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spk07: Thank you for joining the first quarter 2021 ICF earnings conference call. We will begin shortly. We appreciate your patience. Please continue to stand by. Once again, we thank you for joining our call today. Please stand by. We will begin shortly. Thank you. Welcome to the first quarter 2021 ICF earnings conference call. My name is Vanessa, and I will be your operator for today's call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, please press star 1 on your touchtone phone to register for a question. Please note this conference is being recorded on Tuesday, May 4, 2021 and cannot be reproduced or rebroadcast without permission from the company. And now I would like to turn the program over to Lynn Morgan of Advisory Partners. Please go ahead.
spk06: Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's first quarter 2021 performance. With us today from ICF are John Wasson, President and CEO, and Bettina Welsh, CFO. Joining them is James Morgan, Chief of Business Operations. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations for our future performance. 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 4, 2021 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. You may at some point elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn the call over to ICF's CEO, John Watson, to discuss first quarter 2021 performance. John?
spk08: Thank you, Lynn, and thank you all for joining us today to review our 2021 first quarter results and discuss our business outlook. ICF's first quarter results represented an outstanding start to the year, setting the stage for considerable growth in 2021. Indeed, the outperformance led us to move our full year service revenue, EBITDA, and EPS expectations to the upper end of the ranges, despite it being early in the year. There are three key takeaways from our first quarter performance that I would like to point out. First, our qualifications, positioning, and contract vehicles in high growth markets in both the government And commercial arenas drove substantial growth in service revenue, which together with higher utilization and quarter specific margin benefits resulted in year on year increases in EBITDA and EPS that significantly outpaced revenue growth. Second, this was the third consecutive quarter of record contract awards for ICF, resulting in a trailing 12 month book to bill of 1.44 times, which is the highest level in recent years and is overwhelmingly related to bids submitted prior to the Biden administration assuming office. And lastly, the greater clarity we have on the Biden administration's funding priorities, the more confident we are about ICF's additional long-term growth potential for 2022 and beyond. First quarter revenue growth was led by strong results from our government and commercial energy businesses, which together accounted for 88% of total revenues. Looking more closely at our first quarter results by client category, the increase in our government business was driven by a 13% increase in revenues from federal government clients, led by IT modernization, digital transformation, and public health work at key civilian agencies, including the Department of Health and Human Services, the Federal Communication Commission, the Department of State, as well as the Department of Homeland Security. This was also a strong quarter for ICF's contract wins in the federal market, particularly in IT modernization, public health, and cybersecurity. We continue to win new task orders and contract modifications to perform COVID-related response work, which brings the cumulative value of these awards to over 45 million since the onset of the pandemic. More than the dollars, however, these wins continue to strengthen our positioning for future work related to COVID-19 recovery and reinvention programs, which we expect will include the modernization of disease surveillance systems and new initiatives to improve the country's readiness in the face of future pandemics. We are monitoring how the new administration is working to define and implement its policy and funding priorities. Just looking at the Biden administration's $1.9 trillion America Rescue Plan Act that has been passed by Congress, we see significant opportunities in our addressable market. Notably, at least $2 billion has been allocated for federal agency ID, and this includes $1 billion in new funding for the Technology Modernization Fund to help complete modernization projects at federal agencies. Additionally, $650 million specifically designated for the Cybersecurity and Infrastructure Security Agency, which is a new client of ours. Another $40 billion is earmarked to support childcare, childcare providers, and Head Start, where ICF currently provides services to Head Start grantees in six of the 12 Head Start regions across 40 states and the District of Columbia. Other funding includes $12 billion for food support to families in need through nutrition programs, $500 million to the CDC for data modernization and analytics, and $9 billion for essential tribal and federal safety net programs that serve native communities. These opportunities do not even include the proposed $2 trillion American Jobs Plan, where, for example, our project permitting and monitoring of infrastructure projects and our expertise in resilience, mitigation, and