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spk02: Good day, everyone, and welcome to the Hart-Hanks second quarter earnings call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star two. It is now my pleasure to turn the conference over to Mr. Tom Bauman of FNKIR. Please go ahead, Mr. Bauman.
spk03: Thank you. Hosting the call today are Brian Linscott, Chief Executive Officer, and Lori Kearns, Chief Financial Officer. Before we begin, I want to remind participants that during the call, management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections as to the company's future performance represented by management include estimates as of today, August 11, 2022, and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available in earnings press release that was issued shortly after the market closed. A copy of that press release and other corporate disclosure is available on the investor relations section of Hart Hanks' website at harthanks.com. With that, I would now like to turn Nicole over to Brian. Brian, the call is yours.
spk05: Thank you, Tom, and good afternoon. The systemic changes we have made to Hart-Hanks are clearly paying off as we have delivered significant improvements in operating income and EBITDA, even as revenues modestly decreased, as expected due to runoff of some pandemic-related projects. This improved profitability is a direct result of our strategic decisions to implement an asset-light business model and focus on profitable business to drive higher margins. Our operating margins improved to over 8% compared to less than 3% in the year-ago quarter. Hart-Hanks is now sustainably profitable with a strengthening balance sheet and a business model that generates cash. Our restructuring is behind us, but we will continue to drive operational improvements and strive for continued expansion of revenues and margins. Entering 2022, we expected revenues to be in line with what we had experienced in 2021, given that there were a number of pandemic-related projects that we onboarded in 2020 and 2021 that would be concluding this year. The 1.4% revenue decrease in the second quarter, especially the $3.8 million decrease in customer care revenue, reflects this expectation. However, we have been successful in adding new customer relationships and expanding our work with our existing blue chip customer base. So even with the well-documented slowdown in the economy, we remain confident in our outlook with a clear path to grow our top line for full year revenues on a year-over-year basis. As an example, this month we have begun ramping up our customer care staffing to support the August 21st streaming release of the House of Dragons, the prequel to the Game of Thrones. This event, as well as a significant win in logistics and other new business wins, provide added confidence in our ability to exceed a strong third quarter comp we face against 2021. We will face a particularly challenging comparison again in the fourth quarter, but looking out into 2023, we believe we have ample opportunities to drive growth in all three business segments as we continue to invest in sales, marketing, and partnerships while expanding existing client opportunities. Deepening our existing customer relationship continues to be a key area of focus. Our offerings are in demand, and increasingly, we are expanding relationships beyond a single business segment. This is largely due to the sophisticated customers we work with and the fact that our customers view Hart Hanks as a valued and trusted partner. We focus on data-centric, industry-leading solutions to effectively enable and create optimal customer experiences. And increasingly, we are bringing technology solutions to drive improvement to our customers' workflows, further strengthening these relationships. We continue to invest in our business to drive growth, increase profitability, and maximize shareholder value. Hiring and retaining people along with improving our technology platforms and expanding third-party partnerships will improve our market opportunities and provide more cross-segment sales of our fully integrated offerings. We continue to believe these investments will drive additional revenue expansion through improved cross-functional leverage and additional growth within our customer base through deeper penetration and increased wallet share. We are focused on strengthening our balance sheet and leveraging our free cash flow in our capital allocation decisions. At the end of the second quarter, we reach an agreement to repurchase all preferred shares held by Wipro. The repurchase of the preferred shares will eliminate the dilutive impact to common shareholders and will give us greater flexibility with our capital structure going forward. Another more recent third quarter improvement to our balance sheet came as a result of our efforts to migrate to a cloud-based infrastructure platform. As part of this process, we identified more than 52,000 unused IP addresses purchased by Hart Hanks in the early 1990s. In July, we sold unused IP address blocks via a handful of transactions for proceeds totaling $2.5 million. Our third quarter cash and third quarter non-operating earnings will realize a one-time improvement of approximately 2.5 million from the IP address block sales. While our long-term debt as of June 30th was $10 million, as of today, we have no long-term debt and we are building cash. Now on to our results. As you know, our three segments are as follows. Customer care, which is focused on delivering full-service customer care solutions that are tech-enabled and people-driven. Fulfillment and logistics, focused on B2B product and literature fulfillment, B2C e-commerce and sampling, and end-to-end supply chain and logistics services. And third are marketing services, which is focused on strategic planning, data-driven insights, performance analytics, creative design, technology enablement, and program execution to drive business outcomes and optimize customers' ROI. Our segment reporting is designed to provide transparency into the company's financials and visibility into the value and dynamics of each business. As a whole, revenues declined 1.4% in the quarter to $48.6 