ICF International Inc. Q1 2023 Earnings Call
Yeah.
Welcome to the first quarter 2023 ICF earnings Conference call. My name is Grace and I'll be your operator for today's call. At this time all participants are in a listen only mode.
Afterwards, you'll be invited to participate in the question and answer session. During the question and answer session. You will have a question. Please press star and then one one on your Touchtone phone I will now turn the call over to Lynn Morgen of Advisory Partners Lynn you may begin.
Thank you operator, and good afternoon, everyone and thank you for joining us to review Icf's first quarter 2023 performance goals.
Today for my CFO , John Watson Chair, and CEO and Barry brought us CFO joining pattern is James Morgan Chief operating officer.
During this conference call, we will make forward looking statements to assist you in understanding ICF management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events or results to differ materially and I refer you to our may 9th 2023 press release and our SEC.
Filings for discussions of those risks. In addition, our statements. During this call are based on our views as of today, we anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may at some point elect to update the forward looking statements made today, but specifically.
Name any obligation to do so I will now turn over the call to Icf's CEO , John Watson to discuss first quarter 2023 before it John .
Well, Thanks, Ryan and good afternoon, everyone. Thank you for joining us to review Icf's first quarter results and discuss our outlook for 2023.
Our strong first quarter results reflected icf's expanded capabilities in the growth markets, we have identified and have invested in namely it modernization public health disaster management utility consulting and climate environment and infrastructure services.
You said it was a priority spending for our clients and in 2022 accounted for approximately 75% of revenue.
Next to our deep domain expertise and increased scale.
Expect these areas to continue to grow as a percentage of Icf's revenue in 2023 and beyond.
In terms of takeaways from our performance in the quarter.
First we reported over 15% growth in service revenue and total revenue increased close to 17%.
Organic growth was closer to 8%.
Second we achieved significant year on year margin expansion in the first quarter, primarily resulting from increased scale.
Origination levels and reduced facility cost.
This margin expansion is in line with our guidance of 15%.
Adjusted EBITA to service revenue margin for the full year.
Third we made the decision to exit a small non core commercial U K event service Lane that was not contributing to profitability, while immaterial from a revenue perspective. It is indicative of our strategy to focus our investment dollars and human capital on areas that are have the potential to drive growth and are synergistic with the.
Rest of our service offerings.
Fourth this was another quarter of strong contract awards for ICF.
Over 13% year on year, and resulting in a trailing 12 months book to Bill ratio of one three.
So our business development pipeline increased 16% sequentially after more than $400 million in contract wins, which speaks to the high level of bid and proposal activity, we are experiencing as well as the increased value of the contracts we're bidding on.
Taken together these accomplishments represent a strong start to the year and underscore our confidence in <unk> performance in 2023 and beyond.
Looking across our product categories. There are several highlights worth noting.
Revenues from federal government clients increased over 22%.
Starting a combination of high single digit organic growth.
The contribution from the Symantec acquisition, which we closed in July of last year.
Or actually modernization and public health markets.
Drivers of first quarter growth in this client category, reflecting strong spending trends amongst our civilian agency clients.
Both of us have been seen robust funding and bipartisan support.
A recent Bloomberg analysis sided contract spending at federal agencies is forecasted to be a record of 78 billion for 2023. It was about 40% of that's been taking place in the fourth quarter.
Italy analysis noted our civilian agency procurement is continuing a pattern of steady annual growth not seen since at least 2017.
Hello agencies are prioritizing customer experience in digital services.
Data access and use.
In our sweet spot.
Innovation is dramatic vessels complete in the first quarter, we continued to win additional business from existing clients.
Italy, we are working together many potential revenue synergies.
Really at the centers for Medicare and Medicaid services and as you'll see the frenetic pace has served for many years.
As mentioned previously this was a strong quarter for our public health work.
In the first quarter, we continued to execute a number of contracts supporting federal agency efforts to address mental health substance abuse, and infectious disease and global health security.
We also worked on issues related to health equity social determinants of health and the future of the public health system.
Adjacent to this work was the first quarter ramp up of a new contract for the administration for children and families offer separately JV settlement to assist in driving Afghan refugees and getting access to immigration and legal services.
Additionally, we continue to experience demand from federal clients for ICF services with respect to the infrastructure and jobs Act.
