Welcome to the Fourth Quarter and Full Year 2017 ICF Earnings Conference Call. My name is Vanessa and I'll be your operator for today's call. During the presentation, all participants will be in a listen-only mode. Afterward you'll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February 27, 2018, and cannot be reproduced or rebroadcast without written permission from the company. I will now like to turn the program over to Lynn Morgen. Please go ahead.

Thank you, operator. Good afternoon, everyone. And thank you for joining us to review ICF's fourth quarter and full year 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 February 27, 2018 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 fourth quarter and full year 2017 performance. Sudhakar?

Thank you, Lynn, and thank you all for joining us this afternoon to review our fourth quarter and full year 2017 results and discuss our outlook for 2018. Our fourth quarter results represented a strong finish to 2017 and brought our full year performance in line with the guidance we provided at this time one year ago. Revenue growth was led by a strong double digit increase in our commercial business where we saw significant year-on-year improvement across the clients that that was supported by higher pass-through revenues. In addition to the strong growth in our commercial business, revenues from our government clients increased at a low single digit rate, driven by strong growth from our European Union clients and slight growth from the US federal market. Overall, we were pleased with our service revenue growth of 5.3% in the fourth quarter, all of which represented organic growth and reflected positive demand trends from both government and commercial clients. Exclusive of the quarter specific items that James Morgan will detail later in this call, operating income increased 9.7% in the fourth quarter, substantially ahead of service revenue growth, representing significant operating leverage. On the same basis operating income increased 5.7% for full year 2017, considerably ahead of our total revenue and service revenue growth for the year. As we anticipated our results continued to improve through 2017 and we ended the year with positive momentum and tail wins that point to continued growth in 2018 in each of our key business areas. Let's discuss each of these areas. First, in our government business, we expect year-over-year revenue growth in 2018. These expectations are based on our current backlog and pipeline. We're also pleased with the passage of the recent Bipartisan Budget Act as it represents the highest increases in years…

Thank you, Sudhakar and good afternoon everyone. The fourth quarter was a period of solid execution across the key areas of our business, which is continuing as we move to 2018. As in previous periods, the benefits of ICFs diversified business model will clear in the first quarter and for full year 2017. Of the 10.9% total revenue growth we posted in the fourth quarter, 5.3% represented service revenue growth with remainder due to higher pass-through revenue. Our government business continued to perform well in the fourth quarter, with revenue increasing by 2.7% overall. Thanks, to another strong showing by our international government business and a slight year-over-year uptick in our federal business, which more than compensated for the quarterly decline in state and local government revenue. Excluding the impact of pass-through revenue, federal government revenue would have increased about 1% in the fourth quarter and was stable for full year of 2017. This was in line with our original guidance and an accomplishment, given the slowdown caused by the transition to a new administration in Washington and a significant delay in getting a fiscal 2017 budget approved. Federal government revenue accounted for 45% of total revenue for the year, although, in the fourth quarter, it dipped to 40%, given the substantial commercial revenue growth in the period. We were awarded a significant number of high value and strategically important federal contracts in 2017 across a broad group of agencies, including Department of Health and Human Services and the Department of Defense and the departments of state, inland security, interior, energy, transportation and others. In 2017, ICF launched campaigns for the Centers for Disease Control on three priority public health issues, Opioid abuse, Sepsis and Antibiotic resistance. As a result of our excellent work on this campaign, we've already heard…