million. but operating income increased 2.6 million or nearly 180% compared to the second quarter last year. Our EBITDA more than doubled to 4.6 million from 2.1 million in the second quarter last year. Net income for the quarter was 4.5 million and Hart Hanks is now solidly profitable on a GAAP basis. We expect continued profitability both in terms of EBITDA and GAAP net income for each quarter of 2022. Each of our operating segments continued to perform well in the second quarter. Customer care revenue decreased 19.8% from the prior year and year over year EBITDA decreased 25.6% to 2.5 million from 3.4 million in the prior year quarter. The decrease was due to a rolling off of COVID related projects as anticipated. That said, we expect customer care to deliver strong sequential results in the third quarter as the business onboards agents to support the House of Dragons premiere and as the business grows new and existing clients. The customer care pipeline remains healthy with current, new, and former customers. Additionally, we are in discussions with customers to expand our offering beyond customer care into marketing services, fulfillment, and technology development. Customer Care continues to invest in sales and marketing campaigns, conferences, talent, and partnerships with the goal to enhance growth in 2023. New business wins for the quarter included one, an existing client that leveraged Hart Hanks for its back office ticket processing and ticket sharing capabilities awarded Hart Hanks all of its customer-facing functions, including phone, email, and chat. The growth with this client has been driven by consistent delivery, execution efficiency, and high customer satisfaction scores. Second, Hart Hanks was awarded new business by a leading employee screening services company to provide a wide scope of B2B sales and marketing support services. Hart Hanks was selected based on its strong track record of providing seamless support and integration with B2B sales operations seeking to accelerate their growth. As part of this program, Hardhangs will provide our clients' sales team with a range of services to enhance their B2B sales efforts, including new lead generation, appointment setting, education and nurturing, and sales performance tracking. On to fulfillment logistics, its revenue increased approximately 3.9 million, or 24.3%, compared to the second quarter last year, and EBITDA increased 91.7% to $3.2 million. We are realizing the benefits of consolidating our operations into the Kansas City and Boston facilities. The 16 plus percent EBITDA margin for fulfillment logistics was even better than anticipated. We are experiencing healthy demand for our fulfillment logistics services, even as large logistics players and e-commerce giants have announced slowing of logistics spend. We continue to win new contracts in both fulfillment and logistics, and our revenue opportunities remain strong. While we see opportunities for margin improvement, including investment in light automation in both the fulfillment facilities, Boston and Kansas City, we anticipate EBITDA margins will be tempered due to the resultant revenue mix driven by higher growth, lower margin logistics contracts. Early in the third quarter, we entered into an agreement to manage the middle-mile logistics for a platform provider of low-cost delivery services to retailers and brands. We anticipate significant growth in the total freight under management for Hart Hanks Logistics in the second half of 2022 and into 2023, and we expect continued year-over-year growth in our fulfillment and logistics business. New wins for the quarter included a leading branding company selected Hart Hanks Fulfillment to manage the mass production, kitting, and distribution of 600,000-plus holiday sample kits for a Fortune 50 retail partner. This new relationship has already led to multiple follow-on production runs across their kitting and fulfillment network, directly supporting additional retailers and national brands looking for innovative ways to get products into the hands of their customers. Second, an existing customer care client leveraged fulfillment expertise to build and deliver thousands of promotional kits to high-value customers, time to coincide with and promote their monthly televised events. Finally, on to our marketing services business. Its revenues decreased just slightly to $13.5 million, but EBITDA improved to $1.8 million from $1.7 million. in the quarter a year ago. We continue to drive improved profitability from the marketing services segment as we realign our resources, reduce our expenses, and invest in technology and infrastructure to better serve our customers. Continued focus on delivery model and operational improvements are driving the enhanced profitability. We made significant progress in enhancing our product offerings and marketing campaigns that highlight targeted solutions for demanding customers. We remain aggressively focused on attracting new clients within prioritized market categories, including healthcare, financials, B2B tech, and consumer products. And our marketing services revenue pipeline remains strong. To further drive growth, we have increased our marketing spend, and we are hiring sales and marketing talent for the marketing services business in the third quarter. A new business win for marketing services in the quarter included a regional bank that selected Hart Hanks to provide digital media planning and buying, creative strategy and content development, leveraging our strong category expertise, our effective creative product, and our ability to provide the full array of services the bank needed. In conclusion, Hart Hanks has clearly established a new profitable baseline and a platform for consistent growth. Our long-established relationships with blue-chip customers and our talented employees are key assets to our business. Our optimism for top-line growth has increased, and our confidence in sustainable profitability has grown, even as the macro environment has tempered. We expect continued positive net income, a significant year-over-year improvement in full-year EBITDA, thriving higher free cash flows, during 2022. With that, I turn it over to Lori.
