Q1 2020 Earnings Call

Good day and welcome to the her her first quarter 2014 earnings conference call.

All participants will be in listen only mode.

So do you need assistance personally conference specialist or precedent Starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like turn the conference over to Rob said with <unk>. Please go ahead Sir.

Thank you operator, and good afternoon, everyone. Thank you for joining up.

On the call today are Andrew Bennett Executive Chairman and CEO part I love recurring 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 strategy.

Just minutes to its cost structure financial outlook capital resources competitive factors isn't as an industry expectations anticipated performance and outcomes future effects of acquisition disposition litigation regulatory changes economic forecast for the market they serve.

Expectations related to the cost savings measure the availability attach rates among others.

Historical back.

Actual results may differ materially from those projected are applied in these statements because of the various risks and uncertainties.

Putting those described in the company's form 10-K, and 10-Q and other filings with the I think they had in cautionary statement in today's press release.

The call May also reference non-GAAP financial measures. Please refer to the earnings release that was issued after the close for reconciliations and other related disclosure.

The company's earnings release is available on the Investor section of its website at <unk> Dot com.

With all that said I'd now like the call turn the call over to Andrew Bennett, Andrew the call is yours.

Thank you Rob and good afternoon before we get started I want to express my sincere hope that everyone on today's call is staying safe and healthy during these challenging times I also want to take a moment to thank the entire harte Hanks team for their professionalism, the resiliency and let's drive to serve and support our clients and each other the culture and commitment.

Embedded within our organization is one of them yeah.

Attracted me to the company the value that these attributes has been amplified by the response in addressing the people of the last couple of months and I couldn't be prouder, our teams from the Philippine packed in Europe in the U.S. have all done a herculean effort and our clients appreciate it and they're sharing that appreciation with us.

The health and safety ever employees, our customers our partners and our community has always been our top priority and this is important now more than ever we have transitioned to a fully work from home environment with the exception of our operation capability eliminated travel kind of following best practices guidelines paid by the World Health organization working.

They shouldn't the CDC federal and state officials were taking precautions and providing our employees up to date information to the internal corporate website.

As we operate through the pandemic acquiring teams and the resulting because that's reality, we're carefully evaluating expensive business functions to ensure that we're adding value to our customers and positioning harte hanks for sustainable profitability. However, the process of evaluating expenses and improving operational efficiency, it's something that we've been focused on for over a year.

And we're making strong progress on that although the pandemic create new urgency the process hasn't materially changed and we're focusing on ways to create higher more relevant value and streamlined harte Hanks.

Back in March when I hosted my first earnings call. It CEO I spoke about the priorities of this new leadership team following an incentive and thorough evaluation of our organization as part of that I outlined our three pillars strategy to return the company to profitability and to grow first optimize the business and the way we work backend.

Our current services with existing and new clients and third transformer business for the future I'd like to highlight the progress we've made across each of these areas during the first quarter.

First optimizing the organization as I mentioned on the last call. Despite efforts made to integrate our various businesses in the past Harte Hanks was still largely run as a diversified holding company with little connective tissue, we have quickly and completely changed is integrating our activities and reorienting our operations and our people we put the customer.

The center delivering unique solutions.

Which is at the center everything that we do this reflects a new and improved operating model for Harte Hanks, which has enabled us to offer valuable and differentiated solutions, our clients, making us more integral to their operations over the past six month I believe this model has been delivering extremely well in the last quarter, we continue to streamline the organizational structure.

We continue to work hard on engineering growth I'll cover. This later in my remarks as well in the last earnings call I've shared that we were exploring strategic options for our print business and then 2019 as you know we exited the direct mail operations in Wilkes Barre Fuller 10, and earlier this year, we exited our direct mail operation in Grand Prairie.

We have culminated our review and we have determined the best way to support our clients to exit the direct mail, it's exiting the direct mail operations effective June thirtyth and to enter a strategic partnership summit direct mail based in Dallas, Our partnership with some it will allow harte Hanks to continue to managed services for our customers well.

While reducing the high fixed cost to support in house printing operations with these expanded capabilities Harte Hanks will provide the full suite of marketing solutions within the direct mail space and more efficiently allocate resources to our marketing services fulfillment and contact center businesses, where we see opportunity to leverage compelling.

Traders to drive our growth.

To further drive efficiencies, we collapsed our remaining operationally oriented businesses fulfillment contact center and logistics under Brian Lynch God, Our Chief operating officer, and our marketing services business under Dann Adams, Our Chief Planning Officer. This will facilitate greater efficiency and collaboration across our business. In addition under.

