Q2 2020 Harte Hanks Inc Earnings Call

Please standby we're about to begin.

Thank you for Sandy by good day, and welcome to the Harte Hanks second quarter Twentytwenty Earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Sheila Ennis. Please go ahead.

Thank you Paul lock and good afternoon, everyone. Thanks for joining us hosting the call today, our Andrew Bennett Executive Chairman and CEO partnering and CFO.

Sure.

Before I begin I'd like to tell everyone that the information provided during this call may contain forward looking statements such as statements about the company strategy adjustments to its cost structure financial outlook and capital resources competitive factors, there's missing industry expectations.

Dissipated performance it outcome.

Future effects of acquisitions jump just physician litigation.

And regulatory changes economic forecast.

Markets served ex expectations related to cost savings measures and the availability of tax refunds and other statements that are not historical south.

Actual results may differ materially from those projected or implied in these statements.

Because of various risks and uncertainties, including those described in the company forms 10-K, and 10-Q and other filings with the FCC and the cautionary statement in todays press release.

Called me also reference non-GAAP financial measures. Please refer to the earnings release. It was issued after the close for reconciliation and other related disclosures. The company earnings releases are available on the Investor section of its website <unk> dot com and with that I'd like now turn the call over to Andrew.

Andrew called Yours.

Thank you very much Sheila before we get started going to express my keeps your hope everyone on today's call staying safe and healthy during these challenging times I also want to thank the entire harte Hanks team for their professionalism resiliency in constant drive can serve and support each other and our clients.

Culture and commitment are among the kiosk.

The company I'm pleased with Splunk to definitely get people blocks several months because all the answer by these attributes and I couldn't be better.

The operating through the pandemic were carefully evaluating expenses and business functions to ensure we got value to our customers that you weren't like for sustainable profitability.

That's we've explained over the past year continually evaluate expenses and to improve operational efficiency, although the pandemic creates new challenges the process for operational efficiency and excellent not materially changed and we're well on our way to creating a more relevant sufficient stream on hard times.

Before commencing our second quarter, Pete I want to take a moment to look it will be complex during the first top 2020.

Yes, we believe we've stayed lives our quarterly record your run rate.

<unk> cost reductions calls every aspect of the company, reducing overall cost and 2025 over $20 million.

Hands on management team, bringing industry, leading town and promoting internal talent.

Oh, good some engineering cost savings and engineering group to that then we move swiftly to whip swiftly to significantly reduced real big footprint. This aligns with our go forward strategy.

Also beginning to recognize incremental revenue from new products and services.

That's how we go to market as we discussed on last call.

Really backwards and confident we will be adjusted EBITDA positive for the year and are on track to be free cash flow positive for the second top 2021.

I mean on plan for 2020, despite difficult headwinds that are category. It is due to cope with 19.

Like most of my first earnings call that CEO in March I want to Threed pillar strategy to return company to comparability.

First optimize the business and the way the work that could grow our current services with existing and new client.

Third transformed the business for the future.

We are executing on all three of these pillars simultaneously and while our operating environment. That's been drastically changed due to corporate banking. We believe we will emerge from 2020 stronger better company by helping our customers in Great Britain, new marketing imperatives, more effectively and more efficiently.

Beginning with our first pillar optimizing our organization.

Capitalizing on what makes money [laughter] critical for successful transformation, we're launching overall cost structure to meet industry benchmarks, well modernizing partnering with the same cod I'd like to cover a few beams in this area.

This is our IP infrastructure and our new to the cloud to enable value added either.

Services to our customers in conjunction with reducing our states in Boston and policy. The data center operation what I'd from Austin data Center in Pennsylvania, that's part of the datacenter consolidation more teaching application that they didn't need that enables coordinate simplifier server requirements by 30%.

And we anticipate further reducing certain requirement by another 20% for moving most of our application to the cloud. In addition, we're evaluating software solutions to eliminate any legacy.

Any legacy means they need.

