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spk11: Welcome to the third 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, November 2, 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.
spk10: Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's third 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 November 2, 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. We 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 Wasson, to discuss third quarter 2021 performance. John?
spk16: Thank you, Lynn, and thank you all for participating in our call today to review our third quarter and year-to-date performance and discuss our business outlook. By all measures, this was another strong quarter for ICF, demonstrating the positive momentum in our business that we have experienced throughout this year and pointing to the substantial growth opportunities on the horizon as we head into 2022. Key takeaways that I would like to highlight include The continued revenue growth from government and commercial energy clients was together accounted for 88% of year-to-date revenues. The 7.1% year-to-date increase in service revenue of which over 60% represented work in the key growth areas that we identified two years ago and where we believe the opportunities are even more robust given the current administration's priorities. Our efficient execution on existing contracts which in tandem with higher utilization and other positive factors drove the exceptional expansion of our adjusted EBITDA to service revenue margin. While this margin level is not sustainable due to higher anticipated costs in future periods, we expect our business model to be able to continue to drive considerable operating leverage and our success in retention and new business capture which resulted in a book to bill of 1.5 times in Q3 and 1.33 times for the trailing 12 months. along with our record new business development pipeline of $7.3 billion, underscore how well aligned ICF subject matter expertise and cross-cutting implementation skills are with market demand. Looking more closely at our performance by client category, third quarter federal government revenues increased 11.4% year-on-year, led by our continued work in IT modernization, digital transformation, public health and social programs, climate change, and resilience. We continue to execute well on our IT modernization and digital transformation contracts, with year-to-date service revenue growth in this area of 17%. And our pipeline of new opportunities has never been higher, reaching $1.8 billion at the end of the third quarter. This has also been a strong year for us in public health contract awards. In the third quarter alone, ICF was awarded over $75 million in re-compete contracts by the US Centers for Disease Control and Prevention and the National Institutes of Health to support the nationwide surveillance platform Biosense, as well as to provide an array of digital transformation, health surveillance, program management, and communication services to several agencies, divisions, and offices to support HIV prevention, smoking cessation, cancer prevention, and genetic and rare disease research. Additionally, we were awarded $15 million in contracts tied to COVID-19 response. bringing the cumulative total value of our pandemic-related contract wins to over $70 million. Today, we announced the acquisition of the small but uniquely specialized firm that further strengthens ICF's position in the public health arena. ESAC brings advanced health analytics and bioinformatics capabilities to ICF, along with a highly credentialed 40-person staff that serves a roster of government and academic clients, as well as federally funded research centers and private organizations. We look forward to working together with the ESAC team to gain revenue synergies by expanding ICS services at existing federal clients and leveraging their contract relationships with clients such as the Center for Medicare and Medicaid Services and the Department of the Veteran Administration. On a related note, you will see our earnings release that we called out an after-tax third quarter expense of 12 cents per share related to M&A costs. This was in connection with a highly competitive transaction that we pursued but ultimately passed on late in the process as pricing moved above our comfort zone based on anticipated revenue synergies. Revenues from state and local government clients increased 15% in the third quarter, reflecting growth in our disaster management and environmental consulting work. We continue to extend and expand our work in Puerto Rico in the third quarter occupying a central role in FEMA project formulation and grants management. And we won a new award for $22.1 million for the City Revitalization Program under the Puerto Rico Department of Housing. In addition, in early October, the Puerto Rico Disaster Recovery Transparency Portal noted that ICF was awarded a 33-month, $89 million contract for follow-on FEMA grant management support. ICF has a rigorous process for announcing new contract wins but we wanted to make sure you were aware of this notification. The mitigation market continues to develop as U.S. communities continue to suffer from the increasing evidence of severe weather-related events. In the third quarter, FEMA released a notice of funding opportunity for the 2021 Building Resilient Infrastructure and Communities Program, known as BRIC, at double the funding levels of 2020. In addition, more than half the opportunities in the HUD-funded Community Development Block Grant mitigation appropriations funded by Congress in 2018 remain to be awarded. Just yesterday, HUD announced the allocation of more than $2 billion in CDBG disaster recovery and mitigation funding for 15 separate disasters that occurred across 10 states in 2020. And we expect the Biden administration to continue to add to mitigation programs in the future. With climate, resilience, and grants management qualifications, and our position as the largest provider in the CDBG mitigation program, ICF continues to be very competitive within the mitigation and resilience market. Additionally, we continue to support our state and local government clients with environmental services, particularly in transportation, water, energy, and planning and development. ICF was recently awarded a new $30 million environmental services contract for the San Francisco Bay Area Rapid Transit Authority's Link 21 program to provide environmental services to support a major infrastructure expansion to its passenger rail network. ICS Climate, Environment, and Transportation Division also won a number of contracts in the third quarter, including multiple task orders with the city and county of Honolulu, the Texas Department of Transportation, the California Energy Commission, the Minnesota Metropolitan Council, New York City's Mayor's Office of Sustainability, the Metropolitan Washington Council of Governments, and Hawaii State Energy Office. As noted in our earnings release, revenues from international government clients increased substantially in the third quarter, with approximately one-third of the 60% increase tied to a sizable short-term project with substantial passive revenues that we expect to wind down by the end of Q1 2022. In terms of trends, we are seeing greater clarity from clients, particularly in the European Commission, on new funding initiatives as the impact of COVID recedes and continued demand for services related to climate and social inclusion. Moving to the commercial category, in marketing services, we continue to gain recognition for excellent client work and win new business, but overall activity levels remain below pre-pandemic levels. Turnover is an industry-wide issue, and year-on-year revenue comparisons reflect the completion of a large contract at the end of last year. That said, we continue to leverage the excellent engagement qualifications and expertise that are resonant in our commercial marketing business across the ICF footprint, which is materializing and expanded work for government and commercial energy clients. And we continue to carefully manage this part of our commercial business, which represented about 9% of total year-to-date revenues. In the last two quarters, we have seen a discernible pickup in our aviation consulting business, while still a small part of our commercial revenues. Our airline and airport clients are engaging ICF for sustainable aviation and tourism projects in Europe and for logistics projects in North America. Our energy market work remained the core of ICF's commercial client category. Year-to-date, revenues increased 8.7% representing solid growth across our energy efficiency, energy markets advisory, and domestic environmental services businesses. With contract awards from utility clients including traditional energy efficiency programs, electrification programs, distributed energy resources, and customer analytics, we anticipate continued strong market demand. And while we are one of the largest players in this area, we believe there is opportunity to not only grow within the market, but to also increase our market share. In addition to California, we continue to monitor developments in several other states as energy efficiency-related programs are instituted or expanded to address state climate targets. For example, in New York, ICF implements the Clean Heat Program for all the New York investor-owned utilities. This innovative program is designed to replace fossil fuel heating systems with electric heat pumps. We expect similar electrification programs including expansion of electric vehicle programs in several other jurisdictions. Also, our energy markets advisory business has seen continued high demand for ICS financial and engineering due diligence services around the deployment and development of renewable resources and energy storage. Our environmental services business has also been active on energy project development opportunities as we won an additional contract for an East Coast offshore wind project a construction compliance project for solar development in Arizona, an environmental impact assessment for a wind project in Wyoming, and numerous smaller engagements with renewable developers and utilities. This gives you a good sense of the breadth of our commercial energy portfolio of services, which we see as having substantial runway for growth in the coming years. In summary, the third quarter marked another period of significant growth for ICF following the very positive comparisons we achieved in the first half of this year. This performance has set the stage for an excellent 2021 and together with our strong backlog and robust business development pipeline underscores ICF's significant growth prospects for 2022 and beyond. And there do remain additional catalysts in the near term associated with infrastructure and stimulus legislation and 2022 civilian fiscal priorities that could further expand our growth opportunities for the next year and beyond. Now I'll turn the call over to our CFO Bettina Welch for a financial review. Bettina?
