Harte Hanks Inc

NASDAQ:HHS

Earnings Call Transcript 2021-Q2

[Operator]

Good day, everyone, and welcome to the Harte Hanks Second Quarter 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Maria [indiscernible]. Please go ahead.

[Unknown Attendee]

Thank you, Melinda, and good afternoon, everyone. Thank you for joining us. Hosting the call today are Brian Linscott, CEO of Harte Hanks; and Lauri Kearnes, CFO. Before I begin, I would like to tell everyone that the information provided during this call may contain forward-looking statements, such as statements about the company's strategy, adjustments to its cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, anticipated performance and outcomes, future effects of acquisitions, disposition, litigation and regulatory changes, economic forecasts for the markets they serve, expectations related to cost savings measures and the availability of tax refunds and other statements that are not historical facts.

Actual results may differ materially from those projected or implied in these statements because of the various risks and uncertainties including those described in the company's Form 10-K and 10-Q and other filings with the SEC and the cautionary statement in today's press release. The call may also reference non-GAAP financial measures. Please refer to the earnings release issued after the close for reconciliation of other related disclosures. The company's earnings release is available on the Investors section of its website at hartehanks.com.

With that said, I'd like to now turn the call over to Brian Linscott. Brian, the floor is yours.

[Brian Linscott, executive]

Thank you. I'm very pleased to share our quarterly results for the first time as CEO of Harte Hanks. The company continues its positive momentum, and I look forward to driving Harte Hanks to further improvement and growth. I want to start by expressing my sincere appreciation to our Harte Hanks employees, for their continued hard work on behalf of our clients through the challenges that have impacted our daily lives over the past 1.5 years. I'm proud of the resiliency of our employees and how they've demonstrated the ability to excel throughout this challenging time. We had a strong second quarter with year-over-year improvements across all operating segments of our business. I look forward to walking you through the progress we have made, and then Lauri will take you through the detailed financials.

As we have previously shared with you, we have divided our company into 3 operating segments that compete in large addressable markets. First, customer care, focused on delivering omnichannel customer care solutions that are tech-enabled and people-driven; fulfillment and logistics, which is focused on B2B product and literature fulfillment, B2C e-commerce and sampling and end-to-end logistics services. And third, our Marketing Services segment, which is focused on CRM services. Our reporting by segment is designed to provide transparency to the company's financials and visibility into the value and dynamics of each business.

Three indicators reflect our continued progress. First, we had another strong quarter with revenue growth and improved financial performance; second, continued identification of cost reductions that are driving margin improvements and will continue to do so; and third, improved execution and collaboration across each of our operating segments.

Now we'll go on to the results. We delivered another strong quarter with revenue growth and improved financial performance. Q2 revenue was $49.3 million versus $41.6 million for the quarter a year ago or an 18% increase in revenue. We delivered positive adjusted EBITDA of $4.4 million. Q2 is the fifth quarter in a row with positive adjusted EBITDA. And lastly, EBITDA for the quarter was a positive $2.1 million, which is an improvement of $6.9 million over the prior year. While we continue to benefit from COVID-related project revenue, we believe that $40 million or more of quarterly revenues is the baseline from which to base our cost structure going forward. Further, we believe we will be operating free cash flow positive for the year, and that the operating cost reductions implemented this year will flow through to deliver meaningful EBITDA improvement in 2022.

Number two, cost reductions are expected to drive further durable margin improvement. I'm pleased to see that our second quarter operating expenses were up only a few hundred thousand dollars, while revenues were up nearly $8 million during the same period last year. We have been diligently managing our costs, and we continue to focus on margin improvement and cost reduction initiatives. We are confident that this continued focus will deliver millions of dollars in EBITDA improvement in 2022. As previously detailed, these cost reduction initiatives are focused in 3 areas: number one, our real estate footprint; number two, declines in nonrecurring restructuring charges; and three, labor savings from actions taken in 2021. In addition, we began implementing a new enterprise resource planning system, or ERP. The implementation should be completed by the end of next year, and we expect to realize associated cost savings along the way and maximize those savings in 2023.

And number three, finally, execution is improving in each of our operating segments. Customer care revenue increased by $4 million from the previous year and year-over-year EBITDA improved to $3.4 million from $2.1 million in the prior year quarter. We continued to experience strong revenue tailwinds from the COVID-related project work, which we do expect to temper as 2021 progresses. New business wins for the quarter included a major regional sports network for stream and support and growth within 2 media entertainment organizations.

