DLH Holdings Corp. (DLHC) Earnings Call Transcript & Summary

Let's see. Rick, we'll start with you.

Yes. This is the 2021 Annual Meeting of Shareholders of DH -- DLH Holdings Corp. I am Rick Wasserman, Chairman of the Board of the company. I would like to take this opportunity to introduce Zachary C. Parker, the President and Chief Executive Officer of DLH Holdings, who will be acting as the Chairman of this meeting.

Good morning, everyone. I am Zach Parker, President and Chief Executive Officer of DLH Holdings Corporation. It is now 10 a.m., and the meeting will please come to order. First, I would like to thank all the shareholders who are in attendance at this annual meeting. You are all participating virtually due to the continuation of the coronavirus pandemic. And we really, truly appreciate your continued support of DLH. We hope that by hosting this annual meeting virtually, we can increase your access and participation. We will begin today's meeting with the formal agenda. This will immediately be followed by a presentation on the company's business and a question-and-answer period. We will then host a brief virtual networking session available in breakout rooms. Links to join these breakout rooms are available in the -- on the annual meeting web page. I will now introduce the directors, nominees and members of senior management of DLH who are attending the meeting today. James Allen. Jim? Martin Delaney. Put your -- on your screen and pull out the image. Elder Granger. Frances Murphy. Of course, you've met our Chairman, Rick Wasserman. Austin Yerks and Stephen Zelkowicz. Well, my management team participating on the call today are Kathryn JohnBull, our Chief Financial Officer; and Jackie Everett, our Chief Growth Officer. Also attending the meeting is Marc Silverman of WithumSmith+Brown, our independent accountants for the current fiscal year. Marc? Yes. Marc Silverman will also be available to respond to appropriate questions during the general Q&A period. Also joining us today are Victor DiGioia and Michael Goldstein of Becker & Poliakoff, our outside Corporate Counsel. Victor and Michael. We will now proceed with the formal business of the annual meeting. All right. Victor DiGioia will act as the secretary of the meeting. The agenda items for this meeting today are as follows: one, determining the presence of a quorum; two, electing 8 nominees to the Board of Directors to serve until the next annual meeting of the shareholders or until their respective successors shall have been duly elected and qualified; an advisory vote on the compensation of our named executive officers; four, approving the amendment of the 2016 Omnibus Equity Incentive Plan; number five, ratifying the appointment of WithumSmith+Brown as the company's independent registered public accounting firm for the fiscal year ending September 30, 2021; and lastly, transacting such other business as may be properly brought before this meeting. Stockholders may submit questions during this meeting in the space provided on the virtual annual meeting screen. During the annual meeting, questions from stockholders should pertain to the proposals being considered at this meeting. Stockholders wishing to ask other questions will be given an opportunity to do so following the meeting. As indicated, the first order of business is to determine the presence of a quorum. Pursuant to the action of the Board of Directors, only holders of record of the common stock of the company at the close of business on January 25, 2021, are entitled to vote at this meeting.

Mr. Chairman, I wish to report that I've examined the list of shareholders of common stock entitled to vote at this meeting and have determined that the number of shares of common stock outstanding at the record date, January 25, 2021, and entitled to vote is 12,543,906 shares. I'm advised by the inspector of elections that the number of shares of common stock represented at this meeting in person or by proxy is not less than 6,271,954 shares, and a quorum is therefore constituted. Accordingly, the meeting is legally convened.

On the basis of the report of the secretary, a quorum is in attendance. Michael Goldstein of Becker law has been appointed as inspector of the election and has sworn to the oath of inspector of the election. The next order of business is the election of the directors of the company. The Board has nominated 8 individuals to serve as directors of the company for a term of 1 year or until their respective successors shall have been duly elected and qualified. I will now entertain nominations for the 8 directors of the company in accordance with the company's bylaws. Are there any nominations to the office of director of the company in accordance with the bylaws of the company?

I nominate the following persons to hold office as directors of the company: James P. Allen, Martin J. Delaney, Elder Granger, Fran Murphy, Zachary C. Parker, Frederick Wasserman, Austin Yerks and Stephen J. Zelkowicz.

I second the nominations.

