ICF International Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 7 speakers on the call.

Operator

I will now turn the call over to Lynn Morgan of AdvisIRy Partners.

Operator

Lynn, you may begin.

Speaker 1

Thank you, operator. Good afternoon good morning, everyone, and thank you for joining us to review ICF's Q1 2024 performance. With us today from ICF are John Wasson, Chair and CEO and Barry Brodus, CFO. Joining them is James Morgan, Chief Operating Officer. During this conference call, we will make forward looking statements to assist you in understanding ICF management's expectations about our future performance.

Speaker 1

These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our May 2, 2024 press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may at some point elect to update the forward looking statements made today, but specifically disclaim any obligation to do so.

Speaker 1

I will now turn the call over to ICF's CEO, John Wasson, to discuss Q1 2024 performance. John?

Speaker 2

Thank you, Lynn, and thank you all for joining today's call to discuss our Q1 results and review our business outlook. First quarter results represented an excellent start to 2024 and demonstrated ICF's positioning in key growth areas and the strength of our diversified business model. There are several of the takeaways worth highlighting. 1st, revenue growth for the quarter was quite strong. Excluding divestitures, revenues increased by 8.7% from last year's levels.

Speaker 2

2nd, our margin profile continues to strengthen. Drivers such as revenue mix, high utilization and reduced facility costs continue to contribute to the consistent margin expansion that we have achieved over the last several years. And third, our forward looking metrics point to continued growth for ICF. At the end of the Q1, our backlog was 3,600,000,000 our trailing 12 month book to bill ratio was 1.23 and our business development pipeline was 9,700,000,000 dollars This speaks to how well aligned our capabilities are with the current spending priorities of our government and commercial clients. Taking a closer look at our Q1 revenue performance, ICS work in the energy, environment, infrastructure and disaster recovery client market again was a meaningful contributor to our Q1 growth.

Speaker 2

Revenues in this client market increased 20% year on year to account for 45% of 1st quarter revenues. We are seeing very strong results across both our service offerings and our diversified client base. ICF brings together a complement of deep domain and implementation expertise across a broad platform of interconnected subject better areas, including energy efficiency, decarbonization, electrification, environmental and climate impacts and disaster recovery and mitigation. We combine our expertise with proven implementation skills around program management, environmental monitoring and grid engineering services supported by cutting edge analytic tools and proprietary energy models that have become the industry standard. Thus, we are offering unique and very customizable services and solutions, which are resonating with utility clients, renewable energy producers and others on the commercial side, while we continue to provide our government clients with research, policy and economic analysis, program design, analytics, grant management services, disaster recovery work and climate impact analysis.

Speaker 2

Highlights in this market in the Q1 were over 30% increase in revenues from utility programs, including energy efficiency work, reflecting continued expansion in both size and scope of programs. ICF is now serving over 75 utilities across the country. Notable contract wins in the quarter included 85,000,000 dollars of expanded energy efficiency work with a large utility holding company, the new $18,000,000 electrification project for a large Midwestern utility and in conjunction with our disaster management team, ICF was tapped to support a Western States wildfire and natural disaster resiliency rebuild program, which provides incentives to help homeowners impacted by natural disasters rebuild all electric homes. We also saw strong double digit growth in energy advisory revenues, driven by increased demand for both our power and technical advisory work. 1st quarter contract awards included numerous grid engineering and analytics projects for utilities and developers.

Speaker 2

Additionally, revenues from our environment and planning services in the U. S. Continued to show solid growth, representing continued strong demand from renewable developers, increased resilience work for utilities undergrounding power lines and environmental infrastructure related work for state clients on projects funded under the IIJA. Contract wins in the Q1 were from a combination of utilities, developers and government clients for the full breadth of ICF's licensing, permitting and compliance services. IRA and IIJA funds are also starting to flow at scale, including the Department of Energy's Grid Resilience and Innovation Partnership Program and its National Electrical Vehicle Infrastructure Program and EPA's Environmental Justice Awards.