Under existing Federal agency contracts, we've been passed for $245 million of projects to support J.
Digital modernization technical assistance and communications management support for April .
Any programs.
Also I should have you seen considerable interest from states and other perspective.
Funding recipients for a range of environmental support services, including planning and analytical services.
Our pipeline of opportunities containing JA and inflation runs out for that.
IRA later work continues to grow and is currently at approximately $250 million from $150 million at the end of 2022.
This includes a modest amount of work related to the IRS.
Just to see awards to support federal agencies responsibilities under the act late in the second half of this year.
In the first quarter, our revenues from state and local government clients increased 13, 3% year on year.
It's two key business areas disaster management environment, and infrastructure consulting that executed effectively on existing contracts and continue to win new work.
In particular, we noted in.
Not released the awarded a new contract with a value of $25 9 million with.
The U S territory to support implementation of additional energy program. So we'll provide eligible households, with renewable energy installations in case of an extended power outage.
Also we continue to win smaller strategic resilience advisory work in new jurisdictions, and with new clients and current geographies.
Currently our billing mitigation advisory work for 30, plus clients across 17 states.
Three territories, which enables us to build relationships in key markets and are positioned for downstream implementation and the recovery work.
There are significant synergies between our disaster recovery and mitigation work.
And the resilience and energy related work, we do for state and local and commercial clients in.
In Q1.
You need to see the synergies pay off with good size wins with critical infrastructure clients that Oregon and California.
This is a good segue to our commercial energy business, where revenues increased almost 19% in the quarter with each component of this business posting strong double digit growth.
Our commercial utility program revenue growth was driven by two large energy efficiency projects. The addition of several new marquee clients as well as the expansion projects for existing utility clients.
We saw particular strength coming from our innovative offerings related to electrification and grid modernization behavioral efficiency programs.
Pricing.
And energy advisory experienced strong demand for our services in the areas of Decarbonising energy markets in particular demand from renewable energy developers, whose business is supported by the JA and IRI.
We recently introduced energy inside Ics technology enabled service, helping developers identify and analyze renewable project locations and a new power price forecast and subscription service.
Those have been the favorable client response.
Our environment and planning group grew substantially in the first quarter led by energy sector related projects as well as the brand acquisition.
General ramping up other environmental projects.
<unk> energy projects are strong both for developers seeking to permit new onshore and offshore projects and for utilities seeking environmental permits for large infrastructure reliability and resilience projects such as the underground power lines.
To sum up the first quarter was a period of excellent execution process in which we made significant progress in tears to support our full year $2023 as long as our longer term financial targets.
Now I will turn the call over to our CFO Barry brought us for a financial review Barry. Thank.
Thank you John and good afternoon, everyone in the first quarter of 2023, our total revenues were $483 3 million up 16, 9% as compared to the same period last year. This represented a balanced contribution from organic and acquisition growth.
Benefited from broad based revenue increases from our government clients up 16, 3% year over year and revenues from our commercial clients, which increased 18, 8% as compared to the first quarter of last year.
Service revenue grew 15, 3%, a $351 3 million.
Our first quarter total revenue benefited from a onetime media bypass through of approximately $6 million even after adjusting for this our year on year growth in total revenue was firmly in the double digit range at over 15%.
Pass through revenue for the first quarter accounted for 27, 3% of total revenue as compared to 26, 3% in the first quarter of 2022.
Gross margin was 35, 3% of total revenue and 48, 6% of service revenue as compared to 37, 6% and 51% in last year's first quarter respectively.
The year over year variance was mainly reflected.
Mainly reflected a combination of factors, which included the timing of revenue recognition on fixed price contracts.
Energy incentive fees also.
Samantha acquisition similar to our creative acquisition generates a lower gross margin, but higher EBITDA margin than we typically experience.
As a percentage of service revenue, our indirect and selling expenses on an adjusted basis declined to 33, 9% of service revenue 320 basis points below last year's levels as we continued to benefit from higher revenue.
Greater scale and reduced facility related expenses.
In absolute dollars indirect selling expenses indirect and selling expenses increased five 3% year on year, reflecting our ongoing investments in people and technology to support our long term growth initiatives.
Interest expense was $9 5 million as a result of higher debt balances and higher interest rates as compared to last year as I mentioned on our last call.
Erika I think high utilization managing our other non direct billable expenses.
