Hello and welcome to the DLH Holdings Fiscal 2023 First Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Chris, please go ahead..

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer; and Kathryn JohnBull, Chief Financial Officer. The company’s earnings release and PowerPoint presentation are available on our website under the Investor page.

I would now like to provide a brief safe harbor statement, which is also shown on Slide 3 of the presentation. This call may include forward-looking statements that relate to the company’s outlook for fiscal 2023 and beyond.

These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements. Please refer to the risk factors contained in the company’s annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward-looking statements. On today’s call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH’s website.

President and CEO, Zach Parker, will speak next; followed by CFO, Kathryn JohnBull, after which we’ll open it up for questions. With that, I’d now like to turn the call over to Zach. Please go ahead, Zach..

Thank you, Chris, and good morning, everyone. Welcome to the 2023 first quarter conference call. I’m truly excited about how well our leadership team and our talented workforce has delivered during this quarter. And I’m really excited to give you an update around all of those aspects on this session.

Beginning with slide 4, I will first provide a high level overview of the quarter’s major developments and accomplishments, including of course, our acquisition of the privately held GRSi on December 8 of last year, adding approximately 700 highly credentialed professionals to DLH and significantly strengthening our digital transformation and cyber capabilities.

DLH has incorporated some tremendously talented expertise, both technically and analytically into already nationally recognized team of researchers, analysts, technologists and project managers.

This powerful combination of resources positions DLH, to drive even greater value for our shareholders, our stakeholders, which include our talented employees in this leadership team, our mission critical customers and our shareholders. What we now bring to the market is more differentiated and powerful than ever before.

And we look forward to this new growth stage in the company’s history. Truly excited about the trajectory. Given the date of the acquisition, our financial results for this quarter include a portion of GRSi, we are well on our way to integrating this unique enterprise, which I’ll discuss even more in a moment.

Q1 revenue was 72.7 million, which was lower than last year due to the large short term FEMA contracts, which we completed in Alaska during fiscal year 2022. Kathryn will provide pro forma and adjusted numbers for all of our results momentarily. We reported operating income at 3.9 million and reported EBITDA was 6.3 million.

Following the acquisition of GRSi our debt grew and at the end of the quarter, we had approximately 203 million of indebtedness outstanding. However, as prior transactions, we have a plan and a strong track record of using the company’s operating cash flow to delever the balance sheet as quickly as possible.

Our reported EPS was $0.11 per diluted share. Bolstered by the acquisition our backlog stood at 965 million at the end of the quarter, putting us in great shape for the rest of fiscal ‘23 and beyond. Turning to slide 5, I want to briefly provide an overview of our most recent transaction.

As a reminder, we hosted a conference call specifically for the GRSi equity decision in December, which referenced a detailed presentation on our website. And I’d encourage our listeners to pursue this if they have not done so already.

That said, I believe this acquisition is one of the most strategically important decisions we’ve made over the past decade has brought together tremendous capabilities and complementary businesses in terms of clients, capabilities, culture, and strengthen our position for organic growth and a leader in digital transformation and IT modernization.

The acquisition also expands our portfolio of programs at the National Institutes of Health, which has been a strategic target for us for some time, and is offered diversified opportunities within the Department of Defense, particularly the Navy and the Marine Corps, which also have been very, very targeted enterprises.

The information warfare community really helps to elevate our cyber positions and all things associated with digital transformation. The bottom line is that this acquisition significantly broadens our technical capabilities, providing us greater access to mission critical areas expected to accelerate growth.

I think most of our investors are aware that we have been moving into the digital transformation space for some time. And this is where GRSi has unique and proven experience, expertise, as well as a strong track record.

Combining the technical capabilities with our nationally recognized research scientific research expertise and capabilities, along with our R&D competencies derived from our IBA acquisition, our role in providing highly differentiated solutions critical to the host of new business development initiatives remains tanomo.

The GRSi has also enhanced our cybersecurity offerings, further diversifying our operational capabilities, opened up new markets and brought an attractive book of business. At closing, the company had a combined backlog of just around 1 billion and annualized adjusted EBITDA of approximately 50 million.

Given this transformational acquisition and a strong demand for our technology enabled services, we remain optimistic about the federal market and growth going forward. There continues to be a commitment throughout the government, for instance, infrastructure upgrades, overall modernization, enhance cloud computing and cybersecurity.

And we have a solid pipeline of opportunities on the horizon and are actively engaged in new business development opportunities to expand that business, particularly in the scientific and research side where we’re looking at opportunities such as the major CIO-SP4 opportunity, coming up in the near term.

