ICF International, Inc. (ICFI) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the ICF International Third Quarter 2017 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards you’ll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, November 2, 2017, and cannot be reproduced or rebroadcast without written permission from the company. And I would now like to turn the program over to Lynn Morgen. Please go ahead.

Thank you, Vanessa. Good afternoon, everyone. And thank you for joining us to review ICF’s third quarter 2017 performance. With us today from ICF are Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; and James Morgan, CFO. During this conference call, we will make forward-looking statements to assist you in understanding ICF management’s expectations for 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 November 2, 2017 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, Sudhakar Kesavan to discuss third quarter 2017 performance. Sudhakar?

Thank you, Lynn, and good afternoon, everyone. Our third quarter results have put us on track to achieve the full year 2017 revenue, EPS and cash flow guidance ranges that we provided in late February. In addition, our year-to-date contract wins and pipeline opportunities have set the stage for continued growth in 2018. We were pleased with third quarter operating profitability levels, our EBITDA margins were 10.1% on total revenues and 13.9% on service revenues, benefiting from several factors, including efficiencies in program performance and staff utilization, a favorable mix of high margin revenues and the initial effect of ongoing programs to reduce our administration and infrastructure costs that we have implemented. Third quarter revenue performance are stable with last year’s level, despite the impact of one less working day, which James will detail a little later, and revenues for the first nine months were up 1.4%. Similar to trends we discussed on our second quarter call, we continued to experience delays in pass-through revenues in Q3 on a handful of contracts with government clients. We expect these pass-through revenues to increase in the fourth quarter, which will result in a further shift in the historical seasonality of our revenue trend this year with the 2017 fourth quarter showing sequential revenue growth from third quarter levels. Excluding the impact of lower pass-through revenues, our federal government revenue remained essentially flat quarter-on-quarter and year-on-year. Expanding on existing contracts continue to pace. The volume or RFP releases waived agency by agency with some contract being extended rather than reconfigured on schedule. Within this environment which has been the norm for much of 2017, ICF another good quarter of contract wins and the dollar amount of the proposals we submitted in the first nine months of this year is up considerably from the similar period last year. ICF has benefited from having recognized domain knowledge in key federal markets, where enjoy bipartisan support, for example, the Department of Health and Human Services, our largest client, we saw an uptick in RFPs at the end of the third quarter, which we believe is due to confidence that the HHS budget in 2018 will be similar to 2017. As we have said previously, the administration is yet to fill many key agency political positions, which has resulted in a certain reluctance of some agencies to begin new policy and programmatic activities, the situation that we expect to improve in 2018. Our Commercial business continued to perform well with revenues up 4.3% in third quarter and 6.5% for the first nine months of this year. This growth has been primarily driven by work on energy efficiency contracts. Based on our year-to-date results, we are in line to exceed our expectations of mid single-digit revenue growth in Commercial business in full year 2017. A major opportunity on the horizon for ICF is the potential to put our disaster recovery expertise to work in the aftermath of Hurricanes Harvey, Irma and Maria. As you know, ICF is recognized with expertise in existing states, municipalities and other jurisdictions with housing recovery programs that are federally funded through the Department of Housing and Urban Development Community Development Block Grants. John Wasson will discuss this more detail in a moment. We are deploying significant resources within ICF to ensure that ICF is positioned to capture the opportunities in this area as they develop. I would summarize ICF year-to-date performance in each of our market as follow; solid execution in the Federal sector in the first year of the new administration; strong growth in our International Government business; stable year-on-year revenues from state and local government clients and an increasing mix of Commercial business. At the end of the third quarter, our funded backlog was a $1 billion. Our business development pipeline was $4.3 billion up 8% from the same period last year which lays the foundation for ICF to continue grow. I would now like to turn the call over to John Wasson, ICF’s President for a more detailed review of our operating results. John?

