Q2 2023 ICF International Inc Earnings Call
[music].
Welcome to the second quarter 2023 ICF earnings Conference call. My name is tough and I will be your operator for today's call.
At this time all participants are in listen only mode. Afterwards, you'll be invited to participate in the question and answer session.
During the question and answer session. If you have a question please enter.
SAR.
One one on your touch phone.
I would now turn the call over to Lynn Morgen.
Three partners Lynn you may begin.
Thank you Todd good afternoon, everyone and thank you for joining us to review Icf's second quarter 2023 performance.
With us today from ICF are John Watson Chair, and CEO and Barry Bottas CFO , joining Dan 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 and results to differ materially and I refer you to our August three 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 disclaim any obligation to do so.
I will now turn the call over to Icf's CEO , John Watson to discuss second quarter 2023 before John Thank.
Thank you Dan and thank you all for joining us to review our Q2 results the transactions, we announced this afternoon and our business outlook.
There's just a lot to discuss today I will focus on the highlights of the second quarter and then quickly move on to recent developments and comment on the growth initiatives underway at ICR.
Several key several key takeaways from our second quarter performance.
This was an excellent quarter for ICF revenues increased 18% indicative of.
All the lines are.
Services and capabilities are with market demand second.
Second quarter revenue growth was led by strong year on year comparisons in our key growth markets and represented 10% organic growth together with the frenetic pace acquisition, we completed in mid 2022.
Second contract awards were up 28% year on year, and we expect second half contract wins to be quite strong.
Over 80% of our second quarter wins represented new business in contrast to Recompete another indication of Icf's competitive positioning in areas of priority spending.
Trailing 12 month book to Bill ratio of one three is among the highest in the industry and supports our expectations for significant revenue growth this year and into 2024.
Third we ended the quarter with a record business development pipeline of $10 3 billion, which represents almost 20% growth compared to year ago levels.
This growth is attributable to our expanded capabilities our ability to bid on larger contracts. Thanks to our increased scale.
<unk> that are emerging from the IHA and our IR legislation.
Lastly, we executed transactions that strengthened icf's positioning in key growth areas and support our long term growth strategy.
Our energy environment, and infrastructure and disaster recovery market expands our government and commercial client set.
To be a standout performer in the second quarter.
Revenues increased nearly 18% primarily representing organic growth in this market accounted for slightly over 40% of second quarter revenues.
Energy represents a large part of that market and encourage advisory work for utilities renewable energy developers and investors implementation of energy efficiency and distributed energy programs for utilities, and environmental services for utilities and other energy providers.
Commercial energy revenues increased 22% in the second quarter and are up 20% year to date.
We expanded our energy efficiency programs for several large utility clients and saw greater demand for our advisory expertise and our environmental and planning services as clients plan the renewable projects.
Funds and tax credits made available to the NRA.
This is also a strong quarter of new contract awards from our commercial energy Arena.
There was particular strength in multiple innovative pilot programs.
Missing on electrification financing and energy equity.
A portion of the new work that we wanted to provide services necessary to analyze finance permit construct connect monitor and operate renewable projects across the country and offshore.
The Federal Energy Regulatory Commission Commission issued an order last week that should expedite interconnection of new wind solar and storage resources to the grid, which should drive additional demand for our advisory work.
In today's release, we announced the acquisition of <unk> solutions, which will expand our addressable market within the electrical sector.
<unk> solutions is a power and engineering firm that provides next generation technology solutions and data analytics to drive more inform decision, making on grid modernization investments.
<unk> has the team was down 50, electrical engineers, who work with utilities and developers across the U S Europe , and Asia, including Investor owned utilities electric municipalities and electric cooperatives.
Successfully partnered with CMO on several projects and together have an excellent track record of delivering positive results for our clients, which made us a compelling transaction for us.
<unk> expands our addressable market by giving us the ability to support client needs for renewables interconnection substation and distribution upgrades and grid resilience and providing us new technology and data management capabilities that we can offer our commercial energy clients as well as our government clients.
In addition to commercial energy, we also experienced strong demand in the second quarter for our climate and environmental services, which as you know cut across all of our client categories.