spk09: Thank you, John. Good afternoon, everyone. Our total revenue increased 9.4% to $394.1 million year-on-year, led by a 16.1% increase in revenue from government clients and a 3% increase in revenue from commercial energy clients, which reflected the pull forward of energy efficiency program revenues in the first half of this year. Year-to-date revenue from commercial energy clients increased 8.7%, which is consistent with the positive business trends in this client category. Third quarter pass-through revenue increased to 30.1% of total revenue from 26.5% in the year-ago quarter, primarily due to higher activity on our USAID project work. For the first nine months of 2021, pass-throughs accounted for 28.2% of total revenue in line with our expectations for the full year. This takes into account the significant reduction in pass-through revenue that we highlighted for this year's fourth quarter resulting from the completion of a large commercial marketing contract. Service revenue grew 4.1% year over year to $275.6 million and was up 7.1% year to date. Gross profit increased 2.1% year on year to $139.9 million. Gross margin on total revenue was 35.5%, lower year to year due to increased pass-throughs. On service revenue, gross margin was 50.8%, which was 100 basis points lower year to year due to timing of fee recognition on energy-related contracts. Indirect and selling expenses were $99.9 million similar to the $100.1 million in the third quarter of 2020. As a percentage of service revenue, indirect and selling expenses declined to 36.3%, 150 basis points below last year's third quarter with a majority due to lower facilities and related costs. Third quarter EBITDA was up 8.2% to $39.9 million and adjusted EBITDA which excludes special charges, was up 16.1% to $43.8 million. Adjusted EBITDA margin on service revenue expanded 160 basis points to 15.9%, primarily reflecting higher utilization and the lower indirect and selling expenses as a percentage of revenue I just noted. Operating income of $32.3 million was up 14.2% from the $28.3 million reported in the third quarter of 2020. Our tax rate was 31.6% compared to $27.2 in the third quarter of 2020 due to return to provision adjustments resulting from increased revenue generated in higher tax jurisdictions. Net income for the quarter was $20.4 million or $1.07 per diluted share, up 14.1% and 13.8% respectively from the $17.9 million, or $0.94 per diluted share, reported in the third quarter of 2020. On a non-GAAP basis, excluding the impact of amortization of intangibles, M&A expense, and severance and staff realignment charges, earnings per share increased 19.5% to $1.32 year over year. Turning to cash flow, Our year-to-date operating cash flow was $64.8 million and supports our increased operating cash flow guidance of $110 million up from $100 million. Capital expenditures for the first nine months were $12.3 million compared to $12.9 million in the prior year. Day sales outstanding for the third quarter were 76 days compared to 83 days last year. In the third quarter, Our net leverage ratio declined to 1.87, and we expect this to decline further to about 1.75 by the end of the year. Also, today we declared a quarterly cash dividend of 14 cents per share, payable on January 12, 2022, to shareholders of record on December 10, 2021. For modeling purposes, here are our expectations for the full year 2021. Depreciation and amortization expense is expected to be in the range of 19 to 20 million. Amortization of intangibles should be between 11.8 and 12.2 million. Interest expense is now expected to range from 10 to 11 million. And a full year tax rate will now be no greater than 29%. We expect fully diluted weighted average share count of approximately 19.1 million for 2021. and capital expenditures are anticipated to be approximately $20 million. ICF's capital allocation priorities remain unchanged, balanced between investing to drive organic growth and making strategic acquisitions, as well as debt reduction and returning capital to shareholders in the form of dividends and share repurchases. With that, I'll turn the call back to John for his closing remarks.
spk16: Thank you, Bettina. As you've seen in today's earnings release, Our year-to-date performance and expectations for good showing in Q4 have led us to increase our guidance range for full-year 2021 GAAP EPS and non-GAAP EPS, which now represent year-on-year growth of 45% and 15% respectively at the midpoints. EBITDA is anticipated to be at the high end of the guidance range or slightly above. The guidance ranges for total revenue and service revenue remain the same. We expect fourth quarter service revenue to be comparable to third quarter levels with similar trends, namely that growth in the government and commercial energy client categories will more than offset lower commercial marketing revenues. Also, we are pleased to be raising our full year operating cash flow guidance to $110 million from $100 million. Over 60% of ICF's year-to-date service revenue represented work in key areas in which we expect growth rates in the aggregate to be at least 10% over the next several years. These include the high growth areas of IT modernization, public health, disaster management and utility consulting, as well as climate, environment and infrastructure, which align well with the current administration's priorities. Additionally, we have the financial resources to pursue acquisitions that can further expand our addressable market. Analysts and investors often hear me speak about ICF's culture as an important differentiator Of course, we have not been immune from the staffing issues that have impacted others in our industry and, in fact, most industries in the country. That said, we believe we are navigating better than most and have expanded our recruiting and retention activities in today's challenging business environment. We have nurtured a collaborative culture at ICF for the past 50 years. It has enabled us to attract an exceptional group of people dedicated to making a difference by bringing together subject matter expertise with a broad range of cross-cutting skills that enable us to deliver positive results for our clients. We believe our culture has been a key factor in the company's success to date and will continue to drive our growth. Lastly, on January 19, 2022, we will host an Investor Day in New York City to provide you with greater insight into the growth drivers we see on the horizon for ICF and give you the opportunity to engage with our subject matter experts and those leading our crosscutting capabilities in technology and digital engagement. Invitations will be sent out shortly. Please direct any questions to Lynn Morgan. We do hope you can join us. With that, operator, I'd like to now open the call to questions.