Our next business segment, Fulfillment and Logistics revenue increased approximately $2.5 million compared to the prior year and EBITDA. And EBITDA improved to $1.7 million from negative $1 million as the prior year. With the consolidation of our fulfillment operations into the Kansas City facility complete, we anticipate continued margin improvement in 2021. The additional operational capacity of Kansas City will enable growth opportunities that were not feasible with our prior footprint. Across all of our fulfillment and logistics locations, we are focused on facility, profitability and driving further efficiencies through the implementation of a cloud-based order and warehouse management system. Fulfillment and Logistics new business wins for the quarter include product sampling campaigns for a Fortune 500 CPG company and fulfillment of branded product and apparel for a leading U.S. tech company.

The Marketing Services segment, revenue increased by $1.2 million compared to the prior year and EBITDA improved to $1.7 million compared to $1.2 million in the prior year quarter. As mentioned before, we continue to focus on creating deeper relationships with existing clients and attracting new clients. We've made significant progress building capabilities, needed to deliver integrated CRM solutions, a large and growing market. New business wins for the quarter include a major packaging goods company, a leading North American auto parts retailer and a National Sports Association.

In conclusion, we posted a very strong quarter that reflects momentum in the business. Top line and new business revenue are all performing well, and we have rightsized our segments, and we have a seasoned leadership team to drive those businesses forward. We remain optimistic in our ability to continue driving increased performance and profitability.

With that, I'll turn it over to Lauri.

[Laurilee Kearnes, executive]

Thank you, Brian. We achieved our second quarter in a row of year-over-year revenue growth, that's the first since 2014. The June quarter was our fifth quarter in a row of positive adjusted EBITDA at $4.4 million. We continue to be encouraged by new business wins and growth in areas where we have invested including our pharmaceutical and consumer packaged goods vertical, despite uncertainty associated with the effects of the ongoing pandemic. We continue to focus on streamlining and optimizing the business to meet the needs of the market today, and we are encouraged by our results.

I'd now like to walk through the results in more detail. Second quarter revenue was $49.3 million. That's up $5.5 million sequentially from the first quarter and up $7.7 million or over 18% from the $41.6 million in the same period last year. Revenue grew across each of our business segments in the quarter, led by customer care. Our customer care segment was up $4 million year-over-year or 26% as a result of several large projects that we expect to wind down over the course of the year.

Fulfillment and Logistics services was up $2.5 million or 18.3% and Marketing Services was up $1.2 million or 9.6%. We are pleased with the positive momentum we have achieved and have rightsized our cost structure to meet our target goals for the full year 2021. EBITDA for our Fulfillment & Logistics Services segment increased $2.7 million. We completed our facility consolidation in Q2 of this year, resulting in more efficient operations. As a result, we expect to see continued improvement in EBITDA for this segment. Marketing Services EBITDA grew $526,000, an improvement over past quarters of declining EBITDA. While we experienced softness in client marketing spend at the beginning of the pandemic, we are beginning to see improvements and are encouraged by new business wins and increases in client spend.

Our operating expenses for the first quarter were $47.8 million, up from $47.5 million in the year ago quarter. We reduced expenses in advertising, selling, general and administrative costs as well as in restructuring costs. Operating income was $1.4 million. This is a major improvement from the $5.9 million operating loss in the year ago quarter. This improvement is attributed primarily to our sustained aggressive cost efficiency efforts and also to revenue growth. We posted net income of $10.6 million or $1.27 per diluted and $1.36 per basic share in the second quarter. Net income in the quarter included $10 million extinguishment of debt related to forgiveness of our PPP loans. As noted, second quarter adjusted EBITDA was $4.4 million compared to $480,000 in the same period last year. This is our fifth quarter in a row of positive adjusted EBITDA.

Now turning to our balance sheet. As of June 30, 2021, we had cash and cash equivalents of $19.3 million. This compares to a cash balance of $29.4 million as of the period ended December 31, 2020. As of June 30, 2021, we have $13.1 million in long-term debt and no short-term debt. This is a reduction of $14 million compared to the prior quarter, and we are pleased with this improvement in the balance sheet.

With that, I will turn it back over to the operator to take your questions.

[Operator]

[Operator Instructions]

And we'll take our question from Michael Kupinski of Noble Capital Markets.

[Michael Kupinski, analyst]

First of all, congratulations on a great quarter. I know there's been a lot of heavy lifting over the past year even longer, but it looks like your fruits of our labors are certainly coming through in that quarter. A couple of questions. First of all, I know that there was a couple of extraordinary things that are contributing to the growth in the customer care area in terms of revenues. You mentioned the COVID impact of a client there. Can you kind of give us a sense of that, whether or not, that's continuing on into the third quarter? And if you can kind of give us a sense, excluding that particular large client if customer care would actually be showing growth like some of your other divisions are?