Keith deadlock, our keep our chief growth officer, we've accelerated our sales and marketing efforts, we've moved from selling diving services to a product solution selling approach and are experiencing early signs of success, which I'll touch on more in depth. Later, we've also create a product development function and I'll talk about two new offerings, but we'll be launching this year.

Second I spoke about the important today and the focus of profitable growth.

With the new operating model and realign leadership, we're focusing our team towards driving significant and sustained profitable growth as we continue to focus on our core business. We're looking to both improved each business as well its identifying a bigger broader opportunities for our clients by creating integrated solutions with the exit of print.

Well, we're continuing to pursue our asset light strategy, reducing our physical footprint.

With regards to new business.

Our revised offer with regards to new business, our revised operating model and growth engineering continues to gain momentum and deliver a promising results. Our current weighted pipeline that $19 million and unweighted is 48 million to hit our plan for the year, we need to close 13 million of new business.

As of quarter, and we have secured 4.6 million in new business. These wins include a major financial services brand, leading high Tech company to Fortune 50 Pharma company, a biotech company and the National retailer, we believe our new business pipeline remains healthy and diverse and we continue to develop new product offerings, which were taken to market accrue.

Costs, both our existing portfolio and net new logos for increased grip. It's also important to note that many of our services are or will be in greater demand due to become a bit crisis I will talk about this later when I talked about our call center and fulfillment businesses.

We continue to make efforts to enhance our team onboard new customers and specifically focused on the categories that we've outlined before healthcare consumer DTC technology and financial services.

The third pillar of of our plan is transformation for growth.

Part of business transformation for Harte Hanks it to make our offerings more relevant and to better communicate the significant return on investment our offering can provide to current and prospective customers I'd like to spend some time here as I think it illustrates well our ability to build new revenue streams on top of our existing business as we develop new products.

Our team is focused on listening to the customer leveraging our expertise and our AP and AR and AP that both fixed and variable.

And looking to provide relevant product decline, especially useful in the Arab cobot and the last call I spoke about the initiation of these efforts.

Typically our ability to build sampling or an activation business built off of the asset base of our fulfillment operations and a marketing as a service business or an outsource marketing business built off our marketing services infrastructure. Both of these opportunities are stealing share from our focused on stealing share from large addressable mark.

Good and both will be implemented with zero incremental investment beyond limited time of existing staff, we've made strong progress with each and I'd like to expand on each of these opportunities as they're both proving to be relevant to their marketing services as a category is going as well as having heightened relevance for today.

First on our sampling or activation business as I mentioned on the last call. This has enabled by marrying our marketing services business and our fulfillment business.

As as our teams have been working on making this offer relevant and talking to our customers. We realize that we had a unique opportunity to create a new channel to reach consumers and customers. We believe that this offering is especially relevant during and in light of Kogut.

By marrying our world class scaled fulfillment and on demand printing capability with the full service marketing service offer we had the unique ability to leverage our core delivery from our fulfillment business the box to people in home where at work. So essentially we're broadening our core fulfillment business.

Delivering experiences in a box we've just launched this new offering for the last few weeks and we've already delivered to back to work employee programs for major two major pharma companies as well as the conference in a box marketing program that will extend through the year for a fortune 50 financial services company. The application for this is broad.

From supporting brand marketing efforts for brands looking to reach consumers through direct to consumer activation employee engagement programs virtual event conference support customers looking to reach markets at home or at work sales enablement and so on we believe this product tapped into many print trends such as.

Consumers wanting experiences brands meeting to deliver more value a trend toward DTC, especially among the consumer package goods category as well as the disruption happening in the area of virtual events.

At home and specifically in the era of cobot today.

This new offering will support loyalty in brand building sampling acquisition marketing customer engagement, enabling enablement employee engagement and much more and it's made possible by combining harte hanks highly differentiated and longstanding capabilities with data digital direct and fulfillment.

Thanks will will target two key segments first large enterprises directly with an agency led approach current similar to what we do today using existing relationships and agency marketing digital social direct mail as an example, and second we'll target b to B enterprises, meaning enterprises with 500.

<unk> to 2500 employees and revenue at a 50 million a $2 billion to $1 billion drew a new brand that will be launched this quarter will focus on how we solve core midsized b to b enterprise challenges as well employee experiences growth business acceleration transformation.

Through a unique boxed up solution ideal for working with mid sized workforce is focused on customer data is large and as well focused on profit pools. This new brand is under development and will be accompanied by a pilot launch campaign, including both digital and direct followed by a full launch and it always on digital and direct markets.

Effort.

