Q2 2021 ICF International Inc Earnings Call

[music].

Welcome to the second 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'll be invited to participate and a question and answer session at that time. If you have a question. Please press star 1 on your Touchtone phone Register for a question. Please note. This conference is being recorded on Tuesday August 3rd 2.

And in 'twenty, 1 and cannot be reproduced or rebroadcast without permission from the company.

And now I would like to turn the program over to Lynn Morgen of Advisory partners. Please go ahead.

Thank you Vanessa good afternoon, everyone and thank you for joining us to review of ICF second quarter of 2021 and performing with.

With us today from ICF on John Watson.

President and CEO and Bettina Welsh CFO, joining them as James Morgan Chief of business operations. During this conference call. We will make forward looking statements to assist you and understanding ICF 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 August 3.2021 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.

Anticipate the future developments and will cause of 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 Watson to discuss second quarter 2021 performance John.

Thank you Lynn and thank you all for joining us on today's call to review ICF second quarter 2021 results and discuss all of our business outlook for.

Let me say that I am very pleased with Icf's strong second quarter performance and how.

And how well we are tracking against the long term growth catalysts that we've identified the <unk>.

The reported strong revenue growth across our markets and client categories, and even stronger growth and EBITDA and earnings metrics.

At the same time, we are maintaining our backlog we saw the awards the majority of which represent new business and we ended the quarter with a record business development pipeline of $7.2 billion, representing a 1 billion sequential increase and diversified opportunities across our government and commercial clients.

This reflects funding trends on our markets and supports our confidence and reaching the higher end of our guidance ranges on service revenue EBITDA and EPS in 2021, and underscores our strong positioning heading into 2022.

The second quarter revenue growth was led by a double digit increase and revenues from both government clients and commercial energy clients, which together accounted for 87% of our total revenues for the quarter.

And while commercial marketing services revenues were stable with last year and on <unk>.

Aviation consulting practice saw pickup and business.

Looking more closely on a client categories Federal government revenues increased 6.7% year on year and large part representing for continued work and the areas of it modernization digital transformation climate change and the resilience and public health and social programs the key civilian agencies.

So there's also a strong quarter for contract awards, and the Federal Arena, which increased 54% year on year and included and important recompete with the U S National Cancer Institute to provide digital communication services for its behavioral health programs with the U S National Aeronautical space administration of our NASA to assist with climate change.

The research and with the social Security administration to continue on it modernization work to automate its physical security processes and.

And it modernization. We were also awarded a new project to help modernize the U S. Federal Transit administration and oversight of tracking system and we received additional funding to continue modernization efforts for the U S General services administration.

And the first half of this year, our it modernization revenue is up over 15% year on year and.

Large part, reflecting the revenue synergies we have generated since we acquired ITG and January of last year by.

By combining icf's domain expertise robust business development platform and contract vehicles with Itg's best in class qualifications track record deep technology partnerships and leading platform expertise.

<unk> been able to win contracts that neither firm code of 1 on its own and.

Additionally, our business development pipeline and it modernization remains over $1.5 billion.

We continued to build on public health presence and the third quarter with our largest client the department of health and human services accounting for 27% of first half of 2021 government revenues.

We remain and the response phase with respect to the pandemic and since the onset of COVID-19, ICF has received contract modifications and awards totaling approximately $55 million to provide policy and scientific analysis Research Communications and project management services to government clients.

We are writing a tremendous number of proposals on the federal of government Arena, where our business development pipeline was at a record $4.5 billion, including a large number of public health health.

Social program and as I, just mentioned it monetization opportunities.

We're also closely monitoring developments with respect to the infrastructure, Bill, which is where our environmental impact analysis project permitting and construction monitoring of infrastructure projects and our expertise and resilience mitigation and clean Tech also come into play.

Also of precedent items fiscal 2022 bunch of proposal includes double digit increases for many of the civil and agencies that we serve most notably at 24% increase for HHS.

While it is too soon to say how this will all play out I do think it's safe to say that ICF will see a significant amount of additional spending in many areas of our industrial market in the coming years, and we are investing and the talent and technology to enable us to capture those opportunities.

Revenue from state and local clients increased modestly and the second quarter, reflecting both the robust market for disaster management resilience and mitigation advisory and implementation services and opportunities to provide technical assistance and implementation services the state and local governments to help them manage and distribute more efficiently federal dollars.

Received the stimulus and relief programs.

We extended and expanded our work and Puerto Rico during the second quarter.