Thank you, Sudhakar. Good afternoon, everyone. Third quarter results demonstrated the benefits of our diversified business model and the strength of our key markets and a shift in the seasonality of our Federal Government business that we signaled last quarter. Excluding the impact of pass-through revenues, federal government revenues were basically flat year-on-year for both the third quarter and first nine months. This is in line with the expectations we had at the beginning of this year, given the impact of the change in administration and the uncertainty around budgets and staffing at certain agencies. Lower pass-through revenues that caused us to report a decline in total revenues from our federal government agency clients related to several different client contracts, including our largest contract with the Department of State. We expect to capture a portion of these and some additional pass-through revenues in the fourth quarter of this year, which will change this year’s seasonal revenue pattern. Approval of the fiscal 2017 budget in May elevated some of the bottlenecks at our federal government agency clients, fully indications of that fiscal 2018 federal civilian budgets will be similar to this year’s which should result in more certainty next year. As Sudhakar noted, the volume of RFPs continues to vary agency by agency. At the Department of Health and Human Services we are seeing an uptick in activity. We had three large contract wins at HHS in the third quarter. Two with the National Cancer Institute to provide a variety of communications support services, the other was a single award IDIQ recompete to continue the development and operation of the agency’s information gateway and technical assistance center for healthcare system preparedness and response. Additionally, ICF recently launched two very successful high profile campaigns for the center for disease control this year, the Rx Awareness Campaign and Get Ahead of Sepsis Campaign. Both campaigns are receiving high praise from the client. This positions us well for working two priority areas for CDC, prescription drug overdose, opioid abuse and antibiotic resistance, the former being one of the recent signature initiatives of the administration. Communications are critical to the success of campaigns to reduce opioid abuse and ICF is very well-positioned with our government communication expertise and Olson digital qualifications to support the federal agencies on this front earner issue. CDC budgets remain at bipartisan priority in Congress, which should lead to increase spending in 2018. Another key contract award in the third quarter was the U.S. Department of the Interior, Bureau of Reclamation to provide site assessment and outreach support for the long-term operation of the Central Valley project and the State Water Project in California. Commercial revenue increases in the third quarter and for the first nine months were again driven by strong growth in energy markets. In the third quarter we continue to ramp up and expand energy efficiency projects, one in the latter part of 2016 and early 2017, and our energy efficiency pipeline remains very robust. Also our Distributed Energy Resources Consulting business has performed well and acquired several new contracts in the quarter. Additionally, we have been assisting several utilities with resiliency planning activities and to continue collaboration with the ICF Olson, our commercial energy staff is working to leverage loyalty program expertise with ICF utility clients. Commercial marketing services revenues declined in the third quarter, primarily due to the wind down of several projects in ICF’s legacy digital technology services area, which we combine with ICF Olson in early 2015. We are working on building up our pipeline in this area in part through deeper integration with the Olson offerings. Since we integrated Olson into ICF, we have captured revenue synergies of $93 million, representing new business that either ICF or Olson could have won independently and we are pleased to report the commercial marketing new business wins are up over 20% in the first nine months of the year. We continue to leverage our integrated capability, which is helping mitigate against the softness the overall advertising industry. For example, in the third quarter, ICF Olson teamed up with the ICF sustainability team to incorporate sustainability work at a large commercial real estate firm and we are now doing employee engagement work and loyalty programming for a major healthcare payer, which is the client of ICF commercial healthcare practice. As Sudhakar mentioned, we see significant opportunities for ICF arising from the housing recovery programs that will be needed following the devastation of Hurricanes Harvey, Irma and Maria. In October, we awarded two IDIQ contracts in the State of Texas that represent contract vehicles, which ICF will build data on task orders the fall within our area of expertise. We expect additional RFPs to be released for support of Community Development Block Grant funded Housing Recovery programs at the state, county and local levels in Texas and Florida, and in the territories of Puerto Rico and the U.S. Virgin Islands over the next several quarters. Contracts are likely to begin to be awarded in the late spring, early summer of 2018 consistent with past housing recovery programs. In the meantime, we have begun deploying ICF staff members on site who are providing technical assistance support to certain of the affected areas through FEMA Response Focused Task Orders under existing subcontracts with large engineering firms. Moving to our State and Local Government business, revenues declined by $3.7 million or 11% in the third quarter, but were flat for the first nine months of this year and we now expect them to be flat to slightly down for full year 2017 after increasing by 19% in 2016. As you know, this part of our business tends to be uneven quarter-to-quarter and a decline in Q3 was related to the temporary postponement of work on a couple of environmental and infrastructure projects in California. In the fourth quarter, our work on our few California project is likely to be affected by Red Flag Warning days associated with fire risk, but the market on West continues to be strong in the sectors we work in, transportation, water and planning, and development, particularly in major metropolitan areas that experiencing growth such as Los Angeles, San Francisco, San Diego and Seattle. As we have discussed previously, there will be increase in the gas tax in California in 2018 and beyond to fund statewide infrastructure projects and dedicated tax in Los Angeles County in 2018 and beyond to fund light rail projects associated with the upcoming Los Angeles Olympics. We continue to see a significant rebound in our International Government business, with revenues up 31% in the third quarter and up 12% for the first nine months of this year. International Government now accounts for 6.9% of total year-to-date revenues, up from 6.2% at the same time last year. Sales were strong in the third quarter and market conditions are generally positive, with continued activation of new work, put us on track for low double-digit growth in International Government revenues for 2017. ICF business development pipeline stood at $4.3 billion at the end of the third quarter and included 29 opportunities greater than $25 million and 78 opportunities between $10 million and $25 million. Our annualized personal turnover rate was 15.1%. In summary, as you can see, we are moving forward across all client categories and are looking to sequential revenue growth in the fourth quarter, driven primarily by higher pass-through revenues and we are well-positioned to take advantage of additional growth opportunities in 2018, the federal health agencies and hurricane-related housing recovery projects, utility consulting and implementation work, and in commercial marketing services. With that, I would turn the call over to our CFO, James Morgan for a financial review of the third quarter. James?