Second quarter growth in our climate business was driven by new or expanding projects at NASA EPA.
USA.
And three large east coast utilities ICF.
ICF has one of the leading if not the leading kind of practice in the country and we are seeing strong demand, resulting for funding for de carbonization programs.
<unk> assessment disclosure and management of risks in the private sector and large scale program programmatic funding by government, including.
And IRA.
Our environmental planning and monitoring services and disaster management account for over 80% of our state and local revenues, which in total increased over 27% in the second quarter.
Demand post COVID-19.
AJ and Iras are driving significant new infrastructure planning and investment and.
And environmental Scopes of work that required at the front end of such projects are increasingly considering climate risk energy equity resilience.
Our flood and sea level rise, which is another example of the growing interconnections that play to Icf's competitive advantages.
Revenues from our disaster recovery market continued to grow at a double digit rate in the second quarter. We continued our recovery work in Puerto Rico, and just announced a new $32 1 million dollar contract with a U S territory to provide disaster management consulting services to accelerate federally funded recovery efforts across the territory.
Our other large market is health and social programs, which is what our public health and the majority of our it modernization services reside.
This market is primarily comprised of work for the federal government. The small part representing services to state and local and international government clients and a minor contribution from commercial clients.
In the second quarter, its revenues were up 30%, reflecting both organic growth and the acquisition of semantic bids in this market accounted for 41% of total second quarter revenues.
We continued to see strong year on year growth in public health it modernization in the second quarter.
Public health of 19 modernization of two areas that historically have garnered bipartisan support and have been well funded.
We see significant runway to increase our market share of the department of health and human services, resulting from specific opportunities for revenue synergies tied to the <unk> acquisition, which we expect to bid over the next six to nine months.
Also our greater scale is opening more and larger opportunity for us at HHS and across our federal government clients yet.
Similarly, our social programs pipeline is very strong and we have seen material growth in this area in the past and expect to see more in the future.
Our pipeline of federal government opportunities increased 21% from the similar period last year and 6% sequentially supporting our outlook for continued growth in the federal Arena.
Further with regard to federal government opportunities, we are seeing increased interest in the use of AI amongst our federal government clients.
ICF is well positioned to benefit from this trend and.
In fact, we have been deploying AI and machine learning for years with our federal clients.
As a leader in the shift to low code no code platforms into open source solutions are 800 technologists have been and will continue to take advantage of the AI capabilities embedded in these platforms, including developing novel generative approaches to automate cogeneration and enhanced development productivity and leveraging AI to enable them.
More efficient migration of technology, a modern platforms.
At the same time, we see generative AI as a way to improve the productivity and experience of our own employees and streamlined various corporate functions at Ics.
In fact at the beginning of this year, we established degenerative AI enablement team to identify and develop use cases for Amgen AI and be utilized to increase productivity for both client related work and efforts internally within ICF.
Lastly in today's earnings release.
That ICF recently signed a definitive set of agreements to sell our commercial marketing group.
Included in the sale or a commercial loyalty programs and integrated communication services for consumer and financial clients. This.
This group has brought ICF important capabilities that are provided.
<unk> contributed to the growth of the engagement and communication services, we provide to our government and utility clients.
As we have increased our focus on key growth markets and mission related areas within our government and commercial energy clients. However, this group has become less core to what we do and that's the decision was made to divest the business.
We are especially pleased that the group senior leadership and staff have been offered positions by the acquirer.
The transaction is expected to close in the third quarter and variable will provide additional details on the net effect of this divestiture and the <unk> acquisition in his remarks.
That I will turn the call over to our CFO for a financial review Eric. Thank you John and good afternoon, everyone. I will now share additional details of our financial performance in the second quarter of 2023.
As John noted, we had strong second quarter revenue performance, which was a result of our 10% organic growth coupled with the acquisition of somatic Thats July of last year and drove our year over year revenue increase of 18, 2% to $500 1 million.
Revenue growth was broad based reflecting double digit increases from federal.
State and local government and commercial energy clients, which together accounted for 88% of our second quarter revenue.
Subcontractor and other direct costs of $137 7 million represented 27, 6% of total revenue, which is in line with last year's second quarter.