<unk> was awarded an additional $13.7 million to extend our FEMA funded grants management work and another of $13.1 million to expand the implementation of their housing authorities rehabbing the rehabilitation reconstruction and relocation program for single family homes damaged by Hurricanes Irma and Maria.

Also on the second quarter ICF was awarded a new $9 million contract, but the government of the U S. Virgin Islands Department of Labor to implement a new workforce development program that will train local workers to support the territories recovery from the 2017 of Hurricanes.

Additionally, and state and local we continue to support our environmental services clients, particularly in transportation and water energy and planning and development.

We are busy on a broad range of projects that include high speed rail conservation planning, New reservoir planning and permitting and renewable energy projects.

As noted on our earnings release revenues from International government clients increased substantially and the second quarter, primarily reflecting a sizable short term project that includes substantial pass through revenues, which we expect to wind down throughout this year.

ICF continues to make good progress on climate related work internationally with extensions being secured for many of our existing wins plus the number of new opportunities will be of recognized for expertise and climate advisory and implementation services. Additionally, the European Green deal is yielding many opportunities and policy design and Green finance.

The strong pipeline of work on clean energy transition and the European Union.

We continue to expect our international government revenues and 2021 to show considerable growth compared to 2020 levels, but not at the magnitude we saw and the first half of the year.

Moving to a review of our commercial businesses commercial marketing services revenue was steady and the second quarter of just under 1% year on year to.

And the healthcare and consumer packaged goods market continued to show strength, while those markets that have been hardest hit by the pandemic or and an early recovery phase.

Commercial marketing group continues to win awards and recognition for their work, including being recognized as a strong performer among the loyalty solution providers and the Forrester wave.

I'm also pleased to reported our commercial market and group has been engaged by large brand clients, including skittles and Miller Lite on campaigns to promote social inclusion and acceptance during pride month.

The commercial energy markets business had another great quarter with revenues up 11, 4% year on year.

This represented a very strong performance across the group led by the startup of new energy efficiency programs and the expansion of existing contracts we.

We continue to wind energy efficiency work in California, with multiple New awards this quarter and anticipate additional opportunities as the state makes progress towards this goal of 60% or greater outsourcing.

We're also monitoring develops developments and several other states as the energy efficiency related programs are instituted.

Spaniard to address the state climate targets for example, and New York ICF influenced the clean heat program for all of the New York Investor on utilities. This innovative program is designed to replace the fossil fuel heating systems with electric heat pumps, we expect similar electrification programs, including expansion of state electric.

Vehicle programs and several other jurisdictions.

The commercial energy Advisory service business, which now includes distributed grid services also had a strong quarter.

And the main driver of this growth was our power and technical advisory business, which is associated with continued high demand for financial and entering due diligence services around the development and deployment of renewable resources and energy storage.

And our environmental services work for commercial energy companies remained steady with new contract wins with utilities and renewable energy developers. We also continue to pursue and win construction of the compliance monitoring contracts for new of rebuilding energy infrastructure, including environmental studies for large offshore wind projects.

The key trends affecting the energy sector include decarbonization and electrification distributed energy resources resiliency energy equity and the changing utility business models and all of these are closely aligned with the current administration's priorities and all represent growth opportunities for ICF.

To summarize this was another quarter of very strong performance for ICF building on the positive momentum we experienced at the end of 2020 as well and this and this year's first quarter.

The following 3 consecutive quarters of record contract sales and the second quarter, we were awarded $398 million and contracts, 41% of head ahead of the prior year and our trailing 12 months of book to Bill is at 148 times the highest in recent memory.

Also we have replenished our business development pipeline to a record $7.2 billion, adding $1 billion since the end of the years first quarter.

These are strong indications of the growth potential we have on the horizon.

And the same time, we are prioritizing greater engagement with our employees and increasing our investments and people recruiting and technology to ensure that ICF is well positioned for future growth and success.

And with that I'll turn the call over to <unk> for a financial review of Bettina.

Thank you John Good afternoon, everyone I'm pleased to share and more detailed view of our strong second quarter of 2021 financial performance that puts us on track to achieve the upper range of the full year guidance for service revenue EBITDA and EPS that we provided at the start of the year.

Second quarter of 2021 total revenue was up 10, 9%.

$392.5 million year on year, driven by strong performance on both government and commercial markets, which increased 13% and 6% year over year, respectively.

Service revenue grew 7.7% year over year to 281.4 million.

Pass through revenue increase this quarter and accounted for 28, 3% of total revenue in.

