Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Harte-Hanks (NYSE:HHS)

Q2 2013 Earnings Call

August 01, 2013 11:00 am ET

Executives

Robert L. R. Munden - Senior Vice President, General Counsel and Secretary

Robert Philpott - Chief Executive Officer and President

Douglas C. Shepard - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Juan Bejarano

Daniel Salmon - BMO Capital Markets U.S.

Operator

Good day, and welcome to the Harte-Hanks Second Quarter Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Robert Munden, please go ahead, sir.

Robert L. R. Munden

Thank you. Our call may include forward-looking statements, such as statements about our strategies, adjustments to our cost structure, financial outlook, capital resources, competitive factors, business and industry expectations, litigation developments and regulatory changes, economic forecasts for the markets we serve, and other statements that are not historical facts. Actual results may differ materially from those projected or implied in these statements because of various risks and uncertainties, including those described in our most recent Form 10-K and other filings with the SEC, and in the cautionary statement in today's earnings release. Our call may also reference non-GAAP financial measures. Please refer to today's earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations section of our website at harte-hanks.com. I'll now turn the call back over to the operator.

Operator

Thank you, Mr. Munden. And at this time, I would like to introduce your host for today, Mr. Robert Philpott, CEO. Please go ahead, sir.

Robert Philpott

Thank you, and good morning, everyone, and welcome to Harte-Hanks second quarter earnings call. For those of you that I've not yet met, I'm Robert Philpott, and I assumed the role of CEO at Harte-Hanks exactly 1 month ago today, on July 1. So I'm joined on today's call by somebody you are much more familiar with, that's Doug Shepard, CFO at Harte-Hanks. And in a few minutes, he will take you through the details of today's earnings release.

Before that, however, I'd like to take a few moments to explain my engagement plan with the business during these first few months that I'm in the role. Although I'm intimately familiar with the marketing services sector, I will take this time to become more knowledgeable on the direct and targeted marketing industries, and more importantly, to get to know the Harte-Hanks business in detail. It's my intention to spend time in every Harte-Hanks location, whether that's part of our Shopper or Direct Marketing businesses, and it includes our offices in the U.S., Europe and in Asia, speaking with all of the leadership teams. In addition to that, I'm going to make time to listen to input from other key stakeholder groups. I've already begun to hold review meetings with our key client peers[ph] And to communicate directly with you, our investment community. My on-boarding plan kicked off in early July and will not conclude before the end of fall. So with that brief introduction, I'll now pass you over to Doug, who will take you through our latest financial performance. I will, of course, rejoin the discussion to conclude our announcement and to take questions from you later on the call. Doug?

Douglas C. Shepard

Thank you, Robert, and good morning. Consolidated revenues for the second quarter decreased 0.7%. Operating income increased by $0.6 million, after excluding both the $2 million charge this quarter related to the retirement of our former CEO and the hiring of Robert, and $159.1 million last year for the impairment of Shoppers goodwill, other intangibles and restructuring charges. Excluding the same items, second quarter diluted earnings per share from continuing operations was $0.15 per share for 2013 compared to $0.14 per share for 2012.

First, I will focus on the Direct Marketing results. Revenues decreased 1.9% and operating income, excluding 2012 charges, increased 2.3%. I'll explain how we increased operating income in a minute. On an adjusted basis, we increased operating margins from 12.3% in 2012 to 12.8% in 2013. Moving to revenue from a vertical standpoint, we have the following results: financial services increased 4% or approximately $800,000, retail increased 2% or about $800,000, high tech was flat, automotive and consumer brands decreased 2% or about $0.5 million, pharmaceutical health care decreased 12% or $1.4 million, and select was down 17% or about $2.3 million. Our financial services vertical increase was driven largely by volume increases from a demand deposit response program and increased credit card solicitation. Financial service companies are trying to capitalize on new consumer behavior data as a result of cross-channel marketing programs; develop path-to-purchase initiatives, which accelerate and optimize sales; and reallocate marketing dollars in reaction to changing consumer demands and interest rate environments. The retail vertical increased 2% or $0.8 million during the quarter. The increase is due to increased contact center activity and multiple services being implemented at a new specialty vision retailer. Retail continues to be an industry where our clients quickly make changes to their marketing plans based on changing consumer perceptions, and we note the National Retail Federation is projecting a 13% decline in spending for the back-to-school season. The high-tech vertical is flat for the quarter. This reverses a long trend of declining revenues in this vertical for us. Most of our high-tech clients, we support and deliver their demand generation programs to businesses. We believe our investment in solutions designed to support our client's marketing initiatives, particularly aligning content, data and digital strategy with lead generation programs, will continue -- I'm sorry, will continue to hit home with them. Our automotive and consumer brands vertical was driven by increased technical support in agency services. Overall, consumer brands are seeking more expert advice in delivering capabilities for data-driven consumer-focused engagement to drive the right consumers to the right purchase channel. An important sector, automotive, remains steady with increased attention to parts and service and repurchase. The shift towards digital and e-mail continues. Our select vertical decreased primarily from 2 client events; one was a renewal rate reduction and lower headcounts, and the other was a client loss. Our pharmaceutical health care vertical continues to be impacted by the previously-discussed loss of a pharmaceutical customer in the third quarter of 2012. The challenges facing health plans under the passage of the Patient Protection and Affordable Care Act provide opportunities for Harte-Hanks. Health care insurers and providers are looking for assistance as they address marketing strategies and make the transition from a traditional B2B environment to a B2C environment. Health plans need to reach key target populations and clearly communicate the benefits of complex solutions effectively, while differentiating themselves against competitive plans. We are experiencing some success, as evidenced with recent client wins, but these wins are not enough to offset the loss of a large pharma client last year.