Gross margin for the second quarter was 34, 9% a decline of 150 basis points as compared to the same period last year.
Several factors contributed to the decrease including last year's acquisition of semantic bids, which generates a lower gross margin, but higher EBITDA margins and the timing of certain projects and contract ramp ups.
We expect to see sequential progressive improvement in gross margins in the second half of this year.
Year over year, adjusted indirect expenses declined 140 basis points to 24, 6% of revenue due to greater scale and the effective management of our indirect expenses as.
As we continue to make investments in people and technology to support our long term growth, our indirect and selling expenses increased 10, 6% year on year to $126 5 million, which was at a significantly slower pace than our revenue growth.
Second quarter, EBITDA increased 19, 2% to $47 5 million and adjusted EBITDA increased 15, 3% to $51 million year over year.
Interest expense for the second quarter was $10 2 million, an increase of $6 1 million from last year's level. The second quarter acquisition of <unk>, which was not embedded in our prior forecast coupled with the increase in interest rates drove our interest expense to be higher than we anticipated.
The second quarter EPS impact of the higher interest expense was more than offset by the benefit from our tax optimization strategies, we implemented.
We expect.
This additional benefit from our tax optimization strategies to mitigate the forecasted year over year higher interest expense for the remainder of this year.
Net income was $20 3 million or $1 seven per diluted share in the second quarter inclusive of $3 5 million or <unk> 13.
Per share of tax effected M&A and severance charges are.
Our second quarter net income and diluted EPS included a 21.
Per share incremental tax benefit beyond the full year estimated tax rate from which our year end ETR guidance was based upon.
Second quarter of 2022, net income was $18 4 million or <unk> 97 per diluted share.
non-GAAP EPS increased 18, 8% to $1 57 per share, which also includes the benefit of the Companys long term tax strategies.
We're very pleased with our second quarter and year to date cash flow generation, our second quarter cash flow.
From operations was $36 7 million and $19 9 million on a year to date basis significantly ahead of our results in the first half of 2022.
Our ongoing cash management initiatives were a key driver of the favorable cash generation performance and also contributed to our improved days sales outstanding of 73 days as compared to 82 days in last year's second quarter.
Year to date capital expenditures, primarily primarily related to technology investments totaled $13 2 million as compared to $11 million in the first half of 2022.
Our debt at the end of June was $601 8 million similar to our debt balance at the end of the first quarter.
Our second quarter that is inclusive of the funding of the purchase of <unk>.
Solutions.
The acquisition was largely executed through the cash flow generation from operations during Q2.
Our adjusted net leverage ratio was $3 one one at quarter end compared to $3 nine at the end of the first quarter, assuming no additional acquisitions. This year, we expect our year end leverage ratio to be down approximately one turn inclusive of the expected net proceeds from the divestiture of our commercial marketing group.
In addition, during the second quarter the company executed an additional $100 million of interest rate swaps, which increased our fixed rate debt to be approximately 660% of total debt.
With the addition of these new swaps our all in average interest rate now stands at 525%.
In addition to debt reduction our capital allocation priorities include making investments to support organic growth.
Paying dividend.
Repurchasing shares to offset the impact of employee incentive programs and continuing to consider strategic acquisitions.
Used $18 1 million in the first half of this year to repurchase 180000 shares we have $93 7 million remaining under the current stock repurchase authorization plan.
We also announced today a quarterly cash dividend of <unk> 14 per share payable on October 13th 2023 to shareholders of record on September eight 2023.
Now to help you with your financial models I want to emphasize that our second half revenues will be essentially flat as compared to the first half due to the divestiture of our commercial marketing group, which is offset in part by the revenue generated from the <unk> acquisition.
The net effect of the divestiture and the acquisition in the second half of this year were lower our revenue by approximately $15 million weighted towards the latter part of this year.
As John previously stated we are reaffirming our revenue and non-GAAP EPS guidance for 2023, which is inclusive of both the <unk> acquisition and the pending divestiture of our commercial marketing group.
In addition, any potential gain associated with the commercial marketing group divestiture and the onetime noncash charge associated with stranded facilities will not impact our non-GAAP EPS guidance.