Suffice it to say, we are at a whole new level in terms of size and scope. But we’re still the same innovative DLH with the entrepreneurial spirit to provide innovative cost effective technology solutions to our core customers in the adjacent markets. With that, I’d like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn. .

Thank you, Zach and good morning, everyone. We’re pleased to report our first quarter for fiscal 2023, which includes the acquisition of GRSi. As Zach mentioned this closed on December 8 of 2022.

Turning to slide 7, we’re providing a bridge from the reported GAAP numbers to the adjusted results excluding both the GRSi transaction given its short duration in the quarter, and last year’s short term FEMA contracts in Alaska which we’ve discussed in the past.

We’ve also adjusted the fiscal 2023 first quarter for corporate development costs incurred to complete the GRSi acquisition such as legal expenses, and financial due diligence costs among other items.

These results are prepared on a non-GAAP basis and a full reconciliation to GAAP is included in the back of the presentation available on our website as well as in our press release and associated filings.

But the high level takeaway is that on an apples to apples comparison basis DLH continues to report solid performance from the underlying legacy business. Slide 8 shows this information in graphic form. The 7% adjusted revenue growth year-over-year generally reflects higher demand for our key programs.

Adjusted income from operations was 5.3 million for the quarter versus 4.9 in the prior year period. We anticipate operating margins to be positively impacted going forward, reflecting our growing base of business, as well as GRSi’s relatively higher value revenue mix.

Net interest expense was 1.8 million in the fiscal first quarter of 2023 versus 0.7 million in the prior year period, reflecting higher debt outstanding due to the GRSi acquisition. Following the close of the quarter, we implemented an additional floating to fixed interest rate swap.

The notional amount of covered under swaps increased to 112 million or approximately 60% of the term debt outstanding with the remaining balance of debt subject to floating interest rates. The fixed rate for the additional swap is 4.1% plus the applicable credit spread and the swap matures in January 2026.

We believe the swap will substantially mitigate interest rate risk. DLH recorded a provision of 0.5 million and 2.7 million for tax expense during the first quarter of fiscal 2023 and 2022 respectively.

We reported adjusted net income in the first quarter of approximately 3.6 million or adjusted diluted earnings per share of $0.25 versus 3.1 million or $0.22 per diluted share last year.

Adjusted EBITDA for the three months ended December 31, 2022 was approximately 7.2 million versus 6.9 million in the prior year period or 10.9% and 11.1% of revenue respectively. Moving to slide 9. We provide some historical perspective regarding our ability to pay down debt using the company’s substantial operating cash flow.

The bars represent debt levels at the end of each quarter for the past few years, during which time we completed the acquisitions of S3 and IBA. The company has a strong track record of rapidly de-levering the balance sheet after transactions are undertaken. We are confident that this time is no different.

And we anticipate future periods to continue in this tradition. Following the acquisition of GRSi as shown on slide 10. When the transaction closed, we had approximately 208 million of debt outstanding. And we subsequently, prior to the end of the quarter, reduce that balance to just under 204 million.

However, while we’re not providing specific guidance, based on our experience modeling our operating cash flow expectations, we anticipate that our debt will be between 180 and 190 million in fiscal year and if that’s the case, our leverage ratio will be under four times and thereafter we expect our cash generation to continue paying down debt, strengthening the balance sheet over the coming years.

We believe our investors have come to trust our operational excellence and track record in this regard providing them confidence in our ability to proceed in this tradition. We look forward to doing just that. This concludes my discussion of the financial statement. With that I would now like to turn the call over to our operator to open for questions.

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Thank you very much. We will now begin the question and answer session. [Operator Instructions] Today’s first question comes from Joe Gomes with Noble Capital. Please go ahead..

Thank you. So, first one, I am going to lay it out there for Zach, you mentioned you’re going to talk a little bit about the GRSi integration and how that’s been going.

So maybe you can just kind of give us a little bit more detail on integration and if you’re seeing the opportunity for cross selling opportunities and maybe even when you model the transaction I believe you factored in zero expense savings.

And are you seeing anything on the expense side that might lead to some expense savings?.

Yes, no. Great, great questions. Joe, and thank you for the lead in with regard to integration and our compatibilities, I think we certainly featured some of the quotes between myself and David with regard to the cultural fit.

And we did a lot during the diligence phase, both directions, in that regard, as extremely important to the company as well as ourselves, that we would see that tremendously great fit as post closings go, that’s always a critical component of success factors. And I got to tell you that it has been going tremendously well.