The second offering I'd like to talk about is a marketing as a service business. This offer focuses on expanding the work we do for major B to B Tech players today, and creating an integrated offering to perform day to day marketing search marketing services support either on location, meaning on our location on client location.

Third remotely.

This word ranges from eight operations analytics and business intelligence marketing automation and other high time lower value functions. It's important to note that much of the in housing market today is being conducted the big consultancy firms as well as by low cost as we see an opportunity to stop is harte hanks in the middle.

Given our 200 plus the person data development center in gas, Romania. This opportunity. It's also relevant for what clients need today efficiency and cost savings, while also being very relevant for the new world given the fact that most client organizations. They are looking to streamline costs marketing as a service is an innovative.

Flexible outsourcing marketing operation solution that works at the highly integrated cost efficient extension of the clients marketing. It's a unique blend of the best of an agency and VPO approaches and skills, both areas, which we know well and currently operate in combining to operationalize control and deliver.

Our high performing data operations marketing technology and demand Gen. It solves the outsourcing dilemma faced by large and mid sized b to b and consumer focus enterprises and work equally well supplementing in house, they have marketing through in source resources or as an alternative to conventional outsourcing Epo or Asian people.

Ownership models with other hybrid resources.

This solution Leverages, our unique combination of resources geographic footprint technology and process is built over 20 years of data driven marketing sign livery and services and proven with longstanding marketing operational support for several of the world's largest technology financial and automotive Fran.

Engagement range in 10 to 200 stat, plus associated properties and platform.

Harte Hanks is targeting procurement.

It is targeting procurement for that service as well as as client marketers within the mix of large and mid sized enterprises across b to B Tac financial services distributors and consumer direct financial health care automotive online in retail Harte Hanks is also offering a marketing assessment and.

Blueprint to map out marketing and sales enablement to jumpstart.

Hopefully that gives you an update on our business strategy and on the progress that we're making regarding our first quarter performance. Our contact center had a strong start to the year and we expect that momentum to continue in future quarters, we're ramping up significantly for a new clients in the streaming speed and we've seen overall increased demand both from exists.

I think client and new clients coming in in inbound requests. We expect this trend to continue through the year, our marketing services had a slow start on several programs as our clients reevaluating their established budgets for the year. This works picked up towards the end of the quarter and we expect to me and we expect that will be maintained going forward.

Our fulfillment mail and logistics businesses have had some impact in the quarter due to cope with 19, Lori will touch on later when now we're now seeing order volume in those businesses improved. In addition, we're seeing strong initial demand for the new offerings that I've spoke up that's put them I believe that are focused on privatizing our offer to.

To make the to make harte hanks more valuable to our clients innovative innovating by creating relevant new products and solutions will both enhance our group growth and help to deliver our goal of delivering positive adjusted EBITDA in 2020, and being free cash flow positive by the second half of 2021 in.

Summary, like most businesses were facing near term challenges as a result of could 19 pandemic and client marketing spends have declined across the board in in the category. Although we expect to see a more pronounced impact in the second quarter as a result of customer delays in volatility in the macroeconomic environment, we believe new opportunities.

Wilbur will emerge as customers look to outsource certain marketing functions that we provide on a more cost efficient basis with near term uncertainty. We will continue to advance our efforts to align our expenses with our expected revenue levels, which was already a top priority of this management team we've strengthened our cash balances and we believe we have the necessary liquid.

D to execute our turnaround plan stimulus programs introduced in April to provide belief in response to cope with 19 will help us get through the difficult period, and combined with our long targeted or long targeted cost cutting and restructuring has a strain and strengthened our cash position and we believe.

Helped to transform the company to best compete going forward.

I'll now turn it over to Laurie to walk through the details of our financial performance.

Thanks, Andrew.

I'd like to first underscore a point Andrew mentioned early in his remarks I'll close with my team is presenting our business with significant near term headwinds do it reduced client marketing expenditures and requiring us to take a hard look at cost where redoubling, our efforts to streamline and restructured the business.

This is best highlighted by the 21 million dollar reduction in expenses, excluding restructuring charges and depreciation, including a $10 million decline in labor, which more than offset the decline in revenue in the quarter.

I'd now like to walk through the results in more detail.

First quarter revenues were 40.5 million compared to 59.2 million last year for a year over year revenue decline of 18.7 million or 32%.

We estimate the Covance 19 cost us approximately 2 million of revenue in the quarter and as you know we are still cycling over client losses from 2019 that way on our year over year <unk> growth rate, we're now seeing client wins in the business that will generate revenue and teacher corners.

Revenues declined in all vertical markets in the quarter the largest decline in dollar terms with retail which was down 7 million, mostly due to losses in our mail logistics business as well as a change in a contract requiring us to record on a net rather than a gross basis.