Speaker 2

Funding for state energy offices is now in the process of being released and states and other recipients are beginning to issue solicitations for planning and program support. We are actively monitoring opportunities to provide support at all levels, federal, state and local and commercial. Today, ICF has won contracts valued at approximately $125,000,000 related to the IIJA and IRA, primarily from federal and state government clients and our pipeline is about $200,000,000 This does not include all the related work that we are doing for commercial clients where it's more difficult to tie our engagements to specific legislation. In the Q1, our revenues from federal government clients increased 2.4 percent in line with expectations, primarily reflecting a $5,000,000 reduction in pass through revenues associated with large international public health contracts that we referred to last quarter. Revenues from federal government clients excluding subcontractor and other direct costs increased 5.4% in the quarter.

Speaker 2

Our 2 growth markets in the federal government client category are public health and IT modernization. With respect to public health, our contract wins at SAMHSA last year are now fully up and running and we expanded our clinical decision support work at the Veterans Administration. Also, our business development pipeline in public health is quite strong. There is byproducts of support to address the nation's mental health crisis and with increased budgets, we see significant opportunities to expand our work for SAMHSA. Also recent funding for NIH and CDC is in specific areas that are relevant to ICF subject matter expertise and experience, including funding to end HIV and for cancer and Alzheimer's research.

Speaker 2

We continue to see a strong pipeline for global health security and low middle income countries where we have historically worked providing demographic and health surveys, nutrition surveys and diagnostic testing. Global health security involves identifying and containing infectious disease threats wherever they occur in the world. CDCs and USAID's work on monkeypox and Ebola are 2 of the most current examples. Additionally, we continue to see strong steady performance on our environmental health work at EPA with the BPA recompete win for EPA's Office of Research and Development and task order wins to support EPA's Office of Pollution Prevention and Toxics. As you know, the EPA issued the final national primary drinking water standards to protect Americans from exposure to PFAS substances in mid April.

Speaker 2

ICF supported the scientific and regulatory analysis that informed development of the new rule, setting maximum levels of these chemicals for the nation's drinking water supply. Our work continues as we staff EPA laboratory contracts to which samples are tested for PFAS substances. IT modernization and digital transformation is another area of bipartisan support. In the Q1, we continue to execute our programs to update workflows and infrastructure and optimize data usage across our civilian agency clients and we continue to ramp up work on the $300,000,000 of contracts we won in the second half of twenty twenty three. Additionally, we completed several important projects within the Department of Health and Human Services at advanced research efforts and support public health, including the development of dashboards to support the Medicare Diabetes Prevention Program, facilitate health equity data submission and address vascular health.

Speaker 2

Notably in the Q1, we combined ICS domain expertise and energy with cutting edge technology to stand up 3 unique grant management programs with varying complexity levels for the Department of Energy to support 1,000,000 of dollars in new IIJA and IRA funding across multiple rebate programs. This project together with the close tie in that our IT modernization capabilities have with our public health expertise demonstrates ICF's unique ability to divide subject matter expertise with substantial IT capabilities to drive growth and positive outcomes for client. We also have a strong active pipeline in this area, which includes a significant number of opportunities that reflect potential synergies between our open source capabilities and ICS policy related experience. To sum up, this was another record quarter for ICS, which has set the stage for substantial organic growth for the company in 2024. Now I'll turn it over the call to our CFO, Barry Broadus for a financial review.

Speaker 2

Barry?

Speaker 3

Thank you, John, and good morning, everyone. I'm pleased to provide you with additional details on our 2024 Q1 financial performance. Total revenues were 494 point $4,000,000 up 2.3% compared to the Q1 of 2023. After adjusting for the divestiture of our commercial marketing business lines in 2023, revenues increased 8.7% driven by robust growth from our commercial energy clients and solid growth from our government customers. Subcontractor and other direct costs totaled $120,500,000 or 24.4 percent of total revenue, down from 27.3 percent in the Q1 of 2023.

Speaker 3

The year on year decrease was due in part to the divestiture of the commercial marketing business lines and lower pass through revenues on certain U. S. Government contracts. 1st quarter gross margins expanded 190 basis points to 37.2 percent of total revenue, benefiting from the timing of several recently awarded energy efficiency contracts, which are estimated to pull forward approximately $0.15 to $0.20 of EPS in the Q1. But typically these contracts tend to be more profitable during the start up phase of the program.