No other nominations having been received in accordance with the company's bylaws, accordingly, it is ordered that the nominations be closed. The next order of business is the nonbinding advisory vote to approve the compensation of the company's named executive officers as described in our proxy statement for this annual meeting, more commonly referred to as say-on-pay. As discussed in our proxy statement, we believe our executive compensation programs and policies provide fair, reasonable and competitive levels of compensation to our executive officers, and our Board of Directors recommends a vote in favor of this proposal. The secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's compensation of its named executive officers is hereby approved, and it is further resolved that the offices of the company are hereby authorized and directed to take any and all actions as such officers of the company shall deem reasonable and necessary in their discretion in order to implement these resolutions.

Will someone move for adoption of the resolutions?

I so move.

I second the motion.

The next order of business is the proposal to adopt the amendment to the 2016 Omnibus Equity Incentive Plan. The secretary will now present a resolution approving the adoption of the proposal by the shareholders.

Resolved that the company's adoption of the amendment to the 2016 Omnibus Equity Incentive Plan to increase the number of shares of common stock reserved for issuance pursuant to awards granted under the 2016 plan by 1,500,000 shares is hereby ratified and approved in all respects.

Will someone move for the adoption of the resolutions?

I so move.

And I second the motion.

The next order of business is the proposal to ratify the appointment of WithumSmith+Brown as the company's independent registered public accounting firm for the fiscal year ending September 30, 2021. The secretary will now present a resolution approving adoption of the proposal by the shareholders.

Resolved that the company's appointment of WithumSmith+Brown, PC as its independent registered public accounting firm for the fiscal year ending September 30, 2021, is hereby ratified and approved in all respects.

Will someone move for adoption of the resolutions?

I so move.

And I second the motion.

It is now 10:10 in the morning, and the polls for voting on these proposals are now open. All DLH stockholders entitled to vote at this meeting have the ability to do so online. All the shareholders who wish to vote in person and who have not voted, please do so via the website used to access this meeting by using the control number assigned by Continental Stock Transfer & Trust Company. Please remember that if you have already voted by proxy, it is not necessary to vote again. [Voting]

We will now entertain any questions that have been submitted in advance of and/or during the meeting related to the election of directors and other proposals discussed in our proxy statement for this annual meeting, which are the sole matters before the shareholders at this annual meeting. Questions not relevant to these proposals but generally related to the business of the company will not be entertained at this time. Please hold such inquiries for the question-and-answer period that follows our presentation. Substantially similar questions will be answered once to avoid repetition and to allow more time for other questions. If time does not permit us to address each question, the company's answers will be posted to the Investors page of our corporate website after the meeting. Have any questions concerning the proposals before the meeting been submitted to the virtual annual meeting website?

No questions regarding the proposals have been submitted.

As there are no questions -- as there were no questions that have been submitted regarding the proposals, we will move to the next order of business.

Mr. Chairman, I am in possession of the alphabetical list of shareholders of the company at the close of business on the record date who are entitled to vote at this meeting. The list of shareholders has been made available for inspection by shareholders of record on the company's annual meeting web page.

Thank you. Each shareholder of record entitled to vote at this meeting was provided with notice of this meeting and has received a copy of the notice of intent -- notice of Internet availability of proxy materials, which was distributed to the shareholders commencing on January 28, 2021. This was evidenced by an affidavit of mailing by an authorized agent of Continental Stock Transfer & Trust Company, the transfer agent for the company's common stock. I suggest that a reading of the notice be waived. As the polls will close momentarily, so if you have not yet voted, please do so now. I now declare the polls closed at 10:14 a.m. The votes will now be tabulated. Will the inspector of the election, please deliver your preliminary report to the secretary of the meeting, who will announce the preliminary results.

Mr. Chairman, I am in possession of the preliminary report of the inspector of elections. Based on the preliminary report, each of the nominees for director received more than 98% of the votes cast in favor of his or her election and has been elected as a director of the company to serve for a 1-year term that will expire in 2022. The resolution on an advisory basis for the compensation of our named executive officers for fiscal 2020 received more than 97% of the votes cast in favor of the proposal and has been approved. The amendment of the company's 2016 Omnibus Equity Incentive Plan has been approved by more than 83% of the votes cast in favor of the proposal. And the ratification of the appointment of WithumSmith+Brown as the company's independent registered public accounting firm received approximately 99% of the votes in favor, and the appointment has been ratified. We will file a final report of the inspector of election with the records of this meeting. We expect to report the results of the voting on a Form 8-K to be filed with the SEC within 4 business days of this meeting.