cleantech come into play, nor the fiscal 2022 budget proposal that includes a 16 percent increase for civilian agencies, including a 23 percent increase for our largest client, HHS, a 41 percent increase at the Department of Education, a 21 percent increase at EPA, and a 15 percent increase at HUD. This gives you some idea of the magnitude of proposed federal spending over the next several years in areas and agencies where ICF has strong qualifications and relevant contract vehicles. As we mentioned in our conference call last quarter, we are utilizing a portion of the savings we have gained from the optimization of our real estate footprint and reduced travel and entertainment expenses to invest in people and technologies to expand our capabilities in these high-growth markets. State and local revenues declined by 6 percent in the first quarter, probably due to lower pass-through revenues. Our disaster management business continues to track well and is expected to meet our expectations for double-digit growth in 2021. Last week, we announced a first-quarter $46 million award from the government of Puerto Rico's Public-Private Partnership Authority that includes elements of ICF's previous work to provide FEMA-funded project formulation services to support long-term disaster recovery from Hurricanes Irma and Maria and hazard mitigation efforts to protect against future disasters. This contract includes an initial four-month term through June 30th of this year, plus two additional one-year options to extend. Additionally, during the first quarter, we ramped up existing mitigation contracts and added new clients in Oregon related to the wildfires in 2019 and 2020, and expanded work in Louisiana related to the winter power outages. As noted in our earnings release, revenues from international government clients increased substantially in the first quarter, primarily reflecting a sizable short-term project, which we expect to wind down throughout this year. The recent $11 million contract award to manage the EU Climate Pact has placed ICF at the heart of the Commission's activities and provides ICF with a high-profile role in stimulating climate action within the European Union. We expect to see a return to growth in revenue from non-US government clients in 2021, but not at the magnitude we saw in the first quarter. Moving to a review of our commercial business, Commercial marketing services accounted for just under 10 percent of total revenues in this year's first quarter, with the year-on-year decline tied to the impact of the pandemic on a portion of this business. We have closely managed expenses in this area while continuing to do great work for clients, which we were recognized for with awards for multiple campaigns in the first quarter. I am pleased to report that we added several new clients in the first quarter across the health, consumer product, and financial sectors. Adjusting for the completion of the large media buying related contract at the end of 2020, we expect revenues from commercial marketing clients in 2021 to be down slightly compared to last year. Commercial energy markets had a great first quarter, up 12% year on year, and representing 16.5% of total revenues. Specifically, revenues from our utility programs business, which includes energy efficiency, electrification, and flexible load management programs increased at a high single-digit rate, reflecting the startup of new contracts, the expansion of existing contracts under extensions awarded at the end of last year, and the timing of performance-related incentive fees on several contracts. At the same time, we saw significant demand for our energy advisory service activities, which include financial and engineering due diligence services around the deployment and development of renewable resources and energy storage. Additionally, in the first quarter, our environmental services business won new contracts with utilities and renewable energy developers, including an additional contract to do an environmental study for an East Coast offshore wind project. ICF's leadership and expertise in energy-related issues is broadly recognized in both the commercial and government markets. As long-term advisors to the U.S. Department of Energy, we were called in in real time to provide a detailed situation analysis at the time of the winter vortex that caused an energy blackout in Texas and surrounding states in February of this year. ICF also supports electric vehicle programs at the federal and state levels, and we design and run several utility EV programs. Our expertise in renewable energy and transmission issues, energy efficiency, climate science, decarbonization, infrastructure resilience, and climate adaptation aligns well with the Biden administration's priorities and creates significant long-term growth opportunity for both ICF's commercial and government energy business in a multitude of areas. To summarize, this was an excellent quarter for ICF, continuing the positive momentum we experienced at the end of last year and supporting our expectations for strong growth in 2021. We achieved record contract sales of $596 million, up 67% year-on-year, and our business development pipeline was over $6 billion at the end of the first quarter. With that, I'm going to turn the call over to Bettina Wells, our CFO, for a financial review. Bettina?
