Q3 2021 ICF International Inc Earnings Call
Okay.
Welcome to the third quarter of 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 one on your Touchtone phone to register for a question. Please note.
This conference is being recorded on Tuesday November 2nd 2021, 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.
Thank you Vanessa and good afternoon, everyone and thank you for joining us to review Icf's third quarter 2021 performance.
With us today from ICF, John Boston, 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 in understanding ICF management's expectations for 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 2nd 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.
Consider the information presented in that light we may at some point I would like 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 2020 My performance John.
Thank you Lynn and thank you all for participating on our call today to review, our third quarter and year to date performance and discuss our business outlook.
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 our government and commercial energy clients, which together accounted for 88% of year to date revenues.
The seven 1% year to date increase in service revenue of which over 60% represented work in the key growth areas that we have.
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.
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 one five times in Q3, and 133 times for the trailing 12 months. These metrics along with a record new business development pipeline of $7 3 billion.
Underscore how well aligned icf's subject matter expertise and cost 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 and repeat recompete contracts by the U S centers for disease control and prevention and the National Institutes of health to support the nationwide surveillance platform <unk> as well as to provide.
Array of digital transformation, how surveillance program management and communication services to several agencies divisions and offices to support HIV prevention smoking cessation cancer prevention and genetic 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 a small but uniquely specialized firm.
Further strengthens ICF position in the public health Arena.
<unk> brings advanced health analytics, and bioinformatics capabilities to ICF, along with how they credentialed 40 person staff that serves a roster of government and academic clients as well as suddenly funded research centers and private organizations.
We look forward to working with together with the <unk> 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 veteran administration.
On a related note you will see our earnings release that we called out an after tax third quarter expense of <unk> 12 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. That's 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 projects formulation and grants management.
And we want 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 months $89 million contract for follow on FEMA Grant management support.
I'd say it has a rigorous process for announcing new contract wins, but we wanted to make sure you're 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 brick 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 remained to be awarded to.
Just yesterday HUD announced the allocation of more than 2 billion and <unk> disaster recovery and mitigation funding for set 15 separate disasters that occurred across 10 states in 2020, and we expect that by the 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 CD BG mitigation program ICF continues to be very competitive within the mitigation and resilience market.
Currently 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 authorities linked 21 program to provide environmental services to support a major infrastructure expansion to its passenger rail network.
Ics climate environment and Transportation Division also on a number of contracts in the third quarter, including multiple task orders with the city and county of Honolulu.
The Texas Department of Transportation to 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 pass through 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 at the impact of Covid receipts 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 Epsilon 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 resident in our commercial marketing business across the Ics footprint, which is materializing and expanded work for government and commercial energy clients and.
And we continue to carefully manage this part of our commercial business, which represented about 9% of total year to date revenues.
And the last two quarters, we have seen a discernible pickup at our aviation consulting business.
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 remain the core of Icf's commercial client category year.
Year to date revenues increased eight 7% representing solid growth across our energy efficiency energy markets advisory and domestic environmental services businesses.
With contract awards for new utility clients, including traditional energy efficiency programs electrification programs distribute energy resources and customer analytics, we anticipate continued strong market demand.
And while we've got one of the largest players in this area. We believe there is opportunity in the dollar grow within the market 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 Europe, ICF implemented to 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.
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.
So compliance project for solar development in Arizona, and environmental impact assessment for a wind project to 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.
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 in 2022 civilian fiscal priorities that could further expand our growth opportunities for the next year and beyond.
Now I will turn the call over to our CFO Bettina Welsh through financial review Bettina.
Thank you John good afternoon, everyone.
Our total revenue increased nine 4% to $394 1 million year on year led by 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.
Year to date revenue from commercial energy clients increased eight 7%, which is consistent with the positive business trends in its client category.
Third quarter pass through revenue increased to 31% of total revenue from 26, 5% in the year ago quarter, primarily due to higher activity on our USA I'd 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 contracts.
Service revenue grew four 1% year over year to $275 6 million and was up seven 1% year to date.
Gross profit increased two 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 58%, 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%.
Wondered 50 basis points below last year's third quarter with the majority due to lower facilities and related costs.
Third quarter EBITDA was up eight 2% to $39 9 million and adjusted EBITDA, which excludes special charges.
At 16, 1% to $43 8 million.
Adjusted EBITDA margin on service revenue expanded 160 basis points to 15, 9%.
