Good day, ladies and gentlemen, and welcome to the Q2 2015 DLH Holdings Corp. Earnings Conference Call. My name is Emily, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructionss] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Casey Stegman, Investor Relations. Please go ahead.

Thank you, Emily. Good morning everyone and thank you for joining us for today's conference call. My name is Casey Stegman, with Stonegate Capital Partners, Investor Relations Adviser to DLH Holdings. On the call with me today is Zach Parker, President and Chief Executive Officer of DLH; and Kathryn Johnbull, Chief Financial Officer of DLH. Earlier today, the company posted its earnings release, which outlines the topics that management intends to discuss today. Should you have missed that release, it can be found on the Investor’s page of DLH's corporate Web site at www.dlhcorp.com. As a part of today's call, we have provided a slide show presentation that can be accessed on the Web site. Go to the Investor Relation’s tab towards the right side of the page and click on Presentations under the drop-down menu. We're also providing a simultaneous webcast of today's call with a replay available later today on our website. Please note that this conference may contain certain forward-looking statements as defined by the federal securities laws. Statements in this call regarding DLH Corp.'s business, which are not historical facts, are forward-looking statements that involve risks and uncertainties. While these statements reflect DLH's current views and outlook, they are subject to factors that could cause its future results to differ materially. These risks and uncertainties are discussed in detail in our documents filed with the SEC, specifically, the most recent reports on Form 10-Q and 10-K. 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 Web site. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise. With that said, it's my pleasure to turn the call over to Zach Parker, President and Chief Executive Officer of DLH. Zach?

Thank you, Casey. Good morning and welcome to our shareholders and other interested parties. We appreciate your participation in the conference call today and our webcast. Earlier today we posted our second quarter fiscal year 2015 financial results. We're very pleased with operating performance in the second quarter of fiscal 2015 as we received and achieved record results and several of our key operating metrics. Second quarter revenue were up 15.9 million was a record high since we began our corporate transformation and grew 7.8% over the prior year's second quarter. Similarly, gross margin of 2.7 million was also a record high and an improvement of 24% over the prior year period. Income from operations more than doubled over the prior year and adjusted EBITDA approved 83%. As previously disclosed, we recorded a non-cash, non-operational charge of 0.6 million related to the settlement of the retroactive payment claim and Kathryn will discuss that a little greater detail later in the call. Our mix of new business awards and improved contract performance has generated a gross margin rate of return of 17.2% for the quarter. Another improvement of 2.3% over the prior year second quarter. our operating results reflect a strategy and a strategy to expand on business within our key customer base and into adjacent federal markets. We continue to enhance our industry knowledge and expertise by adding business development resources with deep federal health IT industry experience to our team. Our strategic business capture initiative still include the military and the veterans requirements for telehealth services, medication therapy management, health IT solutions, process management, clinical system support and healthcare delivery. We believe these priorities allow us to expand within what we consider to be top national priority programs and budget areas which have a very-very strong addressable market. These…

Thank you, Zach and good morning everyone. We appreciate your joining us today. Our second quarter results continued our trends of improving our key metrics that we delivered in revenue growth margin income from operations and adjusted EBITDA compared to the prior year period. Detailed financial results for the second quarter ended March 31, 2015 versus the prior year second quarter are as follows. Revenue of 15.9 million increased 1.1 million or 7.8% over the prior year second quarter with the increase due principally to a new business awarded in 2014 and expansion on current programs. Gross margin of $2.7 million increased by $0.5 million or 24.1% over the prior year second quarter. As a percentage of revenue, our gross margin rate of 17.2 improved by 2.3 percentage point over the prior year second quarter. Favorable margin results are attributable improved contract performance, and higher margins on new business. G&A expenses, which include general, administrative, operating and business development activities, were $2.2 million, an increase of $0.2 million over the prior year second quarter due principally to declined expenses related to managing and growing our contract base. As a percent of revenue, G&A expenses were 13.8% of revenue, an increase of 0.6% over the prior year second quarter within anticipated levels required to manage and to grow our contract base. Income from operations was approximately $0.5 million, an increase of approximately $0.3 million or 129% over the prior year second quarter due to improved gross margins, partially offset by increased G&A expenses as described earlier. Other expenses approximately 0.7 million was principally due the settlement of the retroactive payment claim which we previously disclosed in 8-K and represents a various of approximately 0.6 million over the prior year period. As result of the closer of this legacy issue and incorporated…

[Operator Instructions] Your first question comes from the line of [indiscernible]. Please proceed.