Speaker 3

As costs ramp up over time, margins will level out over the period of performance. For the second half of this year, we expect that margins from these contracts to be more closely in line with margins we typically see with our other energy efficiency programs. Indirect and selling expenses were $129,100,000 up 4.3% year on year reflecting the expansion of the business and investments in our staff and various growth initiatives. We continue to realize higher utilization and benefit from our increased scale and reduced facility cost. This together with our favorable revenue mix and the quarter specific upside from the energy efficiency contracts I mentioned earlier drove a year over year 21.6 percent increase in EBITDA to $56,400,000 and an 8.2% increase in adjusted EBITDA to $55,200,000 Interest expense of $8,200,000 decreased from 9 point $5,000,000 in the Q1 of 2023, reflecting our lower average debt balances year to year.

Speaker 3

Our tax rate was 20.4% as compared to 23.5% in the year ago quarter, primarily due to tax credits and divesting of equity compensation, which largely occurs in the Q1 of each year. For the full year, our tax rate guidance remains unchanged at 23.5%. Net income was $27,300,000 or $1.44 per diluted share in the 1st quarter compared to $16,400,000 or $0.87 per diluted share reported in the comparable period last year. Non GAAP EPS was $1.77 an increase of 24.6 percent from the $1.42 per share reported in last year's Q1. 1st quarter EPS benefit from the margin expansion, including the profit pull forward from our energy efficiency programs I previously mentioned and the favorable impact of our lower year on year interest expense and tax rates as well as greater efficiency in the business.

Speaker 3

Shifting to cash flows and our balance sheet. In the Q1, we used $10,000,000 of operating cash for working capital needs, an improvement of $6,800,000 as compared to the Q1 of year. The use of operating cash flow is consistent with our typical Q1 seasonal working capital needs. Our days sales outstanding were 75 days compared to 71 days in last year's Q1. Capital expenditures totaled $5,200,000 down from $6,400,000 in last year's Q1.

Speaker 3

At the end of March, our debt was $474,700,000 above the $430,400,000 reported at the end of 20 23. The sequential increase primarily reflects Q1 seasonal use of cash for share repurchases and year end bonuses. On a year over year basis, we reduced our debt by $123,000,000 from $598,000,000 at the end of last year's Q1. Our adjusted net leverage ratio was 2.29 times at quarter end compared to 3.09 times at the end of last year's Q1. Approximately 58% of our debt is currently at a fixed rate.

Speaker 3

We remain committed to a balanced approach to capital allocation. We continue to prioritize investment in organic growth initiatives, acquisitions, debt reduction, share repurchases to offset the dilution of our employee incentive programs and quarterly dividend. Today, we announced a quarterly cash dividend of $0.14 per share, payable on July 12, 2024 to shareholders of record on June 7, 2024. Now to help you with your financial models, our guidance from our last call remains unchanged. As a reminder, we expect to generate approximately 48% of our revenue guidance in the first half of the year.

Speaker 3

Our depreciation and amortization expense is expected to range from $24,000,000 to 26,000,000 dollars Amortization of intangibles should be approximately $32,000,000 to $33,000,000 Interest expense will range from $32,000,000 to 34,000,000 Our full year tax rate will be approximately 23.5 percent. We expect a fully diluted weighted average share count of approximately 19,000,000 shares. Our operating cash flow is expected to be $155,000,000 and our capital expenditures are anticipated to be between $25,000,000 28,000,000 dollars And with that, I'll turn the call back over to John for his closing remarks.

Speaker 2

Thanks, Barry. We are very pleased with our results to date and the opportunities we see on the horizon. Our Q1 performance together with strong backlog, book to bill and pipeline metrics provide excellent visibility that supports our full year 2024 guidance. We're pleased to reaffirm our expectation that 2024 organic revenues from continuing operations will range from $2,030,000,000 to $2,100,000,000 representing year on year growth of 5.2% at the midpoint when compared to reported 2023 and 8.5% at the midpoint on continuing operations. EBITDA is expected to range from $220,000,000 to $230,000,000 reflecting year on year growth of 14.2 percent at the midpoint.