Now I'll move on to other key guidance metrics are depreciation and amortization expenses is expected to be in the range of $23 million to $25 million <unk>.
Amortization of intangibles.
Approximate should be approximately $36 million.
Interest expense is now expected to be in the range of 37% to $39 million compared to our previous forecast of $32 million to $34 million, resulting from higher interest rates.
And higher average debt balances as I previously mentioned our tax rate in the first half based on our tax rate in the first half of the year. We now expect the tax rate for this year to be approximately 17% as.
That's compared to 23, 5%, we previously guided to.
With the second half of this year to be in the range of 19% and more specifically with the third quarter projected to be.
At approximately 12%.
Operating cash flow is projected to be $150 million.
We expect our fully diluted weighted average share count to be approximately $19 million.
And our capital expenditures are anticipated to be between 26 and $28 million.
On a final note we have removed the non-GAAP financial measure of service revenue as it is not in line with recent recently stated SEC guidelines.
Service revenue will no longer be included in our public filings investor presentations and other published reports and documents.
The company will continue to provide information on our subcontractor and other direct costs.
And with that I will now turn the call back over to John for his closing remarks.
Thanks, Barry we are pleased to reaffirm our full year guidance. We expect 2023 total revenue of $1 93 billion to $2 billion, and we anticipate subcontractor and other direct costs will be approximately 27% of total revenue.
EBITDA is estimated to range from $210 million to $220 million.
And GAAP EPS EPS is projected at $4 75 to 505 exclusive of special charges non.
non-GAAP EPS is expected to range from $6 15 to $6 45.
Operating cash flow is expected to be approximately $150 million in 2023.
In the second quarter, we continued to invest in people and technology that enabled ICF to execute effectively on our existing contracts.
All positioning us to capture an even greater share of future growth opportunities.
The sale of our commercial marketing group was a strategic decision to streamline our business and deploy our resources to support the key growth markets. We have identified and the acquisition of CMI fully aligns with the increased demand we anticipate from our commercial energy clients are industry leading.
I think 12 months book to Bill ratio of 1.3, together with a record $10 $3 billion business development pipeline.
To continued growth ahead.
Additionally, we are proud of the impact at ICF and its people are having on society through the services, we provide clients and supportive energy saving carbon reduction and natural resource protection programs as well as health education development and social Justice programs I encourage all of you to review our recently released corporate citizenship report.
Which highlights our impacts in these areas.
With that operator, well open it up for questions.
Okay.
Okay.
Thank you we will now conduct the question and answer session.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby, while we compile the question and answer roster.
Okay.
Our first question will be from Joseph.
Steve.
Canaccord Genuity genuity.
Hey, everyone. Good afternoon, and once again congratulations on the.
The solid and steady results I thought John I'll, just circle back to your some of your opening comments, where you said that you expected a.
Our strong second half in bookings.
I know theres, a lot of <unk> out there relative to the environment and.
Jay and the like but.
Okay.
Unless the deals are signed.
A little bit. Unlike you to say, it's going to be solid so just any color there maybe perhaps some solid bookings already happened in July .
I'll have a follow up.
Joe appreciate the question.
Well first of all I'd say, obviously as you saw and heard in the results.
We have very strong pipeline record pipeline.
And as you know the the.
The cyclicality of our awards Q3 is generally are far and away our strongest quarter for rewards driven.
With the end of the government fiscal year Q4, certainly last year and over the last couple of years has also been quite strong.
Again with some wins in federal but also across commercial and state and local and so I think given.
The size of the pipeline and the significant amount of the pipeline that is in <unk>.
Proposal submitted awaiting award or as in <unk>.
And on negotiation of the opportunity I think we.
Do have a high degree of confidence that the wins and.
The sales for Q3, and Q4 will be quite strong much like last year, where Q3 and Q4, we will quite quite strong.
And.
Obviously, you have a very strong results and so.
I think that's what's driving the confidence.
Again, I think we have we have clear visibility of how that.
The words should play out.
Yes.
Got it and then.
I know you kind of also mentioned about having the size and scale for a bigger bid, but it kind of feels like you had that size and scale for a while I mean Europe Europe .
Kind of.
No.
We're a scale player in a lot of verticals. So just.