spk05: Thank you, John. Good afternoon, everyone. I will provide a more detailed look at our first quarter 2021 results, which exceeded our initial projections. First quarter 2021 total revenue was up 5.6% to $378.5 million, driven by strong performance of our government and commercial energy businesses, which increased 13 and 12% respectively. We are especially pleased with service revenue growth of 9.5% year over year, which we see as a better indicator of our trends in our business, as it represents the work done by ICF employees. Pass-through revenue accounted for 26.1% of total revenue, compared to 28.7% in last year's first quarter. Gross profit increased 14.7% year-on-year to $146.4 million. Gross margin on total revenue expanded by 310 basis points to 38.7%, and gross margin on service revenue grew to 140 basis points to 52.4%. Gross margin benefited from strong service revenue growth and lower fringe costs. Additionally, there was a significant quarter specific benefit primarily from the timing of several recently awarded fixed price energy efficiency contracts on which certain program costs will be incurred in the upcoming quarters and the timing of energy efficiency incentive fees on several contracts. Indirect and selling expenses were $110 million. compared to 103.3 million in the year-ago quarter. However, as a percentage of service revenue, indirect selling expenses declined 110 basis points to 39.3% compared to 40.4% in last year's first quarter. EBITDA was 36.4 million, 49.5% above last year's 24.4 million. Inclusive of $1.3 million in facility closure and severance costs. Excluding special charges, adjusted EBITDA was $37.7 million compared to $28 million in last year's first quarter. Adjusted EBITDA margin on service revenue expanded 260 basis points to 13.5% thanks to higher revenue, favorable mix, and the timing of contract awards and incentives I mentioned earlier. Operating income of 28.1 million increased 72.4% from the 16.3 million reported in the first quarter of 2020. Our tax rate was 26.7% in line with our expectations. This compared to 18.3% in the first quarter of 2020. Net income for the quarter was 18.4 million or 96 cents per diluted share inclusive of $0.05 of tax-affected special charges. This compares to $10.6 million, or $0.55 per diluted share in the first quarter of 2020, inclusive of $0.16 of tax-affected special charges. On a non-GAAP basis, excluding the impact of special charges and amortization, EPS were $1.13, up 36% from last year's $0.83. Moving to the cash flow statement and balance sheet, we are pleased with our positive operating cash flow of $5 million compared to use of operating cash flow of $15.2 million in the comparable period of 2020, which is more typical of our first quarter seasonality. The upside was a function of the higher net income and the timing of accounts payable. Capital expenditures in March were $3.6 million compared to $4.7 million in the prior year. Day sales outstanding for the first quarter were 80 days compared to 88 days in a similar period last year. And our net leverage ratio at the end of March improved 2.38 times compared to 2.47 times at the end of 2020. As for our capital allocation, moving forward, we will continue to prioritize organic growth, acquisitions, and debt reduction, as well as funding our dividend and doing share buybacks to offset dilution. Speaking of share repurchases and dividends, in the first quarter, we repurchased 151,200 shares for $12.8 million to offset the dilution of our employee incentive program. Also, today we declared a quarterly cash dividend of 14 cents per share payable on July 14, 2021 to shareholders of record on June 11, 2021. Given the very strong performance we had in Q1, we are expecting less seasonality and more evenly distributed revenue and earnings this year than in the past. For modeling purposes, the following metrics remain our expectations for 2021. Depreciation and amortization expenses expected to be in the range of $20.5 million to $21.5 million for the full year of 2021. Amortization of intangibles should be in the range of 11.8 to 12.2 million. Full year interest expense should range from 11 million to 12 million. Full year tax rate will be no greater than 27%. We expect fully diluted weighted average share count of approximately 19.1 million for 2021. And capital expenditures are anticipated to be between 20 and 22 million. We also reaffirm our operating cash flow expectations of approximately $100 million. With that, I will turn the call back to John for his closing remarks.