Primarily reflecting higher utilization and 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 <unk> per diluted share up 14, 1% and 13, 8% respectively from the $17 9 million or <unk> 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.
A $100 million.
Capital expenditures for the first nine months were $12 3 million compared to $12 9 million in the prior year.
Days 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 175 by the end of the year.
Also today, we declared a quarterly cash dividend of <unk> 14 per share payable on January 12, 2022 to shareholders of record on December 10 2025.
For modeling purposes.
Here, our expectations for the full year 2021.
Depreciation and amortization expense.
But it to be in the range of $19 million to $20 million.
Amortization of intangibles should be between 11, eight and $12 2 million.
Interest expense is now expected to range from 10% to $11 million.
And our 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.
<unk> 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.
Thank you Bettina.
As you've seen in today's earnings release, our year to date performance and expectations for a good showing in Q4 have led us to increase our guidance range for full year, 2021, GAAP EPS and non-GAAP EPS, which now represents year on year growth of 45% and 15% respectively at the midpoint ebay.
EBITDA is anticipated to be at the high end of the guided range or slightly above.
The guidance ranges for total revenue and service revenue remained the same.
We expect fourth quarter service revenues to be comparable to third quarter levels with similar trends, namely that growth in the government and commercial energy client categories were 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.
We will get 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 is an important differentiator.
Of course, we have not been immune from the staffing issues that have impacted others in our industry.
In fact, most industries in the country.
That said, we believe we are navigating navigating better than most and have expanded our recruiting and retention activities in today's challenging business environment.
We have nurtured collaborative culture at Ics for the past 50 years it.
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 enabled 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 19th 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 a cross cutting capabilities in technology and digital engagement.
Invitations will be sent out shortly.
Direct any questions to Lynn Morgen, we do hope you can join us.
With that operator, I'd like to now open the call to questions.
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 youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again, if you have.
A question. Please press Star then one and we have our first question from Tobey Sommer with choice Securities.
Thank you.
John I was hoping you could.
Maybe tell us about your acquisition appetite and intention given what looks like.
What must have been what must have been a pretty big swings for the company.
Sure.
I think as we've talked about in the past Tobey.
M&A has been a key component of our.
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.
That has been inorganic and I think as we look forward we certainly.
I continue to believe that we can add value and drive growth in the company.
Through M&A activities I think we remain focused in the same markets we've talked about quite.
Quite a bit over the last couple of years in the federal market is really looking at it modernization.
And federal Health markets, and then on the commercial side looking.
And the energy industry and I think that's been our focus.
And we will continue to look for the companies that bring either deep domain expertise of 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 looking to get quality companies, where we can.
I'll make one plus one equal three and so I think.
I think the focus remains consistent with what we've talked about.
Quite focused on.
Youre trying to add scale and capability in these key growth markets, where we can really drive significant synergistic value for shareholders.
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 by the administration I think by and large we're still winning awards that we're in capture and bid submitted prior to the new administration. So the.
The strong sales performance in the.
The very strong book to Bill results.
We've reported for the last.
Four or five quarters really I think are do not reflect the potential upside from this administration I think that.
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.
And then we start to win those.
And it 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.
No.
The book to Bill in the sales you've seen predate the administration.
Okay. 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.
That corporate America, largely is tackling, especially the midstream sector of course sure of course yeah.
I think.
We're well north of 95% of our.
Employees are vaccinated I mean, we have.
Statements that.
Post the vaccine requirement our employees.
<unk>.
I think the end of November.
And so we're working through the last 5% I think.
Yeah.
The results are increasing daily my senses.
We will get the vast majority of folks vaccinated.
I don't think we're going to see material impact from a vaccination policy NR.
On our business I think to the extent, we have issues, we'll be able to match that don't expect any.
Material 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 where material risks.
Thanks, and last question for me if I could just get your broad sense for if inflation stays.
Stays elevated for a period of time.
How does that.
Impact your ability to grow it.
And to achieve the margin goals that you would like.
I think that I think as we've talked in the past.
I think they would.
ICF is fairly inflation resistant or proof I mean, 65, 7% of our workers and government markets.
That I don't think we'd see some of the impacts from inflation and the energy industry.
I think.
It's not a significant concern so I think I think we believe.
The in place and 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 were watching that carefully monitoring it carefully.
Certainly doing what we need to.
Remain at market.
Retain and keep our people motivated.
It's a challenging time I do think on that front.
We believe we will be able to.
Past.
