DLH Holdings Corp. Q2 2023 Earnings Call

Abilities through which we expect to earn better returns.

The company generated $6 9 million in operating cash year to date versus $5 8 million on an adjusted basis in the prior year period.

Slide nine provides an update regarding our plan to use the company's substantial cash flow generation to pay down debt and strengthen the balance sheet, reducing interest expense in tandem.

While timing on certain receivables did not grant us the opportunity to extinguish debt during the quarter. We did so soon thereafter and as of the date of this call have $196 $5 million of debt outstanding. This puts us squarely on track to meet our quarterly debt Paydown targets.

And to reduce debt by approximately $20 million in this fiscal year as a reminder, when we closed the <unk> transaction the company had almost $208 million of debt outstanding.

Our strong track record and a reputation for being able to rapidly turn cash generation into debt reduction and delevering the balance sheet and that is not expected to change. This year. We continue to anticipate that our debt will be between 180 and $190 million at fiscal year end.

This concludes my discussion of the financial statements with that I would like to turn the call over to our operator to open for questions.

We will now begin the question and answer session.

A question you May Press Star then one you have to listen to feedback.

Your speakerphone, please pick up your handset before pressing the keys.

My question to you please.

Thanks, Tom.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question will come from Joe Gomes with Noble capital you.

You May now go ahead.

Good morning, Thanks for taking my questions.

I wanted to start off with.

Top line was a little light versus our expectations.

I thought maybe we could just drill down a little bit more to that you mentioned in the legacy business and with that I would think about $2 million.

In the quarter.

So.

Business get moved to the right are just some things didn't come in that you thought might have come in just trying to get a little better handle on that top line.

Yes, great great.

Great question, Joe and you actually hit it spot on on both are on contracts existing contract growth as well as new business opportunities have continued to slip to the right. So you may recall some of our on contract growth of course, where some of them some of our existing task order.

Contracts, which require to go even to get those programs.

Through the acquisition process, we've seen that does continue to slip to the right a little more so than we expected and it seems to be largely attributed to internal growth.

And delays, but we've seen a long term impact of that just being slipping to the right. The same for our new business pipeline.

These are some of our.

Acquisitions.

Direct awards, we had.

The latter part of last year. We're still just now started we have a pretty heavy load of bidding activity and for those to turn into a proposal to actual contract awards.

And again running through that same cycle slash slipping, what we think will be more Q3 Q4 prospects.

Okay. Thank you on that.

I didn't notice.

Increase.

The increase in VA pharmacy revenues.

Year over year I think.

<unk> by about $3 million.

Was there anything behind that just doing more business with them or was there some onetime items in that that drove that.

Revenue increase on the pharmacy side.

Yes, Joe coming out of Covid, we've learned a lot about our veterans and their readiness to deal with.

So the challenges posed by Covid.

Frankly, the VA put into effect.

A fair amount more regulations that will drive more traffic to the available or pharmacy as opposed to.

Allowing metrics should come in and pick up their manage their local VA hospitals. So we're going to continue to we think that that trend is.

Which has increased its probably level off now and will probably remain stable as we go forward, but you would have seen a lift that was kind of a post COVID-19 regulatory environment change for our veterans.

Okay and sticking with the VA for a second can you provide us any update on the contracts there.

VA potentially looking to re bid out those contracts.

Yes, nothing has really changed since our last report.

As you know we have submitted the government they require.

The mission of STB OSB proposals.

Service disabled veteran owned small businesses.

We are continuing to participate in that portion of the acquisition strategy. We also remain.

Before we would remain.

Ready and available that should they.

Determined that that is not in the best interest of the government that will be able to continue to provide those services.

Through extensions of our current contract, which currently run out through.

The fourth quarter calendar year and then.

And then.

Evaluate what their next acquisition strategy.

It's subject to change, but no awards since we last spoke.

All of those.

Proposals went in during the first quarter calendar.

Okay.

And Pat maybe you could talk a little bit.

At the adjusted operating margin for.

For this quarter.

Sam.

Last year was about 6.8.

8%.

Just wondering what happened there GRS side was.

We expect to help drive operating margins up.

Higher.

And it took a little bit step backward in this quarter.

Yes, it's a key contributor to that is of course, the noncash DNA, which is which is putting about puts about half a point of pressure on that.

Otherwise, it's really just a function of.

The relative Rev.

Revenue contribution from the various.

Streams of revenue that we have just the blend of the revenue.

Nothing nothing I would say that indicates that we wouldnt expect to get.

The relative contribution from the acquisition that we expected more so just the just the particular mix that we had in the quarter.

Okay Fair enough and then one more for me and I'll, let someone else ask a couple of question is that you've talked about the significant pipeline of opportunities.

Wondering if you might kind of point out one or two.

Some of the major ones that youre looking at and give us a little bit more color or detail around that.

Sure.

We don't get into too much on the competition sensitive side.

We did mention a year or so ago that there was a major acquisition that would open up a lot of bids.

Within also NIH measures to help customer and we referred to that contract as CIO SP four and while it has taken a while it was really delayed a lot due to a large number of protests.

