Good day, everyone, and welcome to the Harte Hanks Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you’ll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Tom Baumann of FNK IR. Please go ahead Mr. Baumann.

Thank you. Hosting the call today are Brian Linscott, Chief Executive Officer; and Lauri Kearnes Chief Financial Officer. Before we begin, I want to remind participants that during the call management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may also make additional forward-looking statements in response to your questions today. Therefore the company claims protection under the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition any projections as to the company's future performance represented by management include estimates as of today, August 11, 2022 and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided on the call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures are available in the earnings press release that was issued shortly after the market closed. A copy of that press release and other corporate disclosure is available on the Investor Relations section of Harte Hanks website at hartehanks.com. With that, I would now like to turn the call over to Brian. Brian the floor is yours.

Thank you, Tom, and good afternoon. The systemic changes we have made to Harte Hanks are clearly paying off as we have delivered significant improvements in operating income and EBITDA, even as revenues modestly decreased, as expected, due to run-off of some pandemic-related projects. This improved profitability is a direct result of our strategic decisions to implement an asset-light business model and focus on profitable business to drive higher margins. Our operating margins improved over 8% compared to less than 3% in the year ago quarter. Harte Hanks is now sustainably profitable, with a strengthening balance sheet and a business model that generates cash. Our restructuring is behind us, but we will continue to drive operational improvements and strive for continued expansion of revenues and margins. Entering 2022, we expected revenues to be in line with what we had experienced in 2021, given that there were a number of pandemic-related projects that we onboarded in 2020 and 2021, that would be concluding this year. The 1.4% revenue decrease in the second quarter, especially the $3.8 million decrease in customer care revenue reflects this expectation. However, we have been successful in adding new customer relationships and expanding our work with our existing blue-chip customer base. So even with the well-documented slowdown in the economy, we remain confident in our outlook with a clear path to grow our top line for full year revenues on a year-over-year basis. As an example, this month, we have begun ramping up our customer care staffing to support the August 21 streaming release of the House of Dragons, the prequel to the Game of Thrones. This event, as well as a significant win in logistics and other new business wins provide added confidence in our ability to exceed a strong third quarter comp we face against…

Thank you, Brian. As Brian said, this quarter unfolded as we anticipated, with a modest decrease in revenue, but a significant improvement in operating income and EBITDA. The June quarter was our fifth quarter in a row of positive EBITDA at $4.6 million. And perhaps more importantly, we are delivering solid GAAP profitability, with fully diluted earnings per share of $0.52 compared to $1.27 in the second quarter last year which included a $10 million or $1.39 per share onetime gain related to the extinguishment of our PPP loan. This year's GAAP result does not include any nonrecurring adjustments or benefits. Our performance included new business wins, growth within our customer base and the benefits of our asset-light model. Our focus for 2022 is to expand revenue and margins. Longer term we have a solid platform with differentiated offerings that should enable sustainable growth and solid profitability. The large nonoperational restructuring charges are behind us. I'd now like to walk through the results in more detail. Second quarter revenue was $48.6 million down 1.4% or $0.7 million from $49.3 million in the same period last year. Revenue growth was led by our Fulfillment & Logistics segment which was up $3.9 million or 24.3% year-over-year. Customer Care was down $3.8 million or 19.8% year-over-year and Marketing Services was down 5.3% or $758000 from the prior year quarter. From a contribution margin perspective our Customer Care segment delivered $2.5 million in EBITDA, down $857,000 or 25.6%. Our Fulfillment & Logistics segment delivered $3.2 million in EBITDA, up approximately $1.5 million or nearly double from the year ago quarter. Marketing Services EBITDA grew by $100,000 or 5.1%. We believe each of our three operating segments are operating efficiently and should generate positive EBITDA levels for the foreseeable future. Our operating expenses for the…

[Operator Instructions] We'll take our first question from Julio Romero with Sidoti & Company.