The largest decline on a percentage Hs was transportation down over 80% due to a loss of program last year for contact center client.

As Andrew mentioned, we have signed an agreement to fully exit our direct mail production business by the end of June we anticipate recording a non cash impairment charge related to both in our Jacksonville facility during the second quarter.

This transition that's expected to eliminate just under 1 million and quarterly losses related to this business primarily fixed costs.

We will have variable cost based on print volume going forward inline with our asset light strategy.

Operating expenses for the first quarter were 45.6 million compared to 70.1 million in a year ago quarter.

We reduced our operating expenses in all areas, including labor production and distribution and advertising selling general and administrative.

Operating loss was 5.1 billion for the first quarter less than half the 10.9 million operating loss in a year ago quarter.

Adjusting for the nonrecurring restructuring and impairment expenses.

Our adjusted operating loss with 3.5 million compared to a loss of 5.9 million any here Oh period.

The improvement reflects substantial cost cutting actions taken by management in light of declining revenue.

In the quarter, we recognized an 11.3 million onetime tax benefit mainly related to NFL carry backs.

The krona virus aid relief and economic Security Act refer to lift the terrorists act allow corporate tax payers to carry back net operating losses originating during 2018 to 2020 for up to five years and also eliminated the 80% of taxable income limitations with respect and Noel.

We expect to receive 8.8 million in tax refunds during 2020 related to our 2018 and 2019 and ill carry backs.

Inclusive of benefit we generated GAAP net income of 5.1 million or 68 cents per basic and 67 cents per diluted share in the first quarter.

This compares to a GAAP net loss of 13.5 million or $2, an 18 cents per basic and diluted share in a year ago period.

First quarter adjusted EBITDA was negative 2.4 million compared to negative 4.4 million in the same period last year, a significant improvement when you consider the lower revenue levels.

Turning to our balance sheet and liquidity as of March 31st 2020, we had cash and cash equivalents of 23.5 million.

This compares to our cash balance of 28.1 million as of the period ended December 31st 2019.

As of March 31st 2020, we had 18.7 million in long term debt, which reflects the current draw on our 22 million dollar revolving credit facility.

On may 11th we extended the revolving credit facility through April 2022, and reduce the amount to 19 million.

Subsequent to the ended the first quarter you've dissipated in stimulus programs introduced provide relief in response to cope with 19, which will help us to maintain our employees as we navigate to the present and future challenges as well as things focused on delivering our turnaround plan.

With that operator, we would like to open the call for Jennie.

Thank you we will now begin the question answer session.

To ask a question in your press Star then one on the Touchtone phone.

Your question. Please press Star then too.

Ladies first question comes from Michael Kupinski with mobile capital markets. Please go ahead Sir.

Thank you and thanks for taking the questions. Good afternoon, I'm glad and hope that everybody is safe there as well. So the revenues came in better than what I was looking for in the quarter and is somewhat surprising given the mitigation efforts co bed, which began in March and you said that you feel like that had about a 2 million to.

Dollar impact in the quarter.

Was wondering where where are you seeing strength in the quarter and it then it sounds like you were pretty optimistic about how things are shaping up in subsequent quarters given that some of the quite that you have or actually stepping up campaigns in light of co bed I'm just wondering if you're just.

Got to look up or color on that what you're seeing there.

Yeah, I can I can start Laurie and then you can jump in.

So you know maybe I'll do the reverse with regards to clients I think what we're seeing across the board is first of all where as you know we play is bottom of the funnel marketing so more performance oriented ROI oriented marketing. So generally what you see in.

Economic times like this and in general where were marketing where the the numbers will just show is headed is in that direction.

In a significant way so I think that's what is what has muted it a little bit for us in terms of across the board specifically on the first part of your question, where we've seen increased demand as I mentioned significant increase demand in the contact center and that's a combination of two things new business.

When that happened before but we were then ramping up for new business wins that happened before co bid, which we were then finalizing and getting were to ramp for and then and then co bid where.

As you can imagine and everything but that has happened with that a contact center service is a great demand and great value and so we also were receiving continued to receive very strong inbound requests for our services from from major companies and.

And clients. So so specifically contact centers, where we've seen it has kind of outpaced if you will for the for the quarter.

And as I mentioned marketing services got a slower start and then where we did see the impact was was primarily in our fulfillment and our and our mail business and that was more specifically a reduction of demand then client loss.

Gotcha.

And then in terms of the savings in the quarter I know that you had.