Thank you, John. Good afternoon, everyone. I'm pleased to report on our 2017 financial performance and on the positive momentum that we saw in the fourth quarter. Total revenue for the fourth quarter of 2017 was $321.2 million, a 10.9 increase over the last year's $289.6 million. This double digit growth reflected increased revenues from both government and commercial clients and the higher pass-through revenue levels that we guided to on the third quarter earnings call. Service revenues increased 5.3% to $217.8 million, up from $206.8 million in the fourth quarter of 2016. Pass-through revenues of $103.4 million for the fourth quarter were up 25% year-over-year from $82.8 million last year. Gross profit dollars increased 6.4% to $113.9 million in the fourth quarter of 2017 from $107.1 million in the year ago quarter. From a margin perspective, 25% year-over-year growth in pass-through revenues typically generate little associated margin resulted in gross margin on total revenue, deceasing 150 basis points 35.5% in the fourth quarter of 2017, as compared to 37% from last year's fourth quarter. However, gross margin on service revenue was up 50 basis points year-to-year to 52.3% from the fourth quarter of 2017. Indirect and selling expenses for the fourth quarter were $86.8 million or 27% of revenue, up from $77.7 million or 26.8% of revenue last year. Roughly half of the $9.1 million year-to-year increase of $4.3 million was the result of special charges. Including the impact of a strategic tax planning decision to change the mix of some of our bonus pay off from equity to cash, as well as severance related to organizational staff realignments, office closures and acquisition related expenses associated with the acquisition of the future customer. As always we continue to look for opportunities to reduce our cost and provide a positive…

Thank you, James. In summary, we're heading into 2018 with multiple growth catalysts. We also continue to focus on making our back office leaner and more efficient as James mentioned. This gives us confidence in our ability to continue to generate significant operating leveraging plus investing in our businesses to flow future growth. For 2018 GAAP earnings per diluted share is expected to be in the range of $3.25 to $3.45, exclusive of any special charges, normalizing for the impact of the tax act, our GAAP earnings guidance on the midpoint represents16 .7% year-on-year growth on total revenue of $1.245 billion to $1.285 billion. The midpoint of our total revenue guidance is equivalent to 2.5% growth in total revenue and approximately 4% increase in service revenue, effectively all of it organic growth. At the midpoint of our revenue guidance approximately 80% of the revenue is either already in backlog or in final stages of capture in our pipeline. Non-GAAP earnings per share are expected range from $3.60 to $3.80. As I mentioned earlier, our revenue guidance does not include any material impact from increased federal civilian spending given the expected timing of appropriations, the same holds true for hurricane related recovery spending, we will certainly update you on any developments in these areas as we progress through the year. Operator, I would now like to open the call to questions.

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Tobey Sommer with SunTrust.

Thanks. I was wondering if you could give us an update on your perspective of where we sit with Community Development Block Grant funding associated with the hurricanes seeing some news of HUD dispersing moneys down to local governments, but curious what that represents in terms of the timeline between that kind of news in RFPs. Thanks.

Sure, Tobey. It's John Wasson. I would say a couple of things. I think as you know, the initial appropriation, I've several months back provided about 7 or $7.5 billion of total funding for CDBG program. So I think that that money has been allocated to the states in Puerto Rico and so we are just beginning to see some RFPs related to that. The most recent purchase agreement that added another approximate $90 billion of hurricane funding still needs to be appropriated and that will come later in the summer we expect and so we really expect to see the majority of the RFPs and most of this coming by mid-summer and we would expect to see awards later in the summer. And so I still think we are early in that process in terms of the CDBG related funding flowing down to the states and see RFPs turn into work.

Yeah. I would just add. Of the $7.5 billion, I think $2 billion were CDBG. The rest was sort of human related I think and there was - most of the work is being done on debris removal et cetera. I think the housing recovery stuff is still to commence. So I think that it will take its time as we had suggested to you in our earnings call or two ago. So I think we are still in the same process as we thought we would be and we will follow this carefully.

How many potential customers do you expect to receive CDBG funds associated with residential reconstruction and then secondly, is ICF competing for infrastructure related projects as opposed to a residential reconstruction?

Well, I think the plans depending on the states are going to be different. There could be the states. In Texas, for example, the state could be a client or the counsels of governments in the affected areas will be clients. In Florida, there are different counties will be clients. I think in Puerto Rico, it's the - the Government of Puerto Rico which is going to be the likely client. So I think that all that depends on how the money is divvied up and how works we just have to make sure we follow how the process works out and I think on the infrastructure side, we might be looking at ways in which we can help utilities and other sort of entities on resiliency et cetera, so I think that is what we might be looking at too, but I don't know that I want to say anything more than that.

