DLH Holdings Corp (DLHC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-four 2012 DLH Holdings earnings conference call. My name is Darcelle, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Don Weinberger, managing member of Wolfe Axelrod Weinberger Associates. Please proceed.

Thank you, Darcelle. Good morning, and thank you all for joining us for today's conference call. I am Don Weinberger, managing member of Wolfe Axelrod Weinberger Associates, Investor Relations Counsel, on behalf of DLH Holdings Corp. On the call with me today is Mr. Zach Parker, President and Chief Executive Officer; Ms. Kathryn JohnBull, Chief Financial Officer; and Mr. John Armstrong, Executive Vice President.

Before I turn the call over to our host, let me take a moment to read the forward-looking statements. This conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding DLH Holdings Corp.'s business, which are not historical facts, are forward-looking statements that involve risk and uncertainties.

DLH's actual results could differ materially from those described in such forward-looking statements as a result of certain risk factors and uncertainties, including, but not limited to, our ability to continue to recruit and retain qualified temporary and permanent healthcare professionals and administrative staff on acceptable terms; our ability to enter into contracts with government agencies and other customers on terms attractive to us, and to secure orders related to those contracts; changes in timing of customer orders for placement of temporary and permanent healthcare professionals and administrative staff; the overall level of demand for our services; our ability to successfully implement our strategic growth, acquisition and integration plans; the effect of existing or future government legislation and regulation; a loss of key offices and management personnel that could adversely affect our ability to remain competitive; other regulatory and tax developments; and the effect of other events and important factors disclosed previously and from time to time in DLH's filings with the US Securities Exchange Commission.

For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the Company's periodic reports filed with the SEC. The information in this conference call should be considered accurate only as of the date of the call. DLH expressly disclaims any current intention to update any forecast, estimates or other forward-looking statements contained in this call.

As part of today's call, we have created a slideshow presentation, which can be accessed on the DLH website at www.dlhcorp.com. Go to the Investor Relations tab towards the right side of the page and click on presentations under the drop-down menu.

With that out of the way, let me turn the discussion over to Zach Parker, President and CEO of DLH Holdings Corp. Zach, please proceed.

Thank you, Don. Good morning, and hello to everyone on the call, and thank you for your interest in DLH. As you know, we have issued our fourth quarter and fiscal year 2012 year-end results earlier this morning. I am joined by Kathryn JohnBull and John Armstrong, and together we will take you through those results, and also provide a brief update on some of the strategic and key initiatives that we have implemented, in order to continue the transformation and improvement of DLH's financial performance.

I want to begin by leaving you with a few key messages, and we can and will address them further throughout today's presentation and the Q&A period. First, and foremost, we have continued outstanding operational performance for our customers throughout the year, and have established a good partnership, in my view, with the leadership within our key customers. And this includes the Veteran Health Affairs community as well.

Performance excellence is critical to retaining and growing business in our environment. I am also particularly proud of the spirit and the commitment of our 1000-person work force across the country, as we continue to exceed performance expectations. In addition, we have launched a community outreach program on giving back and assisting our homeless and unemployed veterans -- not only near our corporate headquarters, but throughout the regions that we serve. You can follow our activities in this area on our website under DLH Cares.

Second, we outpaced most of our peers this year with solid double-digit topline growth, which is a key component of our strategy. We also exited the year with a solid contract backlog, exceeding three times our current revenue. However, we fell short of my profitability objectives, due in large part to the federal government gridlock with regard to the budget and the threat of sequestration. As noted, during some of our previous discussions, this gridlock has resulted in continued delayed awards and greater pressure on margins in selected areas of the defense business.

Third, having, A, completed our key infrastructure transition milestones, thus increasing our efficiencies; B, substantially solidifying our foundation via our contract backlog and significantly improved balance sheet; and C, reached a healthy new business pipeline and our reconstituted executive team that is us, we are now prepared to sharpen our focus on delivering the profitability and shareholder value consistent with our strategic plan.

The key component of this phase is the implementation of our project Lean, l-e-a-n, that is generally described on one of the slides in the webcast presentation. In short, Project Lean draws upon the infrastructure investments that we have implemented that will drive efficiencies and substantial cost savings for both of our -- both our customers and for the Company. It impacts all aspects of our business, including the performance and program management on existing contracts, as well as headquarters and back-office operating -- operations, including our finance team, business development team, human resources, and other operational components.