A significant portion of those cost to our clients.
You've also talked about.
We are.
We are having we are achieving savings from the pandemic that we think will last with long run both in travel and entertainment and facilities costs, which I think also provide a buffer to kind of manage.
<unk> that we're feeling on the wage front and so I guess, that's a long winded way of saying Tom is that I think.
I think we feel were.
Sure.
Good shape.
Should be able to Madison, whether an inflationary environment.
And deliver because of the margins and further on expectation.
Thank you very much.
Sure.
And we have our next question from Joseph <unk> with Canaccord.
Hey, guys.
Afternoon, good results I'm just wondering.
If we could drill down a little bit more.
Some of the mitigation comment.
Hey, John.
On FEMA.
And then.
On the HUD side of things it sounds like.
That those budgets are or at least on the FEMA side.
Incrementally bigger than you thought and then timing on any.
A piece of the business that could be put out to bid there and all of them.
A follow up.
Sure.
What do you think that.
Theres certainly more emphasis in FEMA on mitigation.
<unk> and as you know and I've said in the remarks, the budgets are increasing their they've also open 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.
As we go forward here.
Next two or three or four quarters.
Yeah.
It's a core part of our business. So we certainly see the mitigation.
Patient market as a growth market and the FEMA component of that market of growth market. As you know, we're a leader on the <unk> side of the mitigation.
Activities.
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'd probably one more.
Opportunities.
Sorry, I have one.
At the high end, we're one of the least.
Most awarded firms on the mitigation from CDC mitigation front.
And there is still as I said in my remarks significant.
Award decisions pending in that market given the appropriations from 2018 and as I've 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 it will be more opportunity there.
We expect.
No.
Awards in the near term on.
Certainly we've been discussing our Puerto Rico mitigation opportunities.
Those are moving along we would expect decisions here in the next quarter or two on those and so.
We certainly view that as a growth market, Joe and an increase in our market.
The trends are becoming more favorable.
Tobey asked the question well.
What are the SC 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.
Mitigation, which should lead to proposal activities here in the next quarter or two for us.
Got it and then.
Archie Modernizations Ben.
Doing really well.
It's been a very steady performance on new contract awards some of those obviously a little bit on the larger side too.
It looks like maybe this quarter was a little lighter or is there anything.
Building there in the pipeline.
In the near term pipeline.
Any kind of commentary on the quarterly bookings there I know, obviously, sometimes things are lumpy up and down and timing is.
Really more.
All of a factor than anything else. Thanks, a lot guys. Yeah sure Yeah, I mean, I think it's well first of all.
Quite pleased that the business was 17%.
In the quarter that was that was.
That was good to see.
I mean, we have a very robust pipeline and IP monetization.
No.
I think we.
Our pipeline is north of one.
$1 $5 billion, I think I said record high.
This quarter, the rewards can be lumpy, but I think.
I am confident that's going to remain up.
Significant growth driver for us here as we.
Look to the future and looked at the long term as I've said before I think we are in the third or fourth inning in the federal government.
Of modernizing it platforms, including civilian platforms and so I think it's a positive long term trend for us.
Yes.
So.
I remain I think we remain very excited and very positive on that market.
Thanks, very much John.
And thank you. Our next question comes from Andrew Nicholas with William Blair.
Hi, Good afternoon. This is actually Trevor Romeo in for Andrew I appreciate you taking the questions.
First of all just kind of wanted to ask about the commercial marketing business I think last quarter.
It's kind of returned to being roughly flattish.
I'm a bit this quarter. So I'm, just curious kind of what caused the incremental weakness this quarter and any more color on.
Trends for that business and kind of your expected pace of rebound in the future would be really helpful.
Yes, I think.
<unk>.
I think we as you'll see in the release I think the decline in our commercial.
<unk> revenues was entirely related to commercial marketing services.
<unk>.
We did complete a contract in the second half of last year that.
It's certainly impacting the comparisons this year.
But beyond that I would say that.
Commercial marketing recovery.
Commercial marketing services.
It has not recovered in the way we had 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 business is very carefully as we've talked about.
It does represent as I said about 9% of our year to date revenues.
<unk>.
And so I think we saw.
There are certain verticals in that in that in <unk>.
Marketing services have continued to be.
Impacted by the pandemic and client budgets are tight and clients are being very careful with our spending and we certainly saw some of that in the third quarter.
And so I think that some.
That's the that's what's going on in commercial marketing services.
Yes.