Currently house, we anticipate finalizing our IP transformation by the second quarter, 2021, or 2 million annual savings, while delivering new mission critical services to our customers. We appreciate or IP team diligent efforts, so Pete seamless continuity of operation and deliver material cost savings that's working.

Endemic different environment.

Secondly, optimizing our operating footprint to align with no park in June 2020, we're excited to announce execute a long term lease in Kansas City to both the news feed it the arts Goldman facility, which will be 300000 square feet. During the first topic 2021, new turnkey facility.

Probably be fulfillment operation currently performed in multiple locations, we will help optimize our after <unk> crude and traditional fulfillment operational layout to best serve our current and future customers the new facilities being bars in conjunction with aren't occurred with our investment there upgraded order entry and warehouse management system.

Average technology and automation to create new products and solutions for our customers were excited to grow our sampling product offering and expand on direct to consumer solutions through this facility and I'll talk more about that lever. We continue to implement our like strategy I think direct mail production facilities, culminating in the assets.

Several of our Jacksonville direct no facility at the end of June summit right now.

Through the partnership with some of that allows us to make our cost structure more variable and provide a full suite of marketing solutions more efficiently, while reallocating resources to our marketing services fulfillment logistics and contact center businesses as a result of our exit some direct mail in Jacksonville, and Grand Prairie, you eliminate nearly 5 million and labor costs.

And millions more in operating maintenance and capital costs. We also significantly reduced cost associated with our closed and underutilized facilities, we terminated our Wilkes Barre leads and eliminated all future obligations. After may 31st 2020 with respect to work bullets in California in Jacksonville trade partly patients.

Definitely quake, we ended 2019, we executed some of these agreements through the end of the lease terms to mitigate the vast majority of will be carrying cost liabilities.

In response to the pen to the current pandemic.

Our context on that business as I mentioned before effectively converted operations to work from home environment, Although we anticipate a return to offices at some point, we believe our future operating environment the customer needs will likely require less leased office space as we embrace more of a hybrid model as a result, we undertook to initiative.

Just to reduce lease operating expenses first with respect to our often leads which was to expire on June Thirtyth 2020, we negotiated and over 60% reduction NBC unsecured and extension through December 31st 2021.

Second we executed sublease, one of our to the milling facility to eliminate the associated Leach facility call through the lease term ending Q1 2021, our other minimal location will accommodate all agents and support required to service our clients. We anticipate continued margin improvement from our contact center.

As a result of these material cost saving initiatives through the termination of leases somebody's going to close facilities.

Optimization of our current operating footprint, we expect to cheat annual savings of over $3 million and we go operating expenses.

Thirdly, operating hard labor force to drive profitable.

Profitable growth.

2020, we reviewed our labor needs, we both if that's the talent and skills that throughout the organization relying gardening sources to better facilitate collaboration communication and efficiency to best serve our customers leveraging the decades of experience input resident Narcy business segment theaters, we continued to deliver value added services.

Well all sort of this will also improve your technology capability and optimizing our labor through process reengineering to meet current and future customer needs. That's one example art.

For example, with our technology development and data related skill sets us apart.

Holidays function streamlined management and migrated certain functions to lower cost resources, thereby yielding more than $2 million an annualized savings. In addition, your reorganized certain production client service planting and reporting functions within our film organization to drive incremental million dollars labor savings we anticipate.

$13 million and cost reduction, including variable labor costs as a result of the 2020 initiatives.

With regard to our second pillar, we continue to make strong progress growing our current services with both existing and new clients or operating model and realign leadership is gaining positive momentum with a mission to drive significant sustained profitable growth.

The silos, we had broken down have revealed opportunities in both our bottom line as I've shared as well as our top line, we're talking about veeco.

We focus on categories, where we had a proven track record and an offering relevant to market demand in the second quarter, we began to see stabilization and growth across these categories categories. The focus include healthcare financial services automotive B to B tax and consumer DTC and new frontier that I will discuss later on in there.

Area, we're seeing early signs of success from new products that we've launched to deliver value to the target markets. We've organized category pockets, it's across the company, but it probably driving business with each of these categories agnostic to the services that we sell our capabilities and marketing services and our operational server.