spk11: And thank you. We will now begin our question and answer session. If you have a question, please press star then one 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 speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one. And we have our first question from Toby Summer with Choice Securities.
spk06: Thank you.
spk08: John, I was hoping you could maybe tell us about your acquisition appetite and intention, given what looks like what must have been a pretty big swing for the company. Thanks.
spk16: I think as we've talked about in the past, Toby, M&A has been a key component of our strategy for the company for 15 years. As we've talked about in that period, we've enjoyed 15% compound average growth rate. About half of that has been organic. Half of that has been inorganic. I think as we look forward, we certainly continue to believe that we can add value and drive growth in the company through M&A activities. I think we'll remain focused in the same markets. We've talked about quite a bit over the last couple years in the federal markets, certainly looking at IT modernization and federal health markets, and then on the commercial side, looking in the energy industry. And I think that's been our focus, and we'll continue to look for the companies that bring either deep domain expertise or implementation skills that we think we can really drive synergistic revenues. As we've talked many times, We don't do turnarounds. We don't do fixer-uppers. We're looking to get quality companies where we can make one plus one equal three. And so I think the focus remains consistent with what we've talked about, and we're quite focused on trying to add scale and capability in these key growth markets where we can really drive significant synergistic value for shareholders.
spk08: How would you describe the contract awards in the quarter with respect to sort of momentum established prior to the administration change versus processes and procurements that started after the baton was passed to the Biden administration?
spk16: Yeah, I think by and large we're still winning awards that were in caps or in bids submitted prior to the new administration. So the strong sales performance and the very strong book-to-bill results we've reported for the last, four or five quarters really I think do not reflect the potential upside from this administration. I think we'll start to see, I would expect to see opportunities from the new administration to play a larger role as we go into Q4 and Q1 in terms of our pipeline and potential awards. We'd start to win those and they could be materialized shortly as we get into the second half of next year, but But by and large, to date, I would say that the awards and the book to bill and the sales you've seen predate the administration.
spk08: Thank you. Just one or two more from me. I'll try to make them quick. What percentage of your employees are now vaccinated, and how do you ballpark the percentage of employees that you may lose due to vaccine mandates? This is a problem that corporate America largely is tackling, especially the government services sector, of course.
spk16: Sure, of course, yeah. You know, I think we're north of 95% of our employees are vaccinated. I mean, we have, you know, stated that we imposed a vaccine requirement on our employees, you know, by I think the end of November 2020. And so we're working through the last 5%. I think the results are increasing daily. My sense is we'll get the vast majority of folks vaccinated. I don't think we're going to see material impacts from a vaccination policy on our business. I think to the extent we have issues, we'll be able to manage it. I don't expect any material issues there. I will note all the officers in the company are vaccinated at this point, so certainly the leadership is aligned on this issue, and I don't expect material impacts or material risk.
spk08: Thanks. Last question for me, if I could just get your broad sense for if inflation stays elevated for a period of time, how does that impact your ability to grow and to achieve the margin goals that you would like?
spk16: You know, I think that, I think as we've talked in the past, you know, I think that ICF is fairly inflation resistant or proof. I mean, you know, 65, 70% of our work is in government markets that I don't think we'd see the impacts from inflation. The energy industry, I mean, again, I think if, you know, it's not a significant concern. So I think we believe, you know, the inflation, we'll be able to manage it. We'll be able to deliver our margins. Obviously, we're seeing wage inflation and wage pressures like every company in America is, and we're watching that carefully, monitoring it carefully. We're certainly doing what we need to remain in market and, you know, and retain and keep our people motivated. It is a challenging time. I do think on that front, we believe we'll be able to pass a significant portion of those costs to our clients. As we've also talked about, we are achieving savings from the pandemic that we think will last for the long run, both in travel and entertainment and in facilities costs, which I think also provide a buffer to kind of manage pressures that we're feeling on the wage front. And so I guess that's a long-winded way of saying, Toby, that I think we feel we're in good shape and should be able to manage and weather an inflationary environment and deliver the margins and deliver on expectations.
spk08: Thank you very much.
spk11: And we have our next question from Joseph Boffey with Canaccord.
spk02: Hey, guys. Good afternoon. Good results. I'm just wondering if we could drill down a little bit more into some of the mitigation comments that you made, John, both on FEMA and then on the HUD side of things. It sounds like perhaps that those budgets are, at least on the FEMA side, that they could be incrementally bigger any thought and then timing on any, you know, pieces of business that could be put out to bid there. I'll follow up.
spk16: Well, sure. I certainly think that, you know, there's certainly more emphasis in FEMA on mitigation funding. And as you know, and I said in the remarks, you know, the budgets are increasing there. They've also opened the lens of what they'll support to include climate-related activities And so I think that is a market that we are seeing more funding. We will see more opportunities here in the next, you know, as we go forward here and then, you know, the next two, three, four quarters. And it's a, you know, core part of our business. So we certainly see the mitigation market as a growth market and the FEMA component of that market a growth market. As you know, I mean, we're a leader on the CDBG side of the mitigation market. As we've talked about in the past, we've won five or six mitigation contracts here in the last two or three quarters. I think we probably won more opportunities than, or certainly won at the high end. We're one of the most awarded firms on the mitigation front, CDBG mitigation front. And there's still, as I said in remarks, significant award decisions pending. in that market given the appropriations from 2018, and as I said in my remarks, the additional $2 billion for 2020 that was just announced in the last day. So I think it is an area of continued growth for us. I think there will be more opportunity there. We expect awards in the near term on – certainly we've been discussing the Puerto Rico mitigation opportunities. Those are moving along. We'd expect decisions here. in the next quarter or two on those. And so we sort of view that as a growth market, Joe, and an increasing market where the trends are becoming more favorable. I know Toby asked the question, well, has the administration had an impact? I think we're starting to see some of the initial impacts of this administration in terms of putting more money behind mitigation, which should lead to proposal activities here in the next quarter or two for us.
spk02: Got it. You know, IT modernization's been, you know, doing really well. You know, it's been a very steady performance on new contract awards. You know, some of those obviously a little bit on the larger side, too. It looked like maybe this quarter was a little lighter. Is there anything, you know, building there in the pipeline, you know, in the near-term pipeline? And Any kind of commentary on the quarterly bookings there? I know obviously sometimes things are lumpy up and down, and timing is really more of a factor than anything else. Thanks a lot, guys.