Thank you, John. Good afternoon, everyone. We are pleased to report that ICF’s third quarter metrics were broadly in line with our expectations heading into Q3 and we are well-positioned to achieve our full year guidance for 2017. With regard to our third quarter performance, total revenue was $305.3 million, slightly down from a $306.5 million we reported in last year’s third quarter, as one less working day reduced the current quarter revenues by an estimated $4.8 million. Service revenue of $221.8 million was also slightly down as compared to $223.2 million reported in last year’s third quarter, with one less day reducing current quarter service revenue by an estimated $3.5 million. U.S. Federal Government revenues was $142.3 million for the third quarter of this year. John mentioned, the year-over-year 4.9% decline was largely due to lower pass-through revenues. Majority of which have been delayed to the fourth quarter 2017 and into 2018, and the year-over-year reduction of work days also negatively impacted growth in Federal revenues by an estimated 1.6%. Federal Government revenue account for 47% total revenue, compared to 49% of total revenue in the third quarter of 2016. As expected, our Commercial business continued to be a key revenue generator, posting 4.3% growth in the third quarter and increasing this percentage of total revenue to 36%, compared to 35% of total revenue in the third quarter of 2016. Gross profit dollars remained steady at $115.3 million. For the third quarter of 2017 gross margin was 37.8%, up 20 basis points year-on-year. Indirect and selling expenses for the third quarter were $84.6 million, stable with the $84.2 million reported last year and reconciling expenses as a percentage of total revenue were 27.7%. Operating income was $23.4 million, similar to the $23.8 million reported last year’s third quarter. Operating income increased 5.3% sequentially, reflective of the efficiencies and contract execution and staff utilization that we generally experience in the third quarter, as well as the initial benefits from better aligning resources and reduced our infrastructure footprint. EBITDA was $3.8 million for the quarter, inclusive of approximately $0.3 million in special charges related to our ongoing programs to reduce costs, consistent with the $31 million of EBITDA reported in the third quarter of last year. EBITDA margin was also consistent with third quarter of last year at 10.1%. As we have noted -- as we noted last quarter is revenue from commercial clients account for an increasing percentage of total revenue, we believe it is relevant to considered EBITDA as a percentage of service revenue. On that basis, our EBITDA margin in the third quarter was 13.9%. Adjusted EBITDA margin exclusive of these special charges I just mentioned was 10.2% of total revenue and 14 -- 14% of service revenue. On a year-to-date basis, adjusted EBITDA margin as percentage of service revenue was 13% for 2017 as compared to 12.8% for the similar period last year, which reflects our ongoing efforts to improve year-over-year margins. Depreciation and amortization for the quarter was $4.6 million, $0.5 million higher than last year, conversely amortization of tangibles decreased to $2.7 million, $0.4 million or 11.9% below last year’s third quarter. Effective tax rate was 34.5% for the quarter, compared to 39.2% for the third quarter of 2016. The lower rate was primarily due to tax benefits related to the vesting of restricted stock and exercise of stock options in the third quarter. For the full year of 2017 we now expect our effective tax rate to be no