If you backed contact center fulfillment logistics and mail provides a unique full service offering to the market all of this activities, resulting in more meetings, albeit virtual today.

Higher conversion rate, which I'll talk about in a moment with respect to new business. Our current weighted pipelines of 10.3 million an unrelated just 31.2, our plan as I've mentioned before or Twentytwenty requires 13 million of new business sold and delivered in the calendar year.

As of quarter, and we've secured 10.1 million or 78% of our annual goal. These new wins include an insurance brand B to B Tech brand form of brand a big Threed consulting company CPG brand biotech and E. Commerce companies, we believe our new business pipeline remain.

Healthy and diverse and we'll continue to promote our new product offerings, whereas the demand is strong. It's also important to note, we're taking our new product offering to both our existing clients as well as our new ones. Lastly, we continue to invest in our growth team, but new hires with deep category experience that we believe will both open doors.

As well as helped drive the overall.

I'm pleased to share the John Cook, who joined our business development team to lead our automotive practice John brings nearly 20 years of automotive experience working both on the client and the agency side, where he led teams in developing tier one tier two and tier three CRM solution that deep knowledge of the category and strong relation.

Well, our significant momentum is one of our call focus areas.

Third strategic pillar to transform our business model Harte Hanks has extraordinary assets, but we believe are ready to be optimized our roots and expertise lighten the convergence of data and marketing and more specifically in engaging the customer directly through digital and what's been called direct marketing we management.

Total customer behavior, we listen to and counsel customers through our customer care centers around the world. We use our deep data capability to build customer engagement strategies and plans and we design and manage customer marketing programs through this we have a unique competitive advantage in that we can design and deliver multi chip.

No marketing programs that reach customers from their finger tips to their front doors were across both the digital as well as the physical or renewed customer centric focus is adding more value to clients, enabling us to capture more market share by developing broader marketing programs and offering more of our services.

Mr. Two examples of work recently won that illustrate the success of our customer focused capability and our ability to now sell more broadly across the portfolio.

First example of the program that we've developed and deployed for leading European automotive brands. The program. We can support one of the largest dealer groups and attended and slowed as follows by simply placing it will soon as the consumer interacted with the deal. It's that's why we're able to identify and validate Colm addresses.

Noninterest visitors to the to the website masterton email and address track website activity and understand the model again.

Digital data enables us to develop personalized messaging based on their models of interest and then physical assets to their home, which could include personalized high end direct mail piece or custom packages likes to go box, which we've discussed on the prior call within 48 hours of the visits to the dealers site you believed to connect.

Digital experience with a personalized physical engagement in a timely manner resulted in significantly higher conversion rates versus the cats.

The control.

The program, we ran to the automotive brands Brent higher conversion.

Any prior mail and and physical campaign run run before.

Second example, the leading direct to consumer company and this engagement, we're developing a customer win back program designed to recapture well, we've captured law or less customers. We're utilizing handled it it's doing target signals that lead to attrition or customer boxes and determine the right messaging and offers across channels.

When them back where ideally prevent them from leaving we're currently developing winback journey and personalized communications with relevant offers and choices based on specific personal preferences of the customer. In addition, we will be piloting a sampling program to integrate this to drive renewed trial among the thing.

Lapsed users.

In summary, I believe we're building a new type of customer experience company, we are driven by data and applying that data to everything we do what makes up further differentiate is our ability to work deeply good that data to drive all the way through to engaging the customer again, both digitally and physically.

The quality of our existing services that enables us to rapidly transformer business, we believe that we're well positioned to gain market share through our existing offerings digital marketing either be fulfillment customer care, while expanding to close in services that leverage our existing assets or people are places our marketing these areas.

Sampling, which I'll talk about in a moment DPP services ecommerce services and data driven customer care as well as outsource marketing just shared I'm up last quarter's call. Great example of our enhanced.

Customer experiences on new sampling offer.

We have the ability to build this business all of the possibility of our fulfillment operation and the opposite piece of our marketing services business or the merits of both of those [laughter] natural extension of our current business. The marries our services together in a way that that values for clients and provide differentiated offer.