Okay. Is the $90 billion or so in appropriations to date, is that the final total in your opinion or do you think it might be more from what you've heard from perspective customers?

And if you talk to different customers, they all expect large amounts of money. I think that certain states expect that amount just to come to them. So I think that it's difficult to say. I mean I think we just have to follow my - if I take a bet I think there will be more appropriations coming.

Okay. Shifting gears, could you discuss the - give a little bit more color about the pass-through revenues in the quarter and also describe your expectation for elevated levels in 2018? What's driving that?

Tobey, I can cover it. This is James. In Q4, really there were two areas that we expected to have elevated pass-through revenues in the quarter and those came to fruition. One was with our international government business, business we do with the European Commission. We had some elevated pass-through revenues associated with that work. And then also with our commercial digital marketing business, we had some elevated pass-throughs. Those were the two major drivers for 20 - for the fourth quarter of 2017. As far as for next year, if you look at pass-throughs of what we are anticipating and certainly this year was the higher than normal year for pass-throughs, we were low where 28% of our revenues were pass-through revenues. Typically that's a point and a half or two higher than what we typically see. We expect to be next year down a little bit maybe closer to roughly the 27% range give-or-take 20 basis points.

Okay. Thank you. That's helpful. Two other things from me, if you could update us on the size of the California energy opportunities that are coming to market in the third quarter and maybe provide some additional color on your increased intellectual property investment that you described, is that an overhaul of the IPM or anything else you could give color on describing what those intellectual property investments are?

I think on the California RFPs and energy efficiency, I think the state has decided to outsource more of the energy efficiency business than they used to and I think that that's something which we are pleased about. I think we mentioned that earning call or two ago, so I think those RFPs are coming out their traditional energy efficiency RFPs which you would see. Some of them are non-traditional and we will - California is the large market as you know and we will look at that carefully. It's also a leading market and there is lots of pilot projects et cetera which they do. So we will see how those things come out. On the intellectual property investment, I think we basically are improving our loyalty programs. We also are trying to make sure that we invest in them to help utilize them in various other markets, including the customer engagement business in the utility industry and we are also trying to make sure that we have other variants of certain programs which I would - I just don't want to talk about too much. But basically there is a large market in the utility industry where if we just spend a little bit of money and had the right angle on our existing tally platform, we could use it in a much more effective way and we would have an immediate potential for the amount of sales. So I think that we are - that's what we are doing spending more money on - the IPM is in pretty good shape. Over the years that investment has continued. But most of the investment there is from client work. So it's really not required too much of investment from the company.

Okay. Thank you.

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

Hi, good afternoon.

Hello, Mark.

I wanted to follow-up a couple of things, a couple of things you covered with the commentary around the CapEx increase. I was wondering if you could shed a little bit more light on that around maybe what you are looking at, is that from a technology spend perspective, are we looking at that and from a timeframe that you might be looking at that we should think about?

Well, as I said, we are - the loyalty business is a very solid business for us. It's the revenue. As you know, the nature of the revenue is quite sticky. We basically think that if we spend a little bit more money on it and make it a little more modular. We think that we can cater to clients of all sizes. So we are doing that. We are also modifying it to make sure that, as I just said, we cater to the utility industry which has its own characteristics and then we are adding some other elements to it which will help us unseat certain competitors in the utility industry which we think are - where the industry is using products which are perhaps not as effective as this would be going forward. So I think that that's our focus. We should be able to get the development down in the next year or so at different times of the year and we will certainly go to market as we get it done. So I think that's basically what we are doing on that front. We are also spending on the CapEx front. We are also making sure that we modify our back-office systems, which are - which needed some upgrades. We have certain HR systems et cetera, which are going obsolete. So we are trying to make sure that we get those up to speed and up to date and I think that we are doing something there also. So that's basically what we are doing on CapEx.

