Harte Hanks Inc (HHS) 2009 Q3 法說會逐字稿

Welcome and thank you for joining the third quarter 2009 earnings call. At this time, all participants are in a listen-only mode. During the question-and-answer session please press star one on your touch tone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I'll turn the meeting over to Mr. Larry Franklin, President and CEO of Harte-Hanks. Sir, you may begin.

Thank you and good morning. On the call with me today is Doug Shepard, our Executive VP and Chief Financial Officer, Jessica Huff, Vice President of Finance and Controller, Brian Pechersky, our Senior Vice President, General Counsel and Secretary, and I begin my remarks, Brian will make a few comments.

Thanks, Larry, our call may include forward-looking statements. Examples may include statements about our strategies, initiatives and business plans, adjustments to our cost structure, financial outlook and capital resources, competitive factors, business and industry expectations, the economic downturn in the U.S. 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 10(K) and other documents filed with the Securities and Exchange Commission and in the cautionary statement in today's earnings release.

Our call may also include 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 Web site at www.Harte-Hanks.com. I'll now turn the call back over to Larry.

Thank you, Brian. We said on this call last quarter that we didn't see the environment improving over the next few quarters, and although recently there have been some signs that the economy may be improving they seem to have been mostly driven by government spending, which did not create any particular opportunities for us. The consumer spending decline in September more closely mirrors our challenges. Our third quarter results reflect this continued difficult environment, but these results also reflect the tremendous way in which our people are dealing with the environment, and we'll talk more specifically about that in just a minute.

As we look at the two businesses, first Direct Marketing, in the third quarter we continue to experience an all vertical markets some reduced and delayed events and programs, lower transaction volumes, lower prices and some reduced discretionary spending. Our clients are challenging us to help generate revenue or keep customers for them now and at a better value. And Doug will talk again about the individual verticals in just a moment. I want to once again point out that we have a long list of the best companies at clients in each industry we serve, and many have clients for several years. While several have reduced their spending for the programs we manage, we are developing additional approaches for them to be more, for them to more efficiently reach their customers and we are excited about some of the wins that we've had this quarter, particularly those where we added additional services and channels to existing clients to marketing mix. Not only did this enhance our relationship with these clients, but they also provide opportunities for future growth and some of these wins are reflected in the earnings release.

Our Direct Marketing people have aggressively executed against, and reduced our cost initiatives that we've had all year. On a quarter basis to have a $2.6 million operating income decline on a $41.8 million revenue decline is tremendous. And this is only possible by carefully managing all costs, changing the way we operate, and adjusting structure. This allows to us provide better value to our clients and reduce the effect of lower revenue on the bottom line. Again a tremendous job. These efforts are ongoing today as we expect the revenue challenges to continue in the fourth quarter and early 2010.

Even beyond the current revenue challenges, we will continually find ways to improve efficiencies as a part of the fabric of our doing business. In discussions with our clients about 2010 marketing spend the tone has generally been more positive than they had in 2008. We will have a better feel for the retail vertical after the holiday season, but until revenue visibility improves, we expect a challenging environment and we'll manage our expenses accordingly. Our shopper people as all of you know have been dealing with challenging economic conditions for several quarters. The third quarter was no different except we did see lower rates of revenue decline as compared to previous quarters. We do however expect to continue to face stiff headwinds due to low consumer confidence, high levels of unemployment and general uncertainty in California and Florida.

Our reduced revenues reflect fewer customers. Those customers spending less through either smaller ads or less circulation, and although our customer base is down, it remains very large. Our customers know how effective our shoppers are for their businesses. Our Web products continue to grow very nicely, especially power sites. We remain very confident that combining the Web with our print products adds tremendous value for our advertisers, through the call tracking feedback and Web presence they get from our products, and we continue to add functionality and additional services as well. Our advertisers continually confirm to us that this is a truly an added value.

On the cost side, we continue to address structure programs and all activities that better reflect the size of the business we have become. This will yield additional reductions with some additional one time cost in the fourth quarter. We do not have an estimate of those costs at this time. When Florida and California recoveries occur, and although spending, ad spending may not return to the previous high levels for some time, we feel confident that spending will increase, and we will be well-positioned to take advantage of increasing revenues. We are aggressively pursuing increased market penetration particularly with our territory and field reps. And we are confident this will pay long-term benefits, and we are beginning to see some positive results in a number of different markets.

