Greetings and welcome to the Harte Hanks’ Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. And I will now turn the conference over to your host, Tom Baumann of FNK IR, you may begin.

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, March 7, 2023, 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. 2022 was a milestone year for Harte Hanks and this year we'll be celebrating our company's 100th anniversary. After years of cost cutting to mitigate declining revenue, we have successfully stabilized the business, established sustainable profitability across our entire enterprise and created a platform for profitable growth. We enter our 101st year stronger than we've been for more than a decade, and I couldn't be prouder of our team. For 2023, we expect continued growth in our top and bottom line, even though we're facing a tough year-over-year comparison in the first quarter. Historically, Q1 is our seasonally lowest quarter of the year. However, last year we had multiple non-recurring projects in Q1, including a significant recall project that led to an abnormally strong first quarter in 2022. Based on the visibility we have with the first quarter more than two thirds complete, we expect modest year-over-year revenue growth and we expect a drop in year-over-year quarterly EBITDA, due in large part to our revenue mix changes. Nevertheless, as we move through 2023, we expect to generate high-single digit revenue and EBITDA growth on an annual basis. We continue to expand existing client revenues and add new logos. The recent wins have more than offset the customer care pandemic-related projects reaching end of life and the reduced revenue from our legacy direct mail campaigns and marketing services. While most of our growth has been in our Fulfillment & 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 the systemic changes we have made at Harte Hanks most notably a strategic shift to an asset-light business model. We have…

Thank you, Brian. The fourth quarter was another positive quarter and a strong end-to-the-year for us with solid results on both the top and bottom line and with each of our three segments delivering positive operating income. I'd now like to walk through the results in more detail. Fourth quarter revenue was $54.8 million, up 5.4% from $52 million in the same period last year. Revenue growth was led by our Fulfillment & Logistics segment, which was up $6.3 million or 34.4% year-over-year. Customer Care was down $2.5 million or 12.9% year-over-year, and Marketing Services was down $987,000 or 6.8% from the prior year quarter. From a contribution margin perspective, our Customer Care segment delivered $3.2 million in EBITDA, up 24.5%. Our Fulfillment & Logistics services segment delivered $2.3 million in EBITDA, up slightly year-over-year, and marketing services EBITDA declined by approximately $485,000 or 18.4%. 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 fourth quarter were $51.3 million, up 4.5% from $49.1 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 & Logistics segment. Operating income was $3.4 million, up $567,000 compared to operating income of $2.9 million in the year-ago quarter. During the fourth quarter we recorded a non-recurring $19.8 million tax benefit due to the release of valuation allowance. This accounting reversal and associated tax benefit is due to our improved performance and the expectation of continued profitability. We also recorded $1.3 million in other expenses mainly related to pension expense and foreign currency loss. Inclusive of these non-recurring charges, we posted net income of $21.8 million compared to net income of $1.8 million in…

Thank you. [Operator Instructions] Thank you. Our first question is coming from Julio Romero with Sidoti & Company. Please go ahead.

Thanks. Hey, good afternoon, Brian and Lauri.

Good afternoon.

Maybe to start on the quarter, if you could maybe talk to what drove the strong margin and Customer Care and how much was the improved operational efficiencies versus maybe some other factors? And then secondly, how much of that good performance is sustainable into 2023?

So I'll start and pass it over to Lauri, but yes, so I think some of it is certainly revenue mix driven, right? We ran out some pandemic related projects that were lower margin. In the past we made that choice. So with those lower margin pandemic projects specifically relating to a couple of states that were in the 2021 numbers that were not in the 2022 numbers, that obviously helped a little bit. And the other – the other kind of change in the business model is when we had the pandemic kind of related revenues, we ended up leveraging a lot of third-party consultants a lot, but certainly a portion and we've kind of pivoted to more full-time Harte Hanks employees, which has improved the margin profile as well as improved the turnover, right? So reduce the turnover, reduce the attrition, that's actually helped carry forward in some of the operational improvements in that segment. As I look going forward, this is a real strong number. I don't know if that is forever sustainable, but I know the way we operate. We should be on the margins generally within a percentage or 2 of the way we're performing currently. Lauri, any other things to add there?

