Harte Hanks Inc (HHS) 2009 Q2 法說會逐字稿

Good morning and welcome and thank you for joining the second quarter 2009 earnings call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr Larry Franklin, President and CEO of Harte-Hanks.

Thank you and good morning. On the call with me today are Doug Shepard, our Executive Vice President and Chief Financial Officer, Jessica Huff, our Vice President and Finance Controller, Bryan Pechersky, our Senior Vice President and General Counsel and Secretary. Before I begin my remarks, Bryan will make a few statements. Bryan?

Thanks, Larry. Our call may include forward-looking statements. Examples may include statements about our strategies and initiatives and business plan, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, the economic downturn in the US and other economies 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 10K, and other documents files with the Securities and Exchange Commission and the cautionary statement in our earnings release. Our call may also include non-GAAP financial measures. Please refer to today's earnings release for the required reconciliation and other related disclosures. Our earnings release is available on the Investor Relations section of our website at www.harte-hanks.com. I'll now turn the call back back over to Larry.

Ok. Thank you, Bryan. Our second quarter results reflect the continuing difficult environment. These results also reflect a tremendous way in which our people are dealing with that environment. Before I comment on what is happening in each business, as a Company, we came into the year knowing this would be a very challenging year for our customers and for us. We knew that our customers would be managing their marketing spend very tightly and they have, as evidenced by our revenue. We also knew that we would have to manage our expenses very tightly. And our people have done that and it shows in this report. And I'm very proud of all of them.

And direct marketing, all verticals experienced reduced and delayed events and programs lower transaction volumes and reduced discretionary spending, our clients are challenging us to help them generate revenue now and at a better value. Doug will talk about the individual verticals, but I want to, once again point out that we have a long list of the best companies in the world as clients. And each of these verticals and many of them have been clients for many years. While several have reduced their spending, we are developing new, innovative approaches for them to more efficiently reach their customers. These additional channels and programs broadened and strengthen our relationships. Our direct marketing employees have aggressively executed against our reduced cost initiative. To have a 4.7% operating income decline on 20.2% revenue decline is tremendous. This is only possible by carefully managing all costs, while changing the way we do things and adjusting our structure. By doing it we are able to provider value to our clients, and reduce the impact of lower revenue on our bottom line. Again, just a tremendous job.

Our shopper people have been dealing with challenging economic conditions for a couple of years. The economic health of California and Florida is well documented, high unemployment causes all consumers to be extremely cautious. And we expect no meaningful improvement over the next few quarters. Our reduced revenues reflect fewer customers spending less through smaller ads and/or less circulation. And although our account base is down, it remains very large. Our customers know that our shopper products work for their business.

While still very small, we continue to invest in our web strategy. Our web products continue to grow very nicely, especially parasites. We remain confident that combining the web with our print product has tremendous values for our advertisers because they tell us so. Our mission in our shopper business is to bring buyers and sellers together at the local level. And by adding the web parts to our strategy we can add to that in whatever ways they want to be brought together. On the cost side, even after two and a half years of significant revenue declines and related are expense reductions, our people remain committed to conning to improve efficiency and to examine every dollar of cost. When the California and Florida recoveries come, ad spending may not return to the previous high levels for some time. But we feel very confident that spending will increase and that we will be well positioned to take advantage of increasing revenues. We are in two very good businesses.

Our third area of focus this year is on cash. Doug will give you the details on that. But I can tell you that we are doing very well. We do not expect any improvement in the economy over the next few quarters. But I'm encouraged because I know our people are committed to continue to deliver for our customers. And will continue to look for ways to do business at less costs. Combine that with our financial strength, and we have a bright future. Doug?

Thank you, Larry, and good morning. Here's a Company wide overview of our second quarter. Revenue decreased 21.5% for a quarter. Direct marketing decreased 20.2% for the quarters. Shoppers revenues decreased 24% for the quarter and 20.1% circulation during the same period for the second quarter in 2009 and 2008. Operating income decreased 28.2% for the quarter. For the quarter, direct marketing declined only 4.7% while shoppers declined $8.6 million. For the quarter our free cash flow was $19.4 million versus $22.9 million in 2008. Our net debt, total debt less cash declined $32.3 million during the quarter. We reduced our capital expenditures in the quarter to $1.7 million, compared to $5.3 million in the 2008 second quarter.