Speaker 2

Our guidance range for GAAP EPS is $5.25 to $5.55 excluding special charges and for non GAAP EPS is $6.60 to 6.90 The work that I described in today's business review involves helping clients address many of the most challenging issues today. We are proud to participate in this work and to have attracted a like minded group of professionals who are committed to making a positive impact on society. And with that, operator, I would like to open the call to questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Sam Kussbaum at William Blair. Your line is now open.

Speaker 4

Hey, good morning. Thanks for taking my questions here. I know you just mentioned you're still expecting 48% of full year revenue to occur in the first half. Based on your Q1 that implies sort of flat growth on the top line in the Q2 here, if we're using the midpoint guidance, I guess I want to make sure I'm thinking about that in the right way or maybe there's more optimism in hitting the upper range of guidance there?

Speaker 3

Hey, Sam, thanks for the question. Yes, we think that the revenues will certainly uptick in the second half of the year. We have great visibility into the revenue stream and we think that we'll have continued strong growth as outlined in our guidance.

Speaker 4

Got it. Okay. Maybe pivoting here. I guess this question kind of relates to your work in commercial energy and renewables. We've heard about many of the difficulties clients are facing in that industry, such as interconnection, permitting and just grid organization in general.

Speaker 4

I guess I'm wondering if you can help us understand how this impacts your business, if it's limiting some of the work you can finish or maybe it's creating complexity you can help solve? Just want to get your thoughts around that.

Speaker 2

Yes, sure. I mean, I think that we certainly work on grid modernization, grid interconnection, interconnection issues related to renewables energies. And so I think those challenges in the industry are creating opportunity for us and we're advising utility clients and power producers on those issues. And so that is certainly an area where we're supporting our clients and seeing opportunity. We continue to see significant opportunity around renewable power generation resources at the project level, both solar and wind, and are doing significant amount of work for those clients.

Speaker 2

And that continues to be strong and we're quite active on that. And so, I would generally say the specific issues you mentioned, we're working with our clients intently to analyze and assess those issues and help solve them. And so it's I think generally been a net positive for us.

Speaker 4

Great. Thank you for the answers guys.

Operator

Please standby for the next question. The next question is from Tobey Sommer with Truist Securities. Your line is now open.

Speaker 5

Yes, good morning. This is Jack Wilson on for Toby. Maybe just to kick it off, can you maybe dig a little bit more on just what parts of the budget have been sort of most helpful and if there are any sort of headwinds embedded in that other parts of the budget?

Speaker 2

You did ask, Jack, do you mean the federal budget or is that what you mean or Yes, yes, that's

Speaker 5

the budget, please.

Speaker 2

Yes, I think that in the federal arena, I think we've guided to high single digit growth for the year in our federal markets. I think in our last call, we indicated we'd have low single digit growth in the first half as we ramp up our new IT modernization work and we expect our USAID work, which includes the capacity to ramp up as we go forward in the year. And so we remain quite confident at the high level of that guidance. I would say, as we've discussed regularly on this call over the last couple of years, the 2 major areas of growth for us are in public health and in IT modernization. And generally, the budgets there have been quite strong.

Speaker 2

They're bipartisan. They've seen very strong budgets the last several years. And I think we're confident we'll see robust growth there for this year. Also, obviously, these are very large agencies and we have a small share. So we're also taking market share these agencies.

Speaker 2

But generally, I think the budget situation in our key federal growth areas remains positive. And we're as I say, we've guided to high single digit growth for the year and we're certainly confident in that.

Speaker 5

Okay. Thank you for that color there. And then maybe just as a follow-up, can we dig into the IRA a little bit more, maybe using a baseball analogy, could you sort of describe what inning you think we're in? And if it's possible to segment that between sort of the supply and demand side of the equation, that would be helpful as well.

Speaker 2

Well, I would say on the IR certainly on the IRA, I think we're still in the early innings. It's still ramping up. We're seeing that funding beginning has begun to flow. We're seeing it at the federal level. We're seeing it also getting to the state level.

Speaker 2

The states are turning around and starting to put out grants and move that money. And so I think we expect that will continue to ramp up for the next several years. And then from there, I think that's 5 to 10 year money and so it will be a long term tailwind for us. And so I think we're in the early innings. I don't know the IRAs 3rd inning, 3rd or 4th inning.