Very often due to some smaller businesses, but to some extent ROI for businesses as well.

That acquisition has moved really pretty close to having been finalized but the government has continued to have delays in the final award.

The best one that of course, we felt that there was a fair amount of pent up opportunities for us to be able to.

Beyond that we also announced two other awards that we had that were a multiple award <unk> Qs and one of those again with our strategic interest in the National Cancer Institute.

And those those procurements.

Task orders are just now starting to break we've been actually bid.

One or two and we expect another four or five before the end of this fiscal year and the other opportunity, which we also announced the defense health agencies.

We call that omnibus for but as for medical research or military.

Hello.

And that would also allow us it has been awarded the government has yet to release any requests for a task order proposals, we do still remain.

Hopeful that we'll see some.

This fiscal year and time to at least the book, perhaps by this year, but that revenue given that we're already in may it revenue now it looks like it will probably be more likely.

FY 'twenty four really starting soon.

Great. Thanks for the update really appreciate it and I'll get back in queue.

Yes.

You bet.

Again, if you have a question.

Pat.

Yeah.

Sure.

Again, if you have a question please press star one.

Our next question will be following up from Joe Gomes with Noble capital you May now go ahead.

Okay.

Joe are you still there.

Sure.

Alright Julian.

No.

I'll go back to kind of a background here.

Yeah.

No one else can ask them all out some more.

One of the key items with the <unk> acquisition was cross selling opportunities.

Zach one speak about some of those.

Yes, it is in the areas that David and David.

Im really really most excited about and.

Yes.

There are some major programs that.

Some of our existing major targeted agencies, including the National Institute of Health The center for disease control.

Brands and agencies, where we currently have the business space, but there are some adjacencies in the nature.

The work is in the future, but things like precision medicine that depends very heavily.

On the not only the computing power of a secure data environments.

As well as extensive support from biomedical research talent.

Really combines the benefits of what we have been building both in our heritage business and the tremendous.

Bolstering that we've gotten from the addition of GI side. These are key programs at the future.

<unk> is really heavily focused on advancing the state of that business. We think we're really really uniquely positioned for some of those the majority of those are those cross selling opportunities we think are within.

The HHS Arena, we also have some some opportunities.

We would not have been because we would not have been in a position to prime that.

Supports the readiness posture largely our fleet.

And the Defense Health agency, and we think that combinations of.

Cross selling with some of the engineering and technical capabilities from GSI.

Along with the health technology related business that came with the IPA acquisition.

Positioning us in a differentiating way for several of our opportunities going forward. So I think what Youll see continued expansion of our support for military and veterans in that regard.

As well as.

On the retail side.

For research, where the heavy dependence upon technology and innovation.

For the future.

Okay.

And then.

Switching back to <unk>.

<unk> side for a moment.

I know you did $32 6 million of revenue in the quarter.

You annualize that.

Comes out to about 130 million and on your <unk>.

The initial.

Project chance you were talking about $140 million of GRS side should we expect to see maybe that increase on a quarterly basis.

Get back to get closer to that 140 run rate.

Yes.

We as we've discussed <unk> has a strong track record of.

Growth and we've set that expectation.

Low double digits.

So we do think that they are moving upward and just the volume of activity that <unk> talked about in the presence of it with those key.

Public health and National Security network customers, we believe provides that channel.

Continue to support that level of growth.

Great and one last one for me.

I think to you Kathryn again interest expense was $4 nine.

Again.

<unk>.

A $14 million increase with.

With GRS side that.

Are you still comfortable with that number or do you think maybe some of these higher rates out there will we'll increase that number a little bit above the <unk> for this year.

Yes, I do think.

There is certainly going to be pressure on it as a result of continuing interest rates continuing to grow in the coating increase yesterday.

We've obviously hedged a major portion of that with our with our.

Swap contract was put in place in.

January but still we do have some floating rate debt and thats going to be subject to impact from that as well in the quarter in particular as we mentioned we had some we were disappointed in the way that that contract payments are laid out.

Yes.

We're happy to report, we cleared that congestion bounded by this call.

We're happy with where we ended up on March 31.

It's a multi it's multi pronged of course pressure on the interest rate that's going to result in higher interest expense and there is a non cash component of that too that might want to put a finer point on in terms of from an EBITDA perspective.

Amortization of deferred financing costs. This noncash component, but nonetheless as you suggest the cash component of interest expense I think it's going to be a bit Stauter then $14 million.

Okay, Great. That's it for me thank you.

Okay.

Thank you Joe.

Anthony back over to you.

Okay. It appears there are no further questions.

I'd like to turn it back over to Mr. Parker for any closing remarks.

Alright, well. Thank you again, thanks, everyone for joining us.

Interest in DLH.

Catherine conveyed earlier, we remain very very excited about this new chapter and we feel very very well positioned to continue to execute our strategy for both organic growth and.

Building building, a new value proposition and as we go forward. So thank you all and we look forward to chatting with you next quarter rationale.

Okay.

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