And executing on our tax efficiency strategies, which will manifest in the second half of this year.
Our strong service revenue growth together with the initiatives I just mentioned.
And economies of scale drove a 24, 1% increase in EBITDA of $46 4 million and a 21, 8% increase in adjusted EBITDA of $51 million were also pleased to report our adjusted EBITDA margin on service revenue of 14, 5%, representing an 80 basis point improvement over the 13, 7%.
In the year ago quarter.
Net income totaled $16 4 million and diluted EPS was <unk> 87 per share in.
In the first quarter inclusive of $33 5 million or <unk> <unk> of tax effected special charges of approximately nine represented charges associated with the company's decision to discontinue its small noncore commercial UK that service line. The remainder represented severance acquisition related expenses and facility.
Relation costs.
While we may have other opportunities on the horizon to further reduce our facility cost they would be substantially less than what we incurred in 2022, our first quarter net income compared to the $17 9 million and 94 per share in the first quarter last year inclusive of 17 cents of tax effected special charges non-GAAP EPS increased eight.
4%.
<unk> 42 per share from a $1 31 per share reported in the first quarter of 2022.
Moving to cash flow statement and balance sheet, we used $17 million of operating cash for working capital needs in the first quarter of this year, which is in line with our historical trends and our increased scale.
<unk> expenditures totaled $6 4 million essentially the same period, a year ago sales days sales outstanding for the quarter improved to 71 days compared to 79 days in last year's first quarter as a result of our cash management initiatives.
Our debt at the end of March was $598 million as compared to $556 million of debt at the end of 2022. This increase was driven by the.
The cash seasonally required in the first quarter.
For year end bonuses stock repurchases as well as the timing of an extra payroll cycle. This quarter. Our adjusted leverage ratio was $2 98 at quarter end compared to $2 eight at year end approximately 50% of our total debt is at a fixed rate.
Consistent with our capital allocation strategy, we plan to focus on debt reduction as well as paying dividends repurchasing shares to offset the impact of employee incentive programs, making smaller opportunistic acquisitions.
In the first quarter the company used $18 1 million to repurchase repurchased 180000 shares.
Is sufficient to entirely offset the forecasted 2023 solution.
We still have $93 $7 million remaining under the current authorization plan.
We also announced today a quarterly cash dividend of <unk> 14 per share payable on July 14, 2023 to shareholders of record on June nine 2023.
Now to help you with your financial models. There are a few important metrics that are unchanged from our guidance in early March.
We expect our fully diluted.
<unk> weighted average share count to be approximately $19 1 million and our.
Capital expenditures are anticipated to be between 26% and $28 million.
Hey, Matt May have also noticed that we have streamlined our total revenue breakdown by market aggregating smaller end markets under the category of <unk>.
Thank you Barry.
We are pleased with our first quarter results with strong award and pipeline growth, we continue to achieve as a clear demonstration.
How well aligned Ics capabilities are with clients spending priorities suddenly we are pleased to reaffirm our guidance for 2023.
Represent substantial year on year growth across key financial metrics.
I see it has the capabilities and the scale to capture the considerable growth opportunities on the horizon.
We will continue to make the requisite investments in people and technology to build upon our competitive advantages and expand our addressable market.
Doing so will remain mindful of maintaining the cloud with culture, we are known for and continuing to advance the positive impact that our work has on society.
Operator, I'd like to now open the call to questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone.
Wait for your name to be announced to withdraw your question. Please press star one again.
These standby, while we compile the Q&A roster.
Our first question comes from Joe <unk> at Canaccord Genuity Your line.
Hey, guys. Good afternoon nice results.
Go back to your comments John on that.
Jay in the IRI pipeline growing but it sounds like it's mostly II, Jay and the pipeline growth at this point.
Great.
Do you expect to see that.
<unk>.
The IRI contribute more.
So that kind of combined pipeline over the next few quarters and then a couple of follow ups.
So.
Turning to comment is correct that <unk> represents.
We've discussed both the sales the vast majority of the sales and a significant portion of the pipeline and I would expect that IHA will remain certainly the majority of that.
Second majority for this year I think as we've talked about.
Joe I think the IRA it really is I.
So for this year, we'll see more opportunity given the funding is further along and so as coming contributing to pipeline more in the short run.
Sure. Thanks for that and then in the commercial area, especially in energy.