In line with our expectation that pass through revenues for the full year will be approximately 28% of the total revenue.

Keep in mind that and the fourth quarter of last year, we had an exceptional increase and pass through revenue that was onetime in nature and related to the completion of the large contract.

Gross profit increased 11, 7% on a year on year to $145.9 million.

Gross margin on total revenue expanded 30 basis points to 37, 2% while.

Gross margin on service revenue grew 180 basis points to 51, 8%.

Indirect and selling expenses were $106.2 million compared to $99.3 million and the year ago quarter.

As a percentage of service revenue indirect selling expenses for 37, 7% down 30 basis points from last year's second quarter.

We had significant growth and EBITDA and adjusted EBITDA and the second quarter with EBITDA up 26, 7% to $39.7 million and adjusted EBITDA, which excludes special charges up 23% to 40 million of.

Adjusted EBITDA margin on service revenue expanded 180 basis points to 14, 2%.

This strong performance reflected several factors, including service revenue growth favorable business mix high utilization lower indirect costs as the percent of service revenue and the pull forward of energy efficiency project work and energy incentive fees from the second half of this year.

We're very pleased with these results as they were achieved while we continue to invest and our business and anticipation of increased activity and our high growth market.

Operating income of $32 million and was up 43% from the 2020 from the $22.8 million reported and the second quarter of 2020.

Our tax rate was 37% compared to 29% and the second quarter of 2020.

Net income for the quarter was $20.3 million or of $1.7 per diluted share up 48, 7% from the $13 million or <unk> 72 per diluted share and the second quarter of 2020.

On a non-GAAP basis, excluding the impact of amortization of intangibles and severance staff will get alignment charges earnings per share increased 33, 7% to $1.19 year over year.

As you can tell from our reaffirmed full year guidance at the upper end of our initial ranges, we are expecting EPS performance and the second half of this year to be similar to that of the first half as the contracts. We won late in 2020 and early this year continue to ramp up.

Shifting to the cash flow statement, our operating cash flow of $6.3 million was in line with our expectations and we continue to anticipate operating cash flow for the full year of approximately of $100 million.

Capital expenditures for the first half of the year were $7.5 million compared to $9 million and the prior year.

Days sales outstanding for the second quarter were 82 days compared to 88 days and the similar period last year.

Our capital allocation strategy remains the balanced approach we.

We will continue to invest and organic growth and acquisition pay down debt as well as return capital to shareholders and the form of dividends and share repurchases.

And the second quarter, we repurchased 21800 shares for $2 million to offset the dilution of our employee incentive programs.

Also today, we declared a quarterly cash dividend of <unk> 14 per share per.

Table on October 13th of 2021 to shareholders of record on September 10th 2021.

For modeling purposes here, our updated metrics for 2021.

Depreciation and amortization expense is now expected to be and the range of $19 million to $20 million slightly below our initial expectations.

Amortization of intangibles should be in the range of $11.8 million to $12.2 million.

Full year interest expense should range from $11 million to $12 million.

Full year tax rate will be no greater than 28%, whereas we previously noted no greater than 2007.

We expect fully diluted weighted average share count of approximately $19.1 million for 2021 and.

And capital expenditures are anticipated to be approximately $20 million.

As I mentioned earlier, our expectation for cash flow is approximately $100 million.

With that I'll turn the call back to John for his closing remarks.

Our first half performance has firmly positioned ICF to report full year 2021 service revenue EBITDA and EPS sort of at the upper end of the guidance ranges. We provided at the time of our fourth quarter 2020 earnings release.

Also I am pleased to report that and the first half of this year over 60% of ICF service revenue represented working key areas, and which we expect growth rates and the aggregate to be at least 10% over the next several years. This universe of accounted for 55% of annual revenues in 2020.

These high growth areas include it modernization public health disaster management, and utility consulting as well as climate and environment and infrastructure, which align well with the current administration's priorities.

This is the positioning together with a robust backlog and pipeline support our confidence and Ics organic growth prospects over the next several years. Additionally, we have the financial resources to pursue acquisitions that can further expand our addressable market.

The problem solve and nature of our work has enabled ICF to attract and exceptional group of people, who are dedicated to making a positive difference and who share our commitment to carbon neutrality diversity, social justice and the quality. We appreciate their contributions to our success and encourage you to visit our website to learn more about high ICF addresses.

<unk> responsibilities.

Operator, I'd now like to open the call for questions.

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 <unk> Z if youre using a speakerphone. Please pick up the handset first before pressing the numbers.