No, I mean, I agree. I think Q4 was unusually very strong for them. We've certainly seen operating margin improvement and we expect to continue with that going forward, but Q4 was usually strong.

Got it. Very helpful there. Maybe turning to the guidance and the commentary you gave there, just any sense on how much EBITDA should be expected to be down in the first quarter? Any more you have on the mix changes expected in the first quarter? And then secondly, if you could talk about the full year cadence of revenue and EBITDA as we progressed throughout the year?

Yes. So I think the big driver, if you look at a couple of big projects that were in Q1 of 2022 they were very high margin kind of one-time projects. When you look at kind of the revenue mix we have in Q1 this year, we're going to have a higher concentration of Fulfillment & Logistics revenue, noting some strong performance in logistics, which is our lower margin segment. So when we look at year-over-year, we'll be down double-digits in EBITDA for the quarter but we fully expect to, as we mentioned with guidance to ramp-up and actually improve both the new business growth as well as the bottom line EBITDA as we continue into Q2 through Q4. Lauri, you want to give a little more color on Q1?

Yes. I mean, I think as Brian stated, Q1 is really driven by a mix of specific customers, so we've got some of that higher logistics revenue coming in and some lower revenue and some of the other segments and it's really specifically just that customer mix that's driving that performance in Q1.

Understood. And then you mentioned looking at potential M&A, but obviously in a disciplined manner. If you could just speak to the pipeline of deals you're looking at and should we expect something above, you're looking at things of similar size to InsideOut or maybe would you be considering something on the larger side?

Yes. I think, directionally those type of size, tuck-in acquisitions certainly would be easier to digest. Now that said, if there's the right compliment of capabilities and tech profile are something that we think can really more aggressively bolster, will certainly evaluate larger size acquisitions as well. I think the key that I'm really trying to lean into is opportunities that further kind of tighten the fabric between our segments whereby they fit nicely in between maybe two of our three segments. And certainly there's a few opportunities like that, that are out there whether or not we can buy something at the right price and structure it the right way we'll have to find out.

Very good. I'll pass it on. Thanks very much.

Thanks Julio.

Thanks.

Thank you. Our next question is coming from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you and good afternoon everyone. First of all, I have a comment that 2022 in my view was kind of like a watershed year for you guys because coming off of a strong 2021, you showed growth which was great and I think of it to that degree, I look at your confidence in 2023 and looking at growth obviously is, I just love the confidence that you're exhibiting there. Was just wondering if you can just talk a little bit about what is baked into your expectations, whether they be macroeconomic view or whether it be specific business trends that you're seeing that you can, that adds the confidence to show not only revenue growth, but adjusted EBITDA growth and even earnings growth for 2023?

Yes. So, hey Michael thanks for the question. So I guess it goes without saying we do have inorganic growth that helps kind of get some of some of what we're speaking towards, right, for 2023. That said, I do think that there's some compelling opportunities as we see in our pipeline as it relates to certain products such as demand generation, such as inside sales, certainly we're finding some nice opportunities that leverage Audience Finder and Data View with our marketing services business. And we've certainly got some RFPs in the pipeline and hopefully our batting average continues to increase as we gain some confidence and gain some additional capabilities with certainly the acquisition of InsideOut. And I think their inside sales function for us is starting to put a nice structure in place that'll will allow us to more aggressively pursue opportunities. So that's what I would say generically largely as it relates to marketing services and customer care. On the Fulfillment & Logistics side, we continue to see some nice demand in the marketplace for our logistics supply chain products including our all link pricing software. And then we also have some really nice partnerships and are experiencing some value-added fulfilment opportunities that we're pretty excited about. So, all of this is a little more microeconomic rather than macroeconomic, obviously the headwinds with the macro economy always gives me some pause. But I do fully expect that we're going to grow the business this year.

And do you think that you'll have growth in each of your segments?

So, we certainly would expect probably a little heavier growth in Fulfillment & Logistics, but with the acquisition, we do expect growth in Customer Care and we are cautiously optimistic about our marketing services pipeline and opportunities to get us some growth.

Got you. And then of course not just a year or two ago, investors were concerned about the unfunded pension liabilities, and now it seems like you are addressing that even further. I was just wondering if you can talk a little bit about what might be the unfunded pension liability as of first quarter. And then given the fact that we're probably looking at another interest rate increase, do you have thoughts about where the unfunded pension liabilities might be at the end of this year?