spk08: As I mentioned at the outset of this call, our outstanding first quarter performance has led us to move our expectations for full-year service revenue, EBITDA, and EPS to the upper end of the initial ranges we provided at the time of our fourth quarter 2020 earnings release. And we are reaffirming our guidance for total revenue growth and operating cash flow. Approximately 55% of our 2020 service revenue represented ICF's work in key growth areas, namely IT modernization, public health, disaster management, utility programs, along with climate, environment, and infrastructure consulting, all of which are closely aligned with the priorities of the new administration. Taken together, we expect the growth rate in these areas to be 10% or more over the next several years, We are well on our way to achieving this objective for 2021, and we are making the requisite investments to capture the organic growth opportunities on the horizon. Additionally, we have the financial resources to pursue acquisitions that can further expand our addressable market. At ICF, much of our business is in service areas that enable us to create positive impacts. And in fact, in 2020, over 85% of our total revenues were derived from our two largest markets. namely energy, environment, and infrastructure, and health and social programs, areas which benefit society. At the same time, IFCF has prioritized being a good corporate citizen, remaining carbon neutral for the last 15 years, and embracing diversity, social justice, and equal pay. This has attracted like-minded people who've shown a shared commitment to environmental and social issues and have a passion for their work. We encourage you to access our most recent corporate citizenship report to learn more about how ICF addresses its ESG responsibilities. And with that, operator, now I'd like to open the call to questions.
spk07: And thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-tone phone. And we have our first question from Toby Summer with Choice Securities. Please go ahead. Thank you.
spk04: I was hoping to get your perspective on the growth in the sort of complement of the business, the non-55% that you say is going to grow double digits for a number of years. How should we think about the growth there? You know, some of those businesses were impacted cyclically and maybe can bounce back cyclically as well. Could you give us some color?
spk08: You know, I think our assumption, Toby, you know, generally as we look forward is, as you know, the 55% that are in the key growth markets, I think we certainly see 10% and beyond growth there. And as we, you know, continue to look out given the Biden administration priorities, we get more excited about those opportunities. you know, over time. You know, I think the rest of the other 45% of the business, I think we're generally thinking kind of flat to low single-digit growth, you know, as we look forward with those businesses. And so I think that's how we're generally looking at those over the longer term.
spk04: Okay. Thank you. In the budget that the Biden administration proposed as well as the infrastructure-related bill, if those are passed, and let's pick a day, let's say it happened today, when would the influence of those appropriations start to flow through most likely in the contracts and then eventually into the income statement of the company?
spk08: I think generally once a budget's passed and an infrastructure bill is passed, I would say you know, three to six months. I mean, realistically, I don't think the infrastructure bill is going to be passed until, I mean, what I've read. I'm sure you read the same thing I read, you know, towards the, you know, later in the summer, the end of the summer. Obviously, the budget, you know, would start on October 1st. I think it would be unusual for the government to have a budget in place, you know, right on time. But I think if those fall into place, it's a three to six months. I think the infrastructure money could potentially move more quickly. And so I think the way you should think about the budget and the infrastructure bill is that's really, you know, if that plays out positively, very significant upside for us in 2022 and beyond. You know, I think our guidance for this year obviously doesn't assume any material impact there. You know, I do think the stimulus bill that Biden passed provides You know, some opportunity for us, but, you know, obviously over the last three quarters we've had very significant sales, very strong growth to build, which all predated the Biden administration to set us up well already for very strong growth as we look forward.
spk04: Could you talk about the M&A and what the pipeline looks like, your appetite in areas of interest?