spk16: Yeah, sure. Yeah, I mean, I think it's – well, first of all, I'm quite pleased that the business was 17% in the quarter. That was good to see. I mean, we have a very robust pipeline in IT modernization, Joe. I think the pipeline is north of $1.5 billion. I think it's at record high this quarter. The awards can be lumpy, but I think I'm confident that's going to remain a significant growth driver for us here as we look to the future and look to the long term. As I've said before, I think we're in the third or fourth inning here in the federal government of of modernizing IT platforms, including civilian platforms. And so I think it's a positive long-term trend for us. So I think we remain very excited and very positive on that market.
spk03: Thanks very much, John.
spk11: And thank you. Our next question comes from Andrew Nicholas with William Blair.
spk07: Hi, good afternoon. This is actually Trevor Romeo and Andrew. Appreciate you taking the questions.
spk01: Sure.
spk07: First of all, just kind of wanted to ask about the commercial marketing business. I think last quarter, revenue kind of returned to being roughly flattish, and it declined a bit this quarter. So just curious kind of what caused the incremental weakness this quarter, and, you know, any more color on trends for that business and kind of your expected pace of rebounds in the future would be really helpful?
spk16: Yeah, I think the... As you'll see in the release, I think the decline in our commercial revenues was entirely related to commercial marketing services. We did complete a contract in the second half of last year that is certainly impacting the comparisons this year, but beyond that, I would say that commercial marketing services It certainly has not recovered in the way we'd initially planned this year. I think we thought we'd see some improvement as we got into the second half of the year. We certainly have not seen that improvement. We are managing the businesses very carefully, as we've talked about. It does represent, as I said, about 9% of our year-to-date revenues. And so I think we... Certainly there's certain verticals in commercial marketing services that continue to be impacted by the pandemic and client budgets are tight and clients are being very careful with their spending. And we certainly saw some of that in the third quarter. And so I think that's what's going on in commercial marketing services.
spk07: Okay, got it. That's helpful. Thanks. And then just on margins, I know this has kind of been asked in prior quarters, but particularly given the strong margin this quarter, Just wanted to see if your view would change at all on sort of potential for expense savings or sort of the extent to which some of those delayed expenses could come back as we look forward to next year and beyond.
spk16: You know, I would say that on the expense front, you know, I think we're continuing to reap benefits from the impacts of the pandemic that in the long run will not be – you know, are not sustainable. But having said that, I think we have talked about the fact that in the long run, we believe that, you know, 25% of the travel and entertainment spend pre-pandemic. We can, you know, we will save as we go forward. I think we've taken steps to manage our facility footprint. I mean, we continue to look at our facility footprint as a way to, you know, reduce our expenses going forward. We think that could be material. Obviously, some of what you're seeing is, you know, we've, Our offices are still closed, so our operating costs and our offices are down. Eventually we will open up those offices again. And so I think there is some leverage there, but this quarter was quite unusual on several fronts in terms of how we got to the margin levels. I think we have historically talked about 10 to 20 bps of improvement in adjusted EBITDA to service revenue. Over time, I think there's potential that could go higher, given some of the savings that I've just mentioned. We continue to take a hard look at that, and I'm sure we'll have a discussion on that as we talk about guidance for next year.
spk06: Okay, great. Thank you very much. Appreciate it.
spk11: And as a reminder, if you have a question, please enter the queue by pressing star, then 1. Our next question comes from Mark Riddick with Sidodian Company.
spk04: So a few of my questions have already been answered, but I did want to touch a little bit around if you could share some thoughts as to what you're seeing internationally, both as far as activity levels as well as potential for adding expertise outside of the states, and then have a quick follow-up after that.
spk16: Well, I would say in terms of the market, I mean, I think we've reported significant growth in our international markets for several quarters now. And I would say in the third quarter, as I said in my remarks, we are seeing some positive signs in the European Commission market and early signs of activation of work. We have a contract to do communications support for the European Commission where we've seen some recent activation of work. We're seeing a lot of interest in climate and decarbonization out of the European Commission, that's certainly an area where we're going to see growth as we go forward. And so the European Commission, with the pandemic receding, we're certainly starting to see signs of activation of work and growth there, which we're quite pleased with. We've also had a project that we've talked about that's been a one-year energy-related project that we'll wind down early next year. But even setting that aside, I think we're generally pleased with the trends we're seeing in the European Commission and the opportunities there. On the M&A front, I would say that we're primarily focused or we are focused here in North America right now on the M&A front. I think we really believe that given the key growth drivers we're talking about, the highest value can be achieved. with a focus on North America in the key growth markets, IT modernization, health, and energy. And so Europe's really not a, it's not a focus at least for the next year, but obviously we're out in the market and talking to people, and if we saw, and I'm sure we'll continue to evaluate opportunities there, but it's not an area of focus right now on the M&A side.
spk04: Okay, great. And then my follow-up is around potential headcount ads. I was wondering if you could talk a little bit about, you know, whether, you know, sort of how you're feeling about adding on, whether it's in a junior level or certainly talent acquisition is sort of, you know, sort of pricey at this time. But I just wanted to sort of check in on sort of how you're feeling about sort of layering on the base and, you know, getting a foundation stronger.
spk16: Well, I mean, you know, obviously we're a people-driven business, and at the end of the day, if we're growing our revenues, we need to be adding people. We need to be adding headcount. And so we've been able to do that. You know, I think we've, I will say we're investing, we've materially increased our investment in recruiting in the last several quarters, given the competitive nature of the job market. But with that, we've been able to hire the talent to support our growth. And, you know, I think we'll need to maintain and sustain those investments, but generally we've been able to hire the people in a timely way, and you can see in the results the growth we're driving. I do think, you know, we'll continue to invest in the recruiting. We are quite focused on also on the retention side once we have the people on board, you know, making sure we're highly engaged with our workforce, that we're, you know, we really understand where the market is and we're addressing any market issues, you know, thinking hard about retention, you know, and all the other things you need to do, you know, throughout this pandemic, you know, wellness and making sure they, you know, they balance their work and home life and those types of things. And so, but on the recruiting front, I think we've generally been able to, we're certainly adding a headcount and have been able to find the people.
spk05: Much appreciated. Thank you.
spk11: And thank you. We have no further questions in queue. I will now turn the call over to John Wasson for closing remarks.
spk16: Well, thank you for participating in today's call. We look forward to meeting you at upcoming events and certainly hope to see you all on our Investor Day in January. Thanks for attending and take care.
spk11: And thank you. Ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect. Thank you. © transcript Emily Beynon Thank you. © transcript Emily Beynon Thank you. music music Thank you. Welcome to the third 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, November 2, 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.
