Harte Hanks, Inc.

Greetings and welcome to the Hart Hanks fourth quarter and full year 2022 earnings conference call. At this time all participants are in a listen only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. Please note this conference is being recorded and I will now turn the conference over to your host Tom Bowman of FNK IR, you may begin.

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 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 March 7th, 2023, 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 the 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 the call over to Brian. Brian, the call is yours.

Thank you, Tom, and good afternoon. 2022 was a milestone year for Hart Hanks, and this year we'll be celebrating our company's 100th anniversary. After years of cost-cutting to mitigate declining revenue, we have successfully stabilized the business established sustainable profitability across our entire enterprise, and created a platform for profitable growth. We enter our 101st year stronger than we've been for more than a decade, and I couldn't be prouder of our team. For 2023, we expect continued growth in our top and bottom line, even though we're facing a tough year over year comparison in the first quarter. Historically, Q1 is our seasonally lowest quarter of the year, However, last year we had multiple non-recurring projects in Q1, including a significant recall project that led to an abnormally strong first quarter in 2022. Based on the visitability we have, with the first quarter more than two-thirds complete, we expect modest year-over-year revenue growth, and we expect a drop in year-over-year quarterly EBITDA, due in large part to our revenue mix changes. Nevertheless, as we move through 2023, we expect to generate high single-digit revenue and EBITDA growth on an annual basis. We continue to expand existing client revenues and add new logos. The recent wins have more than offset the customer care pandemic-related projects reaching end of life and the reduced revenue from our legacy direct mail campaigns and marketing services. While most of our growth has been in our fulfillment and logistics segments, which has resulted in modest margin compression, we continue to generate significant profitability and free cash flow, enabling us to strengthen our balance sheet. The financial improvements are due in large part to the systemic changes we have made at Hart Hanks, most notably a strategic shift to an asset-light business model. We have eliminated unprofitable contracts, and we are well positioned for long-term, sustainable operating income, EBITDA. Our past and expected future profitable performance is reflected in our fourth quarter results as we recorded a non-recurring $19.8 million tax benefit due to the release of the valuation allowance. Revenue increased 5.4% for the quarter and 6% for the full year. Our fulfillment logistics segment grew 34.4% in the quarter largely driven by a large logistics client. Our customer care segment had revenue decline 12.9%, but EBITDA increased 24.4%, demonstrating the improved operating efficiency in the quarter. Our marketing services segment revenue decreased 6.8%, and EBITDA decreased 18.4%. But we enter 2023 with optimism to deliver improved results based on a growing pipeline and refocused operational discipline. We believe we have ample opportunities to drive growth in all three big business segments in 2023. Our offerings are aligned with the needs of our customers, and we are having success in cross-selling our services and expanding our client relationships. We remain focused on selling our differentiated solutions that leverage more than one of our operating segments to maximize value for our customers and ultimately our shareholders. Importantly, as we move into 2023, our focus is on growth, specifically adding new logos and moving beyond cross-selling. Since the beginning of the third quarter, we have added four new sellers to our team, and we are leveraging our talented team members from our inside-out acquisition to drive our inside sales function. In addition, we are aggressively marketing our services in the B2B tech, DPG, retail, pharma, healthcare, streaming, and QSR verticals. We expect strong new logo performance in 2023 as we convert our growing pipeline. In addition to our sales and marketing investments, we are investing in technology to create opportunities within our current, former, and prospective client base. Our investments in tech enabled solutions, including CRM software, self-service help desk, audience finder, data view, and telephony, provide improved data capture, actionable insights, and digital delivery opportunities for our marketing services and customer care business segments as our customers seek to optimize results, improve the customer experience, and reduce marketing spend in a tough economic environment. Our improved financial and operational performance has strengthened our balance sheet giving comfort and confidence to both our loyal employees and our large customers. We ended the year with over $10 million in cash and no debt. In addition, our outstanding long-term pension liability has decreased by nearly $15 million from December 31, 2021, due in part to higher interest rates. As a result, we've initiated the process to fully fund and transfer one of our qualified pension plans to a third party. Another benefit of our improved profitability was the ability to redeem and repurchase our preferred shares from Wipro. We completed this transaction in December, which eliminated the diluted impact of the preferred shares on earnings and eliminated restrictions on our use of capital and our ability to borrow funds. Finally, we completed the acquisition of Inside Out in December and benefited from one month of revenue from this bolt-on acquisition. As a reminder, Inside Out is a data-driven inside sales optimization firm. Inside Out specializes in building, scaling, and optimizing inside sales initiatives. We paid $7.5 million in cash and stock for Inside Out, and we added a seventh least location in North America with the acquisition of inside out 7,500 square foot headquarter facility based in St. Petersburg, Florida. The