Hey, good afternoon. Thanks so much for taking my question. So to start, I guess in your prepared remarks, Lauri I think you mentioned -- you sounded more confident for year-over-year revenue growth than your comments on the first quarter call. If you could just talk about what's making you guys more confident over the last three months with respect to the sales outlook for the year?

Sure. I think as we've said there's certainly been a focus on some cross-segment selling and we're definitely seeing some results from that. Brian mentioned the ramp-up to support the Game of Thrones release is providing some additional revenue for us in Q3. And overall I think we're just seeing strength in the business and some of these new contracts coming to fruition. Brian did you have anything else to add?

Yeah. No I think the only other real significant increase in the second half that is worth highlighting I mentioned it in my comments, but the platform that we have under our logistics business should generate some material increases in revenues as well.

Got you. And that, kind of, dovetails into my next question on that Fulfillment & Logistics segment. You had really strong sales margins. The incrementals margins were really strong. If you could just talk about what went right for the segment in the quarter, maybe what the mix was of fulfillment versus logistics and how you see margins for that segment trending for the remainder of the year?

Yeah. So sequentially, I will say that we posted a pretty strong second quarter that makes it a little bit more challenging sequentially for us. But -- and I think the revenue mix concept is important to note. That said our logistics business in the second quarter produced double-digit EBITDA margins. And that nice strong performance there along with the revenue mix of both print and kitting fulfillment that we had both in both Boston and Kansas City really helped the business drive forward, including some ongoing project work that we got as a result of a recall that I think we talked about on our first quarter call that continued into the second quarter. So I still think we're improving operationally, because we're fully into the new facility, but we're still racking out the additional 100,000 square feet that might actually be done in the next week or two. But with that I think it's going to allow us to hopefully gain some additional incremental opportunities from operational efficiencies. That said, I think it should be noted that the revenue mix because I think we're going to have a stronger increased performance out of logistics is going to -- it's probably going to push the margins down just a little bit sequentially.

Okay. That makes sense. And then just staying on that segment, you mentioned you're seeing healthy demand for Fulfillment & Logistics even as some of the larger players logistics players e-commerce giants maybe slowing some spend there. Just would love to hear you expand on that? And what are you seeing in the demand pipeline that's maybe giving you some confidence there?

So I think there's three areas. We obviously have a nice opportunity within logistics as I mentioned. There's a lot of really positive momentum with some of our existing clients. And one good example there is us leveraging technology and electronic data exchange with some of our real large employee -- I'm sorry with a real large customer contracts that when we sat in front of them and met with them, it really identified opportunities to not only make their life easier, but find -- it allows us to actually expand some of what we do for these large clients. So I think that organic growth as an example with leveraging tech is going to be a continued catalyst for us just within the old existing customer base. And then I do think that the branding company that I talked about in the new business section is a great example of just a completely new opportunity, no relationship that we ever had in the past. But some of our marketing efforts came to fruition and now we're ramping up as we speak. And I'm heading out to Boston next week to meet with the customer to talk about additional opportunities as we've invested in some light automation to increase the speed of our pick pack and hopefully in improve some of the performance and the margins within Bridgewater.

That’s helpful. Thanks very much for taking the questions and I’ll pass it on.

Thanks, Julio.

Thanks, Julio.

[Operator Instructions] Our next question comes from the line of Michael Kupinski with Noble Capital Markets.

Thank you. Congratulations on your solid quarter. I was just wondering now that you've paid off your debt are you planning to find traditional financing options at this point, or is that still into the future?

So Michael, we did actually do a new traditional financing arrangement that we closed on last December. So this is truly just an asset base based on our accounts receivable so standard $25 million line.

Okay. Got you. I didn't know if you were looking at further financing options beyond what you've done then. Okay. In terms of the quarter, obviously you touched on it on the question earlier the margins in fulfillment were a little better than expected. Did you have duplicative costs in the quarter related to the consolidation of your Kansas City facility? Would margins would have been better, or how much impact did you have in terms of those costs?

