Harte Hanks Inc (HHS) 2009 Q4 法說會逐字稿

Welcome and thank you for joining the fourth-quarter year-end 2000 (sic -- see press release) earnings call. (Operator Instructions) 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 is Doug Shepard, our Executive Vice President and Chief Financial Officer, and Jessica Huff, Vice President of Finance and Controller. And before I begin my remarks, Doug will make a few statements.

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, legal settlements, 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 10-Qs and 10-Ks, other documents filed with the Securities and Exchange Commission and any 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. The earnings release is available on the Investors Relations site of our website at www.harte-hanks.com. I'll now turn the call back to Larry.

Thank you, Doug. We said in this call last quarter that there's beginning to be signs -- excuse me -- that the global economy is improving slightly. And while we continue to have revenue declines in the fourth quarter in both businesses, we did see some improving trends during the quarter and we'll provide more detail of those as we go through our comments and then your questions.

Our people throughout the organization continue to do an excellent job in navigating through this difficult environment. I am very pleased with our fourth-quarter performance, and for that matter the year. Included in the overall Harte-Hanks and Shopper results is the $6.95 million legal settlement in principle announced January 28, 2010 and as described in the 8-K filed that same date. The law suit was filed in early 2001 by one current and one former Shopper sales representatives.

The agreement in principle to settle this lawsuit is subject to the entry of an order of the trial court granting preliminary and then filing notice to the class members final approvement of the settlement and providing for the dismissal of a lawsuit with prejudice against all class members. Pursuant to the agreement in principle, each member of the class will release all claims against Shoppers that in anyway arose from or related to the matters which were the subject of the claims alleged in the class action suit. The judge overseeing the settlement in principle will be involved with the final settlement agreement, so we do not anticipate any material changes. Because the lawsuit remains pending, our ability to comment beyond statements made in the 8-K filing is limited.

Now, with all that said, without the settlement charges, earnings per share for the quarter would have been $0.28 rather than the reported $0.21. And this compares to $0.23 in the fourth quarter of 2008. In last year's fourth quarter, there were $5.4 million of charges and for the year without the settlement, earnings per share would have been $0.81, rather than the reported $0.75 per share.

A quick look at each business. Direct Marketing in the fourth quarter. The revenue declines were less each month and while decreasing declines are encouraging, revenue was still down 19% for the quarter.

The commitment of our people to manage costs by doing business differently and then tight expense controls, continued to allow us to provide more value to our customers and resulted in OI margins of 18.3% in quarter four, the highest in 10 years. While we do not expect margins to remain at that level, we're well positioned for growth as the economy recovers. In Doug's comments, he'll talk more specifically about each vertical.

I want to once again point out that our client list includes many of the best companies in the markets we serve and most of them have been clients for many years. And while several have reduced their spending during this recession, we continued to win business from them both from current clients and from new clients. And details about a few of those are included in the highlights section of our previous quarterly reports and also in this one.

We believe our real strength is to effectively execute programs through the traditional marketing channels such as direct mail, demand center, fulfillment, combined with new channels like mobile, social and digital to provide more and to drive more effective results from our clients. And several of the wins that we've reported over the last few quarters have, in fact, been additional channels to those existing customers.

Regarding Shoppers, the economic climate remains difficult in California and Florida, as evidenced by the unemployment rates. California reached a 10 year high of 12.3% in August and remains at that level and there are some signs in California of some stability. Florida unemployment rate, however, continues to increase and is expected to reach 11.8% in December. It was 11.5% in November. Those are also 10 year highs.

With that said, I am very encouraged by our fourth-quarter performance. Doug goes into more detail, but the fact that our revenue declines were less each month over the last two quarters is encouraging and the 12.5% Q4 for same circulation and eliminating the 53rd week in 2008 was the best that we've seen since Q3 2007. Again, adjusting for the $6.95 million settlement, in principle, Shoppers would have had $1.6 million OI in Q4.

Our Shopper Web products continued 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 and they continually confirm that to us. And we continue to add new services through the Web for our Shopper customers.

When the California and Florida recoveries occur, ad spending certainly may not return to the previous very high levels for some time, but we feel very confident that spending will increase and we will be well positioned to take advantage of increasing revenues.

One thing about which I'm 100% confident is that our Shopper leadership team and all their people have professionally and aggressively responded to the worst economic climate we've seen since 1973, the year we acquired our first Shoppers business, the California Penny Saver. And I'm also confident that when there is sustained economic recovery in these two states, that we're extremely well positioned to reap rewards of these efforts of our people.