Our third key area of focus is cash, keep our cash. Doug will give you the details about that, but suffice it to say, we are doing very well. These are good businesses. I'm encouraged because I know our people are committed to deliver for our customers, again these customers are the best companies in the industries we serve and we will continue to look for ways for business at less cost, creating more value for our customers. Combine that with our financial strength and we will have a very bright future. I'll turn it over to Doug before we take your questions.

Thank you, Larry, and good morning. Here's a company-wide overview of the third quarter. Revenue decreased 22.4% for the quarter, Direct Marketing decreased 22.9% for the quarter. Shoppers revenue decreased 21.6% for the quarter. And 18% for circulation during the same period for the third quarters in 2009 and 2008. Operating income decreased 23.5% for the quarter. Direct Marketing declined 9.7%, while Shoppers decreased 55.2%.

For the quarter, our free cash flow was $18.7 million versus $22.3 million in 2008. For the first nine months of the year we have generated 52.1 million of free cash flow. Our net debt defined as total debt less cash declined 15.2 million during the quarter. We reduced our cap he can during the quarter to 3.5 million compared to 4.1 million in the 20,083rd quarter -- Capex.

Turning to our two businesses. In the quarter Direct Marketing revenue decreased 22.9% and operating income decreased 9.7%. Operating income margin increased to 17%, compared to 14.5% in the third quarter of 2008. The improvement in operating margins is due to our continuing efforts to manage expenses to revenue. In the quarter, our high tech telecom and vertical markets both represented 27% of Direct Marketing revenue. Select markets were 22%, financial was 14 and health care pharma was 10 percent, healthcare.

For the nine months ended September 30 our high tech telecom vertical market represented 29% of Direct Marketing revenue, retail was 25, select markets were 21, financial was 14 and healthcare pharma was 11%. In the quarter, all of our verticals were down approximately 20% with the exception of our financial services, which decreased 33%. Our top 25 Direct Marketing customers represented about 44% of Direct Marketing revenue for the quarter. Our largest customer in the quarter represented approximately 8% of our total direct marketing revenue.

Turning to shoppers. Third quarter revenue decreased by 21.6%, based on circulation distributed for the same time period in 2009 and 2008, shoppers revenue for that circulation declined 18% in the third quarter. Shoppers operating income for the quarter declined $4.1 million to $3.3 million. As Larry said we do have headwinds in California and Florida. We are continuing to evaluate Shoppers expense structure to keep it in line with the revenue realities. Also please remember last year because of publishing dates, Shoppers had a 53 week year with the extra week occurring in the fourth quarter.

During the third quarter, we settled a state tax dispute which resulted in a lower effective tax rate of 33.3%, compared to 39.6% in the 2008 third quarter. Without this settlement, our effective tax rate would have been approximately 38%. On the balance sheet at September 30 we were showing a net debt balance of $166.2 million versus $240.5 million at December 31, a reduction of $74.3 million. Net accounts receivables were $129.1 million, versus $169.4 million at year end. Days sales outstanding at the end of September was 57 days, a decrease compared to the 61 days outstanding at September 2008. We ended the quarter with a leverage ratio of 1.9 times versus a covenant of 3.0 times, and an interest coverage ratio of 12.2 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 excluding outstanding letters of credits. In addition to a cash balance of $83 million at the end of the quarter.

Finally our interest rate swap on $150 million expired on September 30 ,which had locked us into a rate of 4.66%. With that, operator, we will turn the call over for questions.

(Operator Instructions). Our first question comes from Alexia Quadrani of JPMorgan.

Hi, thank you, a couple questions. First on the shoppers business, was there any notable difference in performance between Florida and California? And then more generally still on the Shopper business, the deep declines we've seen in the last couple of years if you could talk to it in terms of how much of that is really just a big drop in volume or how much of it maybe came from pricing as well.

Okay. On the comparison between California and Florida, in the quarter, they were basically the same. A point or two difference one way on the other. On the other part of the question was about the decline, was it from price or volume?

I'm assuming most of it is volume but I'm trying to get a sense how much price also gave as well during this period.

Yes, most of it is volume. And as we've said in the past the in-book ads, they have stabilized although it obviously leveled below last year. As I said in my remarks, the customers are spending less. They are doing that through buying smaller ads and less circ. Obviously there is no upward movement in price, and some price downward movement but we don't, I don't have a number that can say so much of it is from price and so much of it's from volume other than the fact that the vast majority of it is in fact from volume.

Then on the competitive environment, still saying pretty much on the shoppers, how much has it changed if at all during this downturn? I mean maybe some of your competitors have gone out of business or would you say it's maybe even more competitive as your competition gets more did he say primarily for this small pool of ad revenue?

