This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Welcome to the first quarter 2024 ICF earnings conference call. My name is Liz, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Afterwards, you will be invited to participate in the question and answer session. During the question and answer session, if you have a question, please press star, then 1-1 on your touchtone phone. I will now turn the call over to Lynn Morgan of Advisory Partners. Lynn, you may begin.
spk05: Thank you, operator. Good morning, everyone, and thank you for joining us to review ICF's first quarter 2024 performance. With us today from ICF are John Wasson, chair and CEO, and Barry Brodess, CFO. Joining them is James Morgan, chief operating officer. During this conference call, we will make forward-looking statements to assist you in understanding ICF's management's expectations about 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 2, 2024 press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. please consider the information presented in that light. We may at some point elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn the call over to ICF CEO, John Wasson, to discuss first quarter 2024 performance. John?
spk00: Thank you, Lynn, and thank you all for joining today's call to discuss our first quarter results and review our business outlook. First quarter results represented an excellent start to 2024 and demonstrated ICF's positioning in key growth areas and the strength of our diversified business model. There are several takeaways worth highlighting. First, revenue growth for the quarter was quite strong. Excluding divestitures, revenues increased by 8.7% from last year's levels. Second, our margin profile continues to strengthen. Drivers such as revenue mix, high utilization, and reduced facility costs continue to contribute to the consistent margin expansion that we have achieved over the last several years. And third, our forward-looking metrics point to continued growth for ICF. At the end of the first quarter, our backlog was 3.6 billion, our trailing 12-month book-to-bill ratio was 1.23, and our business development pipeline was 9.7 billion. This speaks to how well aligned our capabilities are with the current spending priorities of our government and commercial clients. Taking a closer look at our first quarter revenue performance, ICF's work in the energy, environment, infrastructure, and disaster recovery client market, again, was a meaningful contributor to our first quarter growth. Revenues in this client market increased 20% year on year to account for 45% of first quarter revenues. we are seeing very strong results across both our service offerings and our diversified client base. ICF brings together a complement of deep domain and implementation expertise across a broad platform of interconnected subject matter areas, including energy efficiency, decarbonization, electrification, environmental and climate impacts, and disaster recovery and mitigation. We combine our expertise with proven implementation skills around program management, environmental monitoring, and grid engineering services supported by cutting edge analytic tools and proprietary energy models that have become the industry standard. Thus, we are offering unique and very customizable services and solutions which are resonating with utility clients, renewable energy producers, and others on the commercial side while we continue to provide our government clients with research, policy and economic analysis, program design, analytics, grant management services, disaster recovery work, and climate impact analysis. Highlights in this market in the first quarter were over 30% increase in revenues from utility programs, including energy efficiency work, reflecting continued expansion in both size and scope of programs. ICF is now serving over 75 utilities across the country. Notable contract wins in the quarter included $85 million of expanded energy efficiency work with a large utility holding company, a new $18 million electrification project for a large Midwestern utility, and in conjunction with our disaster management team, ICF was tapped to support a Western states wildfire and natural disaster resiliency rebuild program, which provides incentives to help homeowners impacted by natural disasters rebuild all electric homes. We also saw strong double-digit growth in energy advisory revenues, driven by increased demand for both our power and technical advisory work. First quarter contract awards included numerous grid engineering and analytics projects for utilities and developers. Additionally, revenues from our environment and planning services in the U.S. continued to show solid growth, representing continued strong demand for renewable developers, increased resilience work for utilities undergrounding power lines, and environmental infrastructure-related work for state clients on projects funded under the