Now turning to margins in the Direct Marketing business. Operating margins, excluding 2012 charges, increased to 12.8% from 12.3% during the quarter. This is a result of effective labor management and decreased mail supply chain costs due to fuel costs.

This concludes my comments on Direct Marketing, and I will now turn to Shoppers. Shoppers revenue increased 2.8% during the quarter. Operating income, excluding charges, increased $0.5 million. We experienced revenue growth in the quarter from the following sectors: consumer spending, automotive, health, restaurants and communications. Decreases occurred in real estate and education. The largest increase in consumer spending came within the furniture and home furnishings area. This continues a trend that started in the fall of 2012. While the real estate sector declined, the rate of decline has been getting smaller for the last several quarters. Distribution revenues were strong during the quarter and offset by declines with in-book or ROP advertising. While we are pleased with recent Shoppers revenue performance, we are still cautious going forward because of its dependence on the California economy. On the cost side of Shoppers, labor costs were down 8%, which were offset by increases in printing costs. Postage rates increased about 2% during the quarter from the U.S. Postal Service increase earlier in the year, and newsprint rates decreased approximately 2% during the quarter.

Turning to the items below operating income on the consolidated P&L. Our second quarter effective tax rate was 38.4%, which is consistent with our 39% in the second quarter of 2012, excluding charges. Our net debt balance was $40.3 million versus $60.6 million at year end, a reduction of $20.3 million. We currently have $70 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of approximately $64 million at the end of the quarter. We continue to have a strong balance sheet, with low leverage and plenty of liquidity. For the quarter, we spent $4.8 million on capital expenditures compared to $2.6 million in the second quarter of 2012. We purchased approximately $0.6 million of stock during the second quarter. We have about $4.5 million remaining under our 2012 stock repurchase plan authorization.

Finally, I would like to reiterate our guidance in this morning's release for the remainder of the year. Our business continues to be volatile, especially in the traditional services we provide. For the remainder of the year, we expect to see revenue trends consistent with those seen in the first half, and with the operating income margins under short-term pressure. With that, I'll turn the call back to Robert.

Robert Philpott

Okay. Thank you for that comprehensive run through the information, Doug. So, I'll simply conclude. We continue to successfully navigate our business through a time of significant industry change, and where there certainly is a degree of short-term uncertainty in the outlook. I think our continued astute management of the cost base is serving us very well, although we all recognize that this is not the recipe for long-term growth in our business. I've been encouraged by the depth of expertise and the strength of spirit I have encountered in my visits to our businesses to date. It certainly supports my initial view that Harte-Hanks has a solid foundation of experience and relevance in both the direct marketing and targeted marketing industries. Our ability to win new business in an industry where omni-channel marketing is increasingly the norm is evidenced by our selection as a valued business partner by major multinational brands. I'd like to highlight 1 or 2 of these, just to illustrate the points I've made. Most recently, Shell, I believe are still the seventh largest oil company in the world, selected Harte-Hanks to design and execute new customer acquisition programs, using a combination of data, analytics and custom-designed business-to-business communication strategies. A global information storage company appointed Harte-Hanks to architect and build a worldwide marketing database, integrating multiple marketing technology tool sets and providing a unified data management solution to improve the clients' analytics and their marketing decision. And finally, one of the world's largest independent software firms has engaged our business to provide business-to-business lead generation and qualification services for the firm's operations across Europe. Harte-Hanks will employ an integrated suite of digital agency, data and contact center solutions to meet this brief.