spk10: Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's third 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 November 2, 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. We 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 CEO, John Wasson, to discuss the recorded 2021 performance. John?
spk16: Thank you, Lynn, and thank you all for participating in our call today to review our third quarter and year-to-date performance and discuss our business outlook. By all measures, this was another strong quarter for ICF, demonstrating the positive momentum in our business that we have experienced throughout this year and pointing to the substantial growth opportunities on the horizon as we head into 2022. Key takeaways that I would like to highlight include The continued revenue growth from government and commercial energy clients was together accounted for 88% of year-to-date revenues. The 7.1% year-to-date increase in service revenue of which over 60% represented work in the key growth areas that we identified two years ago and where we believe the opportunities are even more robust given the current administration's priorities. Our efficient execution on existing contracts which in tandem with higher utilization and other positive factors drove the exceptional expansion of our adjusted EBITDA to service revenue margin. While this margin level is not sustainable due to higher anticipated costs in future periods, we expect our business model to be able to continue to drive considerable operating leverage and our success in retention and new business capture, which resulted in a book to bill of 1.5 times in Q3 and 1.33 times for the trailing 12 months. These metrics along with our record new business development pipeline of $7.3 billion, underscore how well aligned ICF subject matter expertise and cross-cutting implementation skills are with market demand. Looking more closely at our performance by client category, third quarter federal government revenues increased 11.4% year-on-year, led by our continued work in IT modernization, digital transformation, public health and social programs, climate change, and resilience. We continue to execute well on our IT modernization and digital transformation contracts, with year-to-date service revenue growth in this area of 17%. And our pipeline of new opportunities has never been higher, reaching $1.8 billion at the end of the third quarter. This has also been a strong year for us in public health contract awards. In the third quarter alone, ICF was awarded over $75 million in re-compete contracts by the US Centers for Disease Control and Prevention, and the National Institutes of Health to support the nationwide surveillance platform Biosense, as well as to provide an array of digital transformation, health surveillance, program management, and communication services to several agencies, divisions, and offices to support HIV prevention, smoking cessation, cancer prevention, and genetic and rare disease research. Additionally, we were awarded $15 million in contracts tied to COVID-19 response. bringing the cumulative total value of our pandemic-related contract wins to over $70 million. Today, we announced the acquisition of the small but uniquely specialized firm that further strengthens ICF position in the public health arena. ESAC brings advanced health analytics and bioinformatics capabilities to ICF, along with a highly credentialed 40-person staff that serves a roster of government and academic clients, as well as federally funded research centers and private organizations. We look forward to working together with the ESAC team to gain revenue synergies by expanding ICF services at existing federal clients and leveraging their contract relationships with clients such as the Center for Medicare and Medicaid Services and the Department of the Veteran Administration. On a related note, you will see in our earnings release that we called out an after-tax third quarter expense of 12 cents per share related to M&A costs. This was in connection with a highly competitive transaction that we pursued but ultimately passed on late in the process as pricing moved above our comfort zone based on anticipated revenue synergies. Revenues from state and local government clients increased 15% in the third quarter, reflecting growth in our disaster management and environmental consulting work. We continue to extend and expand our work in Puerto Rico in the third quarter occupying a central role in FEMA project formulation and grants management. And we won a new award for $22.1 million for the City Revitalization Program under the Puerto Rico Department of Housing. In addition, in early October, the Puerto Rico Disaster Recovery Transparency Portal noted that ICF was awarded a 33-month, $89 million contract for follow-on FEMA grant management support. ICF has a rigorous process for announcing new contract wins but we wanted to make sure you were aware of this notification. The mitigation market continues to develop as U.S. communities continue to suffer from the increasing evidence of severe weather-related events. In the third quarter, FEMA released a notice of funding opportunity for the 2021 Building Resilient Infrastructure and Communities Program, known as BRIC, at double the funding levels of 2020. In addition, more than half the opportunities in the HUD-funded Community Development Block Grant mitigation appropriations funded by Congress in 2018 remain to be awarded. Just yesterday, HUD announced the allocation of more than $2 billion in CDBG disaster recovery and mitigation funding for 15 separate disasters that occurred across 10 states in 2020. And we expect the Biden administration to continue to add to mitigation programs in the future. With climate, resilience, and grants management qualifications, and our position as the largest provider in the CDBG mitigation program, ICF continues to be very competitive within the mitigation and resilience market. Additionally, we continue to support our state and local government clients with environmental services, particularly in transportation, water, energy, and planning and development. ICF was recently awarded a new $30 million environmental services contract for the San Francisco Bay Area Rapid Transit Authority's Link 21 program to provide environmental services to support a major infrastructure expansion to its passenger rail network. ICS Climate, Environment, and Transportation Division also won a number of contracts in the third quarter, including multiple task orders with the city and county of Honolulu, the Texas Department of Transportation, the California Energy Commission, the Minnesota Metropolitan Council, New York City's Mayor's Office of Sustainability, the Metropolitan Washington Council of Governments, and Hawaii State Energy Office. As noted in our earnings release, revenues from international government clients increased substantially in the third quarter, with approximately one-third of the 60% increase tied to a sizable short-term project with substantial passive revenues that we expect to wind down by the end of Q1 2022. In terms of trends, we are seeing greater clarity from clients, particularly in the European Commission, on new funding initiatives as the impact of COVID recedes and continued demand for services related to climate and social inclusion. Moving to the commercial category, in marketing services, we continue to gain recognition for excellent client work and win new business, but overall activity levels remain below pre-pandemic levels. Turnover is an industry-wide issue, and year-on-year revenue comparisons reflect the completion of a large contract at the end of last year. That said, we continue to leverage the excellent engagement qualifications and expertise that are resonant in our commercial marketing business across the ICF footprint, which is materializing and expanded work for government and commercial energy clients. And we continue to carefully manage this part of our commercial business, which represented about 9% of total year-to-date revenues. In the last two quarters, we have seen a discernible pickup in our aviation consulting business, while still a small part of our commercial revenues. Our airline and airport clients are engaging ICF for sustainable aviation and tourism projects in Europe and for logistics projects in North America. Our energy market work remained the core of ICF's commercial client category. Year-to-date, revenues increased 8.7% representing solid growth across our energy efficiency, energy markets advisory, and domestic environmental services businesses. With contract awards from utility clients including traditional energy efficiency programs, electrification programs, distributed energy resources, and customer analytics, we anticipate continued strong market demand. And while we are one of the largest players in this area, we believe there is opportunity to not only grow within the market, but to also increase our market share. In addition to California, we continue to monitor developments in several other states as energy efficiency-related programs are instituted or expanded to address state climate targets. For example, in New York, ICF implements the Clean Heat Program for all the New York investor-owned utilities. This innovative program is designed to replace fossil fuel heating systems with electric heat pumps. We expect similar electrification programs including expansion of electric vehicle programs in several other jurisdictions. Also, our energy markets advisory business has seen continued high demand for ICS financial and engineering due diligence services around the deployment and development of renewable resources and energy storage. Our environmental services business has also been active on energy project development opportunities as we won an additional contract for an East Coast offshore wind project a construction compliance project for solar development in Arizona, an environmental impact assessment for a wind project in Wyoming, and numerous smaller engagements with renewable developers and utilities. This gives you a good sense of the breadth of our commercial energy portfolio of services, which we see as having substantial runway for growth in the coming years. In summary, the third quarter marked another period of significant growth for ICF following the very positive comparisons we achieved in the first half of this year. This performance has set the stage for an excellent 2021 and together with our strong backlog and robust business development pipeline underscores ICF's significant growth prospects for 2022 and beyond. And there do remain additional catalysts in the near term associated with infrastructure and stimulus legislation and 2022 civilian fiscal priorities that could further expand our growth opportunities for the next year and beyond. Now I'll turn the call over to our CFO Bettina Welch for a financial review. Bettina?