IIJA. Contract wins in the first quarter were from a combination of utilities, developers, and government clients for the full breadth of ICF's licensing, permitting, and compliance services. IRA and IIJA funds are also starting to flow at scale, including the Department of Energy's Green Resilience and Innovation Partnership Program and its National Electrical Vehicle Infrastructure Program, and EPA's Environmental Justice Awards. Funding for state energy offices is now in the process of being released, and states and other recipients are beginning to issue solicitations for planning and program support. We are actively monitoring opportunities to provide support at all levels, federal, state, and local, and commercial. To date, ICF has won contracts valued at approximately $125 million related to the IIJA and IRA, primarily from federal and state government clients and our pipeline is about 200 million. This does not include all the related work that we are doing for commercial clients, where it's more difficult to tie our engagements to specific legislation. In the first quarter, our revenues from federal government clients increased 2.4%, in line with expectations, primarily reflecting the $5 million reduction in pass-through revenues associated with large international public health contracts that we referred to last quarter. Revenues from federal government clients excluding subcontractor and other direct costs increased 5.4% in the quarter. Our two growth markets in the federal government client category are public health and IT modernization. With respect to public health, our contract wins at SAMHSA last year are now fully up and running, and we expanded our clinical decision support work at the Veterans Administration. Also, our business development pipeline in public health is quite strong. There is bipartisan support to address the nation's mental health crisis, and with increased budgets, we see significant opportunities to expand our work for SAMHSA. Also, recent funding for NIH and CDC is in specific areas that are relevant to ICF subject matter expertise and experience, including funding to end HIV, and for cancer and Alzheimer's research. We continue to see a strong pipeline for global health security in low middle income countries where we have historically worked providing demographic and health surveys, nutrition surveys, and diagnostic testing. Global health security involves identifying and containing infectious disease threats wherever they occur in the world. CDC's and USAID's work on monkeypox and Ebola are two of the most current examples. Additionally, we continue to see strong, steady performance on our environmental health work at EPA, with a BPA recompete win for EPA's Office of Research and Development and task order wins to support EPA's Office of Pollution Prevention and Toxics. As you know, the EPA issued the final National Primary Drinking Water Standards to protect Americans from exposure to PFAS substances in mid-April. ICF supported the scientific and regulatory analyses that informed development of the new rule, setting maximum levels of these chemicals for the nation's drinking water supply. Our work continues as we staff EPA laboratory contracts to which samples are tested for PFAS substances. IT modernization and digital transformation is another area of bipartisan support. In the first quarter, we continue to execute our programs to update workflows and infrastructure and optimize data usage across our civilian agency clients and we continued to ramp up work on the $300 million of contracts we won in the second half of 2023. Additionally, we completed several important projects within the Department of Health and Human Services that advanced research efforts and support public health, including the development of dashboards to support the Medicare Diabetes Prevention Program, facilitate health equity data submission, and address vascular health. Notably, in the first quarter, we combined ICF's domain expertise in energy, with cutting-edge technology to stand up three unique grant management programs with varying complexity levels for the Department of Energy to support millions of dollars in new IIJA and IRA funding across multiple rebate programs. This project, together with the close tie-in that our IT modernization capabilities have with our public health expertise, demonstrates ICF's unique ability to combine subject matter expertise with substantial IT capabilities to drive growth and positive outcomes for client. We also have a strong active pipeline in this area, which includes a significant number of opportunities that reflect potential synergies between our open source capabilities and ICS policy related experience. To sum up, this was another record quarter for ICF, which has set the stage for substantial organic growth for the company in 2024. Now I'll turn over the call to our CFO, Barry Broaddus, for a financial review. Barry?