Upbringing renegotiated number of vendor agreements from last year and I was just wondering if you can kind of frame how much of that was in the quarter. What can you kind of give us some sense of the the dollar value of those renegotiated vendor agreements from last year.

Yes, Lori you want to give a sympathetically sure sure Mike So and there was several agreements I would say that the major ethylene months we had.

Three to 5 million us savings in this quarter alone regarding those agreements.

And to have the totality of all of them for the quarter, but absent that range.

Right and and then is is that where some of that fell into the production and distribution expenses because that was a little.

Little bit lower than what I was expecting.

Yes, certainly some of it isn't there. There's also some there was some outside labor. So there's some of that that's rolling into the Lake section as well.

Gotcha and then you can you just kinda give us a sense of you know because of all the issues with co that go into the Q2, which is admittedly probably the the the.

Probably the biggest hit for.

Particular quarter, but you have so many mitigating factors some of your clients that are actually you know showing giving you business and and then in this environment can you kind of give us a sense of what the revenues kind of are pacing or looking like in the quarter. Because we obviously we were looking for moderating revenue trend.

So as you kind of cycle through.

The lost accounts from last year was just wondering if you can kind of give us a sense of what the revenues kind of are pacing.

Yeah, I mean says you know you know through the beginning of this year, we still cycle through losses from last year. So so there will obviously be a component of that I would say with regards to demand in Q2, thus far we see the same trend that that we.

I saw in the end of March.

With regards to our businesses contact center others as we spoke of what we've also seen though is that many many clients have started to pick up activity they've just reoriented. It. So many of our financial services clients are reorienting as you'd imagine all of the messaging and the way.

Work that we're doing in that that's part of what caused a pause or lower than our expectation for that business for the quarter.

So I think the one bit that no. One knows obviously is you know what the overall impact on the economy will be to consumer sentiment consumer shopping business sentiment. All obviously very much related to the services. We provide so short short of that event and not.

Knowing that we feel that we're tracking well.

Final question, you mentioned that you have a pipeline of business by 2 million how do we.

Look at that pipeline in terms of when we model the revenues or when we expect to model that rep that revenue.

Well, if I adjust it when you can you explain a little bit I'm not sure. Yeah I'm just wondering in terms of how when you mentioned the pipeline a business that you have what is that how far out into the future you modeling that expected pipeline win win over what timeframe do you expect to.

I guess convert that to revenues.

Yep Yep, Okay. So.

You know, it's generally a 90 day pipeline, meaning it's what's in it is active for 90 days things can take longer it could go out 120 days.

But you're looking to either closed or or things won't get close though they won't be one you know through that process. So we feel good I mean, we went into the quarter because last year in Q4, and I talked about this in the last call, we really ramped up the pipeline, especially being a more of the longer term part of that.

And so we're seeing some of that and then we're seeing some of the effect of having a strong pipeline that activity in January and February.

That has quieted, meaning activity on that as you can imagine during coded and changed and now we're seeing things just in terms of how one goes out to sell improved as the market and in general improves in terms of interacting with one another so I think in turn.

Looking at it that hopefully the timing gives you some contact and then obviously the target that we lay out for it which obviously is against our plan, but you can see how we're cycling against target.

And just what might look at that yeah, sorry go ahead I.

I'd say I would add to that I think what you're trying to understand to assist you know that pipeline, how how long does it take to recognize the revenue from that pipeline. What once we do close the deal I would say and there's a mix of shorter term project as well as some that might be a year long contract. So it's a little bit of the Mets ALM, it's not albany be recognized.

Just on a on a very short term basis.

But it's not all over year either.

Gotcha, just one quick follow up is there a number in terms of the pipeline that you anticipate or would like to have as you enter into another quarter like 50% of the revenues or 35% of the revenues is that one way to look out it might give you set benchmarks are targets for building out.

Our pipeline.

We do so basically the to get to the 13 million. You know, we you know we need essentially and obviously, there's always a quality of the of the of the of the pipeline.

Which we put a great amount a great deal of rigor to but generally we would need you know on average between 40 and 50 million.

To convert to get to about 15.

Okay Gotcha, Okay, and we got it Oh, sorry, Thats unweighted, yeah unwavering right yep. Okay. Thank you so much I appreciate that thanks.

Thank you Mike.

And ladies and gentlemen. This includes the question answer session. During the conference back over to answer Brian for any closing remarks.

Just like to thank everyone, who joined US today. Thank you for your time. Thank you for listening stay safe and I'd also like to once again, thank all of our employees and our team members, who really are doing so much for each other and for our clients.

With that thank you very much.

Thank you Sir This concludes todays conference call. Thank you for turning into his presentation. You may now disconnect your lines and have a wonderful day.