I wanted to drill down into those comments to John relative to your size and average deal size that you are seeing these days and then I'd like to sneak one more in.
Sure I mean I think the.
The area, where the size and scale over the last.
Three years is really helping us on the it modernization on the technology front I mean, as you know Joe we've come a long way that heavily.
As I said in my remarks, we have 18 under technologists, we have.
$500 million in round numbers of $500 million revenue.
Acknowledged business and so I think thats.
That's an area, where we are seeing larger opportunities and we are increasingly able to.
Pursue and capture.
On larger opportunities I think as we also talked about.
With the semantic this acquisition that really is given our scale and our position within CMS.
Larger opportunities.
And combined.
Technology capabilities.
ICF has on a low code no code with the open source and bring deeper ICF capabilities into CMS and then we can also leverage the semantic that's open source capabilities into our butter civilian client base and so.
I would emphasize the scale on Sunday.
Is it.
With respect to technology.
The only thing other thing I'd say is right now I mean, I think as you saw in the second quarter results.
Our energy business is really coming to the fore here in terms of the growth.
All in 22%.
In commercial energy.
<unk>.
I think so I think.
We obviously have scale, there and see large opportunities continue to see large opportunities on the energy efficiency area and so on.
So I think that's what I would emphasize on the scale side.
Got it and then just one more I know that there are some puts and takes kind of in the P&L here in the second half with.
With M&A and divestitures.
But.
With EPS kind of reiterated just drill down a little bit and ask if there was.
Because you're going to lose some EPS from I guess.
Rail of marketing.
The acquisition of <unk> coming in it could be a little accretive maybe the core business was doing a little better.
And it would have been kind of upside to guidance.
Any M&A, but just thought I'd ask if there's any more color to add on how we got.
Kind of reiterated EPS with those moving parts. Thanks a lot.
Yes, Joe Thanks for the question I think as I stated that we are.
Strong on.
Reaffirming the non-GAAP EPS guidance for this year, we think that given.
The divestitures and all the different moving parts.
Including the tax strategies that we've implemented will certainly help.
Offset any of.
The lost.
EPS that we would have from the divestiture, so we feel like that.
I'll leave there for for this year.
Yes.
I just would add on that.
Well I think Barry gave guidance on exactly how the revenues will.
Just given the divestiture of the commercial marketing is up.
The <unk> acquisition on the revenue front I would just say from a and the bottom line.
Earnings and EPS perspective, Bill that would look at it is.
And the commercial marketing business, we divested that.
Yes.
Its margins were.
At the low to mid <unk> in terms of our federal business.
And and <unk>, which is a smaller smaller business and what we're divesting the.
CMG and while the revenues are coming down quickly say $13 million to $14 million.
It is it is a.
<unk>.
It is a commercial energy.
Business the margins that are at the high end of our.
Commercial energy, but we would expect our commercial energy. So at the end of the day from an EPS perspective, let's say more or less.
Loss.
Given the relative margins and the revenues.
Alright.
Can you speak a moderate investment there.
Great.
Thanks, a lot guys much appreciate it.
Okay.
Morning.
Thank you so very much one moment our next question.
We have Tobey Sommer from choice Securities. Please proceed with your question.
Thanks.
<unk>.
Look at your expectation for.
Pretty strong contract awards in the back half of this year.
If you look at the composition source of those are they.
Are they related to the II JA <unk> climate Bill is sort of like that is that what.
Makes some strong or.
From your vantage point is it.
Regular way.
Budget spending by your customers.
Yes.
I'd say at a high level of Televisa.
I mean, I think we're seeing the growth in the pipeline and the and the awards I would've.
Expect to see them across the five growth areas and so and.
And so and the pipeline is expanding across federal commercial state and local.
And so it's.
It's broad based across those five growth drivers.
Having having.
Said that I do think that.
I've said it.
I said in my remarks, I said in response to Joe's question, our commercial energy business.
Is this showing acceleration here.
I think that.
Across.
In a broad way across that business from advisory to utility programs to climate.
To environment and planning.
And.
<unk>.
In the second quarter, our total pipeline, we have reported our pipeline for Iga opportunities here.
Words I think for.