Once again with your question please.

Then 1 and we have our first question from Tobey Sommer with strict securities. Please go ahead.

Thank you.

I was wondering if you're able to parse out these strong contract awards, the extent to which.

The influence of the change in administration is.

On a driver or if this is still representative of the.

The momentum that May in fact of sort of predated the election and change and administration.

Yes, no share Tobey that's a good question I would say generally I think the award drivers.

And we'll remain opportunities that predated the administration that we've had and capture and and.

And then subsequent probe proposals over the last of.

Several quarters, they are and the key growth areas that we've emphasized.

Prior to this administration and certainly those growth towards drivers continue it modernization public of disaster recovery of utility programs, but the things the awards, we're seeing today and.

And have had year to date.

And really predated the administration in terms of.

On the capture on the proposal efforts and now.

Now getting to 2 awards.

So I think that's that's the.

That's certainly how we see it.

Okay great.

No.

The site a lot of sort of key markets as having good outlooks and Thats terrific is there.

You've asked the sort of rank order the areas, where you think youre going to have the fastest growth.

Over from sort of.

The time period doesn't have to be near term and can be over some sort of medium and long term how would you how would you answer that question.

I would say first of all we're pleased with the bounty of growth drivers at our markets right now I mean, I think as of just said I mean, we've had for we've talked about for the last year or 2 it Mohan public out of disaster recovery utility programs.

And clearly with this administration, we've also discussed the.

On climate.

And I think we'll kind of moves up to a key growth driver and infrastructure has the potential to.

And then I.

What I would say Tobey as we see all of those as double digit growth markets.

As I said.

60% of our revenues and the last quarter, we're in those markets and the growing north of 10%.

I think we've emphasized the.

And modernization has been growing north of 15% for the last year for the last 5 or 6 quarters.

And if not more since we.

Completed the ITG acquisition and so.

I would put them all of the north of 10% bucket I would I would hesitate to try to rank order.

Rank order them from there I think they are all strong growth drivers.

So and we are.

We're quite excited about it I think and.

I think we are.

We're confident they'll remain growth drivers for the next couple of years.

Okay.

The work left for us to do that.

If I.

You did the <unk> acquisition, not long ago and decided the the.

The superior growth you generated since then.

How would you describe your enthusiasm to do more acquisitions and.

If you could share areas of interest that would be helpful.

Sure. So I mean, I think as you know of.

Over the 15 years, we've been a publicly traded company.

Acquisitions, and M&A has been a key aspect of our strategy I think we've talked about that are on.

The average compound growth has been about 15% of half of it's been organic has been and inorganic and so I don't think M&A remains a key part of our strategy I think and the.

And we're primarily focused on companies and the key growth markets that I just mentioned.

And I would say that I think I've said this many times I mean, we were looking for quality companies high quality companies sort of good cultural and strategic fit where we really see a path to significant synergistic revenues when we put their capabilities together with ours like we've achieved for ITG and so.

So we're certainly.

And active time on the M&A market Theres a force of activity.

I would say the valuations are.

Frothy, but.

But even with that if you can find high quality company, where you can really have confidence and the strategic and cultural fit and you can see the synergistic revenues.

It can be.

It can be transformational I mean, ITG has certainly opened up and are much more significantly of the it modernization market for us over the last whatever 16.17 months.

And we're focused on.

On the federal side of it.

Sales.

And it modernization.

Certainly and commercial energy markets.

For the right opportunity came in and disaster recovery, we take a look at that.

And I think Thats, so I think thats, how we are currently looking at M&A.

Thank you very much.

And thank you we have our next question from Joseph <unk> with Canaccord.

Hey, guys good afternoon.

Great results and great to see.

Due to the broad based strength of the business.

Just the scholar.

And from you.

And your comments, John you talked about.

Clearly a good bookings.

Bookings quarter of blood.

You also.

The fact that the pipeline.

And it was actually pretty strong and we're kind of in the middle of the federal budget cycles. So I was just wondering where youre seeing extra kind of pipeline strength at this point and.

The federal budget cycle and.

And then just 1 for the team and also I know you mentioned that there was some pull forward on some of the energy business just wondering what the second half of May.

Or what the next few quarters may have on store with that pull forward and then all of a quick follow up after that.

Yes, I think on the question.

And the until on the federal side of and I think were and <unk>.

Certainly the.

And again I keep coming back for the safe key growth drivers I mean, I forget it modernization and certainly driving a significant driver of our pipeline.