For both of these businesses, we believe 2010 will continue to be challenging, but we have the people and the financial strength which we're committed to use to further improve our already strong products and services that will allow us to provide even more value to our existing and new customers. In a word, I'm encouraged. Doug?

Thank you, Larry. Here's a Company-wide overview of the fourth quarter and full-year 2009. Revenue decreased 19.3% for the quarter and 20.6% for the year. Direct Marketing decreased 19% for the quarter and 20% for the year. Shoppers decreased 20.2% for the quarter and 21.7% for the year. Operating income decreased 22.3% for the quarter and 29.7% for the year. For the quarter, Direct Marketing declined 5.1%, while Shoppers declined $4.4 million. For the year, Direct Marketing decreased 7.1% and Shoppers decreased 105.2%.

Excluding the $6.95 million legal settlement in principle announced last Friday, Harte-Hanks operating income would have increased 4.9% for the quarter and declined 23.8% for the year. Excluding the same legal settlement, Shoppers operating income would have been $1.6 million for the quarter.

For the quarter, our free cash flow was $19.1 million versus $20.8 million in 2008. For the year, free cash flow was $71.3 million as compared to $82.8 million in 2008. We ended the year with $9 million in capital spending, $11 million less than the $20 million we spent in 2008. For 2009, we expect our capital spending to be approximately $15 million.

Now, turning to our two businesses. In the quarter, Direct Marketing revenue decreased 19% and operating income decreased 5.1%, resulting in an operating margin increase to 18.3% compared to 15.6% in the fourth quarter of 2008. A charge of $2.8 million was taken in the fourth quarter last year. Removing this charge would have resulted in an operating income margin of 17.1% for the 2008 fourth quarter compared to the 18.3% for the fourth quarter of 2009.

For the year, operating income margins finished at 16.4%, an increase from the 2008 margins of 14.1%. Our Direct Marketing leaders had a strong year, limiting the operating income decrease to $7.3 million on a revenue decrease of $146.8 million for the year.

In the quarter, our High-Tech Telecom and Retail vertical markets represented 28% of Direct Marketing revenue. Select markets were 20%, Financial was 13% and Healthcare was 11%. For the year, High-Tech Telecom represented 29% of Direct Marketing revenue. Retail was 26%, Financial 13%, Select Markets 21% and Healthcare and Pharma 11%. Our top 25 direct marketing customers represented 43% of Direct Marketing revenue for the quarter and 42% for the year. Shoppers fourth-quarter revenue decreased by 20.2% and 21.7% for the year.

Based on circulation distributed for the same time period in the fourth quarter of 2009 and 2008 and adjusting for the extra week in the fourth quarter of 2008, Shoppers revenue for that circulation declined 12.5% in the fourth quarter. This is Shoppers best performance since the third quarter of 2007.

Shoppers operating income margin for the quarter declined to negative 8.3% as compared to negative 1.2% for the prior year quarter. For the year, operating income margin was negative 0.5% as compared to 7.4% in 2008. A charge of $2.1 million was taken in the fourth quarter last year. Removing this charge would have resulted in an operating income margin of 1.4% for the 2008 fourth quarter compared to 2.5% for the fourth quarter of 2009, adjusted for the $6.95 million legal settlement. Adjusted for the fourth-quarter 2008 charge and the current year legal settlement, operating income margins for the year would have been 2% compared to 8% in 2008.

Our fourth quarter effective tax rate was 28.2%, which was lower than the 2008 fourth quarter of 35.6%. Lower state taxes drove the decrease. Our 2009 effective tax rate was 33.7% compared to 38.2% for 2008. This is primarily due to the favorable state tax settlement we received in the third quarter. For 2010, we expect our effective tax rate to be approximately 37% to 38%.

On the balance sheet, net receivables were $140.1 million versus $169.4 million at the end of 2008. Days sales outstanding at the end of December was 59 days compared to 58 days outstanding at the end of December 2008.

At December 31, we have a total debt balance of $239.7 million compared to $270.6 million at the end of 2008. Our net debt balance was $153.1 million versus $166.2 million at September 30, a reduction of $13.1 million.

We ended the quarter with a leverage ratio of 1.9 times versus a covenant of three times and an interest coverage ratio of 16.2 times versus a covenant of 2.75 times.

We currently have all $125 million available under our revolver, excluding outstanding letters of credit, in addition to a cash balance of $86.6 million at the end of the year compared to $30.2 million at the end of 2008. With that operator, we will turn the call over for questions.

(Operator Instructions) Alexia Quadrani from JPMorgan, your line is open.