spk01: Thank you, Brian. As Brian said, this quarter unfolded as we anticipated with a modest decrease in revenue, but a significant improvement in operating income and EBITDA. The June quarter was our fifth quarter in a row of positive EBITDA at 4.6 million. And perhaps more importantly, we are delivering solid GAAP profitability with fully diluted earnings per share of 52 cents compared to $1.27 in the second quarter last year, which included a $10 million or $1.39 per share one-time gain related to the extinguishment of our PPP loan. This year's GAAP result does not include any non-recurring adjustments or benefits. Our performance included new business wins, growth within our customer base, and the benefits of our asset light model. Our focus for 2022 is to expand revenue and margins. Longer term, we have a solid platform with differentiated offerings that should enable sustainable growth and solid profitability. The large non-operational restructuring charges are behind us. I'd now like to walk through the results in more detail. Second quarter revenue was 48.6 million, down 1.4% or 0.7 million from 49.3 million in the same period last year. Revenue growth was led by our fulfillment and logistics segment, which was up 3.9 million or 24.3% year over year. Customer care was down 3.8 million or 19.8% year over year, and marketing services was down 5.3%, or $758,000 from the prior year quarter. From a contribution margin perspective, our customer care segment delivered $2.5 million in EBITDA, down $857,000, or 25.6%. Our fulfillment and logistics segment delivered $3.2 million in EBITDA, up approximately 1.5 million or nearly double from the year-ago quarter. Marketing Services EBITDA grew by 100,000 or 5.1%. We believe each of our three operating segments are operating efficiently and should generate positive EBITDA levels for the foreseeable future. Our operating expenses for the second quarter were 44.5 million. down 6.9% from $47.8 million in the year-ago quarter due to labor, advertising, and SG&A expenses, as well as the absence of $1.7 million in restructuring expense in the second quarter last year. This was partially offset by modestly higher production and distribution expenses due to the increased revenue in our fulfillment and logistics segment. Operating income was $4 million, up 2.6 million compared to operating income of 1.4 million in the year-ago quarter. This improvement is attributed primarily to margin expansion and sustained expense management efforts. We posted net income of 4.5 million, or 54 cents per basic and 52 cents per diluted share in the second quarter, compared to net income of 10.6 million, or $1.36 per basic, and $1.27 per diluted share in the second quarter last year. We recognize that one-time gain of $10 million, or approximately $1.39 per diluted share, related to the extinguishment of our PPP loan in the second quarter last year. EBITDA for the second quarter was $4.6 million, compared to EBITDA of $2.1 million in the year-ago quarter. Now turning to our balance sheet. As of June 30th, 2022, we had cash and cash equivalents of 10.6 million compared to 11.9 million at December 31, 2021. As of June 30th, we have 6.8 million in net income tax receivable. This is due to our net operating loss carrybacks for 2020 of 7.6 million, which are partially offset with state tax payables. Our combined long-term pension liability on the balance sheet as of June 30th was $50.7 million. As a reminder, we have both qualified and non-qualified pension plans. We continue to monitor the impacts of rising interest rates and changes in asset values that are impacting our pension liability. While the pension liability is formally revalued on the balance sheet only at year-end, We have evaluated our net pension obligation as of the end of July and our net pension liability has declined approximately 10 million since year end 2021. Additionally, as Brian mentioned, we reached an agreement with Wipro at the end of the quarter in which we will acquire all of the outstanding preferred shares for a one-time cash payment of 9.9 million and 100,000 common stock shares. Please note that under GAAP at closing, this transaction will result in adjustments to our earnings per share, but not our net income. This is likely to close during the third quarter. The elimination of the preferred stock dividend accrual and the earnings attributable to preferred shareholders will be offset by a one-time accounting charge based on the fair value of the common shares. We funded the cash portion of the repurchase consideration with a combination of cash and cash equivalents on hand and an additional $5 million borrowing under our credit facility. As of June 30, 2022, we had a total of $10 million drawn against our $25 million credit facility. As of today, the full $10 million has been repaid and we have no amounts drawn on the credit facility. With that, I will turn it back over to the operator to take your questions. Thank you.