Okay. And I was wondering if you could touch a little bit about the new commercial wins that took place during the quarter and I wanted to get a sense of given what you saw there and the pickup that you saw there with new business wins in the commercial space, are we may be looking at sort of overall gain in momentum there and would it make sense to sort of look at commercial as potentially being over 40% of revenue going forward for a while now that you seem to gain some momentum there? And then just from the standpoint of magnitude, is that commercial specific? Is that one of the larger quarters of new business wins? Maybe if you could sort of help us sort of get the framework of the magnitude of that. Thank you.

Yeah. I think that we certainly have - over the last quarter I think most of our wins, as I suggested in the overall sales, were primarily new work and we certainly won our fair share of more commercial work than we did - than we have in the past. I don't know that one quarter makes a trend, so we will just wait and watch and see. I think that it will take more than a quarter for us to switch to 40% or more on commercial. I think we're certainly ahead of that way, but we hope that it continues to grow as rapidly as it did. But we will wait and watch, but we are optimistic.

Okay. Then one last one from me, I was wondering if you could spend a little bit of time on the international growth and maybe some of the revenue drivers there and some of the trends that you are seeing that perhaps may have had some influence on your guide for 2018. Thank you.

And so this is John Wasson. I mean I think as we've talked about over the last year to 18 months on the international side, we have certainly won a significant amount of new contracts with the European Commission. The issue was the activation of work under those contracts and I think we've seen in the last couple of quarters certainly that return to activating the work and the issue is getting back to business as usual. Obviously the last year or 18 months, there's been a number of distractions, the migration crisis and I think we are getting - what you are seeing is we are getting past that and European Union and European Commission is getting back to its mission and certainly resulting in activation of work under contracts we won in the last year to 18 months and we expect that to continue. That's really what's driving the revenue growth right now.

Okay. Perfect. I appreciate. Thank you very much.

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

Hi, guys. Good afternoon. Could you repeat the guidance methodology for the year based on what percent of visibility in your backlog right now?

I think we have about 80% of our revenues is in backlog which is not dissimilar to what it has been in the past, Joe.

Okay. Thanks for that color. And if you kind of looked at that visibility, I mean I know that 2017 was - there was uncertainty in that 80% number. Would you characterize the amount of uncertainty and how hard that 80% visibility is versus a year ago? Would you call it really apples-to-apples or is that potentially a harder visibility on the 80% versus a year ago?

Yeah, I would say it's certainly - the atmospheres certainly, Joe, are better. Last time when we did this call, the administration had made certain statements which seemed to be quite dire and I think things are settled down since then last year when we talked to you. So I think that we certainly think the quality of the 80% is that's what you are alluding to is certainly better than what it had been last year.

That's helpful. And then, John, I know in some of our discussions during the year, I know you are continuing to look forward to see more second and third level political appointees across agencies and departments et cetera that kind of help drive new policy and that would maybe ripple into potentially more opportunities for you. Have you seen any progress on that front to kind of help drive those new policies and then potential work for you on those new policies?

Yeah, I would say there has been some improvement, Joe. There is still more room for additional appointments that could certainly be made and need to be made. But there has been some progress on that.

And then I mean it's a nice to see a dividend with the tax break. I mean it's clearly not something that's going to really slow down any M&A efforts. Was the idea just - is the M&A environment changing at all and it's not that much money really that's going up to dividend versus other capital allocation strategy, is there anything going on the M&A front that said, hey, maybe we just hand it out right now?

As you pointed out, I think that we basically - as I emphasized too, Joe, we think that there is lots of interesting things out there. And so we are not changing our sort of overall allocation strategy. We clearly thought that given that the tax rates had gone down and we have an opportunity to return some capital to shareholders. We should do that. That's what we did. But I don't think our posture has changed any in terms of how we want to make sure we grow the business.

Yeah, keep in mind. We still have a very healthy credit facility with capacity for us to help support our acquisition desires as we move forward, so paying the dividend will not hinder our ability at all to do acquisitions in addition that we expect to have great cash flows coming here.