more than 37.5%. Net income was $13.7 million, 1.9% higher as compared to $13.4 million reported in the third quarter of 2016. Diluted earnings per share were $0.72, 2.9% above the $0.70 in the third quarter of last year. Non-GAAP EPS, which excludes amortization of intangible, special charges and the related income tax effects of the amortization and special charges was $0.83 per diluted share for the quarter, an increase of 2.5% over the $0.81 reported in the last year’s third quarter. I should note that during the third quarter of 2017 our EPS benefited by approximately $0.02 due to the lower than expected tax rate, which was then partially offset by roughly $0.01 due to a small foreign exchange adjustment and slightly higher than expected interest costs. Looking at the first nine months of 2017, total revenues increased 1.4%, led by 6.5% increase in revenues from commercial clients. Service revenues were up 1.3% to $666.5 million. Diluted earnings per share of $1.86 was reported for the first nine months of 2017, the year-over-year increase of 6.3%. Non-GAAP EPS was $2.24, up from $2.11 last year, a 6.2% year-over-year increase. Year-to-date cash provided by operating activities was $70.3 million, up 21.6% year-over-year, putting us firmly on track to meet our cash flow guidance range of $90 million to $100 million for 2017. Days sales outstanding for the third quarter was 75 days, within our anticipated year end DSO target of 72 days to 77 days, including the impact of deferred revenues. During the third quarter we continue to allocate capital to repurchase shares and pay down our outstanding debt. In the third quarter we repurchased 169,100 shares and year-to-date we repurchased 684,335 shares under our share repurchase program. As a result of the repurchases so far this year, we anticipate a full year weighted average diluted share count approximately $19.2 million for 2017. With regard to paying down debt, during the third quarter we reduced our outstanding long-term balance by $29.3 million. As of the end of the third quarter, we had a long term debt balance of $230.1 million and a debt to trailing 12-month EBITDA leverage ratio slightly less than 2. I should also mentioned that in the third quarter of 2017 and similar to last year, we entered into a hedging transactions to mitigate the financial risks associated potential future interest rate volatility for a portion of the debt outstanding under our credit facility. The details of this transaction are presented in our 8-K filing dated August 31, 2017. And lastly with regard to capital allocation, we had capital expenditures for the first nine months of this year of $11.9 million. Looking ahead, as Sudhakar and John noted, we expect to see sequential increase in revenues for the fourth quarter compared to third quarter levels. Keep in mind that this revenue increase will be from a higher volume pass-through revenues on which we earn much lower margin. Also for modeling purposes, please note that we expect depreciation and amortization expense to be in the range of $18.1 million to $18.6 million for the year. Amortization of intangibles is estimated to be approximately $11 million for the year. Interest expense we expected to be in the range of $8.2 million to $8.7 million for the year. Capital expenditures are expected to be in the $17.5 million to $18.5 million range. Cash flow from operation is expected to be in a range of $90 million to $200 million, and as I previously mentioned, we now expect the full year tax rate to be no more than 37.5%. With that, I would like to turn the call back to Sudhakar.