It's a good question and in this business our core customer is the local business and there have been a number of competitors that have gone out of business. But there's also those that you suggest who are trying to hang on until they see some light. I wouldn't say that in the last two to three quarters there has been that much difference in the competitive landscape for the primary categories that we serve.

And the last question, just you guys did an excellent job really protecting your profitability through this cycle. I think I remember I asked this question on the last quarter call and you were a little cautious about being able to do it again and you've done a great job again. I guess any commentary on your ability to sustain it through the fourth quarter?

Well, the interesting thing is that as we look and this is reflects and this is more directed towards Shoppers but it's also toward District Marketing as well, but particularly in Shoppers where we are continually looking at the way we do every single thing in our business, and at the level at which we are currently operating. We are, after several quarters of significant revenue decline we are creating less adds we are 10% down, Doug, in circulation from basically this time last year. So when we talk about how we look at structure, we are looking at structure in relationship to the size of this business today, and while we are very confident that this will turn and this revenue will start to move back up, we obviously just don't know when, then we are resizing and is it harder? Of course it's harder. But it's basically becoming a way of life to say, how do we deliver services that people, that our clients can afford and in a way that we can make a profit and that we can provide service at a level where the quality sustains our relationship with our clients over the long-term. So with that said, it's more difficult but we are working it hard. We are looking at every single thing we do and how we do it again in relationship to the current size of the business.

Okay. Thank you.

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

Thanks. When you look at the Shoppers business did you guys get any benefit in the quarter from Cash for Clunkers in the auto channel?

I'm sorry, Dan?

Among the local auto dealers in the Shoppers business did you get any benefit around the cash for clunkers business?

No, in fact it was very difficult for the auto dealers to manage their way through it.

Okay. Then just shifting to the Direct Marketing business, it looked like the tech and telecom and healthcare and pharma businesses have gotten worse in the quarter. The declines seemed to increase a little bit. Can you talk about what you are seeing from your customers because those are a couple of areas where we heard about some nice customer wins and customers doing some things?

Right. If you look at the tone I would say in Direct Marketing. something generally better And in those categories the more positive ones are in the pharma and the high tech areas. They are, the performance in the quarter was not quite as good as it had been in the or -- how can I say this? It had been less bad than some of the other categories. But currently looking in our business, pharma still remains healthy. We've got some good opportunities there. In the pharma healthcare segment, the healthcare insurance segment is the one that's performing least well. What was the other category you mentioned?

Tech telecom as well.

Yes. On the tech side, we are, we are getting some additional businesses but there are some lower volumes of transactions for our call center business. And pharma is somewhat a timing of the program. Still strong on demand.

Great. Then could you just talk a little bit more about could you talk about the tone you are hearing from your customers when they are looking to 2010 budgets how they are thinking about mix of budgets that could be towards or potentially away from your services and how they are thinking about spending their dollars as they go into next year?

As I said I think the tone is positive. As I also said until we actually get some greater visibility on the revenue then we are going to operate reasonably cautious. In some of our wins, this past quarter and the previous quarters in the whole multichannel area, that makes those services even more important and as you well know the absolute level of revenue from those are not as great as some of our core services but what they do is they solidify our position with those customers and as they reduce spend in some of more traditional areas, that will give us another opportunity to provide services and get more revenue.

I don't see, I think in the short term there is, there is a need from all of our clients to spend less money. And to get obviously greater results and we have been successful in helping our clients do this, although it results in some reduced revenue. But I don't know of any major shift that significant portions of budgets in absolute dollars will be moving dramatically over the next few quarters.

Great. Finally any feedback from customers on their view of the lack of a postage increase next year, if that makes them more or less like to the visit the direct mail part of the business?

Well, it's, it's obviously a pleasant surprise, not a surprise, they should have done it more but it was, the postal rate increase is based off of CPI and so we were thinking probably a point and a half or percent and a half increase, maybe two at most. So that's tremendous value for us. I'm not sure that that's going to drive significant change in people's mailing programs. What it will probably do more is it will help prevent some decline. It might, there might be a situation or two with some of our core customers, where it might increase a little bit, but postage is a huge cost. We're the service part of the mail programs for our clients so postage is big, and I don't mean to imply that it's not an important category in expense, in the magnitude of the expense to our clients. But I can tell you this, we are glad to see it.

Great. Thanks, guys.

Our next question comes from Edward Atorino of Benchmark. You may ask your question.

Good morning, Larry, I have a couple of questions. Sounds like you might be thinking it might be a lower rate of decline year to year in this direct mail business in the fourth quarter. And secondly, can you continue to hold margins in the fourth quarter based on what you are seeing?