Okay got it that's helpful. Thanks, and then just on the on margin I know this is kind of a.
Estimate in prior quarters, but.
Particularly given the strong margins this quarter.
Just wanted to see if your view changed at all on sort of potential for expense.
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.
I would say that.
The expense front.
I think we're continuing to.
Reap benefits from the impacts of the pandemic that no one will not be.
Are not sustainable, but having said that I think we have talked about the fact that in the long run.
Believe that 25% of the travel and entertainment spend pre pandemic we can.
We will save as we go forward I think we've taken steps to manage our facility footprint.
And we.
We continue to look at our facility footprint as a way to.
Reduce our expenses going forward, we think that could be material.
Obviously some of what Youre seeing is we've our offices are still closed some of our operating costs and our offices are down essentially we will open up those offices again so.
And so I think there is some leverage there.
But.
This quarter was.
It was quite unusual in.
On several fronts in terms of how we got to the margin levels I do I think we have historically talked about 10 to 20 bps of.
Improvement in adjusted EBITDA to service revenue over time, I think there is potential that could go higher given some of the.
Savings that were.
Just mentioned certainly we will continue to take a hard look at that in a month.
Sure we will have a discussion on that as we talk about guidance for next year.
Okay, great. Thank you very much appreciate it.
And as a reminder, if you have a question. Please enter the queue by pressing Star then one our next question comes from Marc Riddick with Sidoti <unk> Company.
Hi, good evening.
Mark.
So all my questions have already been answered, but I did want to touch a little bit around.
<unk>.
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 I have a quick follow up after that.
Well I would say in terms of the market I mean, I think we've reported significant growth in our international markets for.
For several quarters now.
Hello.
And I would say in the third quarter.
As I said in my remarks, we are seeing.
So positive signs in the European Commission market.
And early signs of activation of work.
We have a.
Contracted too.
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.
De carbonization out of the European Commission, that's certainly an area, where we're going to see growth.
As we go forward.
So were the European Commission.
The pandemic, we seating, we're certainly starting to see signs of of <unk>.
Activation of Oregon and growth there, which we're quite pleased with we've also had a project that we've talked about that it's been a one year energy related project has had.
Wind down early next year, but even setting that aside I think we are.
We're generally pleased with it.
Trends were.
We're seeing in the European Commission and the opportunities there on the <unk>.
M&A front I would say that.
We're primarily focused on we are focused here.
Here in North America, right now on the M&A front I think we really.
Believe that given the key growth drivers were talking about.
The highest value can be can be achieved.
With a focus on North America in the key growth markets, It modernization health and <unk>.
Energy and so.
So youre actually not it's not it's not a focus at least for the next year.
But obviously, we were out in the market and talking to people and if we saw.
And I am sure we will continue at about valuate opportunities there, but it's not an area of focus right now on.
On the M&A side.
Okay, Great and then my follow up is around the potential head count adds just wondering if you could talk a little bit about whether it.
So how are you feeling about adding on whether it's on the junior level or certainly.
So on acquisitions.
Alright.
So the place yet.
At this time, but I just want to.
So I came on sort of how you're feeling about sort of layering on the base.
Getting our foundation strong.
I mean, 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 head count and.
And so we've been able to do that I think we've I will say, we've we're investing.
We've we've materially increased.
Our investment in recruiting in the last several quarters.
Given the competitive nature of the job market, but with that and we've been able to hire the talent to support our growth.
And I think we'll need to maintain and sustain those investments, but generally we've been able to hire the people and in a timely way and you can see in the results the growth we're driving.
I do think.
We will continue to invest in our recruiting we are quite focused on.
Also on the retention side once we have the people on board.
Making sure were highly engaged with our workforce that we're we really understand where the market is and where it.
Dressing any market issues thinking hard about retention.
And all the other things you need to do throughout this pandemic.
Wellness and making sure they.
The balance of work at home life and those types of things so.
But on the recruiting front I think we've generally been able to.
We're certainly adding head count and have been able to find the people.
Much appreciate it thank you.
Thank you we have no further questions in queue I will now turn the call over to John Watson for closing remarks.
Well. Thank you for participating in today's call. We look forward to meeting you at upcoming Investor and certainly hope to see all of our Investor day in January.
Thanks for attending and take care.
Thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.
[music].
Yeah.
Okay.
[music].
Okay.
Sure.
[music].
Okay.
[music].
[music].
[music].
Welcome to the third quarter of 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.