Hi, I have three questions for you, the first question has three parts, so I'll ask all three and then you can respond. The first question is on labor cost sensitivity, I saw on Bloomberg yesterday that labor costs are climbing and you know we hear in the news that Wal-Mart and others are increasing wages, and so I was wondering if we could pass that on to our customer. That was the first part and then the second part is kind of related, so based on that do we have fixed price bids or time and materials and what percentage of those fixed price and so forth if you could give me some feeling there. And then the third part of that question is I saw in the 10-Q on page 14 under Section 13 under subsequent events, it mention the forming of the Chicago Union for the purposes of collective bargaining. I was wondering if that was a trend -- start of a trend and if that would also have an impact. Thank you.

Okay, thank you, Bark. Let me start with the response and thank you again very much for your astute, paying attention to the events within the company, I think it's very important for us to communicate these types of events and appreciate your questions. The first thing, with regard to Bloomberg and their assessment on labor costs insensitivity, we follow -- we do a lot in conjunction with Bloomberg. They also have a segment within their industry analysts which is Bloomberg Government and we generally far more closely aligned with the Bloomberg Government analysts, some of which we include their continent some of our messaging and analysis of the market. With regard to the labor costs sensitivity, generally in our space the federal government support in the military side, we're not seeing any substantial impact to labor costs. As you know there is an industry wide of course, there are things such as health and welfare and ACA compliance and things of that nature that are affecting a number of companies but in large part we're not seeing an upward trend or any unusual trends that result from other analysis. A lot of our business particularly the blue collar business is the labor costs are heavily driven by what’s called wage determinations in the Service Contract Act and there's really no unique things happening there. So, a lot of what they're talking about in terms of basic minimum wage increases et cetera, we do not see any substantial impact. Kathryn, do you want to add anything to that?

No, that’s defiantly a factor for us in terms of the application on wage determination and generally speaking those schedules provide for a wage that’s well in excess of the minimum wage. And so upward pressure on the minimum wage is still well within the compensation levels prescribed under our contract. So, we don't -- for that reason we don't feel the pressure as Zach previously described.

Second part of your question had to do with types of contracts and the overwhelming majority of our contracts are fixed price. Many of our fixed prices kind of operate as very much like a [indiscernible] time the material through you do want to take that. We are also pursuing a fair amount of contracts that also have and we have some IDIQs that allow for cost reimbursable or cost plus fixed contracts. So we’ll continue to see some variations there. I think that being tied to your first comment with regard to cost sensitivity, we do have certain options to explore with the federal government any time there are any externally driven cost increases relative to labor. One of those causes is what's called equitable adjustments and then there are also other triggers that include things like escalations etcetera within the government contracts and we feel we’ve had pretty much all of those levers in place for us to be able to manage that effectively as we see these kinds of wage.

It's generally a routine part of the annual option exercise interaction so as the annual renewal auction come up there is a dialogue that occurs with respect to the cost to delivering that resources effect or under contract.

And with regard to item three, the disclosure with regard to the Chicago Union. It was, we do not see that as a trend and I can’t tell you that Chicago had something one of the many stations which we perform as you well know. It is in environment that has historically been substantially far more union-like in which things have operated there et cetera and natural course of events for us to start to work to develop agreement to refer to them as CBAs which are collective and parterening agreements. We’ll will be starting that process very specifically right away, in fact we've got a meeting this afternoon or tomorrow -- afternoon to start to work part of that strategy but we do not see that as having a substantial negative impact, we've got a number of ways on which we are going to explore that and we feel we have a team in place to really work at a good win ramp for our customers, our employees and ourselves. But we'll stay tune and keep you apprised obviously if we start to see it has had any impact in terms of the erosion of our margins and fees we’ll look to address those and the provided ways on which we've done that before. Fortunately, as you know Kevin, we [indiscernible] President of the Operations, Kevin has experience managing with unions and environments both Kathryn and I had extensive involvement with represented employees in union contracts. So it's certainly nothing that we find important and we feel very comfortable that we have our teams in place to go to manage that.