The fourth quarter I don't see much change in the rate of decline. I think what the fourth quarter will tell us is, you are talking about the during the mail business as relates to our retail customers, it will tell us some thing about probably early next year. Holding margins, I can just tell you that we are working it every day.

Also, Doug, is the tax rate change a one time event back to a pro forma tax rate in the fourth quarter?

Historically we've had a drop in the tax rate between the third and the fourth quarter and you should expect to see something along those lines. It may be slightly greater decrease than it has been in the past.

So it will be up over the third quarter?

It will be up -- no historically the fourth quarter effective tax rate has been lower than the third quarter.

Right. But because of the lower third quarter?

No, the third quarter change will not impact the fourth quarter. What I'm saying is that the usual drop that you see between the third and fourth quarter will actual will be slightly larger this year.

Okay. Larry, on the Shoppers, it sort of seems to be bottoming out at this level. Given what you see, are we going to see it hold at this level? It's sort of asking to look in a dark tunnel, I suppose.

Yes, when you get the answer, call me, Ed.

Okay. Thanks a lot.

Thank you.

Our next question comes from Dan Salmon of BMO Capital Markets.

Good morning, guys. Most of my questions have had taken care of but I just wonder, Doug, if you can give us some insight on CapEx budgets for the rest of this year and going into 2010 as well.

We don't see any significant change right now with our current run rate we've had through the first nine months, and you may see some type of increase in 2010. We are still working through the details, et cetera, but it won't be of any noticeable magnitude.

And what we are doing is as we think about 2010, and looking at the services that we provide, we are looking at opportunities, because we do have the flexibility to invest in ways where there's some initiatives where we can either, one, increase an existing revenue stream and or add a new revenue stream, whether that's through technology or systems or what. So as Doug said it well, I think if anything, we will probably spend more next year than we spend this year but not enough to make a difference in the cash flow forecast. Unless there's just some terrific opportunity that prevents itself. We are constantly looking.

Okay. Thank you.

Our next question comes from Michael Kupinski of Noble Capital.

Thanks, I appreciate that. Thanks for taking the question. I came in a little late here so I'm sorry about that but I was wondering if you addressed paper cost in the shoppers business, what the, I know paper costs isn't a big component there but I was wondering if you could talk a little bit about what the percentage is and if you can give me an idea of how much of the drop in your expenses were related to paper cost.

I'll take the last one and then Doug can talk about future. The drop in expenses in shoppers was not really from paper cost. It was from -- paper is, what, 10% of our cost, something like that? About ten and it will be down in the fourth quarter from where it is now. And that's based on new contract prices.

What is the percentage drop there, Larry?

In quarter four?

Yes.

It's let's call it high single digits, low teens.

Okay.

But that's the rate we are expecting it to drop.

The other thing, this is more of a macro question. In terms of Shoppers, you in the past you would say that in a recovery you would look for about 1% to 2% revenue growth coming from expansion of distribution and obviously we've just gone a period where we cut back distribution. I was just wondering, given the significant drops in circulation of newspapers and you've always said that as newspaper circulation drops it becomes more attractive for you to launch Shoppers in some of those markets. When we do get back into a recovery mode in Shoppers, should we assume that the growth rate for Shoppers business of 1 to 2% of that revenue growth should still come from distribution expansion or can you just outline what your thoughts are about Shoppers longer term?

Well, based on where we were in circulation distribution and where we are now, there are opportunities there. Those are long, I guess requires a definition which I'm not capable of giving you right now, but increasing circulation would be a part of a longer term strategy as opposed to early recovery, et cetera. Other than in our market in the past we would have increased circulation just from adding in new residences that were being built. So that now has become a reduction in circulation, not large by any means but there are fewer homes out there to which we are delivering and this has nothing to do with cutting back circulation. So is there an opportunity to go back into some of those markets, yes, there is but it's longer term not a part of the current thinking, not just that, it's not a part of the current thinking.

Okay. Perfect. Thank you.

We do have another question from Edward Atorino from Benchmark. You may ask your question.

I'm sorry, on the tax rate, it was, let me get my numbers up here for a second, so we went from 35 roughly, 39 to -- let's see, 39 to 33, third quarter, third quarter, and last year fourth quarter was about 35 and change. It's going to be down from the 33?

Yes.

Okay. That clears it up. Thank you very much.

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

Well, I just want to again thank you all for participating and for your interest in our company and also want to again thank all of our people in our company for the tremendous performance that they are delivering in an obviously less than good environment. So thanks a lot. Appreciate it.