So I wouldn't say we have duplicative costs and Lauri can chime in if she can think of any at this point. But what I would say is until we have the building fully racked out, I don't think we're hitting on all cylinders, right? I think the Kansas City management team has done a phenomenal job improving operations and obviously the results are shown there but I still think that there's some room to grow as we finish out the racking of the additional 100,000 square feet we took on five, six, seven months ago.

I would agree. There's no duplicative costs but there were in Q2 some last year as we were moving into that facility and that's certainly part of what's driving that margin improvement.

Got you. And does the repurchase agreement with Wipro dissolved the vendor agreement that you had with them? Does it change the relationship in any way going forward? I was just wondering if you could just shed a little color on your relationship with them.

Sure. So we actually did dissolve the vendor agreements previously. This is the last transaction that we had with Wipro.

Got you. And then just in terms of the general environment you touched on this with your individual businesses talking about the segments and so forth. Are there any particular businesses? I know you're close to your clients and they – and you tend to have a business that is a little bit farther into the future and they are more project-related in many cases. I was just wondering if you can give us a sense of what you're hearing from advertisers. Any concerns that they have at this point in terms of the general economic conditions and things going on with them and how they're being influenced by the inflation and so forth?

Yes. So that Mike is a question that I asked my sales team on a weekly basis at the very least. And to date I've got – we've got no specific examples where spend has been reduced as a result of them pulling back spend, right? Now we've had some clients delay for other idiosyncratic issues within their company but nothing has kind of stopped as a result of the macroeconomic or inflationary pressures and advertising spend that they have. So I don't know if we're just lucky right now but I asked that question just yesterday. And to date we still haven't – we haven't had anything that has stopped our opportunities as a result of contraction in spend.

That's terrific. And then of course now you have -- in terms of the unfunded pension liabilities. So you're saying that the $10 million would be -- it would be lower by $10 million by year end from current levels Lauri, which is by $50 million?

No.

All right. I'm sorry, if you could just explain that a little bit.

Yes, let me just explain. So we revalue -- officially revalue the pension liability on the balance sheet at the end of each year based on the changes in asset value and interest rates. So it hasn't -- other than the normal expense runoff for the year there's no additional adjustments. So we looked at it from December 31 when it was last revalued and then we looked at it as of July 31. And to-date through July 31 we have a $10 million decrease approximately on the pension liability. So we still got five more months to go in the year. So we'll see what happens with asset values and interest rates through the balance of the year. While asset values are certainly going down interest rates have been going off which has more than offset the changes on the assets.

For sure. And then what would be the best use of cash at this point? Are you looking at now that you're generating cash flow, your solid earnings what are your thoughts in terms of looking at acquisitions? What are the options uses of cash at this point?

Yes. So Mike, obviously, we have healthy discussions about the use of capital going forward. I will say I want to step back and say we just paid off $10 million of debt, right? And we paid off $10 million worth of preferred shares or we have it in escrow as you can see on the balance sheet. So we're stepping through all what we think are the big items. The next set of potential use is going to be continued investment in the business whether it's technology or assets that are going to improve efficiency. I think I've mentioned it before if there are acquisition opportunities that help complement our capabilities and expand our revenue, we'll certainly look at that. And then it's a valuation. Is there other things from the balance sheet that we can do whether it's pension and/or deliver money to our shareholders right? And so we're evaluating all of those options and I will say we haven't built a lot of cash yet because we just spent a whole bunch, but we certainly are planning and looking forward to making sure we do what's right for our shareholders and our business.

All right. Terrific. Thank you so much.

Thank you

Thank you.

And there were no further questions at this time. I'll turn the floor back to our speakers for closing remarks.

And this is Brian. Thank you everybody for joining and we'll see you in one quarter from now. Take care.

And thank you for joining the Harte Hanks second quarter earnings call. This does conclude today's program. You may now disconnect. Have a great day.