Public health and social programs at HHS, and I said the debt Thats I guess the 27%.

Net of our federal revenues, we are seeing.

Significant opportunities there.

And we are seeing more opportunities.

And also on the <unk>.

Turning to see more opportunities on the energy and environmental front.

And so I would say those are the true.

The areas of focus.

And federal it's also.

We are seeing a significant you didnt ask about commercial but I would say that the commercial energy markets.

We've really out of strong first half here in terms of the.

The awards and the pipeline and the and the.

The revenue growth of that business and I think that there. We're just seeing very significant opportunities across our commercial energy business with the utilities on energy efficiency and then all of the other kinds of programs that we've talked about decarbonization and electrification.

From renewable energy and utility of the future.

Of resilience.

And we're seeing very strong opportunities there so that the.

And that's and disaster recovery and I have to say, we announced several awards and Puerto Rico and <unk>.

Again, I think we were expecting.

Double digit growth on the disaster recovery this year and so I think thats.

And I know it sounds like a breath of a broken record with those markets, but thats I think that is really driving a lot of our business unit answer the question on the portfolio share.

The effects we had.

And recently began with regard to the energy pull force and the incentive fees that we have begun several of the fixed price of energy contracts, where the revenues are being recognized on a straight line basis through the year, but the costs will ramp up as the program progresses right. So.

This combined with the timing of the energy incentive fees on several contracts really benefited the second quarter gross margin by about 70 basis points. So and just a reminder of experiences last quarter, but at a higher rate having.

Having said that we don't expect.

Continued on material pull forward going forward and facts I think last time, we expected. We stated that we expected gross margin to be around 37% for the full year and we continue to expect the same going forward and I would just put out I think it is linear.

I would just add I mean, I think I agree with everything <unk> said I think.

The net net of this pull forward is our plan for the year I think initially it was more of a bit of a hockey stick that lead.

It was more back and back half loaded in terms of the the higher growth and we kind of of a bit of a hockey stick is going on throughout the year of what's happened here since we pulled forward the synergy work into the first quarter I think we're now expecting pretty consistent revenue and earnings growth quarter by quarter for the year and.

You can see where we're guiding to the.

The upper upper end of our guidance range, which I think puts us in the.

7757, 6% service revenue growth and double digit earnings growth, but and I.

I think that'll be pretty consistent growth here as opposed to kind of more of a hockey stick. We initially expected.

And.

Sure that makes sense given the nature of the contract structure and then just 1 follow up and maybe more of a strategic question.

ITG acquisition.

Clearly looks like for.

Looking out pretty well of the combination of the.

Technology capability on the.

Okay and the other expertise.

Coming together for <unk>.

Synergies and I know, you're really not that focused on Vod.

Across the stability and government do you think you have a big enough footprint now kind of from a strategic level.

With what you have now or is there room for more potentially M&A on the IC side. Thanks, a lot guys.

Yes, I would say that well.

Well, it's certainly more M&A potential and the IP modernization and the it side and I think.

I mean, we've significantly added scale on the it modernization for them, but I think as I've said before we're always looking to add additional platforms and I think we have the scale on service now and at the end, but there's other platforms out there that we'd certainly be looking to add scale and the <unk>.

It is the business, where you need to have the scale you need to have the people of the bodies to demonstrate you can deliver the larger programs.

I would say Joe that we we still see significant opportunity on the civilian side on the it modernization and broader it fronts and.

And given that sort of 95% of our revenues are and we really.

Of deep relationships and those agencies and then.

Distinctive remains significant.

For us on the civilian side and <unk>.

Our focus on on domain expertise.

On the defense side, we just don't have that that level of domain expertise and we don't have that market presence and so.

And so I guess.

I think we I would say we continue to remain primarily focused on.

Our set of end markets, but having said that I don't want on our.

Our second largest client and the firm I think it's 5 or 6% of our revenue is Vod and so we.

We certainly will work there, where we think we can compete and we.

We can.

Bring unique services, but.

This will leave you with the thought that I think there's still a lot of headroom and growth opportunity for us and of course civilian markets on the it for them.

Great. Thanks, so much value.

And thank you.

We have our next question from Sam, England with Barrick Barrick.

Hey, guys. Thanks for taking the questions. The first 1 and I was just wondering how youre viewing the opportunity from future pandemic related health projects now I know you've mentioned and the policy of it'll it could be comparable of great to work you did around HIV and 871, the latest view is that.

I think we're still optimistic about the longer term opportunities.

Around the pandemic.

I think we still have an immediate response phase I think the if the.