The cost reduction program is being managed by our CFO, Kathryn JohnBull, with the complete support of the executive team. In addition, we are realigning accountability and key assets within the Company to track, report, and ensure the success of this initiative. We expect that this initiative will allow the Company to operate profitably in the coming quarters, and this will enable us to preserve our strengthened balance sheet, so that we can better compete for new bids when they arise, and deliver the shareholder value from our current book of business.

As I alluded to before, we were able to take several steps during fiscal 2012 to improve our capital structure that will help us bolster our growth plans in the future. Specifically, we have conducted a successful rights offering of $4.2 million. We have expanded the Company's credit facility with our lender, Presidential Financial, and settled a long-term issue with prior owners of one of our divisions, which was resolved amicably and removed an aggregate $0.7 million in liabilities from our balance sheet.

Those specific funding priorities are subject to change from year to year. We believe that our strategic business alignment around the Department of Defense, the VA, and other federal agencies, healthcare and logistics sustainment services, has positioned us well to address what we consider our country's top national priority budget areas.

I'd now like to turn the call over to Kathryn JohnBull, our Chief Financial Officer, for a more detailed discussion of our financial results. Kathryn, please proceed with your comments.

Thank you, Zach, and good morning, everyone. Walking through the key financial disclosure points. Revenue for the three months ended September 30, 2012, increased 21% to $12.5 million compared to $10.3 million in the same period in fiscal 2011. Gross profit decreased from $1.6 million to $1.1 million in fiscal '12 compared to fiscal '11, respectively, due to competitive pressures on gross margins overall, and to additional health and welfare benefits accrued during the three months ended September 30, 2012.

Below gross margin, as we're walking through the key disclosure points, it's useful to recall that the FY '11 numbers were significantly impacted by an impairment charge, which, of course, is reflected on our financials among G&A costs, but not something that recurs period-over-period. So, as we talk about the changes in the numbers, think about that. But total G&A costs for the three months ended September 30, 2012, excluding that impairment charge taken in 2011, still decreased 27% year-over-year for the fourth quarter to $1.9 million compared to $2.6 million in the same period in fiscal 2011.

Loss from operations for the three months ended September 30, 2012 improved to $0.8 million compared to a loss of $3.6 million in the same period in fiscal 2011, due, of course, largely to that one-time impairment charge in 2011. But also, to reduce year-over-year G&A expenses offset by the impact of softening margins in 2012.

Loss from continuing operations and net loss was $0.4 million in the three months ended September 30, 2012, an improvement of $3.3 million over the comparable period in fiscal 2011, due to those same factors impacting loss from operations, plus a gain recognized in fiscal 2012 related to the satisfaction of the guarantees related to those notes payable to prior owners of part of our business, as Zach alluded to earlier.

Adjusted EBITDA for the three months ended September 30, 2012 and 2011 decreased from -- decreased, pardon me, to $700,000 from $600,000, respectively, due to the same factors impacting loss from operations, but adjusted for the impairment charge, of course, on an EBITDA perspective.

On a full-year basis, revenue for the fiscal year ended September 30, 2012 increased 17% to $49.2 million compared to $41.9 million in fiscal 2011. Gross profit for fiscal 2012 was $5.6 million compared to $5.9 million in fiscal 2011. While gross profit benefited from the additional volume of revenue, the average unit price of hours delivered decreased year-over-year, reflecting competitive pressures in the marketplace.

Total G&A costs for the fiscal year ended September 30, 2012, excluding that impairment charge taken in 2011, increased 3% -- to $7.7 million from $7.5 million in 2011, due largely to the transition in CFO and the costs associated with that.

Loss from operations in fiscal 2012 improved to $2.2 million compared to $4.2 million in fiscal 2011, due to the one-time nature of the impairment charge, offset by the impact of softening gross margins. Loss from continuing operations and net loss was $2 million in fiscal 2012, an improvement of $2.6 million and $2.3 million in loss from continuing operations and net loss, respectively, in fiscal 2011, due to the same factors impacting loss from operations, plus that gain from satisfaction of the guarantees related to notes payable in fiscal 2012, and a gain from discontinued operations in fiscal 2011.

Adjusted EBITDA for the fiscal year ended September 30, 2012 was a loss of $1.7 million, and for fiscal 2011, was a loss of $1.1 million, with the decrease due to the same factors impacting the loss from operations, adjusted for the impairment charge.