Yes.
If you could kind of give us a more detailed breakdown I know historically, you've done a lot with the utilities themselves, but the business is diversifying it sounds like youre doing a lot more with alternative and.
Green power producers.
Can we get a feel for how big the overall businesses X outside of the core utilities.
Joe I think.
I'd say a couple of things have been equal we talked about at our Investor day, a year ago, and I think it's still true.
The vast majority of the business is focused on energy efficiency 70, 580% of the business.
I mentioned in my remarks, we've had some good wins here in the last quarter, we continue to see growth there and kind of the mid mid to high single digit.
Our range.
But having said that.
Some of the newer opportunities around de Carbonization electric electrification.
Flexible load management.
Equity related things.
12, 15%, 20% of the business I think provides in a long run much higher potential growth area is double digit growth areas. We are seeing some signs of that certainly in the.
And the Decarbonization and electrification front you mentioned.
Seeing a lot of opportunity working with developers on of renewable solar and wind resources.
We're seeing opportunities around decarbonization.
And so that <unk>.
This is a smaller is growing more rapidly than I would've thought that a long run.
But we'll see that larger Marshall portion of the business in those new areas.
And we will continue to.
Accelerate the growth rate for our energy business I would also say that we've been we've had quite a nice first quarter with our environment understanding business, which does do some of the environmental work for on solar and wind.
But there is also working on broader infrastructure projects, we've had nice growth there and so.
To be honest, we were quite pleased.
Basically every quarter, our energy business grew double digits in the first quarter and.
And yes.
It gives us a very positive and bullish outlook on that business.
Thanks for the update.
Nice start to the year guys.
Yes, Thanks, Joe appreciate it.
One moment for our next question.
Our next question comes from the line of Tobey Sommer with true Securities you are live.
Hey, This is Jack Wilson on for Tobey.
I just wanted to ask a quick one so can you speak to head count growth and hiring in <unk>.
Sure I think that as we've discussed on prior calls.
It's the highest level.
First of all services firm and so.
If we're going to be growing.
As I said, 8% organically in the quarter then.
On an annualized basis, we need to be adding.
6% to 7% head count to deliver that growth, we always look to.
Squeeze a little more efficiency more utilization out of our existing staff, but.
We're certainly in a mode, where we're.
Adding head count and as I say I would have expected.
You have to be in the.
76% to 7% range with our 8% organic growth. Obviously, we also did the domestic this acquisition last year was strong.
Head count from a non organic perspective.
But I think that's how we think about the head count.
<unk> said before were investing quite significantly in recruiting.
And generally have been successful in attracting the talent.
And adding to head count.
And so.
We feel generally good that we'll be able to.
Sure.
The staff and the capabilities to achieve our growth goals.
Okay. Okay. Thank you.
And then from shifting gears, a little bit is there any.
Opportunity for ICF in the peak bag mitigation space.
I'm sorry.
You said mitigation, what space I'm, sorry, I missed that.
Hey, Ben.
<unk> has an aviation space.
I'm not sure I know what <unk> is.
<unk>.
We do a significant amount of mitigation work.
On.
Disaster recovery.
<unk>.
And mitigation work on climate change and so for for all of our clients across.
Climate from federal state and local commercial.
Mitigation of resilience work, we have significant deep expertise on that.
Okay.
Specific.
Referenced you're making I'm not sure I'm familiar with.
Yes.
Referencing our poly floral alkali substances arms of EPA.
Making sort of a push.
The emphasis on that.
Yes.
I mean, we do a significant work for EPA, but I'm just not familiar with it it's something we can certainly get back to you on.
Okay.
But I don't know the details of what ICF may be doing there.
Okay. Thank you for taking my questions I'll turn it over.
Yeah.
As a reminder to ask a question you will need to press star one one on your telephone.
One moment for our next question.
Our next question comes from Kevin <unk> with Barrington Research Associates, you are live.
Thank you good afternoon.
Just wanted to ask about your state and local government business.
We had a nice sequential.
Pick up in revenue there just wondering.
The sort of opportunities Youre seeing olson.
Disaster recovery.
Right.
More it could be in the pipeline as well as.
On the mitigation side of things.
Sure I think.
As you note I mean, we had quite.
Nice growth in our state and local business is I would say is.
As you know Kevin those are made up of two key components of our disaster recovery business and in our environment and planning.