As indicated by the report of the inspector, all of the matters voted on by the shareholders have been approved. The secretary will file the report of the inspector of elections as part of the records of this meeting. For the purpose of reference, the secretary is directed to file the following additional papers with the records of the company: Number one, list of shareholders of common stock entitled to vote at this meeting; number two, notice of Internet availability of proxy materials and the proxy statement; three, affidavit of mailing; four, ballots and proxies presented to this meeting; five, inspector's oath; and six, report of the inspector of election. I will now report on the business of the company, which will be followed by a question-and-answer session period and our virtual networking session. To submit questions, please follow the instructions on the annual meeting web page. Joining me in this presentation will be our Chief Financial Officer, Kathryn JohnBull; and our Chief Growth Officer, Jackie Everett. [Presentation]

Today, we will address key aspects of our strategic growth in the federal government technology solutions market. You will see that we are in position to continue to build earnings and free cash flow growth in this well-funded government space. This presentation is covered by our forward-looking statements clauses as contained in our corporate filings as well as on Page 2 of this briefing. Please refer to those documents as appropriate. I am joined today by our Chief Growth Officer, Jackie Everett; and our Chief Financial Officer, Kathryn JohnBull. Together, we will give you a comprehensive picture of our growth profile covering our strategy execution, market outlook for organic growth and further corporate development initiatives. In 2016, I shared with you our growth game plan, which addressed steps that we would take for organic growth. I was also quite clear with respect to our capital deployment strategy, focused on M&A over dividend payouts. Two years ago, at this same meeting, I laid out a vision with certain scenarios of what our financial metrics would look like if and when we achieved a run rate of approximately $200 million in revenue. That, of course, assumed that we will stay true to our strategy. Our first quarter filings of this year show that we have hit that milestone, and I am pleased that we have achieved those scenarios relative to gross margin increase, income from operations, net income and EBITDA. Our vision is to be the most trusted provider of technology-enabled health care and public health services, medical logistics and readiness enhancement services to military service members, veterans, children and families and other at-risk and underserved communities. As a market influencer and emerging leader, DLH strives to shape and enhance the sustainability and the readiness posture of those that we serve, delivering value to our customers, our stakeholders and you, our shareholders. We achieved this vision through a focus on the 4 value statements you see on Slide 5. Operating through these lenses is key to our stability and growth. It allows us to attract, retain and invest in a world-class management team and workforce, which is required to deliver on that vision. Slide 6 provides an executive summary of our strategic growth game plan. First, by focusing on mission-critical programs, we would achieve margin expansion while driving top line growth. Also attacking our concentration risk from several years ago hinged on our ability to diversify organically and through acquisitions. And very key was our ability to build a team with strong digital transformation skill sets and nationally recognized scientific research talent. These were all key priorities to deliver on our strategy. Slides 7 and 8 provide a view of exactly how we leveraged these tools to continue to organically grow through differentiation in our marketplace. This is not only a moniker for us, but it is imperative that we continue to create a culture that is focused on competitive differentiation and aggressively seeking the best value propositions for our customers. As we do this, we leverage a strong heritage of being a trusted agent for our customers, which has led us to a strong position with regard to long-standing relationships. With that strong past performance and the new talent that we bring on board, we have been able to customize our solution sets and really differentiate and architect winning value propositions. In doing so, we often offer key advantages to our customers that differentiate us from the competition. These include reduced per capita cost for some of our solutions, cost savings that can be reinvested back into creating greater opportunities for our workforce and/or deliver back to our clients; as well as managing the variance and reducing the instability that comes with some of the more challenging and complex work. We believe that predictability and stability are key components of the readiness equation that our customers look for. And as you can see on Slide 8, we've been able to build a strong portfolio of the type of talent that's going to continue to help us forge into the digital transformation market-leading positions across our 3 market focus areas. In this next chapter, we're going to continue to leverage each of those aspects we discussed in our growth game plan. The culture that we're building is one that is heavily focused on collaboration and innovation. And as we continue to grow organically and acquisitively, these will be key fundamental areas, as you see on Slide 9, that help us continue on this evolution. For each of those areas, Jackie and Kathryn will give you some greater context around our strategy.