Okay. That's helpful and then just perhaps finally I mean there has been kind of ongoing modest restructurings here and there and it sounds like you are talking about a little bit of operating leverage next year or this year I guess. Should we think about these restructurings as helping more long-term on the operating leverage front?

Yeah, it certainly will. I mean as we have talked about in the past, we have been taking efforts over the last few years to continue to improve our profitability and some of that's been getting reinvested back into the business to grow long-term and as we've mentioned we are investing more in some of our internal intellectual property as well as some of our systems, so some of the dollars or savings are going into our reinvestment back into the company. But at the same time we will continue to drive margin improvement at least 10 to 20 basis points per year margin on service revenue. So we believe we can continue to deliver those margins as we move forward and I think as we wrap up some of our internal programs, we will be able to deliver more in the future years, but for right now we're signing out to 10 to 20 basis points improvement per year.

Great, thanks very much guys.

And thank you. Our next question comes from Lucy Grove [ph] with Cohen & Company.

Thank you for taking the questions. First to start off, can we please just clarify it sounds like there is very low hurricane kind of work they did to your 2018 plan, is that fair to assume given the timing of that, you may be able to get to us mid-single digit type growth in 2019?

This is John Wasson. I guess what I would say on the hurricane front is we are picking about $20 million of revenue for disaster recovery into our 2018 guidance. I would say about $5 million of that is Sandy related that will be wrapping up $15 million of work from the hurricane sort of occurred last summer. I think there is significant potential upside depending on the funding and timing of the opportunities in front of us and we are successful. I think we've spoken in other forums about our history on the hurricane recovery work and if you look at that history and efforts around super storm Sandy, we did about $15 million with the housing CDBG related work over four or five years. I think the maximum revenue in the one year was about $20 million. So that's one bookend. I would say that's the conservative bookend. But when you think about our history and then obviously we did the road home and there we did north of $300 million in a single year of revenues on CDBG programs and road home program and so kind of 20 to 25 million to $300 million is how I would bookend the history, I think given the scale and press of the impacts from these recent storms. That's a pretty good range. I think as we said that these opportunities from an RFP perspective will play out this summer and into the fall. We would expect it to wrap up work and as we get later into the fall and into the fourth quarter and then it could potentially be a very significant opportunity for 2019. I hesitate to pick a growth rate for 2019 or give guidance on a specific percentage. I would just say to you it just goes to bookends. The range of revenues we've had or experienced under Sandy down the road home I think is a reasonable range to - it's a reasonable way to look at the potential opportunities in front of us.

That's helpful. Then if you consider that along with potential - more further appropriations on federal civilian agencies, especially with the HHS on healthcare, would it be - do you need to hire more people in order to support those contracts and awards and to support your potentially organic growth?

I mean again I would say on the additional civilian appropriations that are in the recent budget agreement, I would say what I'm about to say is separate from the hurricanes. So this is just talking about the civilian appropriations in the time of the hurricane disaster recovery funds. Again I think we see those as given the timing of the flow of those funds, budgeting should be appropriated. The funds need to throw through the agencies and so we really see any pickup or upside from our guidance as largely a Q4 ramp-up and then really providing material upside in 2019. And so we baked in some ramp-up in Q4, small amount of ramp-up in Q4 into our guidance, but then see it as really - a needle mover again on top of the hurricanes for 2019. In terms of the employees, I would say that I don't think we need to hire significant amount of additional employees to take advantage of the new opportunities we see from additional growth creations as we get later into the year. Of course, we are a people business and for us to increase our revenues, it's a material increase we need to have folks, but I think there is room on the margin for periods to increase utilization with the staff we have and I would expect we would be able to do that to support the additional appropriations as we get later for funding from additional appropriations as we get later into the year.

Got it and maybe a couple of questions for James on the question of pass-through revenue, I thought you had a large state department contract that was also driving the pass-through variances over the course of 2017. That contract seemed to maybe up for recompete by late this year. Is that the case and is that baked into your lower pass-through revenue mix?