[Brian Linscott, executive]

Yes. Thank you, Michael. This is Brian. Nice to meet you over the phone here. As far as customer care, we do have, as I think you've noted, we kind of reiterated multiple sequential quarters that we've got COVID project-related revenue. That revenue is going to continue into the third quarter, but it's going to start stepping down. And I think we're cautiously optimistic that we have opportunities to kind of expand and continue. However, year-over-year, I think customer care will be challenged to have experienced kind of continued revenue growth.

[Michael Kupinski, analyst]

And can you give us a sense on what -- like, we're into Q3 now? And can you kind of give us a sense on how the marketing services segment is performing at this point?

[Brian Linscott, executive]

Yes. So Marketing Services, we had some leadership change in the early part of the year, and they've spent a real good job getting a handle around all our customer opportunities as well as our existing -- servicing our existing clients in a profitable way. There is some kind of increased momentum that we're seeing and experiencing with the spending on some marketing dollars. So again, kind of cautiously optimistic that I think we're going to continue to see some continued positive momentum in Marketing Services. That said, we've obviously made some reorganization efforts throughout the beginning part of this year that we think on the cost side will be reflective in the future quarters.

[Michael Kupinski, analyst]

And then on your Fulfillment and Logistics side, can you kind of give us just a sense of the momentum that you're seeing there? And then also, if you can talk a little bit about whether or not you will have extra expenses from the consolidation of your Kansas City facility in Q3? Or is that largely behind us now in Q2?

[Brian Linscott, executive]

So yes, I'll take the first question on the consolidation. So the second quarter should be the lion's share of the consolidation efforts. And so I think what we should be experiencing in Q3 and beyond is just optimization of that facility. So I don't anticipate any material charges going forward as it relates to Kansas City. Lauri, can chime in if there's anything that I'm missing off the top of my head.

[Laurilee Kearnes, executive]

No.

[Brian Linscott, executive]

But as far as the momentum within -- okay, good. As far as the momentum and Fulfillment and Logistics, I think there -- we're in a different position now where we're actually comfortably handling both our Kansas City location and our East Bridgewater location as well as the logistics business out of our Deerfield Beach location. And we do have capacity for growth. We're investing in additional racking to make sure that we can accommodate additional storage as well as higher velocity fulfillment opportunities. And so I think we still have some nice room to grow there, and I do see the momentum is positive and should continue.

[Michael Kupinski, analyst]

And in terms of the -- you mentioned that you have some real estate prospects of selling some real estate. Do you have any thoughts in terms of what real estate value might be in terms of the potential sale of real estate?

[Laurilee Kearnes, executive]

So yes, Michael, let me clarify that -- yes, it's not a sale of real estate. We have leases. We don't own any real estate. So we're looking to exit. We've exited multiple leases, and we're looking to exit further leases that will provide some operating expense reductions for us in the next year.

[Michael Kupinski, analyst]

Got you. And then I guess in terms of capital allocation at this point, I know that you have reduced contribution requirements for your pension obligation. And it looks like now you're going to be generating some nice free cash flow. I would assume it's going to be towards debt reduction, but can you kind of give us maybe your benchmarks and what your thoughts are in terms of allocation of capital, capital expenditures or capital spending going forward?

[Laurilee Kearnes, executive]

Sure. I mean I think we will see some increase in capital spending over the next few quarters as we complete this implementation of the ERP system. So that will drive some. But as we've talked about before, we've kind of worked on this asset-light strategy to eliminate some of that additional spend that we would normally do on CapEx related to some of our facilities and production equipment. Brian mentioned some additional racking in Kansas City, so we'll have some capital spend there. But it will certainly be reduced from prior years, but we will have a bit of an increase over the next few quarters.

[Michael Kupinski, analyst]

Do you guys have any target debt leverage or target debt, like, maybe by the end of 2022 or 2023? How do you see that?

[Brian Linscott, executive]

So I don't think we're going to share that at this point. But Lauri, if there's any other kind of input or insight you'd like to provide, please do.

[Laurilee Kearnes, executive]

No. I mean I think that we have a line of credit that we feel is sufficient to meet our operating needs and we'll obviously continue to evaluate that as we move forward.

[Operator]

And there are no further questions at this time. Mr. Linscott, we'll turn the conference back over to you for any additional or closing remarks.

[Brian Linscott, executive]

Thank you, and I appreciate everyone's time this afternoon, and I look forward to connecting with you after next quarter. Thanks again.

[Operator]

And that does conclude today's conference. We do thank you for your participation. Have a wonderful day.