Thank you, a couple of questions. First off, can you talk about what you've seen so far in 2010 in January, if anything, in the Shopper and the Direct business have you seen any signs of further improvement from what you were seeing sequentially in the fourth quarter?

The improvement that we saw coming out of the first quarter has continued in quarter one, keeping in mind that it's been four weeks, but yes.

Is it more pronounced on the Direct side or the Shopper side or pretty much just reflective of what you saw in Q4?

Probably about the same.

Okay. And then in the Shopper business, could you give us a bit more color on the improving trends there? Specifically, the lessening of the declines, is it because the advertisers you are currently working with are maybe spending a little bit more or are you actually seeing some of the advertisers that had stopped spending through this downturn begin to come back?

That's a really good question. And I mentioned unemployment in California and Florida, but in talking with our leaders in those markets, along with unemployment, housing is another important metric for us. And we're starting to see some emerging -- how many more words can I put in front of this -- stability and the customers seem to have adjusted to the market reality of unemployment and housing and have remained a little more consistent with their advertising buys than they have been in the prior quarter and that's evidenced by the fourth-quarter results.

Also, we continue to see -- if you look at the revenue improvement overall, our, what we call larger -- we call them major accounts business, that's performing a little better than the territory business.

But, we're also, back to the question of the businesses in the market, we as I mentioned last time, are seeing some stability in the number of accounts. Those are the individual businesses that run with us each week and then there's a slight improvement also in the rate of decline of the ads. Meaning, one customer may buy four, five, six ads in the book and then in the revenue per ad, we're seeing a little bit of an improvement there as well. So, we're still seeing declines, but the trends at the moment are looking rather favorable.

And are you happy with the current circulation then where it stands or do you feel you need to cut more or maybe even potentially add back some? Right now, it seems you're okay with where it is.

We will say our plan at this moment is to stay where we are.

One quick question on the Direct side. The Select category -- was the better performance there driven by auto or was it something else?

Well, it was -- it varied among -- oh you said in Select?

Yes, within Select.

Oh, no. Actually, Business Services and Travel and Leisure were the areas that performed well. We continue to have good performance in Automotive, but there were some program -- there were some budgets spent earlier in the year in 2009 than when they were in 2008. So, it did not drive the Select market, but it's still a good vertical for us.

All right. Thank you very much.

You bet.

Thank you. Our next question is from Michael Kupinski with Noble Financial.

Thanks for taking the question. I have a couple of quick questions. Were there any significant changes in the distribution from the third quarter to the fourth quarter in the Shoppers business?

You mean --

In Shoppers.

The circulation?

In the circulation, right.

No and in fact, after January of 2010, we will have comp (inaudible) for the rest of the year.

And in terms of the SG&A expense in the fourth quarter, it seemed a little high. I was wondering were there any special items in that fourth quarter? And then if you could tell me if that's a good run-rate going into the first quarter and for the balance of the year.

I think --- isn't that where the settlement -- that's where the settlement's recorded.

But, X the settlement though, it was just a little tad higher than I was looking for. What about the run-rate going for 2010?

On the run-rate -- bad debt expense was up just a little bit in the quarter. Although for the year, I think it was actually down, wasn't it? It was down because of a couple of bankruptcies last year. And then I think workers' comp may have been up a little bit. So, I don't know about the run-rate going into the year, do you?

We don't expect any changes on the run-rate, Mike.

Okay. And then in terms of your largest verticals, Retail, a number of publishers have indicated that the retail advertising is starting to come back a little bit. Do you have any (inaudible) about what you're seeing about Retail going into the first quarter?

Well, (inaudible) into the fourth quarter, as well, our retail clients generally I think achieved their revenue goals for the holiday and you saw the articles in the Wall Street Journal about what the increase is supposed to be or would be. 3.6%, I think, was the number. The programs that we executed for our clients were smaller than in 2008 and we think some of that was because they committed to the larger programs in 2008 before they realized the full impact of the recession. And going into -- the tone is better, absolutely. We've had some wins. And then again, we're also working -- and this is where I think we have a real opportunity and a strength of ours is to work with the -- our existing clients to not only continue to provide and execute the traditional channels, but to add additional channels to that. And we are having some success in the Retail side, especially in the Digital part of the space. So, I think it's an opportunity for us to deliver increased value and strengthen those relationships.

I don't think there's any dramatic shift in volumes in Q1. I would call it stabilizing and certainly not going back to anywhere close to the levels in 2007 that we can see at this point.

Okay. Perfect. Thank you so much.

You bet.

And thank you. Our next question is from Dan Leben with Robert W. Baird.