Okay. Thank you both, that was terrific, that was really great. Moving on to my next question, Zach you may remember that during the Q&A session at the most recent annual meeting in New York, you mentioned that DLH Web site for our job postings was getting an over hall so that we could see -- we could have better visibility into those higher margin listings and so three part question again, I was wondering if that it had occurred that was the first part and secondly I saw that you're getting a Senior Executive Assistant that was posted there on April 24th, I was wondering if you did not already have one. And then the third question was -- a third part of that question was that I saw there was also another job postings for Capture Manager, which is one of those business development roles that was posted on April 17th, and I am wondering if that kind of the same as a business development role that was posted three quarters ago and your slides here mention that we had -- were continuing to hire business development people, and I was wondering if there were others and if there was any update on the very first the results from the very first one.

Sure, and I appreciate that, with regard to the Web site changes we're still it’s under development we're looking at treating the new high and the clear opportunities differently as we have discussed before than we have historically, we're still as you probably know still continuing to use Career Builder and is pretty much on the landing page right now it's one of the things we want to try to change. And it will certainly continue to reflect those that we have professional positions as well, you're starting to see that of course with the Capture Managers, etcetera. Well historically you’d would look on our site and almost exclusively Just Fine pharmacy techs and some logistics and administrative support. So, we’re starting to use it more for that but we still got the plans to revise the Web site approach as it relates to that. Some other tools that we think we're going to bring to bear that makes things a little more cost effective force on the professional side as well. Second item, with regard to the EA or the Executive Assessment, recently we have just been working through a temporary agency in that position. So your timing is impeccable because we just did a round of interviews with Kathryn, myself, Kevin and John for EA candidates yesterday and we expect to have that position filled within the next few days. HR is going through the process of finalizing our background investigations and things of that nature. So we're pretty excited about getting that full time position back as a part of our team. And the last one is one that is very important strategic as well, as you know Kathryn have talked a lot about the changes even though we've been continuing to show greater margins as we…

So, where there are other Capture Managers hired over the last quarter or the one before?

Yes, we’ve brought on in the last couple of quarters to very seasoned business development support folks they will work in concert with the Capture Managers. We've done some transition when we've had some folks under consulting agreements for a short term comp support which is quite frankly generally end up paying a higher rate per hour kind of thing for that and bring in some of those resources in-house so that we can leverage their capabilities for a larger portion of our pipeline and brining that home.

Okay. And my last question now, when we last met we ended the last quarter with $3.8 million worth of cash on hand which is 40% of share or 12.6% of total assets and now we've just ended this quarter with 4.2 million cash on hand which is about $0.44 per share or 20% of total assets. And I like that we're buying the stock back but with our tiny trading volume already present kind of a liquidity issue I can't buy or sell more than 100 shares without moving the price and reducing the number of shares more would probably make that a bit worse. So I was wondering if perhaps we could instead issue a tiny dividend say $0.05 per share and still have enough for more than enough cash left to run and grow our business.

Yes it's something to take on their consideration. But honestly, I think the better use for our cash is really in the context of the growth opportunities which is front of our self. Right now, we certainly believe we have adequate cash on hand in addition to our access truck credit facility in the cash flow we're generating but we wouldn't want to -- I think that the better use of cash resources would be to keep them available to continue to fund growth. So I have candidly don't see dividend strategy as a near term event. But it is something we're always mindful of it and certainly understand the shareholder interest in that.

Yeah. And just to add to that we are both very big proponents and looking forward to the day when we’re thinking timely for us to do the dividend distribution, we think that's a very important component, it will be also an indication of the status of the company that is quite frankly exactly where we plan to take this company, [Multiple Speakers] right term. So it is certainly something we keeping in front of us. We also couldn't agree with you more it is still very difficult as you probably may have noticed we have a lot more institutional holders than we had a year or so ago which is a positive drive very difficult to get any substantive shares as you noted. So it is a challenge we're going to continue to work with that, Kathryn and I will be meeting with our IR folks in Dallas I guess is next month and we certainly want to look at some additional measures we brainstorm some things to see how we can make it a little more attractive for folks to be able to get some substantive impact there. But yeah clearly, we do visualize and have on our plate the opportunity to provide some dividends but we're just not there yet.

Thank you for your question. Your next question comes from the line of Howard Brous from Wunderlich. Please proceed.

Congratulations on the quarter. I have two very quick questions. Hi Kathryn and Zach. It iis nice to see the balance sheet getting cleaned up only what seven years?

Right, exactly. Yeah we're where we're very obviously very pleased to have that issue overhanging like getting – legacy assurance, nice to have off the book.