This is for Chris.
Environmental work in front of large infrastructure process for state and local governments, we saw robust growth in both those businesses and I would say the pipelines.
Main quite good on the disaster recovery side.
We continue to see opportunities.
Starting on the mitigation front.
Across multiple geographies.
Doing.
We have a nice pipeline in Puerto Rico.
We certainly are busy in <unk> and.
In Texas as I as I mentioned, we're working with over 30 States mitigation advisory work and so I think that's an area of risk.
<unk> strong funding and.
We continue to build the pipeline there.
In addition to continuing to do our traditional disaster recovery work was again I think.
We have opportunities.
Our Puerto Rico, we have opportunities.
In the Gulf Coast area, we see opportunities in Texas and so.
Yes.
So the business in the pipeline there is quite strong on the environment and planning side.
Again, given the focus on investment in infrastructure around the JA.
And in clean energy technologies and energy.
And the energy technologies generally pipelines our lines I'm again, I think the pipeline has been building quite nicely there and so.
And so we're.
Okay. Thank you.
And just in terms of the international government business I think.
Been cautiously optimistic about the pipeline there and perhaps.
Business.
Picking up as we move forward.
Any update on just trends in international government.
I think we've generally.
Sure.
Indicated that we thought that.
For 2023.
International government business should return.
To grow so I think we're thinking kind of low to mid single digit growth there. Thanks.
For the last year, we've obviously had some difficult constantly rolling off a large inflow.
In the case of project, we did in 2021.
2021 in early 2022.
We'll roll it rolled off of that at the end of this.
First quarter and so I think as we go forward, where we believe that.
Should return to growth in the low to mid single digit range.
We look forward.
Okay. Thanks, and then.
Obviously spoke to the Iot.
Modernization opportunity in la.
A lot of momentum there and.
I believe you.
You mentioned before that you have.
The capabilities in place.
To address that opportunity, but just wondering if there is this opportunity continues to grow and evolve that there are any other.
Pieces that you need to add to the mix in terms of your.
Your service capabilities.
Specifically.
When thinking about M&A.
Yes sure.
Discussing them.
In recent quarters I think we feel like we have a core.
What we need to address.
Generally address the modernization market in the federal Arena.
As you know we've made.
Three three significant acquisitions in the last two or three years that have given us the full range of low code capabilities.
And then with the semantic bits acquisition.
Gave us the open source capabilities to address that market and so I think we have the core of what we need are Kevin.
Having said that as you know that that market is constantly evolving and there's constantly new entrants and new platforms and new capabilities and so.
Yes.
So as you know we're always out looking at potential acquisitions I would think we would do more.
Acquisitions 30 modernization world, that's what they do.
More small to medium sized acquisitions that bring either new platforms that are coming on the market will be filling need skills or capabilities around things like artificial intelligence or data analytics or machine learning.
Rich.
Are important in our news a lot and so but I would think of it more as.
Tuck in acquisitions as opposed to kind of large significant acquisition statistics.
Give us critical scale are critical mass in that market I feel like we we have the critical mass of note the key.
Sure.
The capabilities, we need to address that market.
Effectively.
Okay.
Okay.
Lastly.
I don't know.
If this is.
It's out of your control, obviously, but just any thoughts on that.
The negotiations going on around the debt ceiling.
Yes.
Something investors should even have in mind.
Thanks, you typically get.
Yeah.
Resolved, but just wondering if you could offer up any thoughts on that.
Yes, Kevin I'm not sure I have any great insights into how the debt ceiling at Howard.
We'll resolve it I mean, it's not the first time, we've had this issue.
I mean, obviously, we're watching it carefully I think if history is any guide.
Cuts would occur.
And so.
And so I you know.
I would I think that's how we're looking at it obviously, we're watching it carefully.
I think the good news is obviously the last two years 'twenty to 'twenty three the civilian budgets for us.
Maturity, we have very good momentum and we are very good backlog.
And so we.
So we feel good about that but we're certainly watching that very carefully.
Okay. Thanks, that's helpful commentary I'll turn it over thanks for taking the questions.
I would now like to turn it back to John for closing remarks.
Yeah.
Thank you all for participating in today's call, we look forward to conducting at upcoming conferences and events.
For participating today take care.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
Yeah.
Yeah.
Great.
Yeah.
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