We have stood up an IMO and integration management office, that is consists of representatives from the new company and in our heritage resources. They’ve got their swim lanes, and it’s going very, very, very well. So we’re excited about that. With regard to cross selling. Absolutely. We kind of started that during diligence phase.

We really feel like we want to come out of the gate with some really great synergies, and it’s probably one of the areas I’m most excited about as we talked about some of our previous IDIQ wins.

I’m thrilled when I see a room that has some technologists supporting NIH, that come with the GRSi addition, working collaboratively with some of our nationally recognized scientific researchers, all working on a value proposition and a solution set for some of these customers that we would otherwise not been able to have in the room together.

And it’s really refreshing to see that inside of our first 100 days of integration, that our teams are working very, very collaboratively in that regard.

And so we do see not only enhancements to some of our existing work, but new opportunities that we started developing in a pipeline that do reflect the power of the two companies, not just any of them individually. So really, really great there.

We have actually started to implement some synergies, some expense savings already show up in another quarter. So and of course, we have a plan for a lot of the infrastructure redundancies to be taken out over the course of the year. And IMO has a pretty good cadence and a schedule on those we see. Nothing really taken us beyond the end of this fiscal.

But we have a lot of quick wins already under our belt. So it’s going well, Joe..

Great, and one follow up. So scanning through the queue. You had really strong performance over at the VA headstart at a pharmacy revenues were up 23% year-over-year. Headstart revenues were up almost 34% year-over-year.

I was just wondering, maybe you can touch base as to what is driving that? And is that something that you see continuing? Or do you think that those kinds of types of growth rates will moderate over the rest of the year?.

Well, with respect to the headstart, specifically, that program specifically, it’s really more a case of returning to norm, if you’ll remember, and boy, I’m happy to be among those who has put COVID way in the rearview mirror.

But it hasn’t been that long ago, it was just this time last year that dealing with Omicron caused a significant realignment of the schedule. And so some things that traditionally would have happened in our Q1 moved into Q2 and three. So this year is performing much more to the norm.

So I think programmatically the program while we have had some nice opportunities to continue to grow our reach there, largely the volume on that program is going to be pretty consistent year-on-year. It’s just a matter of which quarter it’ll roll out in.

In contrast, as you probably remember in the successive quarters of ‘22, the pharmacy program and both besides that VA program grew pretty significantly over the course of the year, as the VA really took some operational changes to redirect work and really kind of rethink their business model using again COVID as kind of an excuse to kind of do some, make some efficiency gains that were probably long overdue, and steering work through that automated distribution center that they have previously held at their locations.

And so are those came on largely throughout Q2 last year. And so they’re kind of catching up in Q1 this year, as compared to Q1 last year. But we think that Q1 volume kind of represents the norm of that programs going forward..

Great, thanks for that insight. I’ll stick to two questions and pass it on. Thanks, Zach, and Kathryn..

Grate talking to you Joe, and thanks for being a straight man on the revenue synergies. As you can tell, we’re extremely excited about that..

The next question comes from Brian Kinstlinger with Alliance Global Capitals. Please go ahead..

Hi, there, this is Jerome on for Brian, good quarter guys.

Can you just piggybacking of the ultimate integration question, should we expect the LHC personnel to focus more on BPO RFPs whereas GRSi person will focus on the IP opportunities?.

Well, we’re not going to operate that way. I think it’s the real thing that we should expect each of us brings our strengths but really, the opportunity is in driving convergence on those pursuits. We know each of us has our strength and expertise that we bring to it. And while each group will continue to leverage its expertise and capabilities.

Really, the homerun for us are really the icing on the cake, or whatever cliche you want to use, in that scenario, where we take the expertise that both of us bring together both in terms of capabilities, as Zach described in in terms of business models, from a customer perspective, and really driving convergence on those to drive those revenue synergies that we talked about..

Yes, and I’d say our vision a lot as it aligned with the priority of this deal, was to really be able to make this be a one plus one equals three. I know you hear that often and some of these kinds of deals.

But in this particular case, it isn’t really just having two separate channels, as Kathryn has indicated, we really believe there’s really great value creation that’s going to come from positioning us in in spaces that neither one has been before or would have been able to drive before.

And we’re starting to see that with some of our opportunities now. If you think about some of the opportunities, for instance, we bid in one, an IDIQ, where the VA wants to do more innovation, and drive more innovation in their systems development. And we had a strong and we’ll continue to have a strong partnership team for that.