Thank you, James. To sum up, we are pleased with our result to-date and our prospects heading into the fourth quarter and into 2018. Based on year-to-date results and currently visibility, we have narrowed our full year 2017 guidance range. We expect revenues range from $1.21 billion to $1.23 billion, diluted earnings per share to be between $2.50 and $2.60 and non-GAAP EPS to range from $2.95 to $3.05. Additionally, we continue to expect operating cash flow to be in the range of $90 million to $1200 million. We are looking at 2018 as a year of continued organic growth for ICF across our key client categories, ICF result position in those side of government agencies, we are expecting is like to remain stable or increase next year. Housing recovery expertise should benefit our State and Local Government business in 2018 and indication point to the continued growth in our work for International Government clients. On the Commercial side we expect continued growth in energy markets and for our marketing services business to build on its positive business development momentum. Operator, I would now like to open the call for questions.

And thank you. [Operator Instructions] And we have our first question from Tobey Sommer with SunTrust.

Thank you. I was wondering if you could comment a little bit more with detail about the two IDIQ, the one related to the hurricanes, were they sole-source, multi-award, do you expect that kind of business to be chunky or piecemeal and maybe you could tell us what geographies they serve or maybe if they are broad you can touch multiple geographies?

Sure. This is John Wasson. I think the two contracts we won, we said, they were in Texas, one was at the state level, one is for Houston-Galveston Area Council, so we would serve those geographies. They are multiple award IDIQ, so several awardees, the scope of work is pretty broad, certainly wouldn’t cover all the types of work that we typically do on housing recovery under Community Development Block Grant programs. And we said in the remarks, we would expect that we would start seeing task orders sometime next year, in the second quarter, late second quarter and so start seeing those opportunities come to fruition sometime at towards end of the second quarter next year.

John, did the other companies that won, did they have your skill set in CDBG projects or did they have other skill sets that maybe procured under the IDIQs?

Yeah. I think that we -- I think we bring the full spectrum of capabilities needed to design and implement these programs. I think from that perspective we are unique, we obviously have the deep subject matter expertise around Committee Development Block Grant programs and supporting those for 30 plus years for HUD and with state and local governments. We have also done the implementation of these programs kind of from end-to-end. As you know, Tobey, we obviously, design our largest or implemented the largest housing recovery program in East United States and Southern United States and we have been deeply involved in Superstorm Sandy activities in the Northeast in the last five years. And so, I think, we are -- so from that perspective we bring unique set of full service capabilities.

Okay. And when you look at all of the storm activity in the residential reconstruct damage. Do you have an estimate for how much you think will ultimately be spent on the three geographies in question, the Caribbean territories, including Puerto Rico, Florida and Texas?

Yeah. I don’t think we have a specific estimate for that Tobey. I do know obviously FEMA and HUD are doing damage assessments and trying to come up with their estimates to that as part of their response. I think it’s too early for us to have a set of numbers on that. I mean, I would say, if you look across, the three hurricanes and the geographic spend here in Texas, Florida and U.S. territories, I think, we are looking at higher damage than some of the recent storms that certainly we’ve been involved in hurricane with Rita and Katrina 10 years ago and Superstorm Sandy in New Jersey. So, I think, so there has been -- so -- these are significant opportunities with a broad geographical spread to support housing recovery programs. But we -- I don’t have a set of updated damage estimates.

Okay. And I have kind of few numbers questions to run through if I could quickly.

Sure. Yeah.

What are the pass-throughs that you talked about in the fourth quarter, how -- what’s the value on those?

Yeah. I would say that…

And then I have a couple other ones just in case you need to find that. I was curious if you had a preliminary tax rate estimates for 2018 as well?

We don’t yet have preliminary tax estimate for 2018. I would say that typically we would, I mean, obviously, there is a lot that may happen regard to tax legislation that may have some differences. But I would expect that going in position that it would be fairly similar to where we were -- where we are for this year probably in the 38% to 38.5% range.

Okay.