Pandemic of.

The thought of focus on the Delta variant and we continue to support the immediate response phase.

But I do think as once we move beyond that I mean, there have been bills in Congress to look at Knowhow.

On the government can be better prepared for future pandemics and with programs and.

Governance might look like.

We still have conversations with our clients around those types of issues, but I would say the everybody is still and this immediate response space and so.

I think we're still I think we're still optimistic optimistic about those opportunities.

But I think it's still.

Clients aren't ready to have those conversations and.

Given that the focus is still on the immediate response space.

Okay, Great and then the next 1.

Pretty busy labor environment, so far this year and I, just wondered what you're seeing and tons of wage inflation in 2021 on.

And it looks like what you've been saying in terms of the head count churn and then I suppose linked to that.

And we see of hiring plan developing on the second half of 2021.

Well sure I mean, I think you've touched on several issues. There. So let me take them 1 at the time and please remind me if I forget 1 of them.

And I would certainly I would say in terms of the kind of labor availability and recruiting.

I mean, there is no question of the current labor market is certainly tight and.

As you noted every company is including I believe every company in the comp group and more broadly of the economy is.

<unk>.

Recruiting challenges and a tight labor market.

It's not entirely of new problem and certain areas, even part of the pandemic it monetization of energy cyber certainly.

We saw it and the components, but certainly it's more broad now I would say on the last several quarters, we have increased our investment and recruiting.

<unk>.

And to really make sure we are doing everything we can to bring the talent and in a timely way. So we've hired more ICF recruiters, who are investing more on contract recruiters.

To find the staff.

I would say that with that investment and.

And our market leadership position and the kind of the core markets we serve.

Which helps from a brand standpoint, we've been able to generally continue to meet our recruiting needs.

I mean, 1 metric we track is time to start which is the time between when we posted job description and the candidate starts with ICF.

So pre pandemic or time to start was averaging and $2019.51, 1 days, so far and 2021 and we're at $53.3 days on average across the firm.

And so you know I mean, it's up a couple of days, but all things considered and I'm pretty happy with that metric now.

There are some very hot markets.

Those numbers would be higher and there are more challenges but to be on some of that.

Pre pandemic, so I feel like we're at.

It is the tight market I think we're doing well on the recruiting front and we will continue and best of luck the.

And the inflationary pressures.

I think like everybody and we've certainly experienced some upward pressure on wages.

I think we're and we're certainly carefully monitoring wage pressure and what's going on on our markets and making sure that we're.

We're at market and we're we're doing what we need to continue to incentivize to address any <unk>.

Issues on the wage front I would say we've talked a lot about we do of a strong culture and this is a mission driven place you can do impactful work I think that helps us on.

Maintain the talent, but we are seeing inflationary pressures I do think.

Many of our most of our contracts have some form of escalation.

The escalation clauses that can help us manage that and I think we've talked about from there will be savings, we're incurring from the pandemic reduced travel and entertainment expenses with some of that will walk into the long run reduce facilities footprint. So even with the wage pressure I don't think we're going to see a material impact on our profitability from that.

And I guess I don't want to grow and under 2 loans you asked about turnover and again I think much like recruiting I mean, we have seen some higher turnover, but I think we're managing it I think pre pandemic.

We're kind of core ICF turnover.

It was about 14, 6%, we're up to about $15.5 and the first 2 quarters of 2021.

And we're watching that carefully.

We're managing it we've put in programs to stay engaged with upfront loans frontline employees and 1 of the things we hear is no.

<unk> people are the number 1 recent people leave during the pandemic as they don't feel like Youre engaged with their frontline manager. So we're managing that I've talked about what we're doing on the compensation front and the culture. So generally I think we're across all of those topics. We're doing everything we can.

Great. Thanks, very much for you to that.

And thank you we have our next question from Andrew Nicholas with William Blair.

Hi, good afternoon, thanks for taking my questions.

The first 1 I wanted to just kind of follow up on commercial marketing I was wondering if you could add some color to what youre hearing from customers and that business are they giving you any indications on on timing of of ramping up project activity, there and how you're kind of expecting the rest of the year to play out and that business.

What do you think as I said in the quarter for Q2 of our business flattened out and we were putting.

Up less than 1%, which on.

Obviously, the prior quarters, we have been down given.

And with.

And obviously during the first day of the pandemic the business was down and we're now past the 1 year Mark zone.

So the business is essentially flat as I said in my remarks, I think there are the health care and the consumer packaged goods we're seeing.