Turning to our two businesses. In the quarter, direct marketing revenue decreased 20.2% in operating income decreased 4.7%. Operating income margin increased to 17% compared to 14.2% in the second quarter of 2008. The improvement in operating margins is due to our across-the-board expense reduction initiatives. In the quarter, our high-tech telecom vertical market represented 30% in direct marketing revenue. Retail was 24% select markets were 22% financial was 13% approximate healthcare pharma was 11%. For the six months ended June 30th or high-tech telecom vertical market represented 30% of direct marketing revenue. Retail was 24%. Select markets were 21%, financial is 13% and healthcare pharma was 12%. All vertical markets experienced revenue declines in the second quarter compared to the second quarter of 2008. Our pharma healthcare and high-tech telecom verticals experience revenue declines in the low teens. The retail and select market vertical revenues each decreased approximately 20%, while the financial services vertical revenue declined 37% for the quarter.

Our top 25 direct marketing customers represented about 43% of direct marketing revenue for the quarter. Our largest customer in the quarter represented approximately 6% of our total direct marketing revenue.

Turning to shoppers, second quarter revenue decreased by 24% based on circulation distributed for the same time period in the second quarter of 2009 and 2008. Shoppers revenue for that circulation declined 20.1% in the second quarter. Shoppers operating income for the quarter declined $8.6 million. We continue to evaluate shoppers expense structure in an effort to maintain profitability. On the balance sheet of June 30th, we were showing a net net debt balance of $181.4 million versus $240.5 million at December 31, a reduction of $59.1 million. Net accounts receivables were $131.9 million versus $169.4 million a year end. Day sales outstanding at the end of June was 56 days, a decrease compared to the 61 days outstanding in June 2008. We ended the quarter with a leverage ratio of 1.9 times versus the covenant of three times and an interest coverage ratio of 11.5 times versus a covenant of 2.75 times. Our leverage ratio calculated on a net debt basis is only 1.3 times. We currently have all $125 million available under our revolver, in addition to a cash balance of $74.9 million at the end of the quarter. With that, operator, we will turn the call over for questions.

(Operator instructions). Our first questions comes from Alexia Quadrani with JPMC.

Thank you, a couple of questions. The first one, I know you commented that you don't expect the environment to improve in the second half of the year. Are you seeing any signs though of maybe some stabilization or the rate of decline may be leveling off a little bit. Is there any color you can provide us on any verticals particularly in the shopper business on anything you are seeing that might give us some help that at some point, we are going to hit a bottom here? Then I have a follow-up.

Okay. In the shopper business, if you look at the details behind the numbers on a sequential basis, our end book ads may have stabilized somewhat, albeit at a reduced level from last year and earlier this year. The customers, as I said in my remarks, we have fewer customers. And they are continuing to manage their spend very carefully. And they do that by either, again, the size of the ad or the circ. If you look at the sectors that we service, our primary SIC categories, if you will, real estate, as a category, is down less than the total. And it's improved over the last two quarters. The improvement is in agents, brokers and property management. Anything related to building construction or specialty contractors still way, way down.

On the services side, overall pretty much reflects the overall performance for the shoppers except for educational services. And that's about flat, I guess. Consumer spending, again, has a total about the same as the total grocery. And eating and dining or performing better than the category and better than the overall. Automotive , especially dealers way down and that's actually gotten worse over of the last six months. Communications doing a little better than, actually, performing pretty well. So it's, Alexia, it's hard to draw major conclusions from all that. Also, our larger accounts, we call them major accounts, some national accounts, are doing better than the local business. And that has been the case, I think, Doug, for the last couple of quarters,

Yes.