spk02: And at this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll pause for a moment to allow the questions to queue. We'll take our first question from Julio Romero with Sidoti and Company.
spk00: Hey, good afternoon. Thanks very much for taking my questions. So to start, I guess in your prepared remarks, Laurie, I think you mentioned you sounded more confident for year-over-year revenue growth than your comments on the first quarter call. If you could just talk about What's making you guys more confident over the last three months with respect to the sales outlook for the year?
spk01: Sure. I think, you know, as we've said, there's certainly been a focus on some cross-segment selling, and we're definitely seeing some results from that. Brian mentioned the ramp-up to support the Game of Thrones release is providing some additional revenue for us in Q3. And overall, I think we're just seeing strength in the business and some of these new contracts coming to fruition. Brian, did you have anything else to add?
spk05: Yeah, no, I think the only other real significant increase in the second half that is worth highlighting, I mentioned it in my comments, but the platform that we have under our logistics business should generate some material increases in revenues as well.
spk00: Gotcha. And that kind of dovetails into my next question on that fulfillment and logistics segment. You had really strong sales margins and the incrementals margins were really strong. If you could just talk about what went right for the segment in the quarter, maybe what the mix was of fulfillment versus logistics and how you see margins for that segment trending for the remainder of the year.
spk05: Yeah, so sequentially, I will say that we post a pretty strong second quarter that makes it a little bit more challenging sequentially for us. And I think the revenue mix concept is important to note. You know, that said, our logistics business in the second quarter produced double-digit EBITDA margins, and that nice strong performance there, along with the the revenue mix of both print and kidding fulfillment that we had both in both Boston and in Kansas City really helped the business drive, drive forward, including some ongoing project work that we got as a result of a recall that I think we talked about on our first quarter call that continued into the into the second quarter. So I still think we're improving operationally because we're fully into the new facility, but we're still racking out the additional 100,000 square feet that might actually be done in the next week or two. But with that, I think it's going to allow us to hopefully gain some additional incremental opportunities from operational efficiency. That said, I think it should be noted that the revenue mix, because I think we're going to have a stronger increased performance out of logistics, is going to it's probably going to push the margins down just a little bit sequentially.
spk00: Okay. That makes sense. And then just staying on that segment, you mentioned you're seeing healthy demand for fulfillment and logistics, even as some of the larger players, logistics players, e-commerce giants, maybe slowing some spend there. Just would love to hear you expand on that. And what are you seeing in the demand pipeline that's maybe giving you some confidence there?
spk05: So, I think there's three areas. We obviously have a nice opportunity within logistics, as I mentioned. There's a lot of really positive momentum with some of our existing clients. And one good example there is us leveraging technology and electronic data exchange with some of our real large employee, I'm sorry, with a real large customer contract that when we sat in front of them and met with them, it really identified opportunities to not only make their life easier, but it allows us to actually expand some of what we do for these large clients. So I think that organic growth, as an example with leveraging tech, is going to be a continued catalyst for us just within the old existing customer base. And then I do think that the branding company that I talked about in the new business section is a great example of just a completely new opportunity. No relationship that we ever had in the past, but some of our marketing efforts came to fruition and now we're ramping up as we speak. And I'm heading out to Boston next week to meet with the customer to talk about additional opportunities as we've invested in some light automation to increase the speed of our pick-pack and hopefully improve some of the performance and the margins within East Bridgewater.
spk00: That's helpful. Thanks very much for taking the questions, and I'll pass it on.
spk02: Thanks, Julio.
spk01: Thanks, Julio.
spk02: And as a reminder, if you do have questions, please dial star 1. Our next question comes from the line of Michael Kopinski with Noble Capital Markets.
spk04: Thank you. Congratulations on your solid quarter. I was just wondering, now that you've paid off your debt, are you planning to find traditional financing options at this point, or is that still into the future?
spk01: So, Michael, we did actually do a new traditional financing arrangement that we closed on last December. So, this is truly just an asset based on our accounts receivable, so standard $25 million line. Okay.