Hello. My name is Jackie Everett, Chief Growth Officer for DLH Corporation. It's my pleasure to be here today. I'm going to address the strong addressable markets, the ever-expanding competencies that we are providing our clients and the new business campaigns going forward. First of all, we have a very large and growing addressable market. Across all market focus areas, we obtain addressable markets that involve scientific and medical research, professional services and aspects of IT services. The pandemic of COVID-19 has provided additional government dollars and programs related to child education, the study of short- and long-term COVID effects in military personnel and civilians. Let's talk about our first area, our market focus area, defense and veterans health solutions. Agencies identified on the left side here are Veterans Affairs, Department of Defense, Defense Health Agency and where the Department of Defense focuses on medical research and deployment. There are government dollars and programs in emerging technologies such as AI and telehealth, secure data analytics that are being funded out today. Also, there are investments in advancements in medical devices and medicines for the unique requirements of military personnel. There are government programs and dollars in the future for the health and well-being of our veterans that continue to be high-priority programs. The second area that we've identified as a market focus is human solution and services. Agencies that we've identified there on the left are Department of Health and Human Services, Department of Homeland Security, the Centers for Disease Control and Prevention and the Administration for Children and Families. There are government program dollars related to COVID research on the impacts across America and the request for data analysis from these large and complex data sets that are being collected by the government. There are additional dollars to support emergency and nonemergency activities within the Department of Homeland Security and other agencies to support COVID vaccinations and the safety of migrants and their children. In addition, we are also seeing investments in programs for emerging technologies in the area of AI and telehealth, secure data analytics and also to drive compliance and monitoring of programs and fundings and the delivery of these programs and dollars across America. Our third area is public health and life sciences. Agencies listed are the National Institutes of Health, the Centers for Disease Control and Protection (sic) [ Centers for Disease Control and Prevention ] and the Food and Drug Administration. The government is supporting long-term studies such as COVID, HIV, COPD, substance abuse and other diseases and the biological statistical information from large complex data sets related to these diseases. We are actively involved in these and actively working for the future to be involved in many more of these. The government still maintains tightly coupled legacy systems that make system modification or enhancements extremely complex and prone to issues. There are government programs and dollars today in digital modernization and opportunities across all of our market focus areas to support these efforts. DLH is well aligned to these very important programs that are well funded and have budget priorities for the outyears. Ever-expanding core competencies for strategic markets. Over the last several years through organic growth and acquisitions, DLH has developed competencies that continue to serve and be in demand in our market area. We believe our innovative competencies are key competitive differentiators because they enhance our ability to deliver customized solutions and services to our clients and enable us to be more efficient than our competitors. We provide an array of competencies from compliance, monitoring, fraud, waste to data analytics to medical research, artificial intelligence and machine language, robotics, logistics, supply management, telehealth and system modernization and digital transformation. Each of these are going through various areas of transformation, and I'm glad to say that DLH is right in the middle and working with our clients and keeping pace. Compliance, monitoring and fraud, waste, and abuse detection is very key to our customers. And it's important that all the programs meet the compliance and monitoring of federal regulations and what's been chartered by Congress for those programs to ensure there's adherence to those regulations. Our secure data analytics and cybersecurity is a big component of what our InfiniByte Cloud offering is built upon with clients that have terabytes worth of information and complex data sets that they entrusted DLH and our InfiniByte offering to host. Our clinical, medical and scientific research is ever increasing. During the pandemic, we had many opportunities that we were able to develop more research and more scientific research as it related to COVID and other diseases during this time. Artificial intelligence and machine language, robotics and autonomous vehicles are really changing the landscape of where the industry is going. It's moving very quickly, and we're very happy to be part of it. Within certain segments, our market segments, we look at the war fighter and use AI, machine language to help with the various robotics and autonomous vehicles that would play out in the battlefield and helping the war fighter that may be injured and getting that critical health information back. Our logistics and supply chain management and what we deliver across the board with our veterans and other similar programs have increased during this time. Telehealth research and applications are critically important. In the DoD world, it's the tactical edge of medical information and exchange and the telehealth that will save lives. The fifth generation of telecommunications in AI and ML are playing a very important role in advancing telehealth forward. And then, of course, system modernization, which we talked earlier about, is continue a big push in government systems to help decouple the legacy systems that make modification and enhancements extremely complex, costly and prone to issues. Now for the key new business campaigns. InfiniByte Cloud provides the complete requirements that the government has requested for all cloud providers to operate in the federal government space. It is extremely secure, and we're able to host large and complex data sets for our clients. We have over petabytes' worth of information of storage that we use along with support for statistical processing of this data for our clients. This is our #1 campaign that we will be focused in on for the next year or so to make sure that we are expanding our capabilities across many of the agencies within the federal government. Telehealth and virtual health are driving reengineering of how the U.S. public delivers on its health care. There's modern technologies such as AI and ML, the fifth generation of telecommunications and cloud computing that will deliver better information through data analytics and drive more efficient delivery models in this space. Both telehealth and virtual health will be extremely affected by these technologies as they were infused. The DoD work from our latest acquisition is driving a new and strong pipeline in the DoD, scientific and clinical research area as we expand our capabilities across additional agencies. And we also have increased our -- as we've increased our capabilities, it provides new target opportunities to increase our multiple-award contracts in areas of medical professional service, scientific research and development and information technology. These contracts provide customers with better access to DLH. These multiple-award contracts are contracts in which selected vendors, if they meet the proper capability, will be selected for award. And then we'll compete at a later date for the actual definitive contracts for the dollars of those task orders. Thank you.