So that's the color on the shopper business. In direct marketing, I guess in a general sense, the tone may be a little better as customers are beginning to talk more about maybe adding a few things. But even though there is some talk about that, implementation has been slow, because there is just a significant wait and see, and decisions being made at the last moment. Doug talked about the verticals, FMO. Our financial markets obviously very hard hit. And that primarily or the biggest part of that is from credit card, and what we call diversified finance. A little bit of better performance in the mutual fund side and pharma healthcare was, as Doug pointed out, was one of the better performing verticals. And pharma was the better part of that. And that is where we are providing some bundled services and to our pharma clients. That has worked really well for them and for us. Retail, we've got a few customers that are actually performing very well and those are overshadowed by reduced volumes from some of our really good, long-term customers. Those are transactional volumes and mail volumes. What am I missing? Select market, which includes automotive, where we have had some good database win and his success stories with fully integrated solutions. Although we have primarily serviced the US market for non US manufacturers, the category has suffered as you are all aware and we are no exception. And our other piece in there that is government not for profit, it reflects what's going on in a not for profit market. So, is there stabilization? Is there flattening? I think we are still going to see, over the next few quarters, revenue performance pretty similar to what we have had.

How about on the margin side, does such a great job in the direct marketing segment. Can we continue that in the back half of the year, given the cuts you have made?

Oh, just one other I guess little comment back to the revenue side. The high-tech and I think you'll find a little less in the second quarter than in the first quarter. Can we maintain the margins? What were the margins? 17%? Which I think, as we look back, was one of the best second quarter margins that we have had in a long time, if not forever. And as you know, as you go through the reduced revenues and adjust expenses accordingly, it gets more difficult, obviously, as we go through that process. But I can also tell you that in both of these businesses, and certainly the expense structure has been reduced very dramatically in our shopper business, our people are committed to continue to look for ways to get costs out of the system. And you do that a number of different ways. In the shopper part of our business, we've consolidated production facilities. We are still not operating at the same level of efficiency as we are in some of our other places. And that's simply because we did that in the five month period. We have some continued room there. As we have restructured from those our management structure from those combinations, after you get it done and you operate, then you go back and look and see where do we have more opportunities to right size the organization? Right size the cost structure? Particularly from the managerial level, and we are in the process of doing that. On the direct marketing side, the performance in the quarter, I thought was just spectacular. And there is not that much left. There is not the same amount left as we saw in that quarter. But we will continue to look at it. And I know, as we combine the way we manage some of our similar businesses, that will give us some more cost savings. As we look at with the new level of revenue, what functions can be downsized from where they are today, given the new level of revenue. And then, we are looking at everything we buy. And are having some success in managing our costs from the people who, from our suppliers. And will continue to do that with a vengeance. So will we maintain those margins? I doubt it. But we will have, I think some good margins.

Last question. Just on your cash balance, is it too early to assume you might come back in the market for a buy back?

At the moment and through the rest of this year, our plan is to keep our cash.

Thank you very much.

Until we see some further stabilization. Then we'll decide what the best opportunities are for the use of that cash.

Thank you.

Next question comes from Michael Kupinski from Noble Financial.

Thank you for taking the question. Congratulations on your quarter. Larry, I know that this is a difficult environment, but you guys are doing a fabulous job.

Thank you.

Did the company make any additional distribution cuts in the quarter in the shoppers business. And if so, what type of revenue impact might that have on a quarterly basis.

No we did not.

Ok. And in the direct marketing business , has the company been able to quantify the amount of revenues that are differed rather than cancel projects? Any thoughts of whether advertisers are shifting budgets toward other mediums given there might be a better value or better cost by for instance maybe using cheap advertising for television or radio, for

No, we haven't. If that were going on it's not noticeable enough for us to quantify. And in this kind of environment, direct marketing is the best value there is out there. So, but no, I don't know. And now the delay in projects, in this environment, when we get the projects delayed, we almost assume that that will be reduced spending somewhere down the road. Now there are cases where, it may slip a month or two. But, our clients are looking at their revenue strains the same way as we are looking at ours. And we are staying really close to them and I think have, with our tremendous relationships, we have a good sense of what they are thinking. And I don't think there's a lot of delay that's going to therefore push revenue into the back half of the year or in the fourth quarter. I think they are still trying to decide what the holiday seasons are going to be like. And they are certainly waiting to make decisions based on the latest possible day.

