Welcome to the Fourth Quarter and Full Year 2022 ICF Earnings Conference Call. My name is Michelle, and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Lynn Morgen of Advisiry Partners. Lynn, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to review ICF's fourth quarter and full year 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 February 28, 2023, press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn the call over to ICF's CEO, John Wasson, to discuss fourth quarter and full year 2022 performance. John?

Thank you, Lynn, and thank you all for participating today to review our fourth quarter and full year 2022 results and discuss our outlook for 2023. ICF's fourth quarter was an outstanding finish to 2022, which was a record year for the company across all key financial metrics. There are 5 key takeaways I'd like to highlight. First, our strong year-on-year increases in service revenue up 24% for the quarter and 15.8% for 2022, which reflected double-digit organic growth across our key growth markets in the aggregate was the impact of 2 -- of our 2 acquisitions that benefited revenues from federal government clients. Second, the substantial margin expansion we achieved posting an adjusted EBITDA to service revenue margin of 16.3% for the fourth quarter and 14.9% for the year, up from 14.3% in 2021. Third, we had Record Contract Awards for both the fourth quarter and full year, which resulted in a 12-month book-to-bill ratio of 1.32. Fourth, our robust operating cash flow, which supports our capital allocation priorities and fifth, our 2023 guidance for double-digit revenue growth, improved our margin expansion and GAAP and non-GAAP EPS of $4.90 and $6.30, respectively, at the midpoint. These accomplishments are due in large part to the growth strategy we outlined in 2020 and the strategic decisions we've made since then to expand our investments and capabilities in markets in which we anticipated accelerated client spending that ICF already had recognized experience and success. These markets, namely IT modernization, public health, disaster management, utility consulting and climate environment and infrastructure services accounted for approximately 55% of our service revenue at the end of 2020. Since that time, revenues from these markets have grown considerably through a combination of organic investments in people and technology, the completion of 3 sizable acquisitions over the…

Thank you, John, and good afternoon, everyone. I will now provide an overview of our strong fourth quarter and full year performance that resulted in a record year for ICF and review our 2023 guidance. Our fourth quarter total revenue increased 22.6% to $475.6 million, and our service revenue was up 24% to $339.1 million, which led by a strong year-over-year revenue performance from our federal, state and local and commercial energy client categories. Pass-through revenue for the fourth quarter accounted for 28.7% of total revenue, which was in line with our expectations and slightly lower than the 29.5% in the fourth quarter of 2021. Gross margin expanded 50 basis points year-over-year to 36.9% on total revenue and on service revenue, improved 10 basis points to 51.8%. Indirect and selling expense decreased 280 basis points as a percentage of service revenue to 34.9%, down from 37.7% in the same period last year on an adjusted basis. This improvement reflects the benefit from our work to reduce facility-related expenses and increased scale as our indirect expenses increased by 19.4% on a year-over-year basis, which was at a slower pace than our year-on-year service revenue growth of 24%. Our fourth quarter interest expense was $9.2 million, $6.8 million above last year's level, reflecting both our higher debt balances related to our recent acquisitions and higher interest rates. As I mentioned on our last call, we continue to successfully offset a significant portion of its higher interest expense through various cost reduction initiatives, including lower facility costs, prior utilization, managing our other nondirect billable expenses and executing on our tax efficiency strategies. EBITDA for the fourth quarter was $36.9 million, an increase of 38.9% from the fourth quarter of 2021. Our adjusted EBITDA was $55.2 million which is 45.1% above 2021's fourth quarter.…

Well, thank you, Barry. As noted in our earnings release, we expect 2023 to be an year of record performance for ICF supported by a backlog of $3.9 billion and a robust business development pipeline. We expect full-year service revenue to be in the range of $1.405 billion and $1.465 billion, representing year-on-year growth of 11.6% at the midpoint. And as I said earlier, we expect our key growth markets to continue to increase as a percentage of service revenue. Pass-through revenues are anticipated at approximately 27% of total revenue of 2023, implying total revenue of $1.93 billion to $2 billion. These numbers take into account the $13 million in revenue associated with the commercial marketing business we exited in the 2022 third quarter. EBITDA is estimated to range from $210 million to $220 million, and adjusted EBITDA margin on service revenue is expected to be approximately 15%. GAAP EPS is projected at $4.75 to $5.05 exclusive of special charges, and non-GAAP EPS is expected to range from $6.15 to $6.45, representing increases of 45% and 9.2%, respectively, over 2022 at the midpoints. As we noted in our earnings release, ICF received several important recognitions in 2022, of which we're very proud, being included in Forbes' list of America's Best Management Consulting Firms, America's Best Employees for Diversity, America's Best Employers for Women, reinforces ICF's culture and has helped us to attract the talent we need to effectively execute on our growth strategy. We have a highly engaged workforce, and we recognize the importance of maintaining a collegial culture and offering leadership development programs to provide growth opportunities across our diversified business disciplines. And with that, operator, I'd like to open the call to questions.