A question. Please press star one on your Touchtone phone to register for a question. Please note. This conference is being recorded on Tuesday November 2nd 2021, 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.
Thank you Vanessa and good afternoon, everyone and thank you for joining us to review Icf's third quarter 2021 performance.
With us today from ICF, like John Boston, 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 in understanding ICF management's expectations for future performance. These statements are subject to a number of <unk>.
That could cause actual events and results to differ materially and I refer you to our November 2nd 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 I would like 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 Washington discuss third quarter 2020, my performance John.
Thank you Lynn and thank you all for participating on our call today to review, our third quarter and year to date performance and discuss our business outlook.
By all measures that this was another strong quarter for ICF, demonstrating the positive momentum in our business.
We have experienced throughout this year and pointing to the substantial growth opportunities on the horizon as we head into 2022.
T takeaways that I would like to highlight include the continued revenue growth from our government and commercial energy clients, which together accounted for 88% of year to date revenues.
The seven 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.
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 one five times in Q3, and 133 times for the trailing 12 months. These metrics along with a record new business development pipeline of seven 3 billion.
Underscore how well aligned ICF subject matter expertise and cost 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 and repeat recompete contract by the U S centers for disease control and prevention and the National Institutes of health to support the nationwide surveillance platform <unk> as well as to provide an.
Array of digital transformation, how surveillance program management and communication services to several agencies divisions and offices to support HIV prevention smoking cessation cancer prevention in genetic rare disease research.
Additionally, we were awarded $15 million of 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 a small but uniquely specialized firm that further strengthens ICF positioning the public health Arena.
<unk> brings advanced health analytics, and bioinformatics capabilities to ICF, along with how they 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 with together with the <unk> 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 veteran administration.
On a related note you will see our earnings release that we called out an after tax third quarter expense of <unk> 12 per share related to M&A costs.
This was in connection with a highly competitive transaction that we pursued that 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 want 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 months $89 million contract for follow on FEMA Grant management support.
I would say it has a rigorous process for announcing new contract wins, but we wanted to make sure you're 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 brick 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 remained to be awarded.
Just yesterday HUD announced the allocation of more than $2 billion in CDG disaster recovery and mitigation funding for set 15 separate disasters that occurred across 10 states in 2020, and we expect that by the 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 CD BG 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 authorities linked 21 program to provide environmental services to support a major infrastructure expansion to its passenger rail network.
Yes climate environment and Transportation Division also on 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 pass through 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 at the impact of Covid receipts 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 Epsilon 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 resident in our commercial marketing business across the ICF footprint, which is materializing and expanded work for government and commercial energy clients and.
And we continue to carefully manage this part of our commercial business, which represented about 9% of total year to date revenues.
And the last two quarters, we have seen a discernible pick up 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 remain the core of Icf's commercial client category year.
Year to date revenues increased eight 7% representing solid growth across our energy efficiency energy markets advisory and domestic environmental services businesses.
With contract awards for new 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 in the dollar 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's implemented to 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.
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. The construction of compliance project for solar development in Arizona, and 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 in 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 Welsh through a financial review Bettina. Thank.
Thank you John and good afternoon, everyone.
Our total revenue increased nine 4% to $394 1 million year on year led by 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.
Sure.
Year to date revenue from commercial energy clients increased eight 7%, which is consistent with the positive business trends in this client category.
Third quarter pass through revenue increased to 31% of total revenue from 26, 5% in a year ago quarter, primarily due to higher activity on our USA I'd project, where.
For the first nine months of 2021 pastures 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 four 1% year over year to $275 6 million and was up seven 1% year to date.
Gross profit increased two 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.
Service revenue gross margin was 58%, 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%.
<unk> hundred 50 basis points below last year's third quarter with the majority due to lower facilities and related costs.
Third quarter EBITDA was up eight 2% to $39 9 million and adjusted EBITDA, which excludes special charges.
A 16, 1% to $43 8 million.
Adjusted EBITDA margin on service revenue expanded 160 basis points to 15, 9%.
Primarily reflecting higher utilization and 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 <unk> per diluted share up 14, 1% and 13, 8% respectively from the $17 9 million or <unk> 94 per diluted share reported in the third quarter of 2020.
On a non-GAAP basis, excluding the impact of amortization of intangible 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.
$100 million.
Capital expenditures for the first nine months were $12 3 million compared to $12 9 million in the prior year.
Days 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 175 by the end of the year.