Good morning, and thank you for joining us today. This is Kathryn JohnBull, Chief Financial Officer of DLH. Slide 15 demonstrates our track record of delivering strong growth over the past 8 fiscal years. Of course, revenues have enjoyed a lift from our strategic acquisitions. But net of acquisitions, our CAGR on organic revenue has sustained in the mid-single digits over the same period. Slide 16 displays the strong business base we have built and shows that we have experience throughout our defined markets in winning large contracts valued over $100 million. So when we discuss our strategy of growing through key awards, you can be confident that we know how to do that. A key complementary growth strategy is to expand in adjacent customers through smaller strategic awards that round out our presence in our 3 key markets. Slide 17 displays our track record of enhancing shareholder value by delivering improving returns. Growth in our EBITDA margin derives from 2 key factors: first, enhancing our value proposition to our customers to win more differentiated work, which yields higher margins; and secondly, more effectively leveraging our operating infrastructure, which is built to scale for greater revenue volumes. Our EBITDA returns compare very favorably to the mid-tier government services group tracked by Cap IQ. A reconciliation of net income to EBITDA is at the end of my section. Moving to Slide 18. A major focus of our Phase 1 acquisition road map was to move the company from concentration to diversification. As I often discuss with investors, when we began our acquisition journey in FY '15, we had a position in 1/2 of our 3 defined markets, which was VA. Over time, we have transformed the company by establishing a credible presence in all 3 markets and diversifying the contract base in the process. Slide 19 speaks to our go-forward strategy for corporate development. Having completed Phase 1 of our acquisition road map, we have these plans for Phase 2. First, we are affirming the markets that we have previously defined: defense and VA, human services and solutions and public health and life sciences. All of those markets have a long-standing trend of bipartisan support for the programs within them. And we believe that there is enduring and expanding need for the services, notwithstanding COVID uncertainty or maybe even because of COVID uncertainty. Given the broad markets we have defined, we plan to continue to emphasize growth through all channels, organic expansion and new business, cross-selling opportunities across the markets and the capabilities that we've built and complementary acquisitions. We expect that future acquisitions will be largely focused on augmenting our current path. We are seeking either expanded capabilities such as digital transformation, further application of AI and ML or strategic additional agencies in our current markets. We believe we have adequate sources of capital to finance further growth through acquisitions. We have a strong senior lending group comprised of banks with deep industry knowledge and strong support for the industry. And there is an active capital market that would support equity financing, if appropriate, in support of a key deal. Thank you for your time.

So we hope you got some intel -- some information from the video and our presentation. We will also entertain any questions concerning the general business of the company at this time.

There are no questions in the queue.

As there are no further questions relating to the proposals, we will move to the next order of business. There appears to be no other business that comes before the meeting. We will now move to adjourn the meeting and be available for virtual networking sessions. A motion to adjourn is in order.

I move the meeting be adjourned.

I [Audio Gap]

Moved and seconded that the meeting be adjourned. This concludes the business for the meeting. I declare DLH's 2021 Annual Meeting of Shareholders adjourned. You are now welcome to join the breakout rooms for virtual networking. Please follow the links provided on the annual meeting web page. Thank you for attending today's meeting.