But infusing the talent that comes with GRSi into that mix, supporting our existing competencies, adds some abilities that are really going to position us in a much more competitive light on the task orders as we hope to start to see some of those later this fiscal year.

And so that alignment really is going to be more of driving technology innovations into not only current customers, but now hitting those adjacencies much harder than we had been able to do in the past..

Great, thank you.

Is there any way you can quantify GRsi’s proposals submitted in 2022 and/or plan submission in 2023?.

I didn’t understand.

Which proposal?.

Yes. Just a visibility on the pipeline. Yes. more forthcoming on that Sherman as we really give fuller treatment of the addressable markets. We’re going to we’ve already moved well beyond talking about GRSi as a standalone.

So when we talk about this, the best place in the first place, you’ll probably see this laid out in broad strokes is the upcoming annual shareholders meeting where we’ll have some visibility into the addressable markets of the enterprise, leveraging the capabilities of both GRSi and DLH.

But we are intentionally moving away from what’s the pipeline for GRSi versus what’s the pipeline for the company. It’s really ideal each pipeline. So you’ll see there, how we think that’ll drive more meaningful definition of the pipeline, and really broader markets that we can access because of that broader capability..

Yes. And let me add to that. So as Kathryn has indicated, probably at least a month or two before close, we did some really, really diligent singing around some opportunities that were not in either of our respective pipelines.

And again, we’re viewing this as DLH pipeline of which we’ve got three major operating entities that bring really strong capabilities to go to market. And that’s very important for us to have that full one DLH approach, as opposed to an addition of standalone entities.

You’ll see us evolving structurally over the course of the next year in that regard, but from a market pursuit, our go to market strategy right now is literally a one DLH approach, we will address a single pipeline, there obviously be some leads and partners, and collaboration, etc, on most of these deals now.

But I’m excited the reason I’m so excited about Joe’s observation earlier, and his question earlier is just that, that that cross selling, is driving, we’re driving our pipeline. So this is going to depend upon cross selling. And that’s the exciting part about it.

As Kathryn indicated, you’ll get a little more color around what that looks like in our upcoming annual meeting next month..

[Operator Instructions] The next question comes from Jeff Bronchick with Cove Street Capital. Please go ahead..

Good morning, everybody. Hey the indignity of West Coast never treated, right. My question is maybe just frame out what the seam up or a pea process looks like today.

And you know, how, how does it look and feel from, different ways they’ve approached the contract in the past, and then maybe sort of different ways that you’re thinking about your own capabilities and what you want to do, and how relevant this is to you.

Just maybe frame out some of the puts and takes and then lastly, like timeline, what’s your best guess and how this rolls through? Good luck..

I’ll start with the timeline piece and then give some color again, around the VAs acquisition process. Timeline wise, let me make sure we’re level setting everyone. We are continue to be on so source bridges since 2016. It’s amazingly long, procurement administrative lead time, and Paul, if you will.

But that is actually where we’re currently operating November of 2016, is when the second of the major contracts were awarded in 2011 12 timeframe came to fruition.

Now, with regard to the way in which they’ve come out, they’ve actually come out the same as they did somewhat similar to the way in which they did for the contracts that we won that ended in 2016.

So that was, of course, in the 2010-’11 competition arena, those contracts, the contracts we’re performing on today, were all awarded as unsolicited as individual site bids. So we had maybe 40%, 50% share of one set of those and a little more on the other set.

But they were procured by the government and VA as seven standalone VA, some companies would be one or two. Some could be more. We of course, where we had three or four of them as an incumbent, we did bid all seven.

So happened that we won all seven and having had that clean sweep the government has managed the work and we’ve collaboratively agreed to manage the work as though it was a logistics contract and a pharma contract. But in each of those cases, they were individually solicited just like they are now by site.

And then of course, they gave preferential treatment to small business in that arena as would normally be the case.

And then, of course, over the last few years, we’ve had various versions of the kingdom where induced acquisition changes, and appropriately so the VA remains strongly committed as our way to the small business community, and particularly in service disabled veteran owned small businesses.

We have partnerships that we’ve put into place over the last few years. And that’s been an integral part of our strategy and continues to remain an integral part of our strategy even today, is to leverage approaches that would have benefit for SPOSB.

So the current state, as you’ve seen, other solicitations, again, are back like they were when we won the last time as standalone businesses, standalone sites.