Also today, we declared a quarterly cash dividend of <unk> 14 per share payable on January 12, 2022 to shareholders of record on December 10 2021.
For modeling purposes.
Here, our expectations for the full year 2021.
Depreciation and amortization expense is expected to be in the range of $19 million to $20 million.
Amortization of intangibles should be between 11, eight and $12 2 million.
Interest expense is now expected to range from 10% to $11 million.
And our 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.
And capital expenditures are anticipated to be approximately $20 million.
Icf's capital allocation priorities remain unchanged.
Once 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.
Thank you Bettina.
As you've seen in today's earnings release, our year to date performance and expectations for a good showing in Q4 have led us to increase our guidance range for full year, 2021, GAAP EPS and non-GAAP EPS, which now represents year on year growth of 45% and 15% respectively at the midpoint.
EBITDA is anticipated to be at the high end of the guided range or slightly above.
The guidance ranges for total revenue and service revenue remained the same.
We expect fourth quarter service revenues to be comparable to third quarter levels with similar trends, namely that growth in the government and commercial energy client categories were more than offset lower commercial marketing revenues.
So 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.
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 is an important differentiator.
Of course, we have not been immune from the staffing issues that have impacted others in our industry.
In fact, most industries in the country.
That said, we believe we are navigating navigating better than most and have expanded our recruiting and retention activities in today's challenging business environment.
We have nurtured collaborative culture at Ics for the past 50 years it.
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.
Our culture has been a key factor in the company's success to date, and we will continue to drive our growth.
Lastly on January 19th 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 a cross cutting capabilities in technology and digital engagement invitations.
Invitations will be sent out shortly please direct any questions to Lynn Morgen, We do hope you can join us.
With that operator, I'd like to now open the call to questions.
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 over the hash key if youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again, if you have.
A question. Please press Star then one and we have our first question from Tobey Sommer with choice Securities.
Thank you.
John I was hoping you could.
Maybe tell us about your acquisition appetite and intention given what looks like.
What must have been what must have been a pretty big swings for the company.
Sure.
I think as we've talked about in the past Tobey.
M&A has been a key component of our.
Our strategy for the company for 15 years.
Sure.
As we've talked about in that period.
We've enjoyed 15% compound average growth rate about half of that has been organic.
That has been inorganic and I think as we look forward we certainly.
I continue to believe that we can add value and drive growth in the company.
Through M&A activities I think we remain focused on the same markets we've talked about quite.
Quite a bit over the last couple of years in the federal market started looking at it modernization.
And federal Health markets, and then on the commercial side looking.
And the energy industry and I think that's been our focus.
And we'll continue to look for companies that bring either deep domain expertise implementation skills that.
We think we can really drive synergistic revenues as we've talked many times we.
No. We don't do turnarounds, we don't do fixer uppers, we're looking looking to get quality companies, where we can make.
Make one plus one equal three and so I think.
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.
How would you describe the contract awards in the quarter with respect to sort of momentum established <unk>.
<unk> to the administration change versus.
Processes and procurements that started after the baton was passed by the administration.
By and large we're still winning awards that we're in capture and bid submitted prior to the New administration. So the strong sales performance in the.
The very strong book to Bill.
<unk>.
We've reported for the last.
Fourth quarter is really I think are do not reflect the potential upside from this administration I think that.
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.
And then we start to win those.
And it 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.
No.
The book to Bill in the sales you've seen pre data administration.
Okay. 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.
That corporate America, largely is tackling, especially the government services sector of course sure of course yeah.
I think.
Word of well north of 95% of our.
Employees are vaccinated I mean, we have.
Statements that.
Post the vaccine requirement on our employees.
But I think the end of November.
And so we're working through that.
<unk>, 5% I think.
The results are increasing daily my senses.
We will get the vast majority of folks vaccinated.
I don't think we're going to see material impact from a vaccination policy NR.
On our business I think.
Instead, we have issues, we'll be able to match that I don't expect any.
Material material issues, there I will note all the officers in the company at <unk> at this point so certainly the leadership is.
Aligned on this issue and I don't expect material impacts on material risks.
Thanks, and last question for me, if I could just get your broad sense for.
Yes.
Inflation fixed.
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.
I think that I think as we've talked in the past.
I think there was.
ICF is fairly inflation resistant or proof I mean, 65, 7% of our workers and government markets.
That I don't think we'd see some of the impacts from inflation and the energy industry.
Again I think.