As of September 30, 2012, the Company had $3.1 million in cash and $0.3 million in unused availability under its credit facility. The Company believes it has adequate liquidity resources to fund operations over the next 12 months, in view of existing cash on-hand, the additional funding committed by our lender and forecasted cash flow from operations.

Before I turn the call back to Zach, I'd like to take a moment to discuss our primary focus for fiscal 2013, which is delivering profitability on our current book of business through effective contract performance and cost control. Although there are numerous risk factors facing us, as we describe more fully in our Form 10-K, we currently expect gross margins in fiscal 2013 to be more consistent with historical levels, as new contracts from fiscal 2012 mature and we drive further efficiencies in contract performance.

Additionally, we intend to manage our (technical difficulty) operations to derive further cost savings in in our G&A functions. Based on our actions underway in fiscal 2013, we believe we are well-positioned to drive profitable growth in the future.

We launched our focus on profitability by completing a standup of an ERP system. From there, we were able to better -- to obtain better visibility on project performance, and we identified several opportunities also to streamline our business while remaining highly effective. That's allowed us to eliminate redundancy and deliver cost savings to the bottom line. Finally, we believe we found nonstrategic structural costs that can also be lowered and eliminated in the near-term.

That concludes my discussion of the financial statements. And I will now turn it back over to Zach.

Excellent. Thank you, Kathryn. I'd now like to call upon John Armstrong, our Executive Vice President, to briefly update us on several other key company initiatives. John, please proceed.

Thank you, Zach, and good morning. Our market outlook remains healthy, with our contract backlog standing at approximately 3 times our current revenue base, which provides a solid foundation for the business to build upon. We have a strategy aligned with our customers, a proven portfolio of healthcare and logistics services and technologies, a relentless focus on quality program execution, and a dedicated and talented team that allows us to establish strong new business opportunities within the Departments of Veterans Affairs, Defense, and other federal agencies. This pipeline identifies potential bids through 2015.

Though the logjam continues within the federal government, our approach has, and remains, in retaining current contracts and seeking growth in core markets, as well as expanding into adjacent healthcare and logistics markets, which are both still viable. A recently awarded Army logistics contract is a perfect example that fits our strategy.

While not a sizable contract in dollars, it is significant to our organizations, as it will expand our qualifications, both at the corporate and key personnel, and key logistics competencies, which are prerequisites for future opportunities in this space. This award was granted at the end of September, and we expect to commence work at the beginning of the new year.

To summarize, despite government budget pressures, we believe our focus of aligning current and future business with the government's highest priority is working. We remain focused on meeting our customers' current and near-term commitments to our servicemembers, while delivering value to our shareholders.

Our operational excellence is driving solid program performance that continues to our operating margin -- contributes to our operating margin, enabling our high re-compete win rate and providing outstanding past performance credentials to win new business. Our continuous attention to affordability and strategic growth position us for the future. We have great momentum going forward and expect solid performance in the near-term.

Thank you, John. To conclude, we have made several improvements during the fourth quarter and the fiscal year, which will position us very well for the growth in future opportunities, as we have discussed. In the interim, we have implemented several new initiatives to enable the Company to charge quickly towards becoming profitable, while at the same time remaining focused on obtaining our new awards.

Specifically, we have completed very key infrastructure transition milestones that would increase our operational efficiency. We have maintained a very strong backlog, as John has just described, and we have identified a substantial new business opportunities list and built a solid pipeline. We have also significantly improved the Company's balance sheet. And with all of these in place, we are providing assistance to our executive team, which allows us now to sharpen our focus on this profitability.

That concludes my formal remarks. I would now like to open the call for any questions. Operator, please proceed.

(Operator Instructions). Richard Greulich, REG Capital.

A couple questions. In the fourth quarter, how much was the -- you mentioned increased health benefit costs, how much did that impact the gross margin?

It had approximately a 1 point impact on the gross margin.

Okay. And the rest was due to price competitive issues, I guess?

Well, there was a -- there's a confluence of factors there, but we had a significant part of our growth for this year was in the actual lower margin part of our business. The reason I described earlier, the way I described our profitability for the year, is that we had anticipated several of the awards that are still pending from the government in our larger and higher margin business.