spk08: Yeah, sure. So, you know, I would say that... As you know, I think M&A has been a key element of our strategy over many years, over the last 15 years since we've been public. I think our growth has been robust. About half of it's been organic, half of it's been inorganic. We're certainly constantly out in the market looking to add skills and capabilities either on the domain side or the implementation side that could help us grow our business. I think we've talked about the fact that we're focused particularly on the federal side around IT modernization and digital transformation in the federal arena, public health in the federal arena, and certainly looking at opportunities in the commercial energy arena. I would say the market right now is active. It's become quite active. We're seeing a lot of potential deals, strong deal flow. The pricing is quite frothy. I think obviously interest rates are low. There's concerns about the capital gains rate here before the end of the year. And so the deal flow has certainly picked up. And so there's certainly a lot of opportunity out there. As you know, I think we're obviously focused on finding companies in the markets I just mentioned that are a good strategic fit, a good cultural fit. We want high-quality companies where we really see the synergistic revenue. And if we can find those companies, we have found even with... you know, strong valuations that, you know, if you can really go get that synergistic revenue, it can make the deals very attractive and very, very good for long-term growth. And I think ITG acquisition was a great example in the last year for us. And so we're out in the market and we're looking. As you know, we did ITG a year ago. We levered up. You know, our net leverage ratio is down to about 2.5 or 2.6. I think by year end, if we don't do a deal, it'll be under two. And so we certainly have the capacity here on the acquisition front looking forward.
spk04: Thank you. Last question for me is, what would gross margins on a normalized basis have been if there weren't some of the items that you called out?
spk08: I'm going to look at Bettina and ask her to answer that question.
spk05: Good question. Absolutely. We're real pleased with our gross margin this quarter for sure, but I would say that there's Probably the upside is approximately 200 basis points of the gross margin related to the timing of the fixed price awards on those several energy efficiency contracts and the timing of the energy incentive awards. So hopefully that gives you a good sense there.
spk08: That does. Thank you.
spk07: And thank you. We have our next question from Sam England with Berenberg. Please go ahead.
spk01: Hi, guys. It's Alex on for Sam. My first question is, you commented previously that your work with health agencies on pandemic response could exceed your work that you did on HIV and AIDS. Are you still confident on this?
spk08: You know, I think there's sort of the potential for that. I mean, I think as we've talked about, you know, on the HIV-AIDS front, you know, for NIH, we've run a clearinghouse and a website that, you know, focused on providing the latest treatment options and sharing information to healthcare providers and physicians. I think we announced several quarters ago that we had begun efforts on a similar website on the COVID front. And so I do think as we look down the road, once we get past the immediate response and we look down the road to the longer term response and recovery from COVID, But there could be quite sizable opportunities for us. And I think we're following those carefully. I think that's more of a second half of this year and then out into 2022 and beyond type opportunities. But I think there's the potential for those opportunities to be quite sizable.
spk01: Okay, great. And given the strong performance in Q1, how are you guys thinking about hiring for the rest of the year?
spk08: You know, I think obviously, you know, we're a people business. It's all about the gray matter between the two ears of our employees. And so, you know, with service revenue growing, you know, 9.5% in the first quarter, we obviously, you know, need to be adding staff and aggressively adding staff. So we're out of the marketplace. We're leading forward on the recruiting front. I think it's going to be critical. I think, as I've said in the past, as our revenue grows, if our revenue grows 10%, you know, we need to be adding, you know, 8.5%, 9%. additional staff. We're always trying to leverage and, you know, raise the utilization over time, but, you know, it's a people business. We need to be out there recruiting, and we're working quite hard on that, for sure.
spk01: Okay, great. Thanks, guys.
spk07: And thank you. Our next question comes from Joseph Boffey with Canaccord. Please go ahead, sir. Your line is open.
spk03: Hi, guys. Good afternoon. I just wanted to kind of circle back on some questions I've kind of asked in the past relative to, number one, kind of what you're seeing in average deal size now in the quarter on bookings, especially on the federal side. And with strength in the business, do you have some commentary on your bid and proposal pipeline perhaps coming bidding larger contracts, and then, you know, specifically perhaps in IT modernization, what you're seeing there. Thanks.