spk01: Thank you, John, and good morning, everyone. I'm pleased to provide you with additional details on our 2024 first quarter financial performance. Total revenues were $494.4 million, up 2.3% compared to the first quarter of 2023. After adjusting for the divestiture of our commercial marketing business lines in 2023, revenues increased 8.7%, driven by robust growth from our commercial energy clients and solid growth from our government customers. Subcontractor and other direct costs totaled $120.5 million, or 24.4% of total revenue, down from 27.3% in the first quarter of 2023. The year-on-year decrease was due in part to the divestiture of the commercial marketing business lines and lower pass-through revenues on certain U.S. government contracts. First quarter gross margins expanded 190 basis points to 37.2% of total revenue, benefiting from the timing of several recently awarded energy efficiency contracts, which are estimated to have pulled forward approximately 15 to 20 cents of EPS in the first quarter. Typically, these contracts tend to be more profitable during the startup phase of the program. As costs ramp up over time, margins will level out over the period of performance. The second half of this year, we expect that margins from these contracts will be more closely in line with margins we typically see with our other energy efficiency programs. Indirect and selling expenses were $129.1 million, up 4.3% year-on-year, reflecting the expansion of the business, and investments in our staff and various growth initiatives. We continue to realize higher utilization and benefit from our increased scale and reduced facility costs. This, together with our favorable revenue mix and a quarter-specific upside from the energy efficiency contracts I mentioned earlier, drove a year-over-year 21.6% increase in EBITDA to 56.4 million and an 8.2% increase in adjusted EBITDA to 55.2 million. Interest expense of 8.2 million decreased from 9.5 million in the first quarter of 2023, reflecting our lower average debt balances year to year. Our tax rate was 20.4% as compared to 23.5% in the year-ago quarter, primarily due to tax credits and the vesting of equity compensation, which largely occurs in the first quarter of each year. For the full year, our tax rate guidance remains unchanged at 23.5%. Net income was $27.3 million or $1.44 per diluted share in the first quarter compared to $16.4 million or $0.87 per diluted share reported in the comparable period last year. Non-GAAP EPS was $1.77, an increase of 24.6% from the $1.42 per share reported in last year's first quarter. First quarter EPS benefit from the margin expansion including the profit pulled forward from our energy efficiency programs I previously mentioned, and the favorable impact of our lower year-on-year interest expense and tax rates, as well as greater efficiency in the business. Shifting to cash flows in our balance sheet, in the first quarter we used $10 million of operating cash for working capital needs, an improvement of $6.8 million as compared to the first quarter of last year. The use of operating cash flow is consistent with our typical first quarter seasonal working capital needs. Our day sales outstanding were 75 days compared to 71 days in last year's first quarter. Capital expenditures totaled $5.2 million down from $6.4 million in last year's first quarter. At the end of March, our debt was $474.7 million, above the $430.4 million reported at the end of 2023. The sequential increase primarily reflects first quarter seasonal use of cash for share repurchases and year-end bonuses. On a year-over-year basis, we reduced our debt by $123 million, from $598 million at the end of last year's first quarter. Our adjusted net leverage ratio was 2.29 times at quarter end compared to 3.09 times at the end of last year's first quarter. Approximately 58% of our debt is currently at a fixed rate. We remain committed to a balanced approach to capital allocation. We continue to prioritize investment in organic growth initiatives, acquisition, debt reduction, share repurchases to offset the delusion of our employee incentive programs, and quarterly dividends. Today, we announced a quarterly cash dividend of 14 cents per share, payable on July 12, 2024, to shareholders of record on June 7, 2024. Now, to help you with your financial models, our guidance from our last call remains unchanged. As a reminder, we expect to generate approximately 48% of our revenue guidance in the first half of the year. Our depreciation and amortization expense is expected to range from 24 to 26 million. Amortization of intangibles should be approximately 32 to 33 million. Interest expense will range from 32 to 34 million. Our full year tax rate will be approximately 23.5%. We expect a fully diluted weighted average share count of approximately 19 million shares. Our operating cash flow is expected to be $155 million, and our capital expenditures are anticipated to be between $25 and $28 million. And with that, I'll turn the call back over to John for his closing remarks.
spk00: Thanks, Barry. We are very pleased with our results to date and the opportunities we see on the horizon. Our first quarter performance together with strong backlog, book to bill, and pipeline metrics provide excellent visibility that supports our full year of 2020 for guidance. We're pleased to reaffirm our expectation that 2024 organic revenues from continuing operations will range from $2.03 billion to $2.1 billion, representing year-on-year growth of 5.2% at the midpoint when compared to reported 2023 and 8.5% at the midpoint on continuing operations. EBITDA is expected to range from $220 million to $230 million, reflecting year-on-year growth of 14.2% at the midpoint. Our guidance range for GAAP EPS is 525 to 555, excluding special charges, and for non-GAAP EPS is 660 to 690. The work that I described in today's business review involves helping clients address many of the most challenging issues of the day. We are proud to participate in this work and to have attracted a like-minded group of professionals who are committed to making a positive impact on society. And with that, operator, I would like to open the call to questions.