In this past quarter, Harte-Hanks has continued its progress in the emerging of the exciting digital marketing field. Our ongoing investments in both technology and people allows us to share this journey with clients as they expand their digital marketing programs. Examples of the success of this cooperative approach includes a worldwide IT services company, which has appointed Harte-Hanks' Mason Zimbler agency to develop social media programs that provide the client's sales force with social media skills, tools and tactics. Mason Zimbler will expand on the foundation of several prior successful social media programs that it's built for the client over the past 3 years. And I'd particularly like to highlight a leading home goods retailer, which has engaged Harte-Hanks to provide technical integration support and testing of their customer preference centers. Harte-Hanks will ensure a consistent experience across all channels for the client's customers, and that includes e-mail, mobile and social. And I think this is an excellent example of a company which had a significant, traditional direct marketing program with us, and which has now extended the relationship to encompass digital.

So I mentioned earlier the depth of talent within the Harte-Hanks team. This is not just the view of a new CEO to the business. I'm delighted that our teams have been recognized publicly for the quality of their work. Harte-Hanks' Trillium software was named the data quality leader by the independent analyst firm, The Information Difference, and recognized for its commitment to customer satisfaction. Trillium was cited as the leading vendor in terms of technology and market strength, with the happiest customers. Recently, The Agency Inside Harte-Hanks won 11 Hermes Creative Awards for client work in both traditional and digital media. And although I don't usually single out individuals, I want to recognize Michele Fitzpatrick, Executive Vice President, Strategy and Marketing at The Agency Inside Harte-Hanks, who was named Direct Marketer of the Year in Philadelphia for her significant contribution to industry leadership excellence.

Now having told you all of the great things we've been doing in the past quarter, I think it's fair to say that we still have a great deal of work to do at Harte-Hanks. Whilst we should be proud of our ability to make the most efficient use of our cost base, we must return this business to growth. We acknowledge that this will be challenging in the short term. However, I will lead our teams to a renewed focus on the core strengths in the business, as defined by our clients. As Doug mentioned, we have the capacity for investment, but this investment must be targeted, relevant and value-enhancing. For those of you who may have looked at my business background, you will see that I'm a builder of marketing businesses, investing in people and technology and using both M&A and providing financial backing for internal development plans. And we have the support of a marquee client base, who continues to challenge us to seize the opportunities that are inherent in our new marketing environment. So as you can tell, I'm both excited and enthusiastic about our future.

Finally, on today's call, I want to thank Larry Franklin, our outgoing CEO and Chairman, for his contribution to the business over many years. It is both he and the Harte-Hanks team who should take credit for the solid set of results presented to you today. And with that, I want to thank everyone on today's call for your continued interest in our business and for your ongoing support to our ambition. I'll now hand back the call to our operator who will provide you with details on how to participate in the Q&A session with Doug and myself. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And we will first go to Michael Kupinski with Noble Financial.

Juan Bejarano

This is actually Juan Bejarano in for Michael Kupinski. I guess my first question is for Robert. Can you maybe speak a little bit about your decision to join Harte-Hanks? Maybe talk about the factors that interested you to join the company? And maybe a little bit about your vision for the company and where you may want to take it?

Robert Philpott

Absolutely. Thank you for the question, Juan. Let me take the first part of that and talk about my decision to join the business. In many ways, if I could have written my own perfect job description, the role at Harte-Hanks would have fitted that pretty neatly. We've got a business that has a tremendous tradition, a very solid history of performance. We -- when we look at the client base, I could see in early discussions with people in the industry that this was a business that really had marquee clients and had long-term relationships with them. The business clearly has the ability to invest in its future. That's attractive. It's attractive for any CEO, particularly one who is going to engage perhaps in a change or a refocus of that business. You want to make sure that you've got the ability to make the change. And I think it's no secret that Harte-Hanks has the facility to make that happen. And then most important of all, as I sat down and spoke with the board members, both individually and, at times, together, and as I met some of the more senior management in the company, it was clear that they were a group of people who were ready to make that journey. And therefore, it wasn't a case of having to bring a company or a board fighting to the table for a change of process. So as I said, lots of the ingredients were there in place, and it was a relatively easy decision for me to take. Now, let me talk a little bit about my vision for the company. I'm a firm believer in growth, and that's one of the challenges that Harte-Hanks faces right now. However, I made a commitment to myself that I wouldn't jump to any particular conclusions until I've spoken to enough of the stakeholders in our business. That's both our staff, our clients, investors, suppliers, and I wouldn't jump to a conclusion about where this business needed to go. I'm engaged in significant fact-finding exercises I've highlighted, that's going to take 3, 4 months to complete. And it will only be at that point that I will begin to formulate the ideas what the future for Harte-Hanks might look like, what our strategy might shape up to be and what the vision for the company will be. But I'm confident that it'll be ambitious. I'm confident that it will have growth built in as part of that, and I'm excited about the prospects for the company. I hope that answers your question, Juan.