Linked as most no isn't extremely high or low or high ROI driven marketing activity similar to many of the activities. We perform on behalf of our of our clients. Despite this conversion rate conversion rate in the industry has historically not performed.

As as well and the industry highly fragmented with few few players who offer and and collusion or even data driven sampling our ability to leverage our capability and data with our expertise in fulfillment and the ability to reach a consumer at any point wherever they are allowed to deliver what we're calling.

Mark Samsung Smart sampling is much more than sending out product samples opt to consumers to compete strategic marketing approach, but put the brand right in the hands of those consumers who are most likely to become loyal repeat buyers as well as influencers, we do that by leveraging our analytics expertise analyzing first second.

And third party data, it's a great distribution strategy that has the highest propensity to convert prospect Rip. The greatest predilections, then become profitable customers are smart Pampling approach also includes.

Our smart sampling approach also includes follow up reporting and analytics intelligence to help continuing improved future acquisition.

We believe the combination of art data and analytics expertise and flawless fulfillment execution is a major differentiator in the market and the key to building our momentum. One example of progress with this new offering it sampling business that we've just one from a meeting.

Oh top five CPG company that showcases our early success in entering this market in the program. We work closely with our client to analyze the data and develop targeting lifted consumers, we may be likely to be high value customers or users of competing brands were definitely experience may lead to capturing market share traditional bent.

I think programs have been much more spray and pray which are no longer sustainable understanding the data form and analytics and measuring performance in real time, it's critical to optimizing sampling program as well.

Sampling programs of the future and we're confident that that combine service would benefit our DTC sampling claims in the future. Our efforts in this area will go beyond sampling and intuitive DTC or direct to consumer E Commerce services.

Okay, I can seamlessly sampler of your product to a subscriber of your product or services has become the next frontier for brand building a direct relationship with the consumers critical but there are few end to end options help marketers build direct relationships with consumers or in the case would be to be with their customers. We believe were uniquely positions.

You get our clients, they're starting from point, a deep understanding of their customer to point be delivering product sample for a service to a customer at home or off at the point see concerning the chicken converting that consumer or customer into a subscriber or subscriber like relationship with our customer.

To deliver on our ambitious plans for this business I'm proud to announce that we brought in drew Raymond lead or D. P. C E Commerce practice with a focus on creative and strategy drew is built several leading agencies in the digital Congress space.

Just last agency to Accenture also joining us is great wisner work that drew it's a three agencies. He grew and sold Greg as a strategic sales leader with a proven track record of delivering growth.

Now turning over to Laurie to walk through the details of our second quarter financial performance Laurie.

Thanks, Andrew.

I'd like to first emphasized Andrew's point, but despite the challenges we faced as result of cope with 19.

We are winning business and seemed growing demand in our PDP vertical specifically with our contact center services and we expect this vertical for continued shuttering generating growth in 2020.

Cope with my team has presented our business with near term headwinds yet we have continued to focus on streamlining and restructuring the business to meet the needs of the market today, and we are beginning to see stabilization and growth in that business lines, where we're investing.

In comparison to the year ago quarter, we cut expenses by nearly 14 million.

And our spending is down over 38 million for the first half of 2020 virtually the same story at last year.

The cost cutting coupled with our revenue growth this quarter over last quarter are reflected in our positive adjusted EBITDA in the quarter.

2.25 million some negative 1.77 million, we posted a year ago.

A clear sign but we are successfully executing a turnaround plan.

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

Second quarter revenues were 41.6 million.

Over 1 billion sequentially from last quarter. This compares to 54.7 million last year for a year over year revenue decline of 13.1 million.

We expected a more pronounced cut with 19 intact on our earnings this quarter versus Q1, but are encouraged by recent business wins.

Revenues grew across her BT consumer brands verticals in the quarter.

At the vertical was up 3.1 million or 28.2% due to increased demand for our contact center services.

Similar to last year to last quarter, the largest decline in dollar terms with retail which was down 7.3 million, mostly to the impacts from corporate night.

The largest decline on a percentage basis within our transportation segment, which was down over 80% as a large contact center client did not renew.

The growth of our PDP business helped offset the decline in revenue from our verticals this quarter.

And we expect this increased demand for B to B services to continue.

However, we continue to focus on maintaining a healthy revenue mix with a bias toward higher margin businesses throughout our restructuring process.

As Andrew mentioned, we fully exited our direct metal production business at the end of June.

We recorded noncash impairment charges and dispose a loss relates to closing our Jacksonville facility of 3.1 million during the quarter.

Moving forward as transmission is expected to eliminate just under 1 billion in quarterly losses related to this business primarily six class.

Our operating expenses for the second quarter, or 47.5 million compared to 61.3 million in a year ago quarter.

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

Operating expenses were partially supported by our participation in corporate banking stimulus programs that helps us retain employees. He took a higher margin business lines. We are focused on growing to execute our turnaround plan.

Operating loss was 5.9 billion for the second quarter and although this is slightly up from last quarter and it's still an improvement from the 6.6 million operating loss and a year ago quarter due to our aggressive cost reduction efforts.

Adjusting for the nonrecurring restructuring and impairment expenses, our adjusted operating loss was 563000 compared to a loss of 3.1 million in a year ago period.

Group that reflects our continued cost cutting actions in our increased focus on our higher margin businesses.

This quarter, we reconcile a 1.5 million dollar onetime tax benefit mainly related to enter well carry backs and the elimination of the 80% of taxable income limitations with respect and our wells due to the Corona virus aid relief and economic Security Act referred to as the carriers.

Includes inclusive of this benefit we generate a GAAP net loss of 6.2 million or 99 cents per basic and 99 cents per diluted share in the second quarter.

This compares to a GAAP net loss of 3.8 million or 63 cents per basic and diluted share in a year ago period.

Second quarter adjusted EBITDA was 480000 compared to negative 1.8 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 June Thirtyth 2020, we had cash cash equivalents of 30.1 billion. This compares to a cash balance of 23.5 million as of the period ended March 31st 2020.

As of June Thirtyth 2020, we had 22.2 million in long term debt, which reflects the current draw on our 19 million dollar revolving credit facility as well as the long term portion of our PPP notes.

May 11th we extended the revolving credit facility through April 2022, and reduce the amount to 19 million. We believe we have sufficient balance sheet strength to continue executing on our transformation plan.

With that I will turn it back over to Andrew for closing comments and then we will take your questions.

Thanks, Laurie in summary, although we are facing near term challenges as with everyone. As a result, with the pandemic and declining client marketing spend within our category.

Well in the process modernizing our business.

Through our existing client relationships as well its new relationships as we discussed.

Claims are undergoing accelerated digital transformation in the face of the pandemic and we're making changes now that we believe playbooks got a competitive advantage and positioning for the long term, while we're committed to continuing to align our expenses with expected near term revenue. The revenue levels. We're also making important progress towards aligning our capabilities.

Emerging customer needs, we've strengthened our cash balances. We believe we have the necessary liquidity to execute our turnaround plan and regained organization as a leading customer experience company for years to come with that operator. Please open the lines for questions. Thank you.

Thank you to signal for a question. Please press star one on your telephone keypad also if you are using a speakerphone. Please make sure. Your mute button is turned off to like your signal to reach our equipment. Once again. It is star one at this time for questions.

Well go to Michael Kupinski within global capital markets.

Thank you for taking the questions Doug first of all congratulations on achieving positive adjusted EBITDA for the quarter I think that was the first time you had positive cash flow in the second quarter. Since it leaves 2017. So congrats on that Bob readily showed sequential improvement from first quarter, which was a little bit better than what.

I was looking for and I was just wondering if you can add a little bit color on that because you're good. So you had some quite wins, but.

Hey client losses year over year increases well I'm just trying to understand that have been since July it's already over can you talk about how you started the third quarter and then maybe if you anticipate that there will be sequential improvement yeah, Rob news from the second quarter and third quarter as well.