spk07: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Sam Kuswam at William Blair. Your line is now open.
spk03: Hey, good morning. Thanks for taking my questions here. I know you just mentioned you're still expecting 48% of full-year revenue to occur in the first half. Based on your first quarter, that implies sort of flat growth on the top line in the second quarter here, if we're using the midpoint guidance. I guess I want to make sure I'm thinking about that in the right way, or maybe there's more optimism in hitting the upper range of guidance there.
spk01: Hey, Sam, thanks for the question. Yeah, we think that, you know, the revenues will certainly uptick in the second half of the year. You know, we have, you know, great visibility into the revenue stream, and we think that we'll have continued strong growth as outlined in our guidance.
spk03: Got it. Okay. Maybe pivoting here, I guess this question kind of relates to your work in commercial energy and renewables. We've heard about many of the difficulties clients are facing in that industry. such as interconnection, permitting, and just grid organization in general. I guess I'm wondering if you can help us understand how this impacts your business, if it's limiting some of the work you can finish, or maybe it's creating complexity that you can help solve. Just want to get your thoughts around that.
spk00: Yeah, sure. I mean, I think that we certainly work on grid modernization, grid interconnection, interconnection issues related to renewables energies. I mean, those challenges in the industry are creating opportunity for us and we're advising utility clients and power producers on those issues. And so that is certainly an area where we're supporting our clients and seeing opportunity. We continue to see significant opportunity around renewable power generation resources at the project level, both solar and wind, and are doing significant amount of work for those clients, and that continues to be strong, and we're quite active on that. And so I would generally say the specific issues you mentioned, we're working with our clients intently to analyze and assess those issues and help solve them. And so it's, I think, generally been a net positive for us. Great.
spk03: Thank you for the answers, guys.
spk07: Please stand by for the next question. The next question is from Toby Sommer with Truist Securities. Your line is now open.
spk02: Yeah, good morning. This is Jack Wilson on for Toby. Maybe just to kick it off, can you maybe dig a little bit more into sort of what parts of the budget have been sort of most helpful and if there are any sort of headwinds embedded in that other parts of the budget?
spk00: Jack, you mean the federal budget or is that what you mean? Yeah, I think that in the federal arena, I think we've got into high single-digit growth for the year in our federal markets. I think in our last call, we indicated we'd have low single-digit growth in the first half as we ramp up our new IT modernization work. And we expect our USAID work, which includes the capacities to ramp up, as we go forward in the year and so we remain quite confident you know at the high level of that guidance I would say as we've discussed you know regularly on this call the last couple years you know the two major areas of growth for us are in public health and in IT modernization and you know generally the budgets there have been quite strong they're bipartisan you know they've they've seen you know seen very strong budgets the last several years and you know I think we're we're confident we'll see robust growth there for this year. Also, obviously, these are very large agencies, and we have a small share. So we're also taking market share in these agencies. But generally, I think the budget situation in our key federal growth areas remains positive. And as I say, we've guided the high single-digit growth of the year, and we're certainly confident in that.
spk02: Okay, thank you for that color there. And then maybe just as a follow-up, can we dig into the IRA a little bit more, maybe using a baseball analogy? Could you sort of describe what inning you think we're in? And it's possible to segment that between sort of the supply and demand side of the equation. That would be helpful as well.
spk00: Well, I would say on the you know, certainly on the IRA, I think we're still in the early innings. It's still ramping up. We're seeing that funding, you know, beginning has begun to flow. We're seeing it at the federal level. We're seeing it also getting to the state level. The states are turning around and starting to put out grants and, you know, move that money. And so I think we expect that will continue to ramp up for the next several years. And then from there, you know, I think that's, you know, five to 10 year money. And so it will be a long-term, you know, tailwind for us. And so I think we're in the early innings, you know, I don't know, the IRA, third inning, third or fourth inning. IIJ, you know, started a year, year and a half earlier. Maybe we're getting towards the middle innings there, but there's still a long tail of spend, you know, on the IIJ. And so I think we think those will be tailwinds and, you know, continue to present material growth opportunities for us over the next, you know, five to 10 years. In terms of supply and demand, I think I would say if I focus on the IRA, I think it's certainly having impact on both sides. I mean, obviously the tax credits are providing tremendous incentives around solar and wind and hydrogen and carbon capture, improving the economics of those activities. And so we're seeing tremendous demand from that. And there's also funding available on the demand side, and we're certainly supporting federal, state clients, utility clients who are benefiting from that around energy-related demand programs. And so we're seeing it on both sides. I think it's particularly strong right now on the supply side.