It's not a significant concern so I think I think we believe.
The inflation will 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 we're watching that carefully monitoring it carefully. We're we're certainly doing what we need to.
Remain at market.
We retain and keep our people motivated.
It is a challenging time I do think on that front.
We believe we will be able to.
Past.
Paas significant portion of those cost to our clients as we've also talked about.
We are.
We are having 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.
<unk> that we're feeling on the on the wage front and so I guess, that's a long winded way of saying that I think.
I think we feel were.
Sure.
Shape.
It should be able to manage and whether an inflationary environment.
Deliver silver at the margins and further on expectations.
Thank you very much.
Sure.
And we have our next question from Joseph <unk> with Canaccord.
Hey, guys. Good afternoon. Good results just wondering.
If we could drill down a little bit more.
To some of the mitigation comment.
Hey, John.
Both on FEMA.
And then on.
On the HUD side of things it sounds like.
That those.
Those budgets are or at least on the FEMA side.
Incrementally bigger than you thought and then timing on any.
Piece of the business that could be put out to bid there not all of them.
I'll follow up.
Sure.
I think that.
There is certainly more emphasis in FEMA on mitigation.
Funding and as you know and I've said in the remarks, the budgets are increasing their they are also open 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.
As we go forward here.
Next two to three to four quarters.
Yes.
And it's a core part of our business. So we certainly see the.
Mitigation market as a growth market.
The FEMA component of that market of growth market as you know, we're a leader on the <unk> side of the mitigation.
Activities.
As we've talked about in the past we've won.
Five or six mitigation contracts here in the last two or three quarters, they've been probably one more.
Opportunities.
Okay.
Or sort of one at the high end, we're one of the.
Most awarded firms on the mitigation front CVT mitigation front.
And there is still as I said in remarks significant.
Award decisions pending.
In that market given the appropriations on from 2018 and as I've said in my marks 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 it will be more opportunity there.
We expect.
Words in the near term on.
Certainly we've been discussing the Puerto Rico mitigation opportunities.
Those are moving along we would expect decisions here in the next quarter or two on those and so.
We certainly view that as a.
Growth market, Joe and an increase in our market.
The trends are becoming more favorable.
Tobey asked the question well.
What are the as the administration has had an impact I think we're starting to see some of the initial impacts of this administration in terms of putting more money.
Mitigation, which should lead to proposal activities here in the next quarter or two for us.
Got it and then.
Archie modernization then.
Doing really well.
It's been a very steady performance on new contract awards some of those obviously a little bit on the larger side too.
It looked like maybe this quarter was a little lighter there anything bill.
Building there in the pipeline.
In the near term pipeline.
Kind of commentary on the quarterly bookings there I know, obviously, sometimes things are lumpy up and down and timing is.
It was really more.
All of a factor than anything else. Thanks, a lot guys. Yeah sure Yeah, I mean, I think it's well first of all.
Quite pleased with the business grew 17%.
In the quarter that was.
That was good to see.
I mean, we have a very robust pipeline and IP monetization.
I think we.
Pipeline is north of one.
A $1 5 billion and I think I said record high.
This quarter, the rewards can be lumpy, but I think.
I am confident that is going to remain up.
<unk> 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 civilians platforms and so I think it's a positive long term trend for us.
Yes.
So.
I remain I think we remain very excited and very positive on that market.
Thanks, very much John.
And thank you. Our next question comes from Andrew Nicholas with William Blair.
Hi, Good afternoon. This is actually Trevor Romeo in for Andrew I appreciate you taking the questions.
First of all just kind of wanted to ask about the commercial marketing business I think last quarter.
It's kind of returned to being roughly flattish.
I'm a bit this quarter. So just curious kind of what caused the incremental weakness this quarter and any more color on.
Trends for that business and kind of your expected pace of rebound in the future would be really helpful.
Yes, I think the.
<unk>.
I think we as you'll see in the release I think the decline in our commercial.
Revenues was entirely related to the commercial marketing services.
<unk>.
We did have completed a contract in the second half of last year that.
It's certainly impacting the comparisons this year.
But beyond that I would say that.
Commercial market recovery.
Commercial marketing services.
It has not recovered and 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 business is 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.
Are there certain verticals in that in that <unk>.
Marketing services have continued to be impac.
Impacted by the pandemic and client budgets are tight and clients are being very careful with our spending and we certainly saw some of that in the third quarter.
And so I think that some.