Hi, Michael. I'll take that one. So, in Q1 obviously we're not going to do – we only do the restatement, really the full restatement of the pension liability at year end. With what we're working on the one part of our qualified pension plan and transferring that to a third party, we've really gone through a process now of matching those assets with the liability so that those should move in, in conjunction with interest rates as that moves. So we don't expect a lot of change on that one. As interest rates increase, the other two, the other qualified plan and certainly our non-qualified plan that doesn't have assets against it, we would expect to see some decrease. I don't have a specific number as to where we think that will be at year end, but we would certainly expect to see some additional decrease, maybe not quite as drastic as we saw in 2022.

Thanks, Laurie. And Laurie, what is left on the tax refund and if you expect that in the first quarter?

Yes, I mean, it's $5.3 million is what's left. Given where we are in March, I'm not sure it's going to come in in the first quarter, but we would certainly hope to see that in the second quarter.

Got you. And the InsideOut acquisition, can you give us a sense of what the annual revenue run rate might be and maybe even adjusted EBITDA, if it's accretive since you're anticipating some cost synergies there? Any color on that acquisition in terms of revenues and EBITDA?

Well, I guess I will start with the baseline. The trailing 12, when we acquired it on December 1, it was about $11 million of top line and $1.5 million of EBITDA, right. So, we fully expect some nice growth off of that $11 million from a top line. And obviously there is a little bit of cost this year to integrate and do some of the hard work, but we certainly think that we'll get some improvement on the bottom line as well and I fully would expect it to contribute more than the $1.5 million, right. Probably…

Yes.

Hopefully north [indiscernible] somewhere in that range.

And then outside of the non-recurring projects you had talked about in the first quarter, can you talk about maybe if you factored that out, what the underlying revenue trends were in the first quarter? I believe you are talking specifically about Customer Care, right, over there from a year ago?

Yes.

Yes, largely Customer Care, absolutely.

And then if we took the recurring – just took the non-recurring business in Customer Care out of the equation, what would the underlying – would Customer Care be growing year-over-year? I would assume. So, what would – in the first quarter, what would we – what would the pace be, so to speak, given the fact that you're looking at total revenue growth for the company?

So I don't know that I have that Laurie at my fingertips.

Yes, I was just trying to back into it. I mean, definitely the trend continues that we've seen recently with the largest growth is coming from our Fulfillment & Logistics segment. But if I back out the one time in Customer Care, I would still expect them to be growing in 2023. But I think a modest growth rate for them.

Yes, I was just trying to get a sense of what that growth was in the first quarter to get a sense of how to model out the subsequent quarters in terms of just the underlying growth outside of the non-recurring revenue that you had.

Yes, so we can take…

[Indiscernible]

See, we're talking about pandemic related revenues that that largely rolled off from Q2 of last year. So, it's primarily a first half of this year issue from a comparable perspective. So, we'll have to kind of take a look at that.

Got you. And then final question, in terms of just capital allocation at this point has the company considered looking at returning to capital to shareholders or other options at this point? Or can you just talk a little bit about capital allocation?

Yes, so I mean, I think, when you look at the categories, they are pretty similar, right? We talk about potential bolt-on acquisitions, we clearly are investing in technology, that I think, you kind of see through our CapEx last year and I would expect a pretty nice investment this year as well. And then pension, as we mentioned, we're going through that process that would be a $7 million cash outlay, but that probably wouldn't occur until next year sometime. Am I right, Lauri?

Yes.

And then when we meet with the Board on a quarterly basis, obviously we discuss capital allocation and we do at times have discussion about do we explore a stock buyback or other kind of return of capital to shareholders. And while we haven't made any decisions that will continue to be kind of the four large areas we talk about capital allocations.

Got you. Thank you. That's all I have. Thank you.

Thanks, Mike.

Great, thanks.

Thank you. As we have no further questions in queue, I will hand it back to management for any closing remarks.

Well, thank you for joining the Q4 year end 2022 earnings call. And I look forward to reconvening in a couple months to talk about our first quarter results. Thank you.

Thank you. And this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.