spk08: Thank you very much.
spk06: As a reminder, if you'd like to ask a question, press star 11 on your telephone and wait for your name to be announced.
spk07: Please stand by for the next question. Our next question comes from Mark Riddick with Sedoti. Your line is now open.
spk04: Hey, good morning. Morning, Mark. So I wanted to touch a little bit on how we're feeling about what the potential acquisition pipeline might look like and maybe your current appetite and views as to maybe what you're seeing out there and valuations relative to maybe the beginning of the year. It seems like overall M&A seems to be picking up a little bit. I was wondering if you had any thoughts or views or how that might have evolved throughout the year.
spk00: Maybe I'll say a couple words that I'll let bury. speak to valuations. You know, I think that I wouldn't say we've seen a material shift in the M&A market, you know, in the last couple quarters. You know, at a high level, as you well know, Mark, I mean, M&A has been a key part of our growth strategy over the years. We did our last material deal in July of 2022. We've obviously paid down a lot of debt. We have capacity. You know, I think we So we remain in the market and continue to look at potential deals. Obviously, we're focused on areas around our key growth driver, so around public health, data and analytics, energy. I would say the market has not changed in the last six months. Valuations are still a bit frothy. But Barry, do you want to give a little more color on that?
spk01: Yeah. As John mentioned, we are very active in the acquisition arena. We're continuing to look at different properties as they come through the pipe. I'd say from a valuation perspective, at this point, we thought that maybe the valuations may have ticked down a little bit based on where we are with interest rates and and kind of the equilibrium between the two but you know we still think that um we still see that you know the evaluations are still you know uh not that much change from you know the previous six months or even longer than that um we have as john mentioned plenty of capacity we've paid down a lot of debt so you know we're we're certainly um you know Looking for that, as we've done in the past, we certainly see the different markets that we play in, and depending upon the market, the valuations will fluctuate a little bit between some of the hotter markets versus some of the others, but we are very active and continue to look for acquisitions.
spk04: Great, and then I just have one quick follow-up. I was kind of wondering with the sort of shifting economic landscape, I guess, or forecasting relative to maybe where we began the year. Are you seeing any changes in the pace of RFPs, or are there any particular client verticals that you're noticing any shift of behavior that we haven't had a chance to talk about yet? Thanks.
spk00: I mean, I would say on the government side, we really haven't seen a shift. I think we continue to see opportunities here. The RFP flow, proposal flow is good. The pipeline is at or near a record. Our book is very strong. And so on the government side, I think it's business as usual. I would say in the energy, climate arena, I think the results speak for themselves. I mean, we had north of 20% revenue growth in our energy, environment, infrastructure, and disaster recovery market. Our commercial energy business grew 34% in the first quarter. I mean, we're seeing tremendous opportunity there. I think I've said before, you know, we have our five key growth drivers, but the key growth drivers that are in the energy, environment, infrastructure area, those three are certainly coming to the fore, and there's significant economic activity and significant opportunity across commercial, federal, government, state, and local, and international. So, you know, in that area, I would say that we're, you know, It's accelerating.
spk08: Excellent. Thank you very much.
spk06: This concludes the question and answer session.
spk07: I would now like to turn it back to CEO John Wasson for closing remarks.
spk00: Okay, great. Thanks for participating in today's call. We look forward to connecting with you all at upcoming conferences and events. Thank you.
spk07: Thank you for your participation in this conference. This does conclude the program. You may now disconnect.
Disclaimer