Good day, and thank you for standing by. Welcome to the Q3 2022 ICF Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lynn Morgen, Advisiry Partners. Please go ahead.

Thank you, Kurt. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2022 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them 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 November 3, 2022, press release and the 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 from that light. We may at some point will have to update these 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 third quarter of 2022 performance. John?

Thank you, Lynn, and thank you all for participating in today's call to review our third quarter results and discuss our business outlook. This was another strong quarter for ICF. Key takeaways include our 22% year-on-year growth in service revenue comprised of 7% organic growth and the contribution from our recent acquisitions, 15.5% year-on-year growth in revenues from commercial energy clients, a 14.8% adjusted EBITDA-to-service revenue margin and record third quarter contract wins totaling $865 million, resulting in a book-to-bill of 1.85x for the quarter. These measures clearly demonstrate ICF's enhanced growth trajectory, which together with our significantly increased backlog and robust business development pipeline support our confidence in continued strong growth in 2023 and beyond. Our year-to-date results also underscore our ability to reach the long-term financial goals we laid out in our May 2022 Investor Day, namely to achieve high single-digit organic service revenue growth through 2024, driven by our 5 key growth areas, drive double-digit total revenue growth by adding acquisitions that are a strong cultural fit and offer revenue and earnings synergies and by the end of 2024, increase EBITDA by roughly $100 million from the $143 million we reported in 2021, which implies a CAGR of approximately 19%. ICF's third quarter revenue growth was led by our federal and state and local government clients and our commercial energy work, which taken together accounted for over 87% of the company's total revenues for the period. Within those client categories, we continue to see positive year-on-year comparisons in all of our key growth areas, including IT modernization and digital transformation, public health, disaster management, utility consulting and our climate, environment and infrastructure work, which together accounted for over 70% of our year-to-date revenues. The fastest-growing client category by far was the federal government, where revenues increased 39%…

Thank you, John, and good afternoon, everyone. Our third quarter total revenue increased 18.7% to $467.8 million. And service revenue was up 21.7% to $335.4 million, inclusive of foreign currency exchange impacts, which reduced our gross revenues by approximately $4.2 million. These positive comparisons were led by double-digit growth in our government and commercial energy client categories. Pass-through revenues from the third quarter accounted for 28.3% of total revenue, which is within the range we expect for the full year 2022. Gross margin on total revenue was 34.3% as compared to 35.5% in the third quarter last year. Gross margin on our service revenue was up 47.8% compared to 50.8% in the third quarter of last year. Both metrics primarily reflect the impact of acquisitions that have lower gross margin but higher EBITDA margins and the timing of Board fees and revenue recognition on fixed price contracts. We expect our gross margins to increase to about 50% in this year's fourth quarter. As we have discussed on previous calls, we are seeing the benefit of our increased scale. We achieved 190 basis point improvement and indirect expenses as a percentage of service revenue, which on an adjusted basis, were 33%, which is down from 34.9% in the same period last year. In absolute dollars, indirect and selling expenses increased 18.4% year-over-year to $118.3 million. Our third quarter interest expense was $7.5 million, an increase of $4.9 million as compared to the same period last year, reflecting higher debt balances related to our recent acquisitions and higher interest rates. Approximately 30% of our debt is hedged against higher rates. And as I mentioned in our last call, we were able to offset a significant portion of our higher interest expense through various cost efficiency initiatives. Third quarter EBITDA was $42.2 million…