So actually have three quick questions. One, what’s your ROI, return on invested capital.

We’ll probably had get back to with specific number.

Okay. That’s fine, at your convince offline. Secondly, you referred to higher margins on new business, is that new business telehealth services or is that just in general?

Well, certainly telehealth is one of those areas where the margins are substantially higher than what our trades work has been historically. So the answer is yes. but it's not the only one, the [indiscernible] slow kind of heading for the IT pieces of the business is working several initiatives that include Telehealth but also several that are outside of Telehealth that are higher margins than we are today. I can generally say that across the board most of the new business that we're bringing is higher than where we are today. So the direction to move, we're about as low as we will be historically. So we don't plan on all the things that we had previously two years ago in our pipeline that were in the base support of the logistics to settle, we’ve taken those out of the pipeline, terminated most of the folks that would brought those kind of expertise and resources to the company and that’s been the part of the transformation. So we'll move generally, when we have any subsequent new business, much like -- I would say we've had some small wins that have not been needle mover over the last year and less. But again, they’re just a small -- very small port of portion of our revenue base which is why we haven't seen that. The needle mover contract will be for the large part where the telehealth have not should generally give us positive lift in the margins.

Alright. Last question, seasonality to the business is there any real significant seasonality.

No sir.

Okay. Just one comment with respect to the prior question, at this point in time don't pay a dividend, used it for acquisitions, working capital, build up debt cash.

Right.

You get to a mature business that’s a different story. That's not today. It's just one persons opinion.

We clearly agree with you. We certainly -- it's not off the table it’s certainly something we look forward to that day that is certainly not today and as you probably well know we've talked about the fact that we've got the majority of our focus around organically growing this company that over the course of the next two to three years would not be a surprise to us if we found the right piece to tuck into an acquisition, Kathryn making sure they should protect our capital. [Multiple speakers]

That’s what it is supposed to be. Zach, Kathryn, congratulations again. Thank you.

Good to hear from you, Howard.

My pleasure bye-bye.

Thank you for your question. Your next question comes from the line of Richard Greulich of REG Capital Advisors. Please proceed.

Good morning, Zach.

Good morning, Richard. How are you?

Good. The gross margin was outstanding, is it sustainable, it sounds like it is from what you have said earlier.

Yes, of course there is going to be minor variations from period to period as depending on the particular level of volume we have on our programs. But the point is if you just look back at FY 2013 for example, our over the course of the whole year our gross margins were 14%, last year they were just under 15%. I expect that in the aggregate of the course of the year the gross margins will continue to improve. And that's the function of mostly the more favorable margins on the new work coming in. And we’ve talked before about how we believe we’ve pretty much reach steady stage on the current look of business, the legacy business in the company and we never quit looking for a way to continue to improve of course. But we do think we wrong out of the that work but we can't. So the opportunity to continue to improve gross margins as we blend in new higher return more value added work and that’s what we’re all about doing.

There will be some occasional variation due to the some business climate items. As Kathryn mentioned in a previous session we've had to bring some outside counsel to help move the needle on coming to a final agreement on things like retros and some of the other overhangs. And certainly the CBA negotiations we’re bring some outside resources to help us there that will show up on the books in the near term. But we considered those sort of things you have to do to evolve businesses much like ours and they're not really terribly unusual. So we've got to manage around that. But by enlarge, we think most of those costs while we will continue to disclose those to you on a quarterly basis, we think those are the things that are still manageable and will still continue to have a sustainable trajectory of positive growth.

That IDIQ, I guess contract or acceptance, you talked about in the 10-Q possibly very late in the year being awarded, is there anything in particular about the kind of contracts that would be involved with that IDIQ that would suggest that they would also be fairly high margined.

Good question, now we have -- I'm sorry. We've finished.

Yes. I am.

So we've got and I think we've talked about three or four pretty important strategic IDIQs, one I believe that you may be referring to what the VA on the IT side that we refer to is the T4, our T4 next generation. And yes, we've done a fair analysis of the type of work over the last three years that client has purchased through that IDIQ. We consider probably a third or so to be very addressable by our us and our teammates. And on that [indiscernible] and the reason I say that some of them are just pure buying of equipment. You go to a HP for printers and you go to a different company for software buys or service. But the substantial amount have to do more with bringing some sort of expertise relative to the health of the pharmacy environment and integration of tools and technologies to bring to bear for the VA and with some of the subject matter understanding that we have gained over years of experience with the VA. In all cases, I can tell you that in all the cases of the types of cash orders that we have envisioned pursuing they'll be of higher margin business than we are doing today. And probably a better way of cash that isn’t that necessarily just higher margin business. The type of business is far more professional than trades. The complexity of the work is for some of the things that we're doing on a small scale but doing very well today that will act scale. So we generally convinced that we generally have higher margins, better margin flow with the type of cash orders that we’ll bid under that T4. And that is of course why we consider it strategic.