acquisition will provide short-term revenue growth opportunities as well as being immediately accretive to our earnings. We anticipate cost synergies alone will drive the post acquisition valuation to the three to four times EBITDA range. We look forward to additional acquisitions to augment our existing business with new capabilities enhanced technology offerings, data analytics, new customers, and in some cases, new geographies. However, I stress that we will remain disciplined in our acquisition evaluations and proceed with caution. Simultaneously, we continue to invest in our business to drive growth, maximize profitability, and increase shareholder value. Hiring and retaining talented people is a key area of focus. We are simultaneously improving our technology platforms to enhance market opportunities and sell our fully integrated service offerings. Now on to our results. Revenues increased 5.4% in the quarter to $54.8 million. Operating income increased approximately $500,000 or 19.8% compared to the fourth quarter last year. Our EBITDA increased to $4.4 million from $3.5 million in the fourth quarter last year. Net income for the quarter was $21.8 million compared to $1.8 million in last year's fourth quarter. Hart-Hanks is now solidly profitable on a GAAP basis. We expect profitability both in terms of EBITDA and GAAP net income for each quarter in 2023. Now turning to our operating segments. Customer care revenue decreased 12.9% from the previous year over year quarter. EBITDA increased 24.4% to 3.2 million from 2.6 million in the prior year quarter. The revenue decrease was due to the anticipated rolling off of COVID related project work, but the EBITDA improvement improved due to customer mix and certain bitter operating efficiency in the business. The customer care pipeline remains healthy with current, new, and former customers, including but not limited to outbound generation and inside sales services. And the pipeline is strong for inbound services, including entertainment, streaming, pharma, healthcare, and technology verticals. Customer care continues to invest in sales and marketing campaigns, conferences and partnerships, and the segment recently hired another salesperson to drive growth in 2023. New business wins for the quarter included a community-based health plan selected Hart Hanks to support its members with plan-related customer support. The company selected Hart Hanks to provide extended support hours for its members while maintaining its CMS five-star rating. Hart Hanks has consistently delivered high CMS ratings for its clients through its rigorous training and certification process for employees and systems. Second, a global beverage company expanded services with Hart Hanks by extending its customer care solution to additional market geographies. The expansion allows our client to benefit from our lower cost facility in the Philippines while improving its customer experience with faster and easier access or support. Fulfillment and logistics revenue increased 6.3 million or 34.4% compared to the fourth quarter last year and EBITDA increased 5.9% to 2.3 million. We are realizing the benefits of consolidating our operations into the Kansas City facility and further integrating our supply chain and logistics segments into our fulfillment process. We continue to win New contracts in both fulfillment and logistics and our revenue opportunities remain strong. New business wins for the quarter included a growing international investment firm with approximately $30 billion of assets under management selected Hart Hanks to provide digital print and premium item fulfillment to its brokers. Our financial services sector experience and streamlined onboarding to support a rapid pivot from a competitor were key differentiators in the selection process. Second, a leading brand company selected Hart Hanks to manage the production, kitting, and distribution of 250,000 makeup kits for a Fortune 200 retailer. This partnership includes, or this partnership continues to lead to new value-added product fulfillment opportunities unlocked by our investment in flexible automated production lines. Marketing services revenue decreased 6.8% to $13.6 million and EBITDA decreased to $2.1 million in the quarter. The largest driver of the year-over-year revenue declines relate to direct mail campaigns not continuing. We also had project work conclude last year, but growth in hospitality, financial services, and CPG clients have replaced this revenue. This was another quarter of sequential improvement in profitability from marketing services segment as we realigned our resources, reduce our expenses, and invest in technology to better serve our customers. We remain focused on attracting new clients within prioritized market categories with near-term opportunities in healthcare, pharma, retail, B2B tech, and consumer products. We are experiencing increased opportunities with our demand generation, data view, and audience finder offerings, and we see increased opportunities with inside-out clients and prospects. To further drive growth, we have increased our marketing campaign and leveraged new sellers to expand our opportunities. New business wins for the quarter include a leading premium retailer of kitchen and bath outdoor products, selected Hart Hanks to design and execute a series of lead generation programs, chosen based on our extensive experience in retail strategy and our ability to deliver a full suite of creative data analytics and campaign execution. And second, a leading global technology manufacturer expanded our successful B2B demand generation program into another geography in South America by utilizing Hart-Hank's Audience Finder product to identify buyers with intent. In conclusion, as we celebrate our 100th year, Hart-Hanks is stronger today than it has been in years with a sustainable, profitable business model and multiple pathways for growth. We expect continued positive net income and a significant year-over-year improvement in full-year EBITDA, driving higher free cash flows during 2023 as we target revenue and EBITDA growth for the full year. even when considering a challenging first quarter comparison. With that, I turn it over to Lori.