Stronger opportunities there I would say that the the.

The client verticals that have been most severely impacted hospitality travel and tourism.

Are still on the early stages of recovery of I, Wouldnt say that theres been a significant recovery there.

They are flattening out and they're not getting worse, but.

Yes.

Thank you.

As I think we said when we did on that and so we really did assume a material improvement for.

For 2021, and I think with I think that that is a good assumption.

I think it's a similar story with the European.

Marketing services business.

The event business, we do and Europe for the European Commission, I mean, I think thats.

Again been significantly impacted and we.

It's flattened out, but we're not assuming of a rebound there and in 2021.

Got it. Thank you and then for my follow up I was hoping to touch on margins quickly.

On another really strong quarter, there just wondering how youre thinking about the medium term opportunity on that front.

Given our recent performance and maybe if it's possible to quantify how much costs, you would expect to come back into the cost structure and things like travel and entertainment and started to come back online whether it's later this year early next that'd be that'd be great. Thank you.

I would say that.

Generally on the margin front of me I think we've got it for some time to adjusted EBITDA of the service revenue.

And I think our guidance this year is 13, 5%.

This is down slightly from last year, but it grew at $13.7 but still proud of that youre at the highest.

Setting aside the 37.

The 13th 5 it would be the highest we've had.

Since the time I've been here. So it has been trending up I think we've said that generally.

We're committed to delivering 10 to 20 bps improvement on that year on year.

Based on mix based on leveraging our back office managing utilization.

I think as.

And on.

On the travel and entertainment front I think we've I mean.

And obviously the travel and entertainment is still significantly down through the first half of the year I would expect channel.

These assets.

The trend upwards as we.

And begin begin and then do more face to face visits with our clients.

I think we said on the long run that we would expect.

Cash flow at least the 25% savings on those.

And our travel and entertainment and I think we expect to capture material savings.

On the facility and space front.

Now some of that will be invested back in.

Business development and our people.

And so we're certainly doing right now given all of the growth opportunities in front of the so I guess, what I would say as of we remain committed to the 10 to 20 bps.

And then.

And then depending on the mix and.

Of the how we invest back of the savings and travel and entertainment.

And Theres more room, there, but I think I would stick with.

Sticking with my 10 to 20 bps for the App.

It sounds good thank you very much.

And thank you. Our next question comes from Kevin Spanky with Barrington.

And good afternoon.

You, specifically called out aviation and consulting is having a good quarter. So I don't know if there is.

And anything behind that or to read into the in terms of.

The recovering economy and recovering travel or.

And kind of more 1 off.

And any color on that would be helpful.

Yes, well first I just want to remind folks of our aviation consulting practice of the small practice and I think it's.

It's a small practice with the change 25.

$30 million of revenue of the aviation.

It's a small practice I think they are.

They are seeing.

Operating on a couple of other is I think it's.

On.

<unk>.

Sure.

First of all they do aircraft leasing arrangements.

And with investment banks and leasing companies, we have seen some pickup and that work.

We're also doing work for.

And more international European and Middle Eastern Airlines, I think theres been some pickup on our strategy and.

And we actually do some.

And the environmental oriented work around greenhouse gases and that type of stuff. So.

Yes, we're certainly seeing signs of improvement and I think and the last 2 quarters and the <unk>.

Generally optimistic on that business. It is the small business. Although it can also be highly profitable.

Okay understood that's helpful.

When we think about it modernization and the pipeline there.

And what does the pipeline and specifically look like for some of the larger deals of $100 million plus.

And as the pipeline continues to build and develop.

And while the pipeline has certainly been.

Ramping up and it's.

And it has been.

Quite robust I don't have a breakdown in front of me Kevin on the.

And the breakdown of <unk>, I mean of $100 million deal not on a minority of hockey monetization is quite a large opportunity for us of and I think our sweet spot is manav.

The $5 million to $50 million range.

And think we have been trending up and larger deals.

But I don't have those figures in front of me.

I think they are trending up.

And we certainly as I said before I think there are 100 million plus $250 million deals out there I think it's.

That does come down on the scale that you have the villa demonstrate that you have.

The the.

And the talent on board to.

And deliver those scale of problems, which.

And the scale of deals.

Which is just.

Can you demonstrate that you have the the talent and depth on service and our IP and on some of the platform stuff to.

For the rig contracts of that size.

Alright that makes sense.

Sure.

And also lastly wanted to ask just about the.

California energy efficiency pipeline and I think you mentioned you continue to win some new deals there, but should we still think about.