That's the that's what's going on in commercial marketing services.
Yes.
Okay got it that's helpful. Thanks, and then just on the on margin I know it was kind of asking that in prior quarters, but.
Particularly given the strong margins this quarter just wanted to see if your views changed at all on sort of potential for Covid.
The next 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.
I would say that.
The expense front.
I think we're continuing to.
Reap benefits from the impacts of the pandemic that no one will not be.
Are not sustainable, but having said that I think we have talked about the fact that in the long run we believe that 25% of the travel and entertainment spend pre pandemic we can.
We will save as we go forward I think we've taken steps to manage our facility footprint.
And we will continue to look at our facility footprint as a way to.
Reduce our expenses going forward, we think that could be material.
Obviously with some of what Youre seeing is we have our officers are still closed some of our operating costs and our offices are down essentially we will open up those offices again so.
And so I think there is some leverage there.
But.
So.
This quarter was.
It was quite unusual in.
On several fronts in terms of how we thought the market levels I do I think we have historically talked about 10 to 20 bps of.
Improvement in adjusted EBITDA to service revenue over time, I think there is potential that could go higher given some of the.
Savings that were there.
I've just mentioned and certainly we continue to take a hard look at that and.
I'm not sure we will have a discussion on that as we talk about guidance for next year.
Sure.
Okay, great. Thank you very much appreciate it.
And as a reminder, if you have a question. Please enter the queue by pressing Star then one our next question comes from Marc Riddick with Sidoti <unk> Company.
Hi, good evening.
Tomorrow.
So all my questions have already been answered, but I did want to touch a little bit around the.
If you could share some thoughts on what you're seeing internationally, both as far as activity levels as well as potential.
Potentials.
For adding.
Expertise outside of the states and then I have a quick follow up after that.
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.
Hello.
And I would say in the third quarter.
As I said in my remarks, we are seeing.
So positive signs in the European Commission market.
And early signs of activation of work.
We have a.
Our contracted too.
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.
De carbonization out of the European Commission, and that's certainly an area, where we're going to see growth.
As we go forward and so were the European Commission.
The pandemic, we've seating, we're certainly starting to see signs of of <unk>.
Activation of Oregon and growth there, which we're quite pleased with we've also had a project that we've talked about that it's been a one year energy related project has had.
That will wind down early next year, but even setting that aside I think we are.
We're generally pleased.
The trends.
We're seeing in the European Commission and the opportunities there.
The M&A front I would say that.
We're primarily focused on we are focused.
Here in North America, right now on the M&A front I think we really.
I believe that given the key growth drivers were talking about.
The the highest value can be can be achieved.
With a focus on North America in the key growth markets It modernization health and.
In energy and so.
So Europe is really not it's not it's not a focus at least for the next year.
But obviously, we were out in the market and talking to people and if we saw.
And I'm sure we will continue at about valuate opportunities there, but it's not an area of focus right now.
On the M&A side.
Okay, Great and then my follow up is around the potential head count adds just wondering if you could talk a little bit about weather.
So how are you feeling about adding on whether it's on the junior level or certainly John.
So on acquisitions.
Alright.
The place yet.
At this time, but I just want to check in on sort of how are you feeling about sort of layering on the basin.
Getting our salvation Sean.
I mean, obviously, we are a people driven business.
At the end of the day, if we're growing our revenues we need to be adding people, we need to be adding head count.
And so we've been able to do that I think we've I will say we were investing.
We've we've materially increased our investment in recruiting in the last several quarters.
Given the competitive nature of the job market, but with that and we've been able to hire the talent to support our growth.
And I think we will we will need to maintain and sustain those investments, but generally we've been able to hire the people and in a timely way and you can see in the results the growth we are driving.
I do think.
We'll continue to invest in our recruiting we are quite focused on.
Also on the retention side once we have the people floored.
Making sure were highly engaged with our workforce that we're.
We really understand where the market is and where.
Dressing any market issues thinking hard about retention.
And all the other things you need to do throughout this pandemic.
Wellness and making sure they.
The balance of work and home life and those type of things so.
But on the recruiting front I think we've generally been able to.
We're certainly adding head count and have been able to find the people.
Much appreciate it thank you.
Thank you we have no further questions in queue I will now turn the call over to John Watson for closing remarks.
Well. Thank you for participating in today's call. We look forward to meeting you at upcoming Investor and certainly hope to see you all our Investor day in January.
Thanks for attending and take care.
And thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.