Larry, I know that back to school is important to the retail vertical and direct marketing which may give you insight into the holiday season. And obviously, your common there, I want to see if you have any color. Because typically at this time you have a little visibility in the retail sector. How is that vertical performing, heading into the holiday season then?

It is interesting. Because you are right. It is an important season. And this is a case where they are truly waiting. I mean, it's just, we are almost there, obviously. We don't see any great volume increases at this point.

How much lead time generally do you get for a program like that? I mean is the lead time just weeks? Or is it usually a month or two.

Well it depends on what service it is, obviously. And so, we can react to our retailers very quickly, particularly in the mail and related services area. And there's one of our significant clients have said that it started off a little better than they had expected. But, we've got so many clients, I don't know if that's a, that's a data point of one.

Right.

And in terms of the shoppers, this is my last question I promise. In terms of the shoppers you indicated national seems to be picking up a little better. That is what we are hearing pretty much across-the-board. National advertising is pacing a little bit better than local. In your experience in the past ,does national typically lead out before local starts to pick up? Mike, when I talk about national in our shopper business, these are our large customers. They are not national customers as you are referring to. We use the term very carefully, obviously. They are just our larger customers that are in and throughout the geography where we serve. Obviously California and Florida.

I see.

And they are, what I said or meant to say was, their performance was better than the local than the performance of our local advertisers.

Perfect of the thank you very much for answering our questions.

You bet.

Our next question comes from Dan Leben from Robert W. Baird.

Great. Thanks. On the shoppers business are you guys looking at additional circulation cuts or has that pretty much bottomed out where you feel comfortable with it?

We are not looking at any at this time.

Ok, And then help us with the margins. When we do get through this, and start to grow the top line again, help us think about how the margins are going to flex. Are there a lot costs you kind of need to bring back in the business to support higher levels of growth? Or are we going to see pretty significant leverage when we do get to the end of the rainbow?

Dan, we are talking about shoppers, right?

Shoppers and direct marketing, both.

Ok. On the shopper side, we have a lot of capacity. And so, when the revenues turn, we should see some good, upside leverage, just like we are seeing the down side leverage today. The, as you know the cost structure on our shopper business is postage. That must be some of our expense are 30% to 35%. That's fixed as long as we maintain the same level of distribution. Paper is somewhere between 10% and 12% And then our production costs, there is some variability there. But we have the capacity to generate or to deliver a lot of revenue through the cost structure that we have without a significant increase. On the direct marketing side, the same thing is true. We have a lot of capacity where we can move volumes, and a lot of revenue without a significant increase in particularly in structure, in some of what you would think about as being if not fixed, step fixed costs on the way up and/or down. So I think when we see the, in your terms, the end of the rainbow here, we ought to see some good, upside leverage on this business. Now, with that said, we had fabulous margins in direct marketing in the second quarter.

Yes, absolutely. The other question I had you brought up on the postage side is what are you seeing there in terms of costs?

It's tied to the PPI. I think it went up 2% or so, 3% maybe in May. And that should be it until next year.

And the expectations that ,the postal service, some of the pressures there under various areas, do you think a possibility they try to pass on higher than CP I increases?

I don't know, Dan. We obviously, the postal service is very important to our, well both businesses, actually. And we haven't heard that. And I doubt that they would. Their volumes are down pretty dramatically as well. And that's a good way to get them down further, to increase prices more. It is not in our plans that way. But we do spend a fair amount of time thinking and I guess the right word is worrying a little bit about the postal service.

Okay great. Thanks.

Next question comes from Dan Salmon from BMO Capital Market.

Hey guys, thank you for all the detail and for taking my questions. I just wanted to follow-up on a cup of previous answers. Larry, you mentioned that in the shopper segment you'd seen business from the auto dealers actually getting worse in the last six months. Does that imply that you are not seeing any uptick from the cash for clunkers program? Or simply that that's too recent and we may see a little bit more in the third quarter from that perhaps?