spk09: Thank you, John. Good afternoon, everyone. Our total revenue increased 9.4% to $394.1 million year-on-year, led by a 16.1% increase in revenue from government clients and a 3% increase in revenue from commercial energy clients, which reflected the pull forward of energy efficiency program revenues in the first half of this year. Year-to-date revenue from commercial energy clients increased 8.7%, which is consistent with the positive business trends in this client category. Third quarter pass-through revenue increased to 30.1% of total revenue from 26.5% in the year-ago quarter, primarily due to higher activity on our USAID project work. For the first nine months of 2021, pass-throughs accounted for 28.2% of total revenue in line with our expectations for the full year. This takes into account the significant reduction in pass-through revenue that we highlighted for this year's fourth quarter resulting from the completion of a large commercial marketing contract. Service revenue grew 4.1% year over year to $275.6 million and was up 7.1% year to date. Gross profit increased 2.1% year on year to $139.9 million. Gross margin on total revenue was 35.5%, lower year-to-year due to increased pass-throughs. On service revenue, gross margin was 50.8%, which was 100 basis points lower year-to-year due to timing of fee recognition on energy-related contracts. Indirect and selling expenses were 99.9 million, similar to the 100.1 million in the third quarter of 2020. As a percentage of service revenue, indirect and selling expenses declined to 36.3%, 150 basis points below last year's third quarter, with a majority due to lower facilities and related costs. Third quarter EBITDA was up 8.2% to 39.9 million, and adjusted EBITDA which excludes special charges, was up 16.1% to $43.8 million. Adjusted EBITDA margin on service revenue expanded 160 basis points to 15.9%, primarily reflecting higher utilization and the lower indirect and selling expenses as a percentage of revenue I just noted. Operating income of $32.3 million was up 14.2% from the $28.3 million reported in the third quarter of 2020. Our tax rate was 31.6% compared to $27.2 in the third quarter of 2020 due to return to provision adjustments resulting from increased revenue generated in higher tax jurisdictions. Net income for the quarter was $20.4 million or $1.07 per diluted share, up 14.1% and 13.8% respectively from the $17.9 million or $0.94 per diluted share reported in the third quarter of 2020. On a non-GAAP basis, excluding the impact of amortization of intangibles, M&A expense, and severance and staff realignment charges, earnings per share increased 19.5% to $1.32 year-over-year. Turning to cash flow, Our year-to-date operating cash flow was $64.8 million and supports our increased operating cash flow guidance of $110 million, up from $100 million. Capital expenditures for the first nine months were $12.3 million compared to $12.9 million in the prior year. Day sales outstanding for the third quarter were 76 days compared to 83 days last year. In the third quarter, Our net leverage ratio declined to 1.87, and we expect this to decline further to about 1.75 by the end of the year. Also, today we declared a quarterly cash dividend of 14 cents per share, payable on January 12, 2022, to shareholders of record on December 10, 2021. For modeling purposes, here are our expectations for the full year 2021. Depreciation and amortization expense is expected to be in the range of 19 to 20 million. Amortization of intangibles should be between 11.8 and 12.2 million. Interest expense is now expected to range from 10 to 11 million. And a full year tax rate will now be no greater than 29%. We expect fully diluted weighted average share count of approximately 19.1 million for 2021. and capital expenditures are anticipated to be approximately $20 million. ICF's capital allocation priorities remain unchanged, balanced between investing to drive organic growth and making strategic acquisitions, as well as debt reduction and returning capital to shareholders in the form of dividends and share repurchases. With that, I'll turn the call back to John for his closing remarks.
spk16: Thank you, Bettina. As you've seen in today's earnings release, Our year-to-date performance and expectations for good showing in Q4 have led us to increase our guidance range for full-year 2021 GAAP EPS and non-GAAP EPS, which now represent year-on-year growth of 45% and 15%, respectively, at the midpoints. EBITDA is anticipated to be at the high end of the guidance range or slightly above. The guidance ranges for total revenue and service revenue remain the same. We expect fourth quarter service revenue to be comparable to third quarter levels with similar trends, namely that growth in the government and commercial energy client categories will more than offset lower commercial marketing revenues. Also, we are pleased to be raising our full year operating cash flow guidance to $110 million from $100 million. Over 60% of ICF's year-to-date service revenue represented work in key areas in which we expect growth rates in the aggregate to be at least 10% over the next several years. These include high growth areas of IT modernization, public health, disaster management and utility consulting, as well as climate, environment and infrastructure, which align well with the current administration's priorities. Additionally, we have the financial resources to pursue acquisitions that can further expand our addressable market. Analysts and investors often hear me speak about ICF's culture as an important differentiator Of course, we have not been immune from the staffing issues that have impacted others in our industry and, in fact, most industries in the country. That said, we believe we are navigating better than most and have expanded our recruiting and retention activities in today's challenging business environment. We have nurtured a collaborative culture at ICF for the past 50 years. It has enabled us to attract an exceptional group of people dedicated to making a difference by bringing together subject matter expertise with a broad range of cross-cutting skills that enable us to deliver positive results for our clients. We believe our culture has been a key factor in the company's success to date and will continue to drive our growth. Lastly, on January 19, 2022, we will host an Investor Day in New York City to provide you with greater insight into the growth drivers we see on the horizon for ICF and give you the opportunity to engage with our subject matter experts and those leading our crosscutting capabilities in technology and digital engagement. Invitations will be sent out shortly. Please direct any questions to Lynn Morgan. We do hope you can join us. With that, operator, I'd like to now open the call to questions.