Thank you, Barry. As you have noticed from our earnings release, we have made revisions to our full year guidance to reflect on current expectations as well as the special charges we have incurred year-to-date. We narrowed our service revenue guidance and brought down the midpoint by $12.5 million reflects year-to-date currency impact in the postponement of several projects in our international government business as well as the exiting of certain [indiscernible] service lines of business in Q3. We've reaffirmed our guidance for 2022 adjusted EBITDA to service revenue margin of 14.8%, [filled] up the GAAP EPS range to improve this severance M&A and facility-related charges included to date and the impact of this quarter's tax benefit and increased the midpoint of our non-GAAP EPS guidance. Based on these pin points, we're now expecting 2022 service revenue growth of 16%, adjusted EBITDA growth of 19.4% and non-GAAP EPS growth of 20.3%. [indiscernible] we believe are at the top end of sector performance. And with the backlog of $3.7 billion, it's approximately 50% funded, expectations for significant new awards in the fourth quarter and with a robust business development pipeline, we are confident that 2023 will be another year of strong performance for ICF. As we noted in our earnings release, ICF is ranked by Forbes in 2022 as one of the best management consulting firms, one of the best employers for diversity and one of the best employers for women. We appreciate this recognition as ICF like most companies is facing challenges in attracting the talent we need to effectively execute on a growth strategy. I'm pleased to report that our head count increased over 8% in the third quarter to about 40% of new hires added organically in the remainder coming 2 acquisitions. We are experiencing a record-setting hiring pace, and the results of our recent employee survey indicated deep connection tied to the strong value-based culture and flexibility. On our part, we continue to make sure that communication is fluent to the organization at all levels and our benefits are in line with employee priorities and that our leadership development programs provide growth opportunities across our diversified business disciplines. Operator, with that, I'll now open the call over to questions.

[Operator Instructions] Our first question comes from Tobey Summer with Truist Securities.

What do you think the impact on growth over the next 3 or 4 years will be of the climate bill also known as IRA?

Sure. So I start off by saying thing, Tobey, that, as you know, as part of our Investor Day in May, we did lay out our long-term financial goals based on the 5 key growth drivers in front of us, and as I noted in my remarks that would -- those who included high single-digit organic growth, the expectation of double-digit total revenue growth with acquisitions and higher EBITDA growth than the level of our revenue growth. And so I think that was just background. I think as you also know, the inflation reduction after our Investor Day, I think, does provide, as I said in my remarks, a potential significant opportunity for us on the clean energy. In climate fronts, and I think those opportunities will develop in 2023. It should become material in 2024 and beyond. And so it's hard to fully characterize those opportunities, but I think that has -- certainly can provide upside on top of the high single-digit growth we indicated at our Investor Day. It has the potential to -- potentially take us to double-digit organic revenue, but we'll have to see how it plays out over time. As I also note, it does impact directly about 25% of our business, the Inflation Reduction Act as a funding within it. So it's certainly a material opportunity for us, yes.

How much of the contract awards in the quarter represented new work to the company? And do you have an expectation or any color on what you expect for ramps of that business?

I don't have the breakdown of [indiscernible] recompete with I think I would expect the majority, significant majority would be new contract wins. Obviously, the growth in the pipeline, the growth in our [ad] side is being driven by the opportunities in our 5 growth areas. And so I think certainly in the majority, I would expect about 65% to 70% of the on track leads our new business.

And what's the outlook for the low-growth parts of the company, including commercial marketing, international aerospace? And could you also, in the context of that answer once you talk about the outlook, talk about what changed to cause you to lower and narrow the top line guidance range?

Yes. I think what caused us to lower and narrow the guidance range for the remainder of this year was, as I said in my remarks, I mean, it was the impact of the European business, the currency issues and related to the movement of the right of projects given what's going on in Europe with the war in Ukraine and the overall economy. So we reduced our guidance to about $12.5 million. I think about $10 million of that was related to reductions in our European business and about $2.5 million was related to revenues associated with shutting down the specific service lines and in commercial marketing services. And so I think that's what drove the specific reductions. I think in terms of your question on the remainder of the business, generally, I think we've discussed the remainder of the business. We see is low single-digit growth. Obviously, we haven't been achieving that in incremental marketing services, and it is not rebounded from pre-pandemic levels. But setting that aside, I think the rest of the business we generally see is low to mid-single digit, low single-digit growth opportunities as we go forward.

Okay. I'll sneak one more in if I could. How are you thinking about interest expense as a headwind into '23? And are there steps that you can take to mitigate that kind of expense growth beyond simply paying down debt?

Yes. Thanks for the question. Well, there's a number of things that we'd like to look at. One would be hedging more of the debt and when the timing is best for the company, then we'll execute on that. And then I think paying down the debt is a critical component of that. So we'll look and continue to improve our cash flows and use those cash flow to delever and reduce that debt amount.