Much like John indicated, one of those awards, though small, that's in a different margin space force for us, was not awarded until September. And our pipeline today has 10 bids that have been waiting for the majority of those years for the higher margin business. So, it's largely driven by the component of the majority of the business of that 21% growth for this year within the lower margin space, where there is a different competitive pricing posture.

We expect that with some of the modifications that we alluded to earlier, that we will deliver better margins on that same business during this current year. And as Kathryn may have mentioned, we're seeing the signs of that already in the early parts of Q1.

But you didn't see any of those signs in Q4 then? Was that correct?

That's correct.

And these modifications -- or cost modifications you're talking about, are those wholly within your purview? Or is there -- is that subject to competitive pressures as well?

It's actually both of them. The competitive pressures, certainly, will drive us towards certain pricing structures for various bids. For instance, some of the type of opportunities that we're pursuing are substantially higher margins than some of our others. And as you well know, we are looking both into the healthcare market and the logistics market.

But there's a range. And we -- our strategy says that approximately 15% of our pipeline is in the lower-end margin of this business, and the majority will drive us towards higher profitability.

The second part of our answer is, as Kathryn indicated, we've implemented some major program management changes. Kevin Wilson's team, leadership out in the field, has received specialized program management training. And it is our expectation -- in fact, we are already seeing the signs that the way in which we're managing these current contracts will deliver greater profitability.

So, if you don't get any additional new contracts, except for the one that already will begin in January, will gross margins be improved enough in G&A to show profitability at your current $13 million to $13.5 million a quarter run rate?

Yes, excellent question, Richard. And, yes, the way we kind of went about this is, we said as we established objectives on how much costs we're going to have to take out of the business, and we did an extremely conservative forecast of what do we expect on the lift on the margins, and we assumed little to no new business growth, and set those levers to achieve total profitability as we move forward.

So, the answer is yes.

Within the year. Within the year.

Yes, within this year. That's correct.

Within some quarter of this year?

That's correct.

Yes.

But not necessarily for the full year?

You got that. That's correct.

Okay.

That's correct. Some of these are being implemented, as we discussed. Some take on a greater -- some of the things which we're cutting, for instance, Kathryn has identified. We've terminated some efforts that don't expire until February, for instance, some of the trailing nonstrategic structural costs we had for former facilities, for instance, in Florida, and some relationships and some commitments we're making still in Somerset, New Jersey, which we're terminating. A number of those will take a quarter or two before those end, but --.

Right.

But as we look at those in totality, we are setting our objectives to ensure that we come out profitable at some period throughout this upcoming year.

And last question, and it's the one, unfortunately, I'm asking every quarter, is when do you think you'll be able to get -- I guess it's roughly $0.5 million -- when you finally have the accrued payroll offsetting, et cetera, with the government?

(laughter) Yes, good question. We're -- not that we're getting tired of you asking that question, but as you might imagine, we (multiple speakers) --

Getting tired of answering it.

(multiple speakers). But we work -- it's outside of our control right now. I can tell you that we can't give an accurate prediction, because it is a function of the government finalizing their -- what we call their reconciliations. And Mr. Wilson is in constant contact with our customers in this area. And we are given a new date probably every two weeks, and I hesitate to give you what that is, because of the credibility of the recent quarters.

But we -- the good news is that they have issued to us the modified contracts, as we informed you last year, which generally means in government contracts they've also had to identify and set aside the funds. And they're just working through the process of the reconciliation. And we've seen no indication that it is at risk. It is just going at kind of the same pace as the budget talks within the federal government.

Well, there is active engagement. Frequent, active engagement. We are in frequent contact with them. But their process takes a certain amount of time to proceed and they're driving.

Thank you. And I just want to mention, as a shareholder, I do appreciate your real focus on profitability this year, because you really do need to get the expenses down to the current level of business. And if you can grow from there, that would be great. Thank you.

Absolutely.

Absolutely. We appreciate it. That is our number one objective and focus area as we move into this quarter. And as you know, the transformation of this Company that some would, of course, call turnaround, really involved us getting stable first, and then laying the groundwork for a sustainable profitability.

We could have certainly avoided some of the investments we made this year and maybe peeked our head above there; but it's important that we have sustainable, profitable growth in our strategic -- to exercise our strategic plan. And we're on that path, and we're entering that phase right now where there's no second -- I mean, that is both our number one and number two objectives.