spk11: And thank you. We will now begin our 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 speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one. And we have our first question from Toby Summer with Choice Securities.
spk06: Thank you.
spk08: John, I was hoping you could maybe tell us about your acquisition appetite and intention, given what looks like what must have been a pretty big swing for the company. Thanks.
spk16: I think as we've talked about in the past, Toby, M&A has been a key component of our strategy for the company for 15 years. As we've talked about in that period, we've enjoyed 15% compound average growth rate. About half of that has been organic. Half of that has been inorganic. I think as we look forward, we certainly continue to believe that we can add value and drive growth in the company through M&A activities. I think we'll remain focused in the same markets. We've talked about quite a bit over the last couple years in the federal markets, certainly looking at IT modernization and federal health markets, and then on the commercial side, looking in the energy industry. And I think that's been our focus, and we'll continue to look for the companies that bring either deep domain expertise or implementation skills that we think we can really drive synergistic revenues. As we've talked many times, We don't do turnarounds. We don't do fixer-uppers. We're looking to get quality companies where we can make one plus one equal three. And so I think the focus remains consistent with what we've talked about, and we're quite focused on trying to add scale and capability in these key growth markets where we can really drive significant synergistic value for shareholders.
spk08: How would you describe the contract awards in the quarter with respect to sort of momentum established prior to the administration change versus processes and procurements that started after the baton was passed to the Biden administration?
spk16: Yeah, I think by and large we're still winning awards that were in caps or in bids submitted prior to the new administration. So the strong sales performance and the very strong book-to-bill results we've reported for the last, four or five quarters really, I think, do not reflect the potential upside from this administration. I think we'll start to see, I would expect to see opportunities from the new administration to play a larger role as we go into Q4 and Q1 in terms of our pipeline and potential awards. We'd start to win those and they could be material as soon as we get into the second half of next year, but But by and large, to date, I would say that the awards and the book to bill and the sales you've seen predate the administration.
spk08: Thank you. Just one or two more from me. I'll try to make them quick. What percentage of your employees are now vaccinated, and how do you ballpark the percentage of employees that you may lose due to vaccine mandates? This is a problem that corporate America largely is tackling, especially in the government services sector, of course.
spk16: Sure, of course, yeah. You know, I think we're north of 95% of our employees are vaccinated. I mean, we have, you know, stated that we imposed a vaccine requirement on our employees, you know, by I think the end of November 2020. And so we're working through the last 5%. I think the results are increasing daily. My sense is we'll get the vast majority of folks vaccinated. I don't think we're going to see material impacts from a vaccination policy on our business. I think to the extent we have issues, we'll be able to manage it. I don't expect any material issues there. I will note all the officers in the company are vaccinated at this point, so certainly the leadership is, you know, aligned on this issue, and I don't expect material impacts or material risk.
spk08: Thanks. And last question for me, if I could just get your broad sense for if inflation stays elevated for a period of time, how does that impact your ability to grow? And to achieve the margin goals that you would like?
spk16: You know, I think that, I think as we've talked in the past, you know, I think that ICF is fairly inflation resistant or proof. I mean, you know, 65, 70% of our work is in government markets that I don't think we'd see the impacts from inflation. The energy industry, I mean, again, I think if, you know, it's not a significant concern. So I think we believe, you know, the inflation, we'll be able to manage it. We'll be able to deliver our margins. Obviously, we're seeing wage inflation and wage pressures like every company in America is, and we're watching that carefully, monitoring it carefully. We're certainly doing what we need to to remain in market and, you know, and retain and keep our people motivated. It is a challenging time. I do think on that front, we believe we'll be able to pass a significant portion of those costs to our clients. As we've also talked about, we are achieving savings from the pandemic that we think will last for the long run, both in travel and entertainment and in facilities costs, which I think also provide a buffer to kind of manage pressures that we're feeling on the wage front. And so I guess that's a long-winded way of saying, Toby, that I think we feel we're in good shape and should be able to manage and weather an inflationary environment and deliver the margins and deliver on expectations.
spk08: Thank you very much.
spk11: And we have our next question from Joseph Boffey with Canaccord.
spk02: Hey, guys. Good afternoon. Good results. I'm just wondering if we could drill down a little bit more into some of the mitigation comments that you made, John, both on FEMA and then on the HUD side of things. It sounds like perhaps that those budgets are, at least on the FEMA side, that they could be incrementally bigger any thought, and then timing on any, you know, pieces of business that could be put out to bid there. And I'll follow up.
spk16: Well, sure. I certainly think that, you know, there's certainly more emphasis in FEMA on mitigation funding. And as you know, and I said in the remarks, you know, the budgets are increasing there. They've also opened the lens of what they'll support to include climate-related activities And so I think that is a market that we are seeing more funding. We will see more opportunities here in the next, you know, as we go forward here and then, you know, next two, three, four quarters. And it's a, you know, core part of our business. So we certainly see the mitigation market as a growth market and the FEMA component of that market a growth market. As you know, I mean, we're a leader on the CDBG side of the mitigation. As we've talked about in the past, we've won five or six mitigation contracts here in the last two or three quarters. I think we probably won more opportunities than, or certainly won at the high end. We're one of the most awarded firms on the mitigation front, CDBG mitigation front. And there's still, as I said in remarks, significant award decisions pending. in that market given the appropriations from 2018 and, as I said in my remarks, the additional $2 billion for 2020 that was just announced in the last day. So I think it is an area of continued growth for us. I think there will be more opportunity there. We expect awards in the near term on – certainly we've been discussing the Puerto Rico mitigation opportunities. Those are moving along. We'd expect decisions here. in the next quarter or two on those. And so we certainly view that as a growth market, Joe, and an increasing market where the trends are becoming more favorable. I know Toby asked the question, well, has the administration had an impact? I think we're starting to see some of the initial impacts of this administration in terms of putting more money behind mitigation, which should lead to proposal activities here in the next quarter or two for us.
spk02: Got it. You know, IT modernization's been, you know, doing really well. You know, it's been a very steady performance on new contract awards. You know, some of those obviously a little bit on the larger side, too. It looked like maybe this quarter was a little lighter. Is there anything, you know, building there in the pipeline, you know, in the near-term pipeline? And Any kind of commentary on the quarterly bookings there? I know obviously sometimes things are lumpy up and down, and timing is really more of a factor than anything else. Thanks a lot, guys.