The difference here is rather than in encouraging service disabled small businesses as teammates, it is currently in a set aside mode, so that the SPOSB has to be a part of the prime position for each of these. So we’re continuing to support them. We’ll evaluate, how the evolution of the acquisition strategy would come.

And we’ll come out as a work to a conclusion on this acquisition process. But either way, we remain fully committed to serving our veterans the way in which we have providing differentiating capabilities to net out as high customer satisfaction ratings, up to an including JD Power Awards on a pretty extensive basis.

So we remain committed with our in our partnership with our veterans, and we’ll continue to embrace the small business investment as well..

So just given the highly efficient way in which the government works, particularly today, how would you envision a timeline of submission review initial awards subsequent complaints and whining, and then into a final next face of the -- just roughly speaking?.

Well, they currently have bridge coverage, I think we talked about in our filing that characterizes through the end of this fiscal year. That has to be an indication of the VA’s thinking with regard to having coverage up through the end of this fiscal year to allow them to go through the adjudication of proposals in any potential protest.

I can’t tell you that proposals have been submitted for each of those sites thus far. So they have an idea of the competitive landscape and what their load of proposals to review will be. We are a part of them. And the jury’s out as in terms of what the time table is going to take to execute that.

But as we had indicated previously, we do feel that we won’t see any disruption during this fiscal year. And every indication is that the VA is tracking with that as well. .

And so a 2024 calendar of some conceptual change would be there or they’re just, they’re just okay.

And just to be clear, so the way you frame that? Would it be fair to say that if you look at things on a curve, that winning all seven is sort of on the right side of possible, but maybe not both likely and losing all steps and is also on the other side of the curve is unlikely that you’ll you think normal and customary somewhere in the middle is a reasonable middle of the curve expectation? Would that be a fair statement out?.

No. No Jeff, now, you look, I’m rooting for Patrick Mahomes, but I wouldn’t be betting on Philly. So, it’s one of those sorts of things where we are very optimistic and continue to lean into protecting our business. And so we’re not modeling scenarios that suggest that we will subordinate.

Any of these clients and critical mission critical work that we do for this agency. Our leadership team is aligned that way. Our relationship partners are aligned that way.

And our history has demonstrated that we’ve been able to deliver, but in any case, obviously, the third parties can take a look at what they think may happen, but we’re really committed and optimistic that we offer or going to offer some solutions that are going to prevail..

My last question. So it would it be fair to say that there is a, there’s economic advantage to running the whole show ergo, different competitors will have, if you’re only going to go for or win or expect to win, maybe two, that would provide inferior economics.

In other words, the attractiveness of a part of your winning a part of this is infinitely less interesting economically than running the whole program as you are now.

Is that a fair statement?.

Well we obviously don’t discuss proprietary bidding strategies. But I think your question is a fair question relative to if you’re looking from the outside does it make sense for the government to maybe expect to see some synergies if you are operating across all domains. And I would say there’s, there’s good reason to Yes, that’s a fair question.

And there’s good reason to think that might be the case. .

Excellent and intuitive. Don’t ever mention the Eagles in my presence again, thank you. .

The next question comes from [Indiscernible] Business Consulting. Please go ahead. .

Hey, good morning, Zach. And Kathryn I don’t have any questions. I’m good. Thanks. I just wanted to say a big thank you. You guys keep banging it, knocking it out of the court, quarter-after-quarter-after-quarter. And it’s much appreciated. So thanks again, and hope you all have a great weekend..

We appreciate your support. It’s very gratifying to see the strategy that we laid out many years ago come into fruition. And we are excited..

Just like clockwork. .

Yes. And as you know, Bert, obviously, we put on a little more debt than you used to be in too comfortable but history. Certainly the market, we think knows our history. And hopefully we’ll be able to chat a little more about that. You’ll see Kathryn has taken some steps already. And you can see that trajectory.

And we can talk a little bit about that more if we see you in New York next month..

I think it’s a great thing, because the stock will get beat up, we can all get in load up for more, and then it’ll clean the balance sheet will clean up. It happens over and over. .

There you go. Some things are predictable right Bert. .

At this time, there are no additional callers in queue. So I’ll turn back to Mr. Parker for any closing remarks..

Thank you, MJ. And, again, a special thanks to all of you for your interest and your continued support for DLH as Kathryn indicated. We are really pleased that the strategy has empowered us to get into what we call our third phase now and probably in many ways, our most exciting phase of the implementing a strategy for DLH.

We want to invite you to join us next month at our annual meeting for greater disclosure of the new DLH. So with that, thank you. Have a productive and a blessed day. Bye for now..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..