And with regard to pass-throughs, if you look at kind of the value of the pass-throughs that are shifting more to the right, that’s more in the, I would say, roughly $10 million range give or take $1 million or $2 million.

For the quarter or…

On the year-to-date basis.

On the year-to-date basis.

On the year-to-date basis and what about in the fourth quarter, because didn’t you say that some kind of…

Yeah. I would say that’s more in the roughly $5 million range -- $4 million to $5 million range.

Okay. Perfect. And last kind of numerical question for me, are there any accounting changes that we should be contemplating and start doing work on as we look into 2018 that impact the business and how you report to?

Yeah. They -- I mean, obviously, there are new revenue recognition rules that will be in place starting 2018, but based on our analysis of what we’ve done gone through, it’s really no significant impact to our revenue recognition results. So that won’t be -- it shouldn’t be anything material, and certainly, that is something as we go through next year we will be required to report any impact of what those changes are.

Okay. Thanks. I will get back in the queue. Thank you.

And thank you. Our next question comes from Tim McHugh with William Blair & Company.

Hi. Thanks. First, maybe on the pass-throughs, just another question there would be how much visibility do you have to those, I guess, being pushed further?

I think we have a good visibility for the rest of this year Tim. I mean, we are in the fourth quarter here. We are a month into the fourth quarter and so, I think that gives us some clear visibility of how this is going to play out for the next -- in this quarter. We also on some of the federal pass-through, we know the clients want to get some of the work done by the end of the year. And so I think we are actually highly confident that we will see these pick up in pass-throughs in Q4.

And the marketing services piece, with that 21% new business growth rate, was that for the entire marketing services business, I guess, just want to understand that and…

It’s for the…

I guess…

… commercial marketing services business, yes.

Right. Okay. Yeah. That piece and what -- I guess, what are you seeing in the end market, just given, I think, you referenced that, but it’s obviously, a very mixed set of results that you see from a lot of marketing services companies out there. Is the environment getting tougher? I guess, and how much you put on the environment versus I guess the internal initiatives there?

Yeah. I think that, let me take this, because I think that the environment might be tougher for the large companies. I think our focus is to make sure that we continue to growth that $93 million number, which is the one which where we are trying to make sure that they continue to sell services in our legacy verticals in addition to doing their own thing. So as long as we continue to grow that I think we will be, okay. And I think in that arena when we go in and talk to clients about specific programs, for example, in the utility vertical or in the health vertical and the government vertical, I think, there is significant receptivity to the kinds of things which they do, because they haven’t necessarily seen that level sophistication. So, I think, that, certainly, the -- their legacy environment continues to be very competitive. But I think our whole focus is to help them, of course, do whatever they can there, but also make sure that we focusing on all the legacy verticals we have.

Okay. That’s helpful. Thank you.

And thank you. Our next question comes from Joseph Vafi with Loop Capital.

Hey, guys. Good afternoon. I was wondering, Sudhakar, I know, you said, there were a couple of federal contracts where there has been delays. If you could provide a little more color there, is that due to the political appointing situation or something else? And anymore color as to what they are and to extent when those delays may be resolve would be helpful and then I have a follow-up? Thanks.

I think -- this is John, Joe. I think we have -- so our largest contract with the Department of State as our USAID Demographic Health Survey work, I think, we have seen certain delays and we talked about this last quarter. We saw certain delays on start of new projects, because the USAID mission here in Washington is correlating with the regional missions more closely on survey efforts over the last several quarters and that that takes more time and so that slowed down beginning of new work a bit. There is also in certain countries we just had some political issues, security issues, that have delayed work. And so the biggest impact has been on the USAID work. I think we do have visibility really that’s going to improve in Q4 and we will recapture a good portion of those pass-throughs that have been delayed certainly as we go into next year. I think that -- and the federal level is the largest driver of the pass-through issue.

Okay. And then on the Olson project ramp downs, do you have visibility to, if we kind of -- if we ramp down, what’s going to ramp down now out of the legacy business or is there some of that base that’s potentially still at risk?