spk08: Yeah, sure. So, you know, I think as we've talked about in the past, Joe, and I think you hit on some of the key areas, I mean, I think generally, you know, on the IT modernization front, I think one of the attractions for us in that market and the basis for doing the ITG acquisition is that is a market where you can see quite significant contract opportunities. And, you know, as we've talked about, as ICF grows, we're a $1.5 billion company. If we're going to double again and become a $3 billion company down the road, we need to be winning larger size deals. Certainly in the IT modernization front, you know, you can find, you know, $100 million, $250 million deals in our client sets, you know, around IT modernization. So certainly part of that strategy is to identify and take down, put in capture, and win larger deals in IT modernization. I would say similarly in some of our program areas in HHS around public health and education and human services, again, we are focused on larger opportunities in trying to kind of go to the next level in terms of taking down the larger deals. And as part of that, we've been investing quite significantly in upping our capture capability and hiring people who have experience in taking down these kind of deals and can kind of help us on this journey. And so that is certainly part of our strategy, and I think we continue to make progress in building that pipeline, both in the federal space, and I will also say that we continue to see sizable deal opportunities in the commercial energy arena around the energy efficiency programs certainly put significant capture resources into those too. And then also disaster recovery. I mean, there, I think, as you know, we've won quite sizable contracts over time. You know, we've obviously been in capture for some time on some of the mitigation opportunities, particularly in Puerto Rico, that could be quite sizable. And so that's a long-winded way of saying it's a key part of our strategy. And we are investing a significant amount in business development right now, capture proposals, marketing, and just writing more proposals. I mean, I think it's, It's a unique time for us. We have these growth drivers, and my view is we have to bid everything that's in our sweet spot, and so we have to invest the resources to do this. You can't let these kind of opportunities pass you by.
spk03: That's helpful, John. So it does sound like you're going to perhaps bid more. I mean, I know the company's growing, and obviously you'll bid more as the company grows, but At the margin, maybe it sounds like maybe there's a little bit of a step up in business proposal activity on top of that this year. Would that be fair to say?
spk08: Here is where we can find these much larger deals, Joe. We are working hard to put those in capture. As you know, if you're going to take down those kind of deals, you have to be in capture a couple years in advance. You can't start working those deals three months before they're out.
spk03: Maybe just, you know, thinking about some of those, I know you mentioned, you know, some of the mitigation work. Would you say a lot of the newer, larger things that you're looking on, are those recent piece with incumbents or is that kind of brand new work that's emerging and kind of some of your leading edge growth areas? Or is it a combination?
spk08: I think it's a combination of both. I mean, I think, you know, we're obviously looking to add new opportunities to the pipeline at scale And that's certainly been the focus as we invest more and bring in new talent. But, you know, there's always a, you know, I mean, our contracts tend to be four to five million, four to five years in length. So, you know, every year you've got a set of re-competes and you've got to take those seriously and do the capture too. But, you know, again, I think we're, you know, as we invest more, I think you should think of it as we're investing more to pursue more newer opportunities in the growth markets that we're, you know, we're in.
spk03: Got it. And then just one other question, kind of, you know, going back to part of the other part of the business on ICF Next. I might have missed it if you particularly called out what you're expecting there and, you know, how that business is faring, especially perhaps in a, you know, reopening scenario with, you know, some of those clients. Thanks a lot and great quarter.
spk08: Yeah, thank you. You know, I would say on the marketing services front, you know, the commercial marketing services, you know, I think we generally expect it to be flat for the year. You know, obviously, you know, as we, you know, obviously through the first quarter a year ago, the comp was still challenging in the first quarter given it was mostly pre-pandemic. But I think as we look forward, you know, we aren't assuming a significant rebound in the commercial marketing business This year, I think several of the verticals that have been impacted, hospitality, travel and tourism, we've generally assumed a late third quarter, fourth quarter improvement. The improvement will come. Those will rebound with the end of the pandemic and the economy improving. We haven't assumed that this year. I would also note that when you look at the You know, the total growth in the commercial marketing business, you know, we did have a large media buying contract last year with a client that ended, and so when you take that out, we're expecting generally flat revenue. And so that's the commercial marketing. I think in Europe, in a similar way, the commercial marketing services we do for the European Commission, you know, that business, generally in Europe, we are seeing a rebound and expect growth this year, but... But we're generally being conservative there in terms of when Europe will open up in terms of marketing and face-to-face meetings. As you know, their vaccination rates have not been as high as other countries. So that's generally how we're thinking about it.
