and methodical in how we go attack the cost improvements, even despite it. So it's all net. We always are dealing with the secular declines. We always have to go find efficiencies and cost improvements or pricing actions, whatever it will take, to minimize the amount of impact from the secular decline. So now that we have North Star, the way we talk about the program can appear that way. But we've been doing this for a long time. It's in our DNA to continue to take cost out, get more efficient, and find ways to offset those secular declines.
And I noticed that there's a delta between the free cash flow savings and the EBITDA savings. So some of that is going to be, where is that coming from?
So some of it's coming from lower restructuring charges. We've been on a multi-year journey, as Barry laid out. So we're nearing the end of this heavy spend of restructuring. So as that winds down, that'll be an added to free cash flow. We also expect, as we pay down debt, we'll have less interest costs annually. And we think we can pull back a little bit on our CapEx as well. So we've got a couple of levers that, even conservatively thinking about increases in taxes or other changes, i.e., working capital, that we conservatively feel like the $100 million is a good figure to put out there with North Star.
I think you touched on this. Maybe just to repeat, the debt reduction versus increased EBITDA portion, as it relates to how you're improving your leverage statistics, how would you sort of talk about that?
Well, it's both. I mean, we have three clear capital allocation priorities. The first is pay down debt. We've publicly stated we want to get our leverage back below 3x. We've been on a journey ever since 4.3x, this time three years ago. And so we are prioritizing debt pay down as a top capital allocation priority. We're also investing internally in our growth of our payments and data businesses while maintaining our dividend and returning value to shareholders through that. So we have three key things we're doing. So as EBITDA grows, that helps, right? You add the overall EBITDA. That helps. But obviously, continuing to pay down debt simultaneously is another part of it. So both things are happening simultaneously through this journey.
How does the debt look with respect to things like the term structure, interest rates, fixed versus floating? Are you happy with how it looks right now? Are there obvious changes that you want to make over the next 12-24 months?
I think we feel really good about where we are. So, like many companies, slower to fix it than we would have wanted. But today, we sit at roughly 75% fixed rate. Our weighted average interest cost is right around 7%. And we have no near-term maturity. So the next major milestone will be Q2 of 2026, when our bank pro-rata deal is due. And so we don't have a sense of urgency to do anything now. But you can start to think we're getting ahead of it and thinking through what our options would be. And obviously, we intend to refinance that debt before it becomes current. So we've got a couple of quarters to think through that. And then we have bonds out in 2029 that are at 8%, which is a nice coupon in today's day. And so I think we feel good about where we are.
We just recently launched an AR securitization worth up to $80 million. We drew down $65 million of it in the first quarter. That allowed us to get ahead of the amortization payments on the Term Loan A. We have no remaining amortization payments here this year. It pushes out some maturities to 2027 and gives us rate-advantaged interest borrowing costs. I think we feel really good about our capital structure, our debt stack, and the optionality we have to kind of manage the refinancing in our timeline.
One of the questions that I get asked all the time by investors is, given that debt repayment, deleveraging is a focus for you, is there an opportunity to strategically peel off one or more assets? And I'm not talking about what you've done to date, which have been sort of around the edges because they didn't fit into the portfolio. Are there opportunities to perhaps sell something larger and make a big dent in the debt? And would you consider that?
So obviously, we consider everything all the time that's going to maximize shareholder value. We think we have the portfolio today at a place that makes sense, and it makes sense on multiple fronts, where I mentioned earlier, where each of the parts help each other succeed. And at least in the intermediate horizon, we think there's great value, for example, of having the check business provide leads and relationship and contracts for the merchant business, and similarly throughout the different businesses. I don't think we foresee lopping off any one of the four legs of the stool anytime soon.
Yeah. I mean, is it fair to say the checks business is very valuable and perhaps more valuable to Deluxe than it would be to anyone else?
Well, it's very clearly helping us grow the payments business. The credibility, the trust, the relationships, the contracts we have with, and the partnerships we have with institutions is very, very helpful to us. It's worth it, for your point, if that's worth more than just the cash flow. The cash flow is incredibly powerful, but really powerful. It's helping us build these other businesses. But it's bringing more to us than just cash flow.
Sure. So how safe, or how do you think about the dividend in the context of your capital allocation decisions and so forth?
We think it's a very important aspect of the shareholder returns we deliver. And to us, it's about having confidence in our projections of our cash flows and knowing that the overall amount of the dividend annually isn't something that gives us concern. So can we continue to pay down debt, achieve our capital allocation priorities while maintaining the dividend? And we believe we can. So for us, it's something we discuss with the board every quarter. But it's an important aspect of shareholder return. And it's an aspect of capital allocation we're comfortable with.
OK. Just a couple more questions for me, if I can. The first, I guess, is, Barry, and I know this is sort of a rote question, but what keeps you awake at night? What are you worried about?
Of course, everyone always pays attention to macro conditions that you have no control over. So I don't spend a lot of time worrying about that because I can't change that outcome. What we spend our effort and focus on is really, how do we satisfy customers better so they'll buy more from us? So how do we build additional product and service? How do we get it to market faster in a better way? And how do we cross-sell more to the existing customers we have? And that's really where we spend our energy and effort. Really proud of the progress. And each one of those three growth businesses have specific things they're working on to expand their market share and to grow their revenue and profitability. And that's where we spend the significant majority of our time.
OK. Then just on the checks business, the longevity and I mentioned this earlier, the longevity has been surprising to a lot of us, myself included. I'm just wondering if it's been a surprise to you. Or how would you think about, are there specific pieces of that business that perhaps you're more exposed to or less exposed to that are better or worse than when we just think of, gee, no one's going to be going to the grocery store and writing a check for their groceries anymore?
So I love the question because I think it's on everybody's mind about what is the future for checks. And we don't, in any way, deny that the checks are declining. They're going to decline for the long term. What is remarkable is that the trend line on check decline has not changed in a long, long, long time. Everyone thinks that right around the corner, there's some massive deceleration. It's just not happened. And it's not true. And the reason we don't think it's true is that the checks that were being used for consumers at the grocery store were replaced a long, long, long time ago by debit cards. And the checks that remain have very specific use cases that there aren't really any viable substitutes. B2B checks, in particular, are robust because you can't pay certain bills any other way than with a paper check.
That's why we're still shipping 100,000 or 150,000 packages of checks every day, every day. There are billions of checks being written with no real viable substitutes on the horizon. So we're not saying that it's a growth business because it's obviously not, even though we did grow in 2022. But we think we can manage that decline because we're well-positioned for business checks. And we've invested in our infrastructure to make the cost of managing that business much more variable.
Thank you so much. Unfortunately, we're out of time. But I really appreciate you being here with us today. Thanks again.
Great conversations. Thank you.