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

I was hoping you could give us your current thoughts for the timing of the contract awards and financial impact related to the infrastructure bill, and maybe what your current expectations are related to climate-related spending activity at federal and local customers?

Sure. So I think as we've discussed previously, on the infrastructure bill, IIJA, we're beginning to see opportunities there. I think we've reported sales of about $40 million in 2022 on IIJA-related activities. I think we have a pipeline of -- north of $100 million to $150 million of opportunities in our pipeline. I think we expect those to ramp up in the second half of the year and certainly present material growth opportunities for ICF in '24 and '25. And so that's the IIJA set of activities. I would say on the IRA front, as we've discussed previously, I think there will be significant opportunity there. I think that's going to take a little longer for that money to flow. And so we've begun to see some opportunities, but I really would expect that to be more material in 2024 and beyond. But obviously, we're watching that carefully and paying close attention to it. More broadly, I would say that our climate and resilience business is obviously one of our key 5 growth drivers. It cuts across all of our markets, federal, state and local, commercial work with utilities and our international business, it's been -- as we said, those 5 growth drivers in the aggregate have been growing north of 10%. And I fully expect that climate and resilience will -- we will see robust growth there, robust double-digit growth over the next several years on that front, both given what's being appropriated and when -- what clients are spending but also with the tailwinds from IIJA and IRA as we look down the road over the next couple of years.

With respect to IT modernization, when you look at your closest in largest customers, where would you say they are in terms of migrating their systems to the kinds of commercial systems that you could help in terms of a transition, either the baseball analogy or some sort of measure as to how far their progress is in this regard?

Yes, sure. So as you know, our IT modernization business is, again, 1 of our 5 growth drivers. I would say it's the first among equal to that of those 5 growth drivers. We have a $500 million business that, as you know, Tobey, has been growing 15% a year for the last couple of years. And I think we have high confidence we can maintain double-digit growth as we look forward. We're primarily focused on civilian clients, given our portfolio. And I would say we see significant opportunity across those client sets. Obviously, HHS is our largest client, north of 20% of our total revenues. And as I mentioned in my opening remarks, I mean, we won a $160 million new task order within HHS within NCI to undertake IT modernization opportunities. So we're certainly seeing a lot of opportunity there, a lot of opportunity within CMS, particularly given the SemanticBits acquisition. And so from a baseball analogy standpoint, I would say we're in the third or fourth inning here of modernization efforts with these clients. This is going to take -- this is a multiyear effort, and I think it will drive -- continue to drive significant growth for ICF over the next 5-plus years.

I wanted to drill into one aspect of sort of the push in climate towards green energy. Seen some media reports of kind of queues of accumulating of new energy generation plants and sources that are having trouble connecting to the grid. Could you speak to that in broad terms and maybe what that means for the company over time?

Sure. So you're certainly correct. There is a significant backlog in the ability of developers to connect to the grid and a backlog on interconnection studies and approvals that are impacting developers of renewable power projects. I do think the government is trying to address this. I know the Federal Energy Regulatory Commission has taken steps to better plan and streamline the process around interconnections. There's a variety of interagency task force addressing the issue. And so it's certainly impacting developers of these types of clean energy projects. I will say for ICF, we have not seen a slowdown in our advisory business related to renewable projects and are doing a significant amount of work on interconnection issues. I think it's more -- and so for us, even with the challenges and the queue here that developers are experiencing, there's only a limited number of players that can provide these capabilities, and we're fortune to be on those limited players. And so even as some of these projects are delayed, we still are very busy at quite a significant pipeline. And I do think over time this will get resolved but it's more of an impact for the developers as opposed to, as I say, we remain quite busy on these types of issues.

If I may sneak in two numbers question. Cash flow from ops improved nicely, about, I think, 80%, 81% conversion from EBITDA up from 70% a year ago. Do you have any thoughts for what that will be in '23? And then conversely, at the adjustments to EBITDA were more significant this year as a percentage of the total number than the year before. Do you have an expectation for whether that trend will continue in '23?

Tobey, this is Barry. I think that I will answer the second question first. We did have a number of unusual onetime charges that were related to the facility closures, and that was mostly related to the commercial market services business. So I don't expect that to repeat, though. We are always looking for ways to improve our facility footprint in lower expenses. But I would say that those -- that was certainly a onetime charge. As far as the conversion on the cash, I would expect it to be a similar fashion in 2023 as we had in 2022. I don't see anything that would be a headwind on that.