Juan Bejarano

Yes, it does. We're glad that you joined in, and congratulations.

Robert Philpott

Thank you very much, I appreciate that.

Juan Bejarano

And then kind of moving on. In terms of the Shoppers business, it seems that the segment is showing some signs of life. I mean, in the past, it was expected to reflect about 6% to 8% revenue growth. Can you maybe talk a little bit about what you expect the long-term revenue growth of Shoppers to be, particularly in an economic recovery? And maybe, where do you think sustainable margins or normalized margins should be going forward?

Robert Philpott

Well, I'm going to take the first part of that question and then pass across to Doug, because I know he's keen to answer that. The first part is that, as someone new to the business and having heard a little bit about Shopper previously, I'm delighted to see, as you have noted, signs of life, I think, as you mentioned with it, and growth in that business. So that's -- it's very pleasing. I'll spend some time with our Shopper business in California later this month. I've already met Mike Paulsin, who has told me a lot about the -- that part of our organization. But I'll pass to Doug to give you more information on the specifics of your question.

Douglas C. Shepard

Yes, Juan, to deal with the potential growth rates and things of that nature with Shoppers, we're, as you stated, obviously encouraged by the revenue results for the last several quarters. Two of the last 3 quarters we have had revenue growth. But at the same time, we pay attention and are worried to a certain degree, because it's highly dependent on one state economy, which is the state of California. So it's a muted excitement, but obviously, when you do what they have done for the last several quarters and start seeing some of the results that they have delivered in the State of California, has performed better, it's encouraging to see. But we don't pay as much attention or are as focused on trying to figure out what the long-term growth rates are, both from a top line and bottom line standpoint, as we are very focused on short-term growth rates and what we can do to sustain the revenue growth rates, especially after the last 4 or 5 years that the Shopper product has gone through. And the same thing on the bottom line results. We're focused on getting that incremental growth and continuing to grow and getting as much as we can and what we should be getting out of the incremental revenue growth, and not necessarily focus on hitting a certain number at a certain point in time. It's more of a focus on measured, sustained growth and continuing that over a long time period.

Juan Bejarano

Okay. Did you guys, maybe, view Shoppers as a non-core asset, I mean, possibly to be rationalizing some way in the future? Given the lower margins, lower growth potential, it's possible that it may be constraining total company stock valuations.

Robert Philpott

Since I joined the company and the 4 short weeks that I've been here, there have been sort of 2 or 3 questions that have consistently cropped up, and one of those relates to the question of whether Shopper is a core asset or is a strategic asset of the business. All I can do is repeat at this stage that I haven't met with that business yet. I intend to do that fairly soon. I recognize it as a question that needs to be addressed, and we will address that question relatively quickly.

Juan Bejarano

Fair enough. And then can you maybe comment about possible new areas of growth for the Direct Marketing business, including location-based and mobile advertising? Maybe, how do you guys stack up against the competition on that, and how significant is this business for the company at the moment?

Robert Philpott

It's a significant part of the business. We believe it will continue to be a significant part of the industry. But what we see as opportunities going forward will form part of the strategic exercise that I will engage with, with our business unit heads. And as I said, that will not begin to take place until I've completed understanding what we have. So I don't expect to come back and be able to answer that question fully for you quite until at least later in this year and perhaps early in 2014.

Juan Bejarano

Okay. I see. And then on Trillium, there appears to be strong growth prospects here. Can you maybe comment on revenue growth possibilities here, the prospects? And maybe what type of margins are you seeing at the moment?

Douglas C. Shepard

We -- as you know, in the past, we don't specifically disclose revenues by product or offering that we have out there, but we will share with you, as we have shared in the past. Trillium is a very strong offering that we have, highly rated, highly respected both by our clients and the analyst community who looks at their product. It's something that we're very proud of. They've had recent success with the banking and insurance claims modules that they've rolled out in the last year or 2. We highlight some further development that they are doing and that they've rolled out in the earnings highlights in the back of the press release. And about all we will comment about on revenue growth and so forth, they did have revenue growth in the second quarter, and we would expect and we do expect revenue growth for the full year out of that particular product.