I think that we’ve -- the projects we rolled off that impacted us in Q3. We wrote-off those projects. We have and so we’ve taken that impact. I think we have a good pipeline. We see visibility to improve the business. And so I don’t -- if your question is, is there more roll-off coming and is the business going to decline further, no, we don’t see that, I think…

That…

… given the pipeline and the backlog and kind of what we have visibility on we are pretty confident that it’s not going to be a continuing trend and then it just a matter of now closing a couple of deals to get that business back on growth trajectory. We did roll-off couple of technology projects, significant technology projects for clients that we are just -- winding down or wrapping up at the end of the third quarter.

Okay. And then just one housekeeping question or I guess on the energy efficiency business. Did you disclose how much -- what percentage it is or the total of the Commercial business?

That was in the press release.

It should be in the release I believe Joe.

Okay. All right. I will find it. Great. Okay. Thanks, guys.

Yeah. It’s 40%.

Okay.

And thank you. [Operator Instructions] And we have our next question from Kevin Steinke with Barrington Research.

Yes. I wanted to make sure I heard correctly in your prepared comments. I believe you said you’re on track to exceed your mid single-digit growth target in Commercial this year, is that correct?

Yes.

That is correct, yes.

What’s -- so can you just talk about what’s driving that, I mean, it’s just the ramp up of energy efficient is going more quickly than planned or anything that’s really change from your outlook last quarter?

I think, it’s continued strong performance in the energy efficiency arena and I think we have visibility on health care related marketing and communication we are doing in the Commercial sector in the fourth quarter, that’s going to ramp up in a significant way.

Okay. Okay.

That will drive the commercial growth to high-single digits, to be strong in the fourth quarter high digits. I think high single-digit growth for the year.

Okay. For the year, oh, yeah, and then, ramping up growth rate in the fourth quarter, obviously, okay. So also on the Commercial business, in the commercial marketing services specifically, you usually called out the decline there in the quarter due to roll-off of legacy ICF business projects. I’m just wondering if you have a sense or can separate out how the acquired Olson business did, if you’re able to separate that out or not?

Yeah. I think, the Olson business were generally flat for the quarter.

Okay. Okay. Thanks. And the -- so the International Government, the ramp up and growth there, is that again just a matter of previously signed contracts ramping up or are there new business wins in there as well?

I think it’s both. I think it’s -- we are seeing strong activation on contracts that we have won throughout 2017 and we have talked -- we talked for many quarters about the fact that we were looking for this activation to take place. We are certainly experiencing robust activation and we are winning additional contracts. And so, I think, our outlook on the International front is quite bullish right now.

Right.

Okay. Great. And then, just lastly here, last couple quarters you have called out the impact of the change in labor cost allocation methodology on the gross margin and also the indirect and selling expenses, I don’t know if you have that handy or not?

Yeah. Roughly on gross margin that labor dilution has somewhere in kind of 50-basis-point, 60-basis-point impact for the quarter and for the full year, what that impact would be. And then, obviously, that flows through other metrics.

Yeah. Yeah. So, I mean, it looks like…

Down to -- down through service revenue, obviously, it nets out at the EBITDA, it’s basically neutralizes itself at the EBIT level.

Okay. Part of the reason for asking is that if you factor that shift in methodology into the indirect and selling expenses, it looks like they are probably down year-over-year again, so I’m just trying to figure out how much more room there is to take out cost on the indirect and selling expense line as we move forward?

Yeah. I think the way to think about it is that we have stated that we are looking and trying to year-over-year improve our adjusted EBITDA margins as percent of service revenue by 10 basis points per year to 20 basis points per year and we have visibility to continue doing that for the next several years. While that’s driven by the timing of when we can get out of facilities and things of that nature, and as we are able to take other actions to streamline how we are operate internally. So we have visibility to continue doing that for the next several years. And certainly, as I mentioned, we are on track for this year as we are 20 basis points higher than where we were last year on a year-to-date basis.

Okay. Great. Thanks for taking the questions.

Yeah.

And thank you. Our next question comes from Marc Riddick with Sidoti & Company.