Approaching about $270 million pipeline for Iga opportunities I think we're up to about $70 million awards here.
And so we are seeing some positive momentum on <unk>.
Jay front, which we said we thought we would see in the second half of the year.
The IRR, we're seeing a lot of interest and a lot of <unk>.
The impact of that on the market, particularly around.
The economics of solar wind and.
Investment activities with utilities developers.
Which is a very positive sign for our pipeline and so.
As I've said I think we.
Not a significant amount of built into our guidance for 2023 from those areas I just would say that the.
The momentum we're seeing from a J.
And <unk> remains positive.
Think.
As I've said before.
It's a positive indication that.
Things are playing out in a positive way.
I think it was.
Essentially set the subsidies in particular as we go into 2024.
Okay.
What does your guidance assume from a from a physical.
Federal 2020 for budget or CR.
I know you don't have a particular crystal ball and you can't predict it but curious what sort of assumption you have as you get into the fourth calendar quarter.
I mean, I think we're I mean, we.
We haven't given guidance per se for 2024, yet obviously, we do have our long term.
Our goal, we articulated at our Investor day around high single digit organic growth.
The potential for double digit growth with leveraging the balance sheet over time through 2024, I think generally.
Our assumption is that.
Well, we'll have a budget.
We will have a budget.
Certainly we would expect to have a continuing resolution.
And I think with either of those I think given.
Momentum in our markets.
Federal side, the fact that public health. It modernization has tended to be bipartisan has remained at a very high priority.
Those areas will do better than the average budget increase in income.
And frankly, given the strong momentum we have with contract awards and.
And backlog work, we have in place in those areas.
Yes.
That's what we're assuming.
To continue to deliver the results we've discussed through 2024, obviously.
There is unexpected.
Obviously.
Government shutdown or unexpected cuts.
Our novel, we're expecting but generally I think.
We're assuming it'll be there'll be a budget or there'll be a continuing resolution.
Thank you very much.
Yeah.
Okay.
Thank you we will have our next question.
Yes.
Finally, Kevin Stein Barrington Research associates.
Hello, Good afternoon.
Just wanted to ask about with.
With the divestiture of the commercial marketing group.
You mentioned that.
Helped with the growth.
Some of your engagement and communication services that you provide to your government utility client utility clients.
Do you still retain some of those.
Capabilities.
Within within the company.
Even after the divestiture that are going to.
So our view going forward to serve that those key client basis.
Yes, let me be very clear Kevin it's a good question.
So.
Within our government business, we have a separate.
Sure.
<unk> debt.
<unk>.
Marketing and communication services to our federal clients.
North of $100 million business.
That business resides within our federal business and that business is staying with ICF Theres snow.
A key part of ICF in our ICF next sub brand. We also have a core set of people that support our commercial energy business with communication and marketing, particularly our energy efficiency and other utility programs.
Those people are embedded in our commercial energy business. They are all staying with ICF and we'll continue to do that work.
And then we have an international marketing communications business.
Brussels.
And that's also remaining with us so all of those businesses remain in the firm.
<unk> been operating on a standalone basis, there's a little bit of interaction with the commercial market and we looked at that.
Its de Minimis and so we'll keep all those capabilities in all of the skills.
All of that all those people.
We are selling it as kind of the core commercial marketing services business, which included the hospitality.
Innovative marketing.
Business transformation consulting we do.
Really for retail hospitality travel and Super packaging good clients switch.
Which today are not core or core part of our business a core part of more broadly who we serve and so that's what we're divesting.
Divesting.
With this transaction.
Okay understood that's helpful.
Just also wanted to ask about.
The service revenue, although you mentioned that it's not going to be.
Of your Investor Communications anymore is that.
And it would be a metric you choose to look at it internally to.
Monitor the progress of the business and margins.
Just overall health of the business.
Yes, Kevin This is Barry Thanks for the question and answer to that question is yes, we do think that it's an important metric.
We look at that as we think it's a very good representation of how the core business is performing.
We'll continue to.
Look at that.
And we will provide.
The Street.
Information on subcontractors in OTC, so that if you'd like to be able to calculate that number.
Certainly we will be able to youll see that in the.
The 10-Q, when we file that.