Byron Ward, Action Human Technologies.

Mr. Parker, your growth for the year is quite impressive. You've given the federal budget environment that you work in. Looking at your competitors, it seems that single-digit growth is considered excellent. However, looking at the math on your results, it appears that the margins for your new business was lower than previous periods. Is that accurate? And, if so, will you please comment on what you are seeing for the near-term margins on your current business.

First of all, your assessment -- first of all, thank you for the comments regarding growth. It is this management team and executive team that has delivered on that. And while we're appreciative of it, much like I said in my opening comments, and as addressed by Richard with the earlier question, profitability is very important and is the top priority for us.

The answer is yes, we -- the work which we incurred, that we grew, the new business, in particular, which we expanded this year, happened to be at lower margins during this period. However, given some of the changes we've made throughout this year, we expect that with very little new business, our margins will return, as Kathryn indicated, to at least -- the gross margins will return at least to the historical margins. And with implementation on Project Lean, we'll be taking further costs out to affect our net.

Okay, thank you. And I have one other question. And this deals with some of your previous comments. It sounds as though you have a good strategy for cost-cutting and improving the efficiency of your business. However, can you give us some indication of how much you see in savings and reductions in your G&A as a result of these measures?

Well, we -- as you well know, we do not give guidance. And as Kathryn talked about, we are taking out substantial costs. There's four primary areas. And if you were to look at our presentation, we do have a slide online that does give at least some color to the areas of that. I can tell you that it is a substantial amount of the -- with the Project Lean, there's a significant amount due to redundancies and consolidations as they're coming out. There's a real shift towards emphasizing our strategic objectives and reducing some of the structural costs, as we talked about before.

We are also realigning some of our accountability and processes to ensure that, with implementation of Lean Six Sigma, we're eliminating unnecessary processes. We've had some significant gains. I can tell you one metric from our finance team, Kathryn has reduced from what last year were some 200 step processes down to 30 processes and procedures, that allows us to, A, reduce some costs and to substantially increase efficiencies.

We're not really in a position to be able to give a quantitative number. We do have numbers allocated throughout our management team with allocations, but I can assure you that, with regard to your math question, they will allow us to turn, as Kathryn indicated, with no new business, and with just the return to the margins of the prior year, they will deliver for us on the profitability side to turn the corner. Sorry, again, I can't give you (multiple speakers) a firm number.

Okay, thank you.

(Operator Instructions). Spencer Lehman, Financial West.

Yes, I'm wondering about Obamacare, and how that might impact your Company, your industry, and what you're doing? I assume -- nobody else in the country, of course, understands what's in it, and I can't -- may I assume that your team has been studying this and will become experts in the new law and will know how to implement it? Just wonder if you could discuss that briefly?

I can. Thank you, Spencer. My team, in particular, Kevin Wilson and Kathryn, just concluded meetings this week, in fact, with a number of outside firms and partners to address the impact of Obamacare and other regulations upon what we see as potential future impact.

We have started to plan some measures to deal with that. I can tell you that it is going to have an increase -- potentially an increased cost effect that has to be borne and managed in a variety of ways by the industry. But we're on top of that. We're pretty convinced that we're working a strategy that will not impact our competitive position and ability to deliver still very cost-effective services to our clients.

Well, couldn't I assume then that could bode well for you, because you might become the experts in that area, and it would give you a competitive advantage from the standpoint of people needing to hire you to implement that?

Sure. We'd like to think so. And certainly, we are considered in many ways a trusted agent in the healthcare arena for some of our customers. We've been able to successfully, through implementation of some of our differentiators such as [SpotM] to be able to deliver a number of these services, particularly in the pharmacy area, at a reduced cost per capita and reduced cost per script. So, we're hoping that that certainly will offer an opportunity for us for additional consulting services.

So we could generate additional services required, additional business?

Yes. You bet.

Okay, thank you.

And there are no further questions at this time.

Hello, Don?

Yes.

Well, let me close by, again, saying thank you to everyone for joining us, and again, your interest in DLH. We'll look forward to next quarter giving you an update on the continued progress of the Company's improvements in financial performance.

You all have a very happy holiday season, and we'll look forward to chatting with you in the not-too-distant future. Bye for now.

I would like to add my happy holiday wishes to everyone on the call as well.

Thank you, Operator. We are now concluded.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.