Speaker 2

IIJ started a year, year and a half earlier. Maybe we're getting towards the middle innings there, but there's still a long tail of spend on the IIJA. And so I think we think those will be tailwinds and continue to present material growth opportunities for us over the next 5 to 10 years. In terms of supply and demand, I mean, I think I would say if I focus on the IRA, I think it's certainly having impact on both sides. I mean, obviously, the tax credits are providing tremendous incentives around solar and wind and hydrogen and carbon capture changing the improving the economics of those activities.

Speaker 2

And so we're seeing tremendous demand from that. And there's also funding available on the demand side and we're certainly supporting federal, state clients, utility clients who are benefiting from that around energy related demand programs. And so we're seeing it on both sides. I think it's particularly strong right now on the supply side.

Speaker 5

Thank you very much.

Operator

Our next question comes from Marc Riddick with Sidoti. Your line is now open.

Speaker 4

Hey, good morning.

Speaker 2

Good morning. Good morning. So I wanted

Speaker 6

to touch a little bit on how we're feeling about what the potential acquisition pipeline might look like and maybe your current appetite and views as to maybe what you're seeing out there and valuations relative to maybe the beginning of the year. It seems like overall M and A seems to be picking up a little bit. I was wondering if you had any thoughts or views or how that might have evolved throughout the year?

Speaker 2

Maybe I'll say a couple of words and I'll let Barry speak to valuations. I think that I wouldn't say we've seen a material shift in the M and A market in the last couple of quarters. At high level, as you well know, Mark, I mean, M and A has been a key part of our growth strategy over the years. We did our last material deal in July of 2020. We've paid down a lot of debt.

Speaker 2

We have capacity. I think we so we remain in the market and continue to look at potential deals. Obviously, we're focused on areas around our key growth drivers, so around public health, data and analytics, energy. I would say the market is it's not changed in the last 6 months. Valuations are still a bit frothy.

Speaker 2

But Barry, do you want to give a little more color on that?

Speaker 3

Yes. As John mentioned, we are very active in the acquisition arena. We're continuing to look at different properties as they come through the pipe. I'd say from a valuation perspective, at this point, we thought that maybe the valuations may have should tick down a little bit based on where we are with interest rates and kind of the equilibrium between the 2. But we still think that we still see that the valuations are still not that much change from the previous 6 months or even longer than that.

Speaker 3

We have, as John mentioned, plenty of capacity. We've paid down a lot of debt. So we're certainly looking for that as we've done in the past. We certainly see the different markets that we play in and depending upon the market, valuations will fluctuate a little bit between some of the hotter markets versus some of the others. But we are very active and continue to look for acquisitions.

Speaker 6

Great. And then I just have one quick follow-up. I was kind of wondering with the sort of shifting economic landscape, I guess, or forecasting relative to maybe where we began the year, are you seeing any changes in the pace of RFPs? Or are there any particular client verticals that you're noticing any shift of behavior that we haven't had a chance to talk about yet? Thanks.

Speaker 2

I mean, I would say on the government side, we really haven't seen a shift. I think we continue to see opportunities here. The RFP flow proposal flow is good. The pipeline is at or near a record. Our book to bill is very strong.

Speaker 2

And so on the government side, I think it's business as usual. I would say in the energy, climate arena or I think the results speak for themselves. I mean, we had north of 20% revenue growth in our energy environment infrastructure and disaster recovery market. Our commercial energy business grew 34% in the Q1. I mean, we're seeing tremendous opportunity there.

Speaker 2

I think I've said before, we have our 5 key growth drivers, but the key growth drivers that are in the energy, environment, infrastructure area, those 3 are certainly coming to the fore and there's significant economic activity and significant opportunity across commercial, federal government, state and local and international. So you know in that area, I would say that we're it's accelerating.

Speaker 6

Excellent. Thank you very much.

Operator

This concludes the question and answer session. I would now like to turn it back to CEO, John Wasson for closing remarks.

Speaker 2

Okay, great. Thanks for participating in today's call. We look forward to connecting with you all at upcoming conferences and events. Thank you.

Operator

Thank you for your participation in this conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
ICF International Q1 2024
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