spk16: Yeah, sure. Yeah, I mean, I think it's – well, first of all, I'm quite pleased that the business was 17% in the quarter. That was good to see. I mean, we have a very robust pipeline in IT modernization, Joe. I think the pipeline is north of $1.5 billion. I think it's at record high this quarter. The awards can be lumpy, but I think I'm confident that's going to remain a significant growth driver for us here as we look to the future and look to the long term. As I've said before, I think we're in the third or fourth inning here in the federal government of of modernizing IT platforms, including civilian platforms. And so I think it's a positive long-term trend for us. So I think we remain very excited and very positive on that market.
spk03: Thanks very much, John.
spk11: And thank you. Our next question comes from Andrew Nicholas with William Blair.
spk07: Hi, good afternoon. This is actually Trevor Romeo for Andrew. Appreciate you taking the questions.
spk01: Sure.
spk07: First of all, just kind of wanted to ask about the commercial marketing business. I think last quarter, revenue kind of returned to being roughly flattish, and it declined a bit this quarter. So just curious kind of what caused the incremental weakness this quarter, and, you know, any more color on trends for that business and kind of your expected pace of rebound in the future would be really helpful?
spk16: Yeah, I think the... As you'll see in the release, I think the decline in our commercial revenues was entirely related to commercial marketing services. We did complete a contract in the second half of last year that is certainly impacting the comparisons this year, but beyond that, I would say that commercial marketing services It certainly has not recovered in the way we'd initially planned this year. I think we thought we'd see some improvement as we got into the second half of the year. We certainly have not seen that improvement. We are managing the businesses very carefully, as we've talked about. It does represent, as I said, about 9% of our year-to-date revenues. And so I think we... Certainly there's certain verticals in commercial marketing services that continue to be impacted by the pandemic, and client budgets are tight, and clients are being very careful with their spending, and we certainly saw some of that in the third quarter. And so I think that's what's going on in commercial marketing services.
spk07: Okay, got it. That's helpful. Thanks. And then just on margins, I know this has kind of been asked in prior quarters, but particularly given the strong margin this quarter, Just wanted to see if your view would change at all on sort of potential for expense savings or sort of the extent to which some of those delayed expenses could come back as we look forward to next year and beyond.
spk16: You know, I would say that on the expense front, you know, I think we're continuing to reap benefits from the impacts of the pandemic that in the long run will not be – you know, are not sustainable. But having said that, I think we have talked about the fact that in the long run, we believe that, you know, 25% of the travel and entertainment spend pre-pandemic. We can, you know, we will save as we go forward. I think we've taken steps to manage our facility footprint. I mean, we continue to look at our facility footprint as a way to, you know, reduce our expenses going forward. We think that could be material. Obviously, some of what you're seeing is, you know, we've, Our offices are still closed so our operating costs and our offices are down. Eventually we will open up those offices again. And so I think there is some leverage there, but this quarter was quite unusual on several fronts in terms of how we got to the margin levels. I think we have historically talked about 10 to 20 bps of improvement in adjusted EBITDA to service revenue. Over time, I think there's potential to actually go higher given some of the savings that I've just mentioned. We continue to take a hard look at that, and I'm sure we'll have a discussion on that as we talk about guidance for next year.
spk06: Okay, great. Thank you very much. Appreciate it.
spk11: And as a reminder, if you have a question, please enter the queue by pressing star then 1. Our next question comes from Mark Riddick with Sidodian Company.
spk00: Hey, good evening. Hey, Mark.
spk04: So a few of my questions have already been answered, but I did want to touch a little bit around the – if you could share some thoughts as to what you're seeing internationally, both as far as activity levels as well as potential for adding expertise outside of the states and then have a quick follow-up after that.
spk16: Well, I would say in terms of the market, I mean, I think we've reported significant growth in our international markets for several quarters now. And I would say in the third quarter, as I said in my remarks, we are seeing some positive signs in the European Commission market and early signs of activation of work. We have a contract to do communications support for the European Commission where we've seen some recent activation of work. We're seeing a lot of interest in climate and decarbonization out of the European Commission, that's certainly an area where we're going to see growth as we go forward. And so, you know, the European Commission, with the pandemic receding, we're certainly starting to see signs of activation of work and growth there, which we're quite pleased with. We've also had a project that we've talked about that has been a one-year energy-related project that we'll wind down early next year. But even setting that aside, I think we're generally pleased with the trends we're seeing in the European Commission and the opportunities there. On the M&A front, I would say that we're primarily focused or we are focused here in North America right now on the M&A front. I think we really believe that given the key growth drivers we're talking about, the highest value can be achieved. with a focus on North America in the key growth markets, IT modernization, health, and energy. And so Europe's really not a, it's not a focus at least for the next year, but obviously we're out in the market and talking to people, and if we saw, and I'm sure we'll continue to evaluate opportunities there, but it's not an area of focus right now on the M&A side.
spk04: Okay, great. And then my follow-up is around potential headcount ads. I was wondering if you could talk a little bit about, you know, whether, you know, sort of how you're feeling about adding on, whether it's in a junior level or certainly talent acquisition is sort of, you know, sort of pricey at this time. But I just wanted to sort of check in on sort of how you're feeling about sort of layering on the base and, you know, getting a foundation stronger.
spk16: Well, I mean, you know, obviously we're a people-driven business. And at the end of the day, if we're growing our revenues, we need to be adding people. We need to be adding headcount. And so we've been able to do that. You know, I think we've – I will say we're investing – we've materially increased our investment in recruiting in the last several quarters, given the competitive nature of the job market. But with that, we've been able to hire the talent to support our growth. And, you know, I think we'll need to maintain and sustain those investments, but generally we've been able to hire the people in a timely way, and you can see in the results the growth we're driving. I do think, you know, we'll continue to invest in the recruiting. We are quite focused on also on the retention side once we have the people on board, you know, making sure we're highly engaged with our workforce, that we're, you know, we really understand where the market is and we're addressing any market issues, you know, thinking hard about retention, you know, and all the other things you need to do, you know, throughout this pandemic, you know, wellness and making sure they, you know, they balance their work and home life and those types of things. And so, but on the recruiting front, I think we've generally been able to, we're certainly adding a headcount and have been able to find the people.
spk05: Much appreciated. Thank you.
spk11: And thank you. We have no further questions in queue. I will now turn the call over to John Watson for closing remarks.
spk16: Well, thank you for participating in today's call. We look forward to meeting you at upcoming events and certainly hope to see you all on our investor day in January. Thanks for attending and take care.
spk11: And thank you. Ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect.
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