Welcome to the First Quarter 2022 ICF Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded on Wednesday, May 4, 2022 and cannot be reproduced or rebroadcast without permission from the company. And now I would like to turn the program over to David Gold, Investor Relations. Sir, you may begin.

Thank you, Vanessa. Good afternoon, everyone and thank you for joining us to review ICF's first quarter 2022 performance. With us today from ICF are John Wasson, Chairman and CEO; and Barry Broadus, CFO. Joining them is James Morgan, Chief of Business Operations. During this conference call, we will be making 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 May 4, 2022 press release and our SEC filings for the 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 Wasson, to discuss first quarter 2022 performance. John?

Thank you, David and thank you all for participating in today's call to review first quarter business and financial trends and discuss our business outlook. ICF's first quarter results represented a very strong start to the year, supporting outlook for considerable growth in 2022. In terms of the key takeaways from our first quarter performance. First, we continue to build our position in high-growth markets. These markets, namely, IT modernization and digital transformation, public health, disaster management, utility consulting, together with our climate, environmental and infrastructure services are expected to account for approximately 70% of service revenue in 2022, up from around 65% at the end of 2021. Second, we continue to drive margin improvement. Our adjusted EBITDA to service revenue expanded to 13.9%, while we continue to invest in people, technology and strategic initiatives to support our future growth. And third, our business development results continue to support our long-term growth outlook. At the end of the first quarter, our trailing 12-month book-to-bill ratio was 1.27 and our business on the pipeline was a record $7.9 billion, putting to ICF substantial runway for future growth. The strongest year-on-year revenue comparisons in the first quarter were in our federal government business which was up 25%, reflecting organic growth across our growth markets and the acquisition of Creative Systems and Consulting which we completed at the end of 2021. As you'll recall, Creative is an IT modernization, digital transformation solutions provider to U.S. federal agencies that expanded our addressable market in two ways. First, it brought substantial expertise in Salesforce and Microsoft platforms that complement our ServiceNow and Appian capabilities, strengthening our qualifications for new awards. Second, it expanded our presence in several civilian agencies, including USDA and Treasury, where we see additional growth potential. The acquisition is performing well, in…

Thank you, John and good afternoon, everyone. I'm very pleased to be part of the ICF team and to report on such strong financial results during my first quarter as CFO. To start, our 2022 first quarter total revenue increased 9.2% to $413.5 million which is inclusive of organic revenue growth of approximately 5%. Service revenue increased 8.9% to $304.6 million. These year-over-year comparisons were mainly driven by the robust performance of our federal and state and local government businesses. This quarter's pass-through revenue accounted for 26.3% of total revenue which is in line with the first quarter of 2021 and within the range we expect for full year of 2022. Our gross profit totaled $155.3 million, an increase of 6.1% compared to the first quarter of 2021. Gross margin on total revenue was 37.6% compared to 38.7% last year. Gross margin on service revenue was 51% compared to 52.4% a year ago. As we discussed in the first quarter of 2021, we realized significant gross margin benefits, primarily from the timing of several fixed-price energy efficiency contracts which drove gross margin variance. This year's first quarter gross margin is consistent with what we would expect for the balance of the year. Indirect and selling expenses, while up in dollars by 6.8%, were 180 basis points lower as a percentage of service revenue on an adjusted basis due to our increased scale and actions we have taken to reduce our nonlabor expenses. We have also made investments to streamline our systems and processes that will yield cost savings in future periods. EBITDA increased 4% to $37.9 million as compared to $36.4 million in the first quarter of 2021. Excluding special charges totaling $4.4 million related to our new headquarters, M&A and severance expense, adjusted EBITDA outpaced our revenue growth, increasing…

Thank you, Barry. We are looking ahead to double-digit revenue growth and strong margin performance in full year '22. And we are pleased to reaffirm the guidance we provided with our year-end 2021 results. At the midpoint of the guidance range, as noted in today's release, we expect service revenue for 2022 to increase by 12%, adjusted EBITDA margin on service revenue to be 13.9% and GAAP EPS and non-GAAP EPS to be up 15% and 10%, respectively, all compared to 2021. Operating cash flow is expected to be approximately $130 million for the year, up 18% year-on-year. We consider this performance to represent an inflection point for ICF, demonstrating our strong position in key growth markets as well as our expanding addressable market. Our Investor Day on May 25 in New York will feature presentations and panels that will provide greater insight into the growth drivers ahead for ICF as well as additional insight into the impact of our work. Please direct any questions to Lynn Morgan. We certainly hope to see you all there. With that, operator, I'd like to now open the call to questions.

[Operator Instructions] I see we have our first question from Tobey Sommer with Truist Securities.

This is Jasper Bibb on for Tobey. Some of your federal peers with more of a defense focus described a slowdown in tasking during the first quarter. Is that something that you were seeing given your mix? And have you seen customer activity improve in April and May after we got the budget?

I wouldn't say that we saw a slowdown in tasking in Q1. I think we had -- the businesses remained steady. And as I said, we certainly have seen a pickup and are very busy on the business development and the proposal front. But I think our tasking and our awarding of funding has been pretty steady. I don't think we've seen a slowdown.

Then I wanted to follow up on the decline in energy market revenues during the quarter. Could you just provide a bit more color on what drove that decline? And are you expecting some of those delayed projects to pick back up again in 2Q or in the latter half of the year?