spk04: Gotcha. I didn't know if you were looking at further financing options beyond what you've done then. Okay. In terms of the quarter, obviously, you touched on it in the question earlier. The margins and fulfillment were a little better than expected. Did you have duplicative costs in the quarter related to the consolidation of your Kansas City facility? Would margins have been better, or how much impact did you have in terms of those costs?
spk05: So I wouldn't say we have duplicative costs, and Lori can chime in if she can think of any at this point. But what I would say is until we have the building fully racked out, I don't think we're hitting on all cylinders, right? I think the Kansas City management team has done a phenomenal job improving operations, and obviously the results are shown there. But I still think that there's some room to grow as we finish out the rackings. of the additional 100,000 square feet we took on five, six, seven months ago.
spk01: I would agree. There's no duplicative cost, but there were in Q2 some last year as we were moving into that facility, and that's certainly part of what's driving that margin improvement.
spk04: Gotcha. And does the repurchase agreement with Wipro dissolve the vendor agreement that you had with them? Does it change the relationship in any way going forward? I was just wondering if you could just shed a little color on your relationship with them.
spk01: Sure. So we actually did dissolve the vendor agreements previously. This is the last transaction that we had with Wipro.
spk04: Gotcha. And then just in terms of the general environment, you touched on this with your individual businesses, talking about the segments and so forth. Are there any particular businesses, I know you're close to your clients, and you tend to have business that is a little bit farther into the future, and they're more project-related in many cases. I was just wondering if you could give us a sense of what you're hearing from advertisers, any concerns that they have at this point in terms of the general economic conditions and things going on with them and how they're being influenced by the inflation and so forth.
spk05: Yeah, so Mike is a question that I ask my sales team on a weekly basis at the very least. And to date, we've got no specific examples where spend has been reduced as a result of them pulling back spend. Now, we've had some clients delay for other idiosyncratic issues within their company, but nothing... has kind of stopped as a result of the macroeconomic or inflationary pressures in advertising spend that they have. So I don't know if we're just lucky right now, but, you know, I asked that question just yesterday, and to date we still haven't had anything that has stopped our opportunities as a result of contraction in spend.
spk04: Oh, that's terrific. And then, of course, now you have – In terms of the unfunded pension liabilities, so you're saying that the $10 million would be lower by $10 million by year-end from current levels, Laurie, which is $50 million? I'm sorry, if you could just explain that a little bit.
spk01: Yeah, let me just explain. So we revalue, officially revalue the pension liability on the balance sheet at the end of each year. based on the changes in asset value and interest rate. So it hasn't, other than the normal expense runoff for the year, there's no additional adjustments. So we looked at it from December 31st when it was last revalued, and then we looked at it as of July 31st. And to date through July 31st, we have a $10 million decrease approximately on the pension liability. So we've still got five more months to go in the year, So we'll see what happens with asset values and interest rates through the balance of the year. You know, while asset values are certainly going down, interest rates have been going off, which is more than offset the changes on the assets.
spk04: For sure. And then what would be the best use of cash at this point? Are you looking at, you know, now that you're generating cash flow, your solid earnings, what are your thoughts in terms of, looking at acquisitions, you know, what are the options uses of cash at this point?
spk05: Yeah, so Mike, obviously, you know, we have healthy discussions about the use of capital going forward. I will say, you know, I want to step back and say we just paid off 10 million of debt, right? And we paid off 10 million worth of preferred shares, or we have it in escrow, as you can see on the balance sheet. So, We're stepping through all what we think are the big items. The next set of potential use is going to be continued investment in the business, whether it's technology or assets that are going to improve efficiency. I think I mentioned it before. If there are acquisition opportunities that help complement our capabilities and expand our revenue, we'll certainly look at that. And then it's evaluation, is there other things from the balance sheet that we can do, whether it's pension and or, you know, deliver money to our shareholders, right? And so we're evaluating all of those options and, you know, I will say we haven't built a lot of cash yet because we just spent a whole bunch, but we certainly are planning and looking forward to making sure we do what's right for you know, for our shareholders and our business. All right. Terrific. Thank you so much.
spk02: Thank you. And there are no further questions at this time. I'll turn the floor back to our speakers for closing remarks.
spk05: And this is Brian. Thank you, everybody, for joining, and we'll see you in one quarter from now. Take care.
spk02: And thank you for joining the Hart-Hanks Second Quarter Earnings Call. This does conclude today's program. You may now disconnect. Have a great day.
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