I have couple of just detail questions then. The new lease paying about 250,000 a year, how does that compare to your current lease expenses?

Well, the market here is starting to improve but we believe we were ahead of the trend there and as a result we were able to get a very competitively cost per square foot is actually lower than what we're currently paying for the two facilities that were combining.

The stock based compensation expense for the quarter was 73,000 and so quarter-to-quarter that goes down from 273,000. But I noticed that last year the first fiscal quarter was also high. Is that sort of inherent or is the 73,000 level, the new quarterly run rate for the next couple quarters.

That would be a reasonable expectation.

With that likely didn’t pop back up in fiscal Q1 of 2016 or no?

Right. First quarter is a reason that tends to pay because that’s couple of things that annual allotment for the stock compensation for the Board of Directors and then any management awards associated with annual results occur in that period.

Okay. There was kind of a small shift in terms of your prepaid benefits like, so that increase but then the prepaid some other items in that same category decreases. How does that work out? Do you know what I'm talking about and I'm sure making cleared up.

Yes. It is a function of where an increased compared to September is what you're picking up. So as you might expect given that we are the way our fiscal period falls most of the benefits particularly around holidays happen in our first two quarters because of all the holidays that occur in the November, December, January timeframe and so by the time you come to the end of the September the annual benefits costs have to settle out and clear to zero. So that’s why at any given quarter through the year we’re going to see as compared to September an increase.

Reconciling in the last quarter.

One item that has been going up in the last couple of quarters on a accrual expense basis is your works comp insurance accrual. Is that a matter – is there trend that you're looking at possibly developing or is that just a matter of being conservative.

Well, it is developed claim based on actual claims incurred and so as our workforce has grown and then just as a matter of how -- what your particular claim experience is those are expected cost, we think it’s appropriate, we don't think it's particularly conservative but we think it's appropriate. But that is an area that we manage very actively and we have implemented many operational changes that we believe had yield at significant cost control around that but cost development that show up in that accrued liability in some cases related to claims that are five, six, seven years old. So it doesn't necessarily -- shouldn't be interpreted as a problem or something an area that is been getting actively managed currently, does that help to clarify.

What I can see the cost of having your credit facilities about 25,000 a quarter and you haven't used it for a little while assuming that there no acquisition you're probably unlikely to use it does it makes any sense to just drop it.

Yeah, help me where you picking up that correct.

25K.

Well I assume that you don't have any interest expense, right? like a fee for the facility.

There is a facility – a commitment thing you will for the fact of having a credit in place. But it's not at that level. So there is also interest accrual on the other obligation related for example when we talk about the payroll tax issue that we could go on and we continue to accrue interest on that. So, that’s running through that same line.

I see. Okay. Thanks. Now you bought 75,000, 76,0000 more shares, you're getting close now to sort of finishing. If you do that one more quarter would you be likely to go and get it reauthorization if you do.

We’re looking at that in the context particularly of the comments that Brake made earlier we were we're not sure that is the best use of cash at this point any longer, I think we’re in a different environment now than we were when we authorize the plan. But it is something that is on our action to evaluate because as you said the plan is getting fairly-fairly fully expended at this point.

And I'd like to have kind of a plan of attack in that regard probably complete in the next 30 to 60 days and we’ll review it with our Board next week in fact I believe so we’ll certainly be able to give an indication before next quarter.

Okay. Thanks for your time.

Thanks for your question.

Thank you for your question. There currently are no further questions. [Operator Instructions] there currently are no further questions. And I would now like turn the call over to Zach Parker for closing remarks.

Great. Thank you again Emily and thank you all again for participating in today's conference call. Should you have any additional questions please feel free to contact myself or Kathryn. We thank you for your interest and support and look forward to speaking with you again in August as we report our third quarter fiscal year 2015 results. Thank you and have a blessed day. Bye for now.

Thank to Kathryn, Zach and Casey. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.