Just to put stock on that facility charts, I mean, I completely agree with Barry. I mean, we've obviously taken additional charges here to get the end of 2022, but I expect -- we certainly expect those to come down materially in 2023 and beyond as we look down the road.

Our next question comes from Joseph Vafi with Canaccord.

Very nice results, nice outlook. Congrats on all the great execution here in 2022. I was wondering if we could drill down following some of Tobey's questions on IT modernization. If you could perhaps walk us through this large joint win to the extent you can with an IT component and a subject matter expertise component. I guess the line of question I was thinking of is, was there an opportunity to do a consultative type sell here a little bit before the RFP was issued. And to the extent that, that kind of opportunity exists across your client base to help the client to do their own transformations with your help even before the RFPs are issued. And then I have a couple of follow-ups.

I would say, in general, Joe, on the IT modernization front. I think we're at our best and can really differentiate ourselves when we are engaged with a client on both their domain-oriented efforts and kind of understand the types of questions they're answering and the issues they're addressing, leveraging our domain expertise. And then also, as they look to modernize their system can kind of bring our top-notch technology skills. So I think we found when we're supporting clients on both sides and both sides of the client's house is engaged around the IT modernization. So the [indiscernible] who are driving the mission, bringing the domain expertise. And those typically in the CIO shop, focused on the technology side, we can really differentiate ourselves and we can connect the dots between those sides of the house and work that white space to really help them make sure that the modernization efforts answer the questions that they're trying to address today as opposed to what they were trying to address 30 or 40 years ago and also bring top-notch technology. So certainly, our -- to the extent that where we can really differentiate, we can really separate ourselves from the competition in terms of how we approach the deals is opportunities where we're bringing our domain and we're bringing our leading-edge technology. In terms of the specific National Cancer Institute, I know we're working on both sides of the house in that agency. So I'm sure it helped us. And that is kind of the unique value proposition that I think can bring in this market, and it is certainly driving very significant synergistic pipeline opportunities and very synergistic sales wins for us, even that we can bring both of those sets of skills in a variety of civilian client arenas.

Sure. And then just kind of another follow-up on the IT business. If perhaps you could give us a sense there, I'd suspect that it's probably your service revenue is growing a little faster there than perhaps some of your other key focus areas. And I suspect that potentially the margins may be a little bit higher there as well, just trying to get a feel for the trajectory of that business as we look into '23.

I mean I think certainly -- I think we've said in the past, I mean, across our 5 growth drivers, the margins on those businesses tend to be at the higher end in each of those markets. And so certainly, in the federal arena, IT modernization tends to be at the higher end of our margin profile. That work can often be fixed price, which is very good for us. And so that is certainly the case. And it's also true that we don't have as many -- we don't use contract -- subcontractors intensely in the IT modernization as we do in some of our disaster management and infrastructure work, which are also in the growth driver. So I agree with the -- what you said, and certainly, it is at the higher end of the margin. And it's certainly helping drive our service revenue growth given the nature of the lower level of pass-throughs.

Sure. That's great. And then I know -- Barry, I know you mentioned that you're focused on those offsets in infrastructure, tax, et cetera, the kind of to offset the interest expense headwind that we have. So I was just wanted to drill down on that a little bit more and how much -- how sustainable you see that being here if we're in a high interest rate environment for the whole year, which we probably will be?

Yes. Thanks for the question. I do think that a couple of things on the interest rate. We have put in place some additional hedges to help us manage the interest expense impact on the company. So if you look at where we were at the end of 2022 with the new hedges, we're at about 50% hedged. So that will help manage some of that. There are things that we are doing. For example, I mentioned the work on the tax strategies that can certainly help offset a good portion of that. And I do think that based on the work that we've done that, that is sustainable for 2023, 2024. And that's -- I think that we've got a lot of visibility in that, and we feel very confident that we'll be able to remain at that tax rate through this year and next year, which will certainly help us offset some of the higher interest rate costs.

Sure. That's great. And then maybe just one final one, kind of on a similar subject here. You did bring debt down by a turn and you'd probably be back in a nice position to maybe go acquisition hunting again, maybe on a larger scale. But given interest costs here, just wondering how you're making the trade-off here relative to further debt paydown versus M&A. And I'd also probably expect that the interest rate environment is perhaps helping bring target prices down as well. Any color on how you're balancing on that -- all of that? Congrats again on a nice year.