Yes, it's too recent to know. And the auto dealers are not getting out ahead of themselves on anything at the moment. And can I add just another comment about postage? Back to Dan's laugh question. We work very closely with our large customers in direct marketing. And with them and the postal service and looking for ways to reduce their postage costs, through the delivery sequencing and some technology. So we are well connected to the postal service, because we are a very large client of theirs. And there are opportunities to influence it somewhat. And every dollar we can save our clients is a dollar to us. On the, I'm sorry. I got off track again. On the clunkers, it's just too, it's too early.

Okay. Does that imply that we would see no impacts from that that the second half? Or might that be a little bit of a catalyst for the dealers business and shoppers?

Obviously, we don't know. But any piece of good news for one of our clients is really important. Because in just having spend the first three days of this week in California, the people there are just, they are very nervous. I know all of the statistics and leading indicators and lagging indicators and when people, when more people are not working today than they were yesterday, and the prospects of there being more tomorrow, everyone is extremely cautious. And until we get a little bit of confidence back in that marketplace, then people there I don't think are going to aggressively increase their spending. Just what little bit I have heard about the clunker program, it seems like if there is a good enough value there. Maybe the people will go out and buy a car. So that could maybe create a little bit of hope in some people's eyes. The California economy and the California budget is likely going to have some impact on employment, further reduction of employment, through state employees. And so that, we'll have to work our way through that new piece of bad news. Although I guess they already had the bad news because they didn't have a budget and they were getting I OUs. So maybe it clarifys one, I don't know.

Okay then one more follow-up on a previous answer. You mentioned that in direct marketing, some of your clients are starting to pickup the conversations, if not the commitments just yet. Are they looking at anything, any certain disciplines that are particularly different from the past? Or is it simply a matter of positioning themselves for hopefully increasing budgets across-the-board going forward?

I don't well, I think it's, I think more depends on or reflects what they are doing and have done. I can tell you that in this environment, we are more, when we can combine our services to create a bundle solution, which is what we do in our agency in our database and is some of our software businesses, those are the areas where we are performing better today. But when it gets to, when I'm talking about people, at least not as negative as they were, generally it's about the broad line of services that they have used and we have been working on with them during this time. Multi-channels, the whole multi-channel area is being discussed more and more. And I think in our first quarter call, when I talked about some of the successes that we had had in the quote digital area, where they were combined, and were actually programs with our existing clients, and we have had some, obviously continue to have some success in the second quarter, those are not big dollars. But they are big impact dollars. Because they strengthen and increase our relationship with our client. And they are an added source lead communications that the clients are trying to have with either prospects. Our clients or different demographics where they are trying to connect to the younger audiences and where it is a very efficient way for appointment to be sent reminders to be sent. Then it has far greater impact than just the dollars that they come from that.

Okay great. Thank you very much.

(Operator instructions) John Haze, private investor. You may ask your question.

Hello?

Hello.

Yes. I'm a retired circulation director out of El Paso, Texas. And I started buying newspaper stocks in the Spring of this year.

Yes

My question is what do you foresee, pardon me, in its future in the newspaper industry. You still see it as an arm of something it will be profitable to you? I noticed that our local Springfield, Missouri paper advertising seems to be picking up for the last two or three times.

We were in the newspaper business for from 1922 until 1997. And we got out and I truly don't spend a lot of time thinking about it. Other than only thing that I will offer is that I truly believe that the, the strength of our two businesses is that we are able to target and saturate, and can target on a number of different variables. And that's a difficult thing, I think for newspapers. But I truly, I'm sorry, but I can't add a lot of expertise to your question.

One quick question, then I'll get off of it. Like Abilene used to be one of your newspapers. Who would you have sold that to? Would you know?

Yes, we sold it to EW Scrips.

Okay good. Thank you very much.

Thank you.

I would turn the call back over to Mr. Larry Franklin for closing comments.

Okay. Thank you all for your questions and your interest in our company. And I want to just one more time thank all of our people for the way they are helping us, and our clients navigate through this difficult environment for the tough decisions that you have made. And I know that you are committed to continue. And also not just the decisions, but the way you are making them. And again, thank all of you, and appreciate your time.

Thank you and this concludes today's conference call. You may disconnect at this time.