spk03: Thanks very much, John.
spk07: And thank you. Our next question is from Andrew Nicholas with William Blair. Please go ahead, sir. Your line is open.
spk02: Hi, good afternoon everyone. This is actually Trevor Romeo in for Andrew. Thank you for taking our questions. First was just a question on your expectation for, you know, kind of hitting the high end of your guidance ranges. Is that more of an increased expectation for the balance of the year or kind of just a reflection of the outperformance in the first quarter? And kind of related to that, if you do end up outperforming guidance for the full year, would you expect that to come from more continued strength in the strong areas like IT modernization and energy or more of kind of an accelerating rebound in some of the softer areas like marketing?
spk08: Yeah, I think that, you know, the fact that we've got it to the upper end of the guidance range, you know, I think is largely reflective of the first quarter, you know, performance. Having said that, I mean, we have very strong momentum and, you know, I do think if, you know, obviously it's still early in the year, but I think if we were going to, you If in the long run we were to exceed, or for the year we were to exceed our guidance, I think it would come into growth areas. I mean, I think we are not assuming a significant, as I just said on the marketing services front, certainly, we're not assuming a significant improvement there for the rest of the year. And so I think we've had a very strong first quarter. We're confident that that takes us to the upper end of the range. It's still early in the year. And, you know, but these are robust growth markets, and we're hopeful to, you know, continue to execute as we go throughout the year.
spk02: Okay, great. Thanks. That's helpful. And then just, I guess, appreciate some of the detail you provided on the new contract you're awarded in Puerto Rico. I was just kind of curious whether you see additional opportunities there for disaster recovery in that market, and then if, you know, if so, the timing of any potential award decisions going forward?
spk08: Sure. So in addition to the contract we won in the first quarter to support FEMA-funded public infrastructure work, there's several proposals we're awaiting award on in Puerto Rico on the housing front. I think there's at least two contracts I'm aware of that we're awaiting award on that could provide upside. I've mentioned the mitigation contract or RFPs that we expect to be forthcoming here, certainly in the first half of the year. Puerto Rico, as we've discussed a number of times on these calls, got $10 billion in mitigation funding. They have received approval from HUD for their plan under that funding. So I think there will be RFPs forthcoming, and we'll certainly bid those. And so I think there's A fair amount of opportunity for us in Puerto Rico still to come, and we're going to be there for the long run. I think we've also talked about more generally with disaster recovery. I mean, obviously, it's partially dependent on the frequency and severity of storms each year, which I think the data shows are certainly increasing. But the mitigation funding is a new bucket, and I think that will continue to be funded the Biden administration and for both, you know, for both under HUD programs and FEMA programs. And, you know, we're a market leader there. I think we've talked about we've won four or five state-level contracts on mitigation in the last year. And so, you know, again, I think we see disaster recovery as a long-term growth driver here. As I said, it's certainly going to be a double-digit growth driver for us this year. And I think, you know, there's a We have long-term confidence in the growth of that business.
spk02: All right, great. Thank you, John. Appreciate it.
spk07: Thank you. As a reminder, if you have a question, please press star then 1 to enter the queue. And we have our next question from Mark Riddick with Sidoti.
spk00: Hi, good afternoon. Mark? So I was wondering if you could talk a little bit about the cadence of how things develop throughout the quarter and into the more recent timeframe and talk about maybe some of the things that have given greater confidence conviction around what you're seeing from the new administration that sort of supports your level of confidence and what should be to come.