Yeah. Thanks, Thank you think they'd like to the the questions I'll start and board can get out as well so.

First part of the question.

In terms of revenue as Mike mentioned upfront, we believe we stabilized.

But that the top line and so you had three day were off versus Q1.

Just meringue second part of your question with regards to July we are seeing slain to come back in areas of our business.

But had softened due to quoted so we had seen as we've mentioned before softening not client losses that softening of volumes in our fulfillment business.

Within our marketing services business delaying of activities from clients as everyone knows what is working out what the Mexican would be and how they would interact with consumers potholes in February drink cobot. So so from a so from an overall revenue top line revenue standpoint, we feel very good but right now.

At a pretty solid run rate at this point.

Guards to where the coming from and how you know where the growth in the in the quarter. The sequential growth is coming probably and also back your question about July.

We are seeing it in and as Lloyd said, we are seeing and included in our contact center.

Mainly due to Kobin related services that we are providing so we're seeing a spike there oh, but we're also seeing as I mentioned that increase not just in new business activity and pipeline did in conversion. So we're starting to see a pick up in new business activity and I would say that.

Happened there has been happening over the last six weeks or the cycle time is taking longer because of coal bid as you can imagine that selling cycle, so thinking take longer it gets a little bit shorter and a little bit more efficient when they're growing our services within existing clients in general but also due to.

Due to coated but we're starting to see things of that labor and lastly, I'd make is you know consumer being up in our focus on.

Broadening and deepening and getting to be the C.. We are seeing early signs of success in winning there. So the sampling program what I talked about four of the top three CPG company is a perfect example, fall.

Lori if there's something they can you talk a lot.

No I mean, I think you've covered it I mean, we definitely see some increases that support contact center, specifically cobot related as well as entertainment services related and another part of your question. Michael We have seen certainly a decrease and as we've said stabilize the revenue. So we're not seeing those same customer losses that we are.

I think previously.

Right.

In terms of the particularly in the near you life savings is that for the full year 2020, or what's the timeframe, where you are you talking about in terms of a 13 million.

Yeah, the other toward it.

So on what is going [laughter], it's really hard when we're not together its really an annualized savings. So we're not going to achieve all of that in this year, but that 13 million is we're getting a good chunk of that savings during this year.

They can you parse that out by quarters that possible.

Do you already have that 14 million did you see some about already in the first quarter and how much was achieved in the second quarter.

Yeah, I would say that it was probably more started in the second quarter, So you're going to see it across the second third and fourth quarters, it's going to be at a higher level in the third and fourth quarter.

Okay, and then in terms of the the sequential higher employee expenses I know that you've gone through these cost reductions, but and certainly production costs were lower than expected, but as a percentage of revenues all themselves some sequential.

Increases from what we saw the first quarter and of course year over year. I was just wondering what are some special things in the second quarter over the employee expenses or is that a good run rate how how should we look at that Lady Gaga Gulfport.

Are you looking at labor Michael stuff, Yeah, Yeah, Yeah, Yeah payroll expense I just want to make sure. We're on the right. So now I'll start on the Labor line, Yes, I mean, some of the increase that we tied to revenue in our contacts services business that is basically they their labor is a higher percentage of revenue, but some of the other businesses. So you see.

Increase there where somebody other businesses may have higher production distribution costs.

Okay.

I would have made its up revenue back.

It's about the index and okay. So I'm kind of looking to the second half.

Well the books were increases because you're indicating that your contact centers to see a higher level. So we would you said they actually model into looking at that at this current run rate or <unk> or or or higher I'm, just trying to understand the nature of where that number that line item should go.

Yeah, I think in Q3, you're gonna have to see about the same percentage and in Q4, it will probably dipped slightly.

Gotcha Okay.

Sorry.

Well, that's all I have for now thank you so much or consider.

Thank you and Michael.

And there are no further questions I'd like to turn the conference back to Mr. Bennett for any additional common.

Okay. Thank you all for joining the call today, we appreciate your time and they say thank you.

And that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.

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