Great. Thanks. Within the Direct Marketing business, if you try to normalize a little bit for historically your fourth quarter that's seasonally very strong and then comparisons that continue to get easier as things deteriorated back in 2008, which verticals do you look at and say here's where we're really seeing an improvement versus steady levels against easing comps?

Again, a good question. And there are some -- in our High-Tech business, which we are very excited about what we're doing there, we have had some reduced volumes of -- in last year, but also in the first part of this year in some of the programs that we're working. Now, we believe that those are shifts from the -- and they'll come back as we go through the year.

We've also in the B to B part of that business of High-Tech, we're having good successes. In fact, in B to B online, there's an article about what we're doing with Rockwell, especially in the use of social, and then we've won a couple of other B to B deals that we think that will add some increased activity and opportunity for growth in the High-Tech sector. Pharma continues to be a really good vertical for us. And I mentioned in Select, the Business Services and Leisure. Financial, which has been a very difficult vertical for us for a number of quarters, actually showed some improvement in the fourth quarter and that was primarily in the Retail Bank, Mutual funds, and a little bit in Diversified Finance. So, Dan, it varies across the verticals and some of it is program-based and some of it is trends.

Okay. Now, when you look at all the new areas of marketing within digital, what kind of percentage of revenues is that up to now? And where do you think longer term that piece of the business can get given the setup of the business model?

We're not disclosing and won't for a while what percent of the business that is. Now I don't have to tell you, I know, that those are smaller dollar activities, but we think they add disproportionate value to us when they're combined with the traditional space. And of our new, more than half a dozen new digital deals in the fourth quarter, I think four of those were additional services for our existing clients. But, we've got some really exciting things going on in that space that we'll be talking about more as we move forward.

Okay. And then within your larger customers, what have you heard just anecdotally from those guys in terms of their approach to marketing spending in 2010 relative to 2008? Is it we cut too far, we are resuming a new level, we're still waiting to see how things play out? What do those guys think?

I haven't heard anyone say they cut too far and I think the preponderance of it is that we will probably spend at or more than we did in 2009. And yet in sum, there's still kind of waiting to see how things roll out for them. They're managing very closely.

Okay. And then last question on the Direct Marketing side. Have you heard anything from Toyota with the large recall going on? Any attempt from those guys to really ramp up marketing spending to try and win back and preserve current customers?

You mean about my Toyota Tundra pickup that I own?

That would be one of them I think.

I don't think -- I don't know of anything that we've heard about ramping up. I think there may be some other auto manufacturers ramping up against them maybe.

And then just shifting to the Shoppers business, it looks like we're seeing a bottom here -- a little bit of a bounce off it in the fourth quarter. Any performance differences between California and Florida?

California has stabilized, I would say, a little more than has Florida. And just our reach and scope in California is obviously more. So, I would say California is probably performing slightly better than Florida is.

Okay. Great. Thanks, guys.

Thank you. Our next question is from Ed Atorino with Benchmark. Your line is open.

Yes. I have a couple of questions. One, interest expense really was down rather dramatically 3Q for 3Q. It looks like the decline was more than just a debt decline. Could you explain that a little bit? Maybe I'm wrong and it's all the debt decline. And could you go over the tax rate settlements and stuff that resulted in a lower tax rate and did you say 37% to 38%? Yes, you did say that. I have that down. I have one more after you answer those. Thanks.

Okay. The interest rate is a function of -- we had an interest swap agreement that expired September 30 on $150 million at 4.6%, 4.7%. So, it explains almost the complete variance. On the tax side, we had a liability for a state tax position that we had taken where the statute of limitations expired, so that reversed due to the timing in the fourth quarter.

Looking forward on interest expense for 2010, is it going to stay about $1 million a quarter or does it go back to normal? More swaps (multiple speakers).

Well, you can see in our filings that we pay basically LIBOR plus around 70 basis points.

Okay. And lastly, is pricing any issue in either Direct Marketing or in the Shopper business? Are you being -- are you forced on lower prices or is it really a volume problem not pricing?

Pricing is competitive everywhere.

Thanks a lot.

Thank you. (Operator Instructions) And our next question comes from Dan Salmon with BMO Capital Markets.

Thanks, guys. I got both of my questions, so I'm fine. Thanks.

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

Thank you all for your interest in our Company. And as I do every quarter, the people that make all this happen are those folks in our Company that are the best in the industry. And so we appreciate all that they do to allow us to perform at the level that we do. And we look forward to talking to you at the end of the first quarter. Have a great day.

Thank you.