Hi. Good evening, everyone.

Good evening.

I wanted to go over a couple of things, some of them smaller than others. I guess I wanted to know if you have any general estimates or thoughts around any direct impacts to ICF results that came from the storms. I don’t recall seeing any mention of that, but I want to see if there was anything that we should be thinking about there?

No.

No. There was no impact, no material impact. No impact to ICF from the storms.

Okay. All right. And this one is more -- little more housekeeping. Why you have the extra day. I was wondering on the next as far as calendar going forward, do we have any extra or one less or one more working day in any of the upcoming quarters, I just want to be reminded to make sure I am not missing something there?

Yeah. We actually do. So this year is a year that has one less day than last year that occurred during Q3. Next year there is one more day than this year and that one additional day is actually in Q4 of next year compared to Q4 this year.

Okay. All right. Okay. Great. And I guess then, this one is more sort of wide-ranging, but I guess, the last time you were competing for these housing recovery programs, certainly you are private company at that point, just before coming public. I just wanted to get a sense of maybe how we should be thinking about the preparation that go into that, whether or not we should be looking at some -- maybe some hiring ahead of these opportunities or maybe pacing of -- do you expect to see some additional expenses before we get to sort of the middle of next year when you’re actually competing for these things or just maybe some general thought as to sort of how you are expecting the flow going into those competition? Thank you.

Sure. I think that -- let me take and then John can add his comments. I mean, usually in the response phase, we do have some expertise, but we traditionally those response contracts are usually given to very large engineering firm and we are subcontractors to them. So they will always ask us for specific positions, so we have given them a bunch of resumes, which potentially have been looked at by the response agencies and which who are in the process being -- are being deployed. So that’s in the response phase. And we expect that we will get some minimal revenue starting in Q4 on the response phase, maybe a little bit in Q1, but that’s not where the real action as far as we are concerned.

Right.

The real action is when we start doing housing recovery and we have the CDBG monies, Block Grant monies are used and those traditionally -- those take a little bit of time after that John said the damage assessment have done and FEMA has a better then the state and local and county et cetera have to figure out how they are going to administer the monies and how they are going to issue task orders. So, for example, the State of Texas, they could use, they do at state level or they could do at the county level, they have to decide all that and in order to decide all that, once they decide all that, they will have to develop an action plan, which will have to be approved by the Feds and once that action plan is approved then they can start spending the money and that’s the phase where we traditionally either have the right action or we help in prevent the action plan and all that happens over the next nine months or so. So I think that that’s traditionally the way it happens and I think you will not see that much of pre-hiring. We already have a bunch of folks who potentially can work on the response phase and we have certainly provided those resumes to the primes. But in the recovery phase usually win the contract and then you hire up for that contract. You have to have some contingent hiring before that, but you won’t necessarily see it in our numbers till such times we are deployed.

Okay. Okay. Great. And I appreciate the color on that. Thank you. And then, I guess, one last thing, we have talked about the opportunities from the storms you would have. I was curious and this a little bit out of left field, I guess, but I was wondering if there was anything that was -- that would directly affect ICF Olson opportunities given the fires in California? Thank you.

There is a potential that there could be recovery work related to California fires and we are certainly monitoring that. I think and so it’s on our radar. I think from -- the initial intelligence I have had I do think a lot of the damage in California from the fires will be insured and so we will be part of people’s homeowners insurance, we will help them rebuild. And so -- but we are certainly monitoring that and if opportunities arise to work in the recovery phase from the California fires we would certainly, we are following that carefully. As you know we have significant presence in California 700 people...

Yeah.

… were located in those communities that have been impacted. And so it is on our radar, we are watching it, I think, it’s -- love to see how it plays out. I don’t think it’s going to be as material on opportunity as the hurricane related housing recovery programs.

Okay. I appreciate. Thank you very much.

Yeah.

And thank you. We have no further questions at this time. I will now turn the call over to management for closing remarks.

Thank you very much for joining us today. We will talk to you next year. Thank you.