Yes. I think -- look, as I said in our remarks, I think we certainly expect for the year that the commercial energy business will grow at least mid-single digits for the year. I think the first quarter results was due really to the timing around kind of wind down of certain projects and the kickoff of new projects in our environment and infrastructure business. It was not unexpected. I think we knew that we would be winding down certain projects and starting up others. And so that's really what drove the Q1 results. I think given the pipeline and backlog, as I said, we certainly expect at least mid-single-digit growth there. I think we'll have a much stronger second half of the year in our commercial energy business, given the trends and the awards.

No, that makes sense. And then last question for me is just hoping you could update us on the pace of RFP activity for disaster work in Puerto Rico. And do you think there's still a meaningful pipeline of work in that area of the bid, given more a couple of years into that funding being obligated now?

I think that our pipeline for disaster recovery is quite robust. And as we said in our remarks, I mean, the state and local business grew 14 -- or certain level of businesses grew 14% in Q1. Obviously, disaster recovery is a key part of that growth, driving that growth. And so -- and certainly, the pipeline there remains robust. I think we still have material opportunities in front of us in Puerto Rico. And as I noted in my remarks, we certainly are seeing a bevy of opportunities on the mitigation front around the country. And I think that's a long-term trend that's here to stay. And so certainly, the disaster recovery remains one of our key growth markets. We have a robust pipeline. I certainly expect that we'll see material opportunities there as we look forward.

Congrats on the nice start to the year here.

Thank you.

We have our next question from Joe Vafi with Canaccord.

Nice results here in Q1. I was wondering if we could drill down a little bit into the supply side. I know you said there was higher utilization that help margins. Was that -- just get a backdrop here of hiring versus utilization going higher, how you're managing that, especially given kind of the inflationary outlook here for wages. And then I have a follow-up.

Well, sure. I mean, I think, Joe, we've talked in the past about recruiting and utilization. I think we certainly are pleased with the strong utilization within the company. Obviously, as we're growing nicely as we are, that certainly can help provide the work to maintain that high utilization as we go forward. And so I think we'll be able to consistently do that. I do think, to your point, we are in a people business, we need to add the head count. We are expecting 7% organic growth here which would imply we need to add 6%, 6.5% more staff to meet that growth. As we talked about on prior calls, we are investing significantly in recruiting and I have confidence we'll be able to recruit that staff and bring them on board in a timely way. I'm not going to kid you, it's a very competitive market and it's a challenging market. But as we talked about in our -- I think in our fourth quarter call last year, we grew 6.4% and we'll be able to hire 5.5% or 6% more staff to meet that. So I think we're generally confident on the recruiting such that we can hire the staff. To your point on wage inflation and those issues, I mean, we're -- like every business in America, we're experiencing wage pressures and higher wages and have had to increase our wage expense, both in terms of various aspects of profits and salaries, retention awards. As I've talked about, I mean, I think we generally believe that we'll be able to manage those, both through passing those costs through in our rates through time in a timely way. And as we've also talked about, I mean, we are continuing to have savings in travel and entertainment. We've taken steps to reduce our facility footprint. And so some of the savings there are certainly being reinvested back into the people and allowing us to stay competitive on the compensation front but without having to impact our profitability. And so I guess that's a long-winded answer but I think we're managing that as well as we can and are generally doing a good job. And I think at end of the day, I'm confident we'll be able to meet our recruiting goals and find the talent we need.

Sure. And then just to follow-up. I mean, your IT footprint is getting bigger which is great, I think. It would just be interesting to get a kind of a lay of the land if it's big enough now, you can kind of see some of the differences in some of the IT work versus just some of the more program management stuff with your government clients. How is attracting and retaining talent in each of those, the IT versus the non-IT segment? And then any differences you're seeing in RFP activity or changes in each of those sectors versus, say, six months ago?

Yes. I think that -- well, certainly, you're correct that IT, IT modernization is certainly becoming a more and more material portion of our business. It's certainly one of our significant key growth drivers, there's significant opportunity there. And over the last two to three years, both through our inorganic efforts to grow the business and the two or three acquisitions we've done, we certainly have scale now in IT modernization. We can go to market on each of the three significant platforms in civilian markets and are certainly very competitive in those markets. Again, I would say that we've -- on the technology side, I think we've generally been quite successful in recruiting the talent. I think to your point, it's not exactly the same as recruiting domain-oriented talent. I mean I think those folks are quite interested in doing really leading-edge, interesting technology work and the training and the skill development you can provide. And so I think -- but given what we do and the platform we have, we can certainly do that. And so I think we're able to recruit and retain the talent. And at the end of the day, I also think that they -- once they are here, they find they like the ICF culture and like the mission orientation of the work we do. And so I think we've really have become quite skilled at recruiting and retaining the technology talent we need. In terms of the pipeline and the business development opportunities, I mean, I would say to you that right now, I mean, as we said in our first quarter results, I mean, really the federal government and state and local markets really drove our first quarter results. And on the federal side, that's really IT modernization and public health. And so we are seeing a lot of opportunity on the IT modernization and on the public health side right now. And I think we're quite bullish on those markets and we think that those will be long-term growth drivers for us. And so as I said, I think the proposal activity within ICF and the variety of deals we're seeing and certainly in the IT monetization, larger deals we've seen are all very positive trends for us.

Just to confirm, Joe, do you have anything further?

Well, that's it for now.

[Operator Instructions] And I see no further questions at this time. I will now turn the call over to John Wasson for closing remarks.

Thank you all for participating today. We look forward to keeping you apprised of our progress as we grow throughout 2022. And we certainly hope to see you at our Investor Day at the end of this month. Thank you and take care.

Thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.