Okay. Great, Joe. I'll make a few comments. I'll ask Barry to -- on the acquisition front, I mean, I guess, obviously, acquisitions have been a key aspect of our long-term growth strategy. I would say that given the 3 deals we've been working on to integrate in 2022 to create the SemanticBits and Blanton, I think in our -- and the relatively high debt load we've had. And as you mentioned, the higher interest rates, I think certainly for the first half of 2023, we're going to be focused on continuing to pay down debt. And in terms of where we might go from there, I mean, I think as you know, interest rates are high. We started to see valuations come down a bit, but I wouldn't say they've come down a lot. And for us, we want our deals to be accretive right out of the gate. So I think we remain out in the market, but I think we're primarily focused right now on debt repayment and focusing on cash flow with that. But Barry, I don't know if you...

I would agree. I think that we are laser focused on debt repayment and delevering and look to do that through 2023. So -- and I think that depending upon from an acquisition perspective, if there's a good deal that comes along, we certainly would look at it. But that's the focus right now.

[Operator Instructions]. Our next question comes from Marc Riddick with Sidoti.

So I was wondering -- a lot of my questions were already answered. So I want to jump into a couple of other areas. One of the things I was sort of curious about, you certainly have quite a bit on your plate and a lot going on right now. So why couldn't you talk a little bit about talent availability kind of where you are? And are there some folks that you would like to add in certain areas? And maybe sort of what we should expect to see there or whether or not that kind of where you are in that relative to historical utilization and the like? And then I have a few follow-ups after that.

I would say that, obviously, we're a professional services business. So it's all about the quality of the gray matter between our people's 2 years. And if we're going to grow, we need to be adding people. And I think I've said before, if for example, we're growing organically 10%, we're going to be needing to add 9%, 9.5% headcount to meet that growth. We're always looking to reduce utilization a little bit. And continue to focus on that. I think we have a track record of doing that. But we absolutely need to be adding the talent for us to meet our growth objectives. And I think we've been doing a good job on that. We've been investing significantly in recruiting. We have a strong culture. We obviously pay attention to the market and the compensation trends and things of that nature. And so we generally -- I would say we've generally been able to find the talent, add the talent and deliver the growth. I would say the market has gotten a little better in terms of the -- in terms of being able to identify and onboard the talent, but it's still very challenging. And you have to make the investment in recruiting and in human capital, and you have to do what you have to do to keep current on the compensation and wage front, and we're certainly doing that. As I said, the good news is we have a strong culture. We're growing. We're offering people a lot of opportunity, and we do a lot of really interesting work, which helps us to attract the talent, too. So -- and so we're certainly working hard on it.

Excellent. I was wondering if you could talk a little bit about -- are you beginning to see more -- I mean, it's kind of hitting this over the last few months, but are you beginning to see more face-to-face activity as far as go-to-market needs? And are we seeing? Or are you modeling a level of take up in travel and entertainment expenses or things of that nature? And maybe you could talk about where you are with...

Well, we'll tell a couple of things. One is I think certainly post-pandemic, we're certainly -- travel has picked up. I think we're -- but it's still below what we were spending pre-pandemic. I'd say we're probably in the 50%, 60% spend on travel relative to pre-pandemic. And I think certainly, ICF were -- we've shifted to a hybrid work environment for those who previously worked in the office or folks in the office one to two days a week. Our clients are -- we're spending and seeing our clients face-to-face, certainly more, but I don't think we're ever going to return to the pre-pandemic level of travel and entertainment spend. I don't think we're going to ever return to fine pace. I mean we're going to be in a hybrid work environment here as we look forward. And I think we're really looking to optimize the company and lean forward on how to best maintain our competitive edge, maintain the culture, continue to grow in that environment.

Great. And then I know this doesn't apply to you as much as some of the -- some of your peers -- like you sort of talk about whether or not you're seeing much in the way of any changes in client behavior or client activity or project-based work or the like based off of the current recessionary environment. I mean, granted, you may not see as much as others, but just wondering if there are any pockets or areas that were [call-outs].

I think as we've talked in the past, I mean, in terms of impacts on ICF, whether a recession or uncertain economy, I mean, I think we generally think we're highly recession proof. 85% of our -- 85%, 90% of our revenues are in end markets that I think are -- typically don't see a significant impact from assessments. Obviously, that cuts across our government businesses. I also think it cuts across our commercial energy business, where actually a large portion of that is funded through tax on electricity, delivery of funds energy efficiency programs. And so I really -- so we really haven't seen any material impacts across any of the business on -- in terms of recession or a slowdown or clients showing more hesitation on their spend. And I would generally expect us to be pretty -- as I say, pretty recession proof on that front. That's not been an issue for us, at least so far.

I show no further questions at this time. I would now like to turn the conference back to John for closing remarks.

Okay. Thank you all for your participation. We sort of look forward to staying in touch through calls and meetings, and upcoming conferences. So thanks for participating.

This concludes today's conference call. Thank you for participating. You may now disconnect.