Youll see how we break that down in the MD&A section. So yeah I appreciate the.
Question and yes, we do think it's important.
Okay great.
Thanks for taking my questions.
Thank you and I'll show on mix.
Question comes from the line of Marc Riddick from Sidoti. Please go ahead.
Hi, good evening everyone.
So I wanted to I wanted to jump into one of the things I wanted to circle back on in the prepared remarks.
You made regarding.
Some of the commentary around AI and some of those those capabilities and some of the progress that youre, making there which is actually somewhat refreshing. This season. There's a lot of folks are kind of you know.
It's a little too early for a lot of folks with certainly it's encouraging to see that as an area that you're encouraged but I was wondering if you spend a little time discussing some of the opportunities there as well as.
Any talent needs that may arise not just specifically within AI, but overall for the entire enterprise as well. Thanks.
Sure so.
I think as I said in our prepared remarks.
Obviously, we have a significant technology business on it modernization I think.
With that business honestly that business has been doing machine learning in various forms of AI for years as part of their work.
I work for clients.
In the federal sector and as I also indicated.
Are looking and experimenting with.
Generative AI the country's generative AI for clients as we go forward and.
Certainly our expectation that.
It has been embedded in these platforms.
For many years and a generative AI will become part of what is embedded in Houston. These platforms are so.
We continue to look at that and take a hard look at that work with our clients and.
And evaluate.
Internally how to best.
Utilize those products to meet those capabilities to meet client needs and to.
Improve productivity.
And we've also used more broadly our domain client.
Staff over the years have used machine learning and predictive AI is for clients and.
And things like literature searches and looking for patterns and data that.
To understand.
What Mike causes of diseases.
At least fraud and abuse based on patterns and data.
And so that's certainly been part of.
What we've done on the domain side.
We're also looking at how we can how far we can use generative AI to improve our productivity throughput internally in our corporate services.
They have created sandbox is to test and experiment with use cases to try to improve how do we do our marketing our business development.
Review of contracts and things of those of that nature.
In terms of the talent I think.
Certainly we.
Yeah.
Obviously funding the <unk>.
And our technology business is quite important.
As I said, we will.
It's been part of our business.
And we will continue to look for that talent is that is an area of words.
Highly competitive and challenging to find that talent, but.
I think we generally made significant investments are putting I think we will be able to define the talent, we need to support our business.
Great and then the last one from me I was wondering if you could talk a little bit about the pricing environment.
And as far as putting through price increases when renewals come up.
Are there any areas that are.
A little more price sensitive due to economic changes or given the funding.
Most of the areas, where you play that you are not really running into them. Thank you.
No I Wouldnt say theres been a significant change in the pricing environment I mean, all of our business is competitive.
With the federal business and with regulated utilities, who you.
We're writing proposals you have to compete for the business.
I'd say theres been a change.
And I think as we've talked about generally in the past certainly in our client civilian client.
Areas.
We've not seen over the years, the kind of lowest price technically acceptable by concepts.
Price is important but.
The quality of your capabilities your past performance people as is.
Is most important.
In terms of passing Hawthorne I would say that.
Like many companies, we've driven significant increases in salaries and.
Paid attention that we stated market on the compensation side, I think and we give them those raises in March each year. So we did give.
Material increases in raises in March I think as we've talked about with cost plus you can more or less passed us on quickly.
About 15% of our work is cost plus.
40 40.
40% is PNM, 45% of fixed price.
The PNM, we can raise those rates on a yearly basis, we can move people up categories.
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With with more experience and so those are the things we do to.
Address the cost challenges and with fixed price we have built in escalators.
So not only is enough to cover the races and their strategies you can use over time.
Two.
Make sure that the.
You pass those along especially Ken.
All of those strategies I think it's.
And they are tried and true strategy.
They don't happen overnight depending on that.
The type of contracts that were.
We remain focused on that and managing that I think generally well.
I appreciate all the color. Thank you.
Thank you.
Showing no further questions in the queue at this time I would like to turn the call back over to John for closing remarks.
Okay, well, thank you for participating in today's call and.
Look forward to connecting with you at future conferences and events have a good rest of the summer take care.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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