Yes. I'll just add to that. I think as we've talked about, I mean, we've been using -- we've been leaning forward and managing our facilities footprint, reducing our spending there given that we'll be operating in a hybrid environment rather than looking full time in the office. And that has -- in doing so, we've reduced the investment spend there, and we've been using those savings both to invest back in the business and to offset some of the interest-related increases we've seen. And I expect we'll continue to do that to be able to do that going forward. I just would also -- as Barry said, I mean we do hedge, I think, about 30% -- as Barry said in his remarks, it's hedged at less than a 4% interest rate. So we have -- we want to be lean in on the hedging front, too.

And our next question comes from Mr. Marc Riddick of Sidoti and your line is open. Go ahead, please.

So I wanted to just sort of touch on the state and local spend and so the activity that we're seeing there and maybe some of the levers involved. I wonder if you could talk a little bit about the, given the strength that we're seeing in federal and certainly, there's infrastructure spend to be done on the state and local level eventually. I was wondering if you could talk a little bit about the time frame that you're looking at for some of those projects, if you're getting sort of any sort of feedback from state and local customers to the timing of putting projects to work and moving forward there as well as maybe if you could give us a bit of an update on maybe some of the disaster work that you're doing.

So I think, as you know, our state and local business has essentially 2 major components that split down the middle, our environmental monitoring and permitting work about large infrastructure projects and then our disaster management work. I think that -- and as we noted in our remarks, that scalable business, I think it's been growing double digit, we achieved double-digit growth in the third quarter. I think the IIJA funding, as we said, going to provide $1 billion to $2 billion addressable market for a year for ICF. I think a lot of that opportunity will be at the state and local level, and we'll be around traditional infrastructure projects with bridges and roads and rail to energy and water-related infrastructure. And so I think that is an important source of future opportunity for us. I think as we've discussed, we really see that ramping up and that opportunity coming -- to begin to come to fruition in the second half of 2023, and then help to drive our growth in '24 and beyond. But that money will be spent over the, assuming, 5-plus years. And so that's certainly an opportunity. I would look to it to really become material and for the company in the second half of 2023. We are seeing -- we do have a robust pipeline on the IIJA front and our overall state and local pipeline is at $1.1 billion. The disaster recovery front, again, I think we have a very strong book of business and are executing well in both Puerto Rico and Texas. I think there will be additional opportunities for us over time on Hurricane Fiona in Puerto Rico. As I said in my remarks, we've already won -- received a $10 million plus up to support Puerto Rico from of the immediate response activities underway down there. And I expect there will be opportunities from the Hurricane Ian that will play out here in the next 6 to 9 months that we'll be tracking very carefully and could potentially be material in the second half of 2023 and beyond. So we remain quite bullish on both of those markets. They're part of our key growth drivers, and we certainly expect to have strong growth in the state and local markets as going forward.

Great. And then if I could just add one more question. I just wanted to touch maybe if you could bring us up to speed on your thoughts on views on acquisition pipeline and following SemanticBits, the year acquisition appetite seem to be healthy still. But just wonder if you could sort of talk a little bit about maybe what the pipeline might look like now and maybe if it's changed over the last 6 months given the recessionary concerns that are out there.

Yes. I think the -- I think our focus right now is on integration and integrated the acquisitions we've completed here in the third quarter, significant business and significant acquisition for us and certainly helped greatly improve our positioning in the IT modernization front, Blanton & Associates was a small tuck-in on the environmental front. My expectation is we're going to be laser focused on integration of those acquisitions here through the first half of next year. And associated that with that, we're going to be laser focused on pay down debt and carefully managing our cash flow. So I don't see us leaning in or making any significant investments on the M&A front, at least through the end of this year and in the first half of next year, I think we'll quite focus on successfully simply integrating the deals we've done and paying down our debt. In terms of the market, I mean, I would say that there's still opportunities in the federal government services market. There's still activity in energy markets. I think there's still quality companies out there. And so we obviously are out in the market. We have a pipeline, we'll stay close to the market. Honestly, we haven't seen a significant change in valuations in the market. But as I say, I think our focus, Peter, for the next -- to the first half of next year will beyond integrating the deals we've done and focus on paying down our debt here through the first half of next year.

That was our last call. I would now like to turn it back to John Wasson for closing remarks.

Well, thanks for all of your participation today. We certainly look forward to meeting you at upcoming events. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.