This is John. Maybe I will start here. It is true we have a large state department contract that's actually with the USA IDs. It's a significant contributor to our pass-throughs. That contract is up for recompete this year and so that - it's a potential contributor. We've had that contract for many, many years I want to say 20, 25 years that is probably six or seven cycle of recompetes and so we are confident about our prospects on that recompete. But that contract has had material pass-throughs and there had been some timing associated with some of the international development work we do under that contract from a health perspective for around specific countries using developing countries, political issues, or USA ID approving has to begin work in certain countries. James, do you want to add anything on that?

Yeah, I guess I would just say with regard to 2018 in the level of pass-throughs, what we've done, what we have baked into our plan for 2018 for that contract is essentially the same level of pass-throughs that we had in 2017. So we are giving that somewhat conservative until we see the change.

But your initial point is correct. The pass-throughs on that contract have been down several quarters of 2017. It certainly impacted our pass-through ratio.

That's right.

That's great.

Latter half of 2017, yeah.

My last question is, James, if you can help us quantify some of the moving pieces in your operating cash outlook in terms of the process from tax savings and offsets. It looks like a pretty large increase in CapEx and if there's any other offsets in there?

For 2018 or are you referring to 2017?

For 2018, so your operating cash outlook of 100 to 110 is down from the 117 that you reported?

Yeah, so what we - I mean at a very high level, you may recall that we had guidance for 2017 of $98 million to $100 million of operating cash flow, so at midpoint of 95 going at 117, we would be bet by $22 million at the midpoint. And that was really driven by the fact that we had some - there were some contracts especially associated with our international work and also some of our domestic commercial work, whereby we received some advance payments for the work and that's why differed revenue balances went up. In addition, we had some receivables that basically moved to the left by few days from 2018 into 2017. And when you sum all that up, it gets you close to that $22 million difference. What we're anticipating for 2018, if you look at kind of our net income and then non-cash performance, we're expecting - if you that add that up you would expect to be just over - somewhere between $100 million to $105 million of cash flow. And we believe we'll get a little bit of a benefit from a tax perspective just because we've - the tax rate is down and we have some receivable balances and taxes that will reverse. And but then we do expect that our DSO will go up slightly, we are at a little less than 71 days in 2017. We expect that will get a little bit closer to the middle of our range for 2018, our range being 72 to 77 days. So that's causing a little bit of use of cash from a working capital perspective and that's what is taking this to the midpoint of 105. Hopefully that helps.

Thank you for the color. I appreciate it.

[Operator Instructions] And we have our next question comes from Ben Cleave with Noble Capital.

Hi, I have two questions. First, is there a state of excitement of your business that has an especially strong potential to beat your 2018 guidance?

Could you repeat the question?

Is there a certain segment of your business that seems like it could - seems like it has a strong potential to beat your 2018 guidance - revenue guidance?

I guess based on the decent amounts we made, I think that clearly if we get some of the disaster recovery work earlier, that would help us more than what we've anticipated. We've got $15 million build in here, but if there's a run rate which is higher than that that will probably help beat the guidance and also if the budget process, the reconciliation process moves more quickly and the agencies have money earlier and we start getting projects on existing contracts, we have all the contract vehicles which we - which are required, even that could also up the numbers. So both the civilian agency spending issues and I think, disaster recovery are the two things which could potentially up the number.

Okay, great. Thank you. And my second question is, can we expect the CapEx for 2018 to be somewhere to fiscal 2017 levels or will there be any meaningful change there?

So 2017 we were - as I'd said $19.3 million in CapEx, our guidance range that we gave for CapEx for 2018 is $24 million to $26 million, so it's about $5 million to $6 million higher at the midpoint. And as we mentioned that's been driven by some investments that we're making internally from an industrial property perspective as well as we are making some investments in some of our internal systems, HR and financial systems driving capital up.

Okay, thanks. That's all for me. Thanks for your time.

And we have no further questions at this time. I'll now turn the call over to management for closing remarks.

Thank you all for participating in today's call. We look forward to keeping you up to date on developments at ICF. Thank you again.

And thank you ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.