Robert Philpott

I'd also like to add that we have secured a recent win with John Lewis Partnership with Trillium in Europe and London in the last few days. So we're very happy that's a continued trend in our Trillium business.

Juan Bejarano

Okay. Great. And then 1 last question on JCPenney, are there any updates on possibly changing strategy at JCPenney? Have they come back, or where are they in terms of previous levels?

Robert Philpott

First of all, I'll give my feedback on that, with the message that it continues to be difficult to establish any trend in behavior with JCPenney at this stage without a very clear direction on the leadership with that company. Some of the marketing functions in there are really just trying to do very short-term programs, and that's one of the things that leads to our view on volatility. But I'll give Doug an opportunity to perhaps supply a little bit more background to that.

Douglas C. Shepard

We continue to have a strong relationship with JCPenney. It's still a top retail client for us. We're very tied in and working with them very closely. As their new management team, and as Robert said, they're going through their own internal changes. But as they're making decisions, they're strategically focused on what they're going to do going forward. We're working very closely with them to provide the services that they need, and it's a business that did grow for us in the second quarter. So we're glad to see that. But exactly where they're headed and what some of their decisions are going to be going forward, we don't know yet at this point. But the relationship is still very strong and we're working with them on a daily basis to be a strong partner.

Operator

[Operator Instructions] And we will now hear from Dan Salmon with BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

Welcome, Robert.

Robert Philpott

Thank you, Dan.

Daniel Salmon - BMO Capital Markets U.S.

I wanted to just understand a little bit better your background with Synovate, and more recently in the mobile space, and how you think some of your strengths, in particular, can benefit Harte-Hanks? And then just as a follow-up, if you know yet whether or not you plan to move to San Antonio?

Robert Philpott

Let me take the last of those questions, because I think it was a relatively short answer and a relatively simple answer to that. I have no plans to move to San Antonio. I have plans to base myself close to where our major clients are. At this stage, and on the advice of my senior colleagues in the business, I work out of the office in Baltimore, but essentially try to cover a large part of the East Coast. I'll eventually determine where I think on the East Coast that I'll need to be based, but not until we really get to deciding what our strategy is going to look like. But I think it's safe to say that I'm not anticipating a move to San Antonio. Let me go back to discuss then a little bit about my background, and if you look at my involvement with either Synovate or Aegis. I'll take Synovate to begin with. I was part architect of the building of what became, I think, the third or fourth largest research agency in the world, market research agency, and we built that through a combination of greenfield startups in many countries, but also with significant M&A activity in order to increase the ways in which we were able to create that global presence. Many of the businesses we bought were relatively small, but filled with creative and entrepreneurial talent. And therefore, that made my job as an architect of where we were going significantly easier. I don't consider myself a turnaround CEO. I'm a builder CEO. And I look for the raw material to help me do that. I believe that our industry is a people-based industry, and I need to secure the appropriate talent to be able to build effectively, and we can do that through our conventional hiring activities, but also through M&A, again. The M&A activity, I don't fear. We've been -- I've been successful in the past, not just with acquiring the businesses but retaining the talent that remained within those businesses. So that's really how I see my background during my days at Synovate. In all of those industries. I'm not a subject matter expert. I'm an organizational expert, if it's going to be any expertise, and it's really about developing the correct strategy and then building an appropriate organization to execute on that and to remain absolutely focused on the execution against the strategy. My interest in mobile, really again, came from my background with the Aegis Organization, both on the media side of things, digital, and also with market research. The fact is that increasing numbers of marketing dollars are making their way onto mobile devices. Those same mobile devices are becoming more sophisticated year-on-year and their reach of quite sophisticated devices now goes well beyond just developed markets. So I see this as an opportunity to remain ahead of the game and very relevant in my understanding of where mobile fits into the marketing framework. And that explains my continued involvement with OnePoint Global, a U.K. mobile company. And I think that the skills or the information that I gain from my involvement there will be useful in application in Harte-Hanks.

Operator

[Operator Instructions] And it appears that there are no additional questions. And I will turn the conference back over to Mr. Robert Philpott for closing remarks.

Robert Philpott

Okay. Thank you very much for that, Steph. Well, I appreciate the time that everybody has taken this morning to join us on the call, I just want to repeat my earlier thanks for your continued interest in the Harte-Hanks business and for the ongoing support that you give us. As I mentioned at the very top of the call, I will be reaching out to our stakeholder groups, including you as the investor community. And I look forward that, over the next 3 to 4 months, I'll get an opportunity to meet with each one of you face-to-face and take some more questions at that stage. Thank you for your involvement.

Operator

And that does conclude today's program. Thank you all for joining.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Harte-Hanks Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts