Good afternoon, ladies and gentlemen and welcome to the Harte Hanks Third Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Tom Baumann of FNK IR. Sir, the floor is yours.

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, November 10, 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 call is yours.

Thank you, Tom and good afternoon. This was another strong quarter for Harte Hanks. We entered the year expecting revenues to be generally flat to slightly down as pandemic-related projects ran off. However, our new business efforts have been successful. We have expanded existing client revenues and added new logos over the past few months. The recent wins have more than offset the project’s reaching end of life. And as a result, we continued to grow. While most of that growth has been in our Fulfillment and Logistics segment, which has resulted in modest margin compression, we continue to generate significant profitability and free cash flow, enabling us to strengthen our balance sheet. The financial improvements are due in large part to systemic changes we have made at Harte Hanks. The strategic shift to an asset-light model the elimination of unprofitable contracts and the meaningful cost-cutting measures have positioned Harte Hanks for sustainable operating income and EBITDA generation. Our restructuring is behind us, but we will continue to drive operational improvements and strive for continued expansion of revenue and margins. Revenue increased nearly 9% for the quarter and we are up more than 6% year-to-date. Again, this is encouraging considering two things. First, last year in Q3, Customer Care experienced significant revenue from its state unemployment projects tied to the pandemic. And second, last year in Q3, our Marketing Services segment realized favorable revenues from less profitable direct mail projects that concluded in 2021. Our Fulfillment and Logistics segment grew nearly 56% in the quarter, including a large wins in logistics, evaluated kitting and packaging project for a Fortune 50 retailer and increased programs from an existing pharmaceutical company. While Q4 2021 was one of our strongest revenue quarters in recent history and despite the macroeconomic environment, we think Q4…

Thank you, Brian. The third quarter was our sixth quarter in a row of positive EBITDA at $4.4 million. Additionally, we again delivered solid GAAP profitability. Our performance included new business wins as well as growth within our customer base. Each of our three segments are delivering positive operating income. I’d now like to walk through the results in more detail. Third quarter revenue was $53.9 million, up 8.7% or $4.3 million from $49.6 million in the same period last year. Revenue growth was led by our Fulfillment and Logistics segment, which was up $8.4 million or 55.6% year-over-year. Customer Care was down $2.4 million or 12.1% year-over-year, and marketing services was down $1.7 million or 11.6% from the prior year quarter. From a contribution margin perspective, our Customer Care segment delivered $3 million in EBITDA, down $1 million or 26%. Our Fulfillment and Logistics services segment delivered $2.8 million and EBITDA up approximately $1.1 million or 64% from the year ago quarter. Marketing Services EBITDA declined by approximately $851,000 or 30.7%. 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 third quarter were $50.1 million, up 10.5% from $45.4 million in the year ago quarter, due to the increased revenue and change in the revenue mix, resulting in higher transportation costs in our Fulfillment and Logistics segment. Operating income was $3.8 million down $453,000 compared to operating income of $4.2 million in the year ago quarter. This change is largely due to the revenue mix. With higher costs in Fulfillment and Logistics and increased stock compensation expense. We posted net income of $7.2 million or $0.87 per basic and $0.83 per diluted share in the third quarter, compared to net income of…

Thank you. [Operator Instructions] Our first question is coming from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you and good evening. A couple of questions. First of all, congratulations on a solid quarter. I was just wondering if you can, you gave guidance for Q4 and indicated that Q4 revenue should look very similar to Q3. And I was just wondering if the segment components of that revenue is the mix about the same as well, with Fulfillment and Logistics are performing very strongly, in the Customer Care still weak and then marketing services. And I was just curious if you can highlight marketing services for me in that question, because I did think that marketing services was going to perform a little bit better in Q3. But so I was just wondering, to kind of give us your thoughts about the outlook for Q4?

Hi Mike. Thanks for the question. We certainly are happy with the results, certainly in the third quarter. I will differ a little bit to Lauri on some of the specifics. But I think that the revenue mix in the fourth quarter, we would anticipate to be somewhat similar to the third quarter without getting too specific. And I do think that when you factor in the roll-off of some direct mail projects that ended in 2021 for marketing services, that’s the largest piece of the driver. We do anticipate continued improvement sequentially. But year-over-year I still think last fourth quarter was a pretty strong quarter. And so I would again expect kind of similar revenue mix in the third quarter. Lauri, any additional commentary there.

Yes. I mean I just want to clarify, I think Michael, you thought that we were seeing similar to Q3, but I think we are seeing similar to Q4 prior year. So, Q4 year-over-year should be similar. The mix still from Q3 this year to Q4 sequentially, I think the revenue mix is fairly well in line, although customer care did have the large House of Dragons project in Q3, that did kind of accelerate the Q3 number. And that obviously wound down after the launch of that piece.

Oh. Got it. Okay. Thanks for that clarification. So, you are saying that Q4 2022, should look similar to Q4 2021.

Correct.

Yes. Okay. Got it. Okay. And then, when you look at the, some of the expense lines, like, for instance, payroll labor, that was a little bit higher than I was expecting, it was certainly a little bit of a pivot from what we saw in Q2. With – and then, of course, the production distribution and that could have been just the Fulfillment and Logistics line being sort of much stronger. Can you kind of just give us your thoughts about how labor – pressure on labor expenses? Were there anything unusual in terms of was it related, more so to the Fulfillment and Logistics business that you had, kind of give us some color on the expense line items?

Sure. So, definitely the production and distribution is related to the large increase, and especially with logistics. So, that’s where our transportation expense is showing. So, that’s why you are seeing such a large increase in those expenses. And in the labor year-over-year, relatively flat. But remember, we have got the large customer care program with House of Dragons in Q3, that definitely would have had a little bit of spike in labor. And that may be why you have seen that little bit of a difference there.

Yes. Do you have any thoughts about how we should look at that line item going forward, going into Q4?

Yes. I mean definitely, we are looking at a revenue mix change. So, as the Fulfillment and Logistics is stronger, you are going to see the production and distribution higher with I think labor stain, I would say more flat on labor. I don’t think there is anything particularly that we are seeing as far as like labor market pressures that we haven’t been seeing all along. Brian did talk about the fact that we did put our 401(k) back in this year. And then going forward to next year, we are going to increase our health benefits. So, you will see some of that in the labor line. And those were some things that we took actions, obviously, when we were going through restructuring and to get the company back in a better position that we are now giving those benefits back so that we can retain those employees.

And so Lauri, you insisted that there are some tax refunds and things like that, can you kind of give us a sense of what the balance sheet will look like, maybe by year end, with the prospect of seeing some of these, the tax refunds and so forth, and maybe net after you purchase the preferred and so forth what the balance sheet is going to look like?

Right. So, currently, the $9.9 million that we put into the escrow for the redemption of the preferred is seeing our balance sheet and other current assets. So, you are going to see a change of that as that deal comes to completion. The other thing I would say is that, sorry, where was I going with that be, the taxes. So, we do have $7.6 million that we are expecting to receive. We are hoping anytime now, it’s been quite a while. But we are doing all that we can to continue to follow-up on that, we don’t have any concerns or any issues. I think it’s just timing with the IRS processing.

Got it. And then can you talk a little bit about since you are cash flow positive, and you have now cleaning up the balance sheet, and all these things. What is the best use of cash at this point? What is the capital allocation that you are focused on?

Yes. So, clearly, I think investing in tech is important to us, when I think longer term, we have clearly spent some CapEx this year as it relates to light automation and building out some of our Kansas City facility. So, those things are behind us. I do think some additional tech investment is required on a smaller scale. I do think we will clearly continue to look at tuck-in acquisitions, if it makes sense and bridges multiple segments and increases our kind of compelling offering to the marketplace. And then our typical – we will continue to review meaning, who knows what pension plans look like. And as interest rate environment continues to increase. If we get – ever get asset values to kind of come back a little, maybe there is a creative way to mitigate risk on the pension side. But it’s premature to think that all of these kind of levers are on the table as we come together as a Board, quarterly and more frequent than that.

Alright. That’s all I have. I will let others ask questions. Thank you.

Thanks Michael.

Thank you. Our next question is coming from Julio Romero with Sidoti & Company. Sir, please go ahead.

Thanks. Hey, good afternoon. To start, I guess on the Fulfillment and Logistics segment, the revenue was pretty strong. Just talk about what you guys are doing to drive the growth in logistics? And do you kind of see the business wins continuing there?

Yes. So, I think we have mentioned in the second quarter, we had a nice win and uptick on our logistics customer that really is continuing to accelerate, I think we will probably continue to have a little bit of an uptick in Q4. And a lot of that will kind of continue into the next year, which there is good and bad. The only downside is in the logistics, some of it’s a little more margin pressure with the competitive landscape of logistics, pricing. However, we are an asset light organization. And we certainly can manage these transportation relationships and drive pretty comfortable margins from that business. So, I think I do expect continued growth in logistics as we look out into next year. We are also within the third quarter from fulfillment. We do have nice growth, as we have expanded into new logos that have really driven value added fulfillment opportunities for us that are rather substantial. We do think that some of those can continue a lot of more project based, but we have got a relationship with a new client that has repeated and continued opportunities quarter-over-quarter. And so as we continue to perform, we fully expect continued opportunities to be able to bid and grow with this new logo client. And then within existing customers, we have mentioned this before, we have got some great relationships with customers that really want to use us in a more significant way. And so we are investing in some tech and working through how do we make the relationship easier to expand and actually scale. And we are making some good headway on that front. So, I do – I am cautiously optimistic that we are going to continue to trend very favorably in our Fulfillment and Logistics business.

Great. Thanks very much for that color there. Obviously, in this quarter, one of the big bottom line drivers was the non-operating income, the currency gain due to the intercompany receivables. Have you seen any income from that, or do you expect any income from that in the fourth quarter?

Yes. I mean it’s really, purely driven by the change and the strengthening of the dollar. I have a hard time believing that the dollar can get stronger against some of these currencies. So, I am really not expecting that to re-occur in Q4, but we will see what happens.

Got it. Just as I am thinking it through, I guess it really just depends on what the dollar is at quarter end I guess.

It is, yes.

Okay. And then on the preferred repurchase, how confident are you guys in the repurchase closing by year end?

Very confident. Yes.

Okay. Got it. You have done a nice job maximizing some opportunities, the IP block sale, the sublease of Jacksonville. Any other further runway for opportunities similar to those two in the upcoming quarters?

I mean I would say with a couple of other leases that we are – that we have shrunk to kind of at the end of this year. So, maybe $200,000 to $300,000 more savings next year related to those decrease in that space.

Excellent.

Brian, if you...

Yes. No, the only other thing I think I have mentioned before is we still are holding on to a small block of IP addresses that if we sometime next year, I think we can monetize, probably third quarter somewhere around then. But it’s not going to be at the order of magnitude of $2 million to $2.5 million, it might be a $0.5 million or less.

Got it. And you mentioned, you went live with ERP this quarter, just talk about how the rollout has gone and what you kind of anticipate in terms of efficiencies?

Yes. So, actually went live, October 1st, so kind of right at the beginning of the quarter that we are in now. And as you know, it’s kind of the learning curve happening right now, which we expect to then get to the efficiencies starting early in 2023.

Perfect. I will pass it on. Thanks so much for taking my questions.

Thanks Julio.

Thank you.

[Operator Instructions] Okay, there appear to be no further questions in queue. So, I will hand it back to Brian for any closing comments. End of Q&A:

Thank you and appreciate everyone joining and look forward to our call next quarter. Take care.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.