And maybe 2022 is when some of the larger opportunities come through.

And just the pipeline with regard to.

The California energy efficiency.

Yes.

Pipeline and California remains.

It remains good I do think the.

Or I mean, there is a set of awards. We've discussed that I think we are ramping up this year than on a set of awards that we think will be later this year and that would be more.

2022 related the other development.

The development of our aspects of the California situation is.

I think we've talked about the outsourcing 60% of the worldwide.

And in 'twenty, 2 and 2023, there is now the discussion around.

That number could go higher.

The outsourcing of California could go.

Much of the 100% by 2.

2025.

For the year 2 after that and so there is.

I think that.

What I would say there is I think there is.

And there is certainly on increasing the likelihood that the.

Okay.

And the addressable market there will continue to increase beyond.

Beyond 2022, 23, and so I guess, we'll be talking about California for the next 4 of 5 years instead of kind of.

A couple of years.

Alright that sounds great. Thanks for taking the questions.

Thank you as a reminder, if you have a question. Please press Star then 1 on your Touchtone phone and our next question is from Marc Riddick with Sidoti and company.

Hi, good afternoon.

Was wondering if you covered quite a bit already but I was wondering if you could go back and talk a little bit about the.

The strong pickup and <unk>.

Activity with the health and human services, and and maybe walk us through sort of how the.

Wade into.

Whether it was the messaging or on the various needs around the pandemic and sort of of how we should think about that will develop.

Messages and they need to change or be altered.

We go forward.

With few challenges slash discoveries.

I would say that our.

Pipeline and HHS is pretty broad based I mean, I think part of the story. There is we are winning and it modernization work on the it from within HHS on leveraging on our relationships that is our largest client.

And so a significant portion of of what we've been talking about in terms of ITG and we've been doing the errors.

Is this it modernization related I would say the other thing thats.

And certainly the last 3 or 4 quarters as you look to our.

And our book to Bill and our awards.

Sure.

The.

We've won significant contracts some of them re competes but we compete with plus ups on the human services side and so so for example, I mean I think we.

And we create enough that a long history of supporting the head start program.

And the.

And the HHS and.

And when we compete for.

4 of 5 regions, where we had.

The long term contracts, we did 1 of the new region for us.

Yes.

Loans.

1 of the Recompete for our child wells.

Both of our information gateway and as Adam.

And funding.

And we've won work on the social services side of the band.

Pandemic around.

And of broadly around.

Yes.

Education.

Homelessness.

Child child abuse and.

School lunch programs.

So I would say the.

The social services side of HHS, including some of the work we've done it on the pandemic has been.

And net positive for us and.

And I think we obviously have been reported in the.

And specific pandemic flu.

And our outlook.

Sure.

Once we get beyond the immediate response phase but.

I think the other thing just to say there is the budgets and HHS and the Trump administration and the budgets and HHS of went up nicely.

On.

And balance obviously looking at even greater increases so as the budgets go up.

I mean that has the potential of the kind of lift all boats within HHS.

I don't know James if theres anything on Mr.

Okay.

Yes.

Okay, Great and then I was wondering I wanted to shift over to the commercial side and it certainly seems as though.

It was encouraging with the commercial activity I was wondering if this day.

Is there any particular beat the roof from from the mix of the client activity is too maybe.

Some maybe some groups of clients or are there any particular verticals that have been more aggressive and active.

Ahead of others are we starting to see some of the benefits of leisure and things like that thank you.

I don't think its been and a significant share so and I would say that energy efficiency remains the the.

And the most significant part of that business, we've seen very positive trends there.

We've won a lot of energy efficiency or of re competes add ons and new contracts from the first half of this year.

We are seeing some up some.

The initial indications of states that haven't paid as much attention from the spend as much on energy efficiency or re looking at it given the <unk>.

Climate issue.

I would say that we our advisory business has been very busy around electrification.

De carbonization distributed energy.

Which is.

Which is very positive I mean that debt advisory business.

And it tends to be very high margin.

And so.

So I think it is.

And certainly on the energy side, it's the.

The trends in terms of the.

The pipeline and the opportunity is pretty broad based.

Okay excellent. Thank you very much.

And thank you.

Have no further questions I will now turn the call over to John Watson for closing remarks.

Alright, well thank you for.

Participating on today's call, we look forward to meeting with you at upcoming events and senior will assume thanks for participating.

And thank you ladies and gentlemen, this concludes our conference. We thank you for your participation you may now disconnect.

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