spk08: Yeah, well, I mean, I think I touched on many of those in the remarks, but... But it's a good question. I mean, I think obviously, you know, for the last several years, we've talked, you know, about, you know, kind of four of the key growth drivers, IT, modernization, public health, disaster recovery, and utilities. And I think, you know, those were growth drivers for us in the last couple years of the Trump administration. I think they will remain strong growth drivers in an abiding administration. I think in addition, based on just what we've seen in terms of his policy priorities and his initial, you know, budget proposals, You know, I see obviously climate change and kind of resilience as an area of focus for the Biden administration. I mean, they recommitted to the Paris Accords the first day in office. You know, they've put in place several executive orders. He just had a, you know, a meeting of 45 countries on climate change at the White House a week or two ago. I don't know if there's any question that they're going to move out and take steps to address climate change. We have one of the largest climate change consulting practices in the world. That will certainly be very beneficial for us. And then obviously, I think given the American Jobs Plan with the focus on infrastructure, I talked about in my remarks, we do environmental work on the front end of traditional infrastructure, roads, bridges, rail, and also on clean technology and some of the broader definitions of infrastructure that Biden has. And then his budgets, his proposed budgets for civilian agencies are up significantly, you know, for 2022. And, you know, obviously those are proposed budgets and it's a proposed infrastructure bill. But, you know, if only a portion of that becomes reality, that will be very, very good for ICF. And so I think that's what's giving me a lot of confidence in terms of the Biden administration.
spk00: And then I was wondering if you could bring us up to date on what you're seeing specifically with California around that outsourcing effort and an update there. You gave an update on this at the end of the year. I was wondering if there's a little further information there as far as what we might see as far as timing and actual work being done there. And then I have one last follow-up after that.
spk08: I think we remain quite focused on energy efficiency opportunities in California. I think in the fourth quarter call, we said we'd won, I think, north of 60, perhaps $65 million of contracts on energy efficiency last year. I think we have a robust pipeline. I would hope we'd win a similar, you know, those kinds of numbers could be accomplished again this year. I think there's those kinds of opportunities out there, and so we're quite focused on the California market. You know, I think we I will say in the first quarter, we did win a significant number of new energy efficiency contracts and got plus-ups on our existing contracts. One re-competes. The work came more quickly than we expected. I think Bettina spoke to how some of those contracts have raised our gross margin in Q1. I would say, I'm not willing to call it a definitive trend, but I think, again, I think if energy efficiency will be a central aspect of addressing climate change going forward. And so if the Biden administration is successful or undertakes steps to address that issue, it will provide additional impetus to grow our energy efficiency business. So anyway, we remain quite focused on California and remain optimistic about the energy efficiency market generally.
spk00: Okay, great. Then one last thing for me. I wanted to just go over where you see things as far as leverage levels, I think, as far as comfort level, and then what we might see throughout the course of the year as to use of cash. Thanks.
spk08: I'll say a few words on all that, Patina, get into all the details of leverage, that leverage ratio. I mean, I think generally, as I think I answered Toby's question, I mean, we have a history of acquisitions are a key part of our strategy. Every two or three years, you know, historically we've levered up. We used a strong cash flow to pay that down. You know, I think generally, you know, we're quite comfortable, you know, when we do it, leveraging up into the 3.5, 3.75 leverage ratio range and then, you know, paying it down over the next several years, which we've certainly done with ITG. I think we've had very strong cash flow here. And so, you know, I think that remains a part of our strategy. Do you just want to talk about leverage ratio in the last year?
spk05: Sure. Absolutely. So, you know, if you recall, you know, when we levered up with ITG, it was certainly in the, you know, over three and a half times. But, you know, by the end of the year, we brought that down to 2.47. And we just, you know, described in the script that, you know, it's down to 2.38. We project by the end of the year, should we not purchase a company to continue to buy down our debt and get down to about a 1.65 ratio. Clearly, we're maintaining our fodder for M&A, and that's our primary objective. In the meantime, we'll continue to pay down the debt.
spk00: Much appreciated. Thank you very much.
spk07: And thank you. We have no further questions in queue. I will now turn the call over to John Watson for closing remarks.
spk08: Okay, well, thank you for participating in today's call. We look forward to meeting with you at upcoming events. Thank you.
spk07: And thank you. Ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect.
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