Welcome to the Third Quarter 2023 ICF Earnings Conference Call. My name is Hope, and I will be your instructor for today's call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I will now turn the call over to Lynn Morgen of Advisiry Partners. Lynn, you may begin.

Thank you, Hope. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2023 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 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, 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 third quarter 2023 performance. John?

Thank you, Lynn. And thank you all for participating in today's call to review our third quarter 2023 results and discuss our business outlook. This was another strong quarter for ICF in which we achieved significant growth across all key financial and business metrics. There are several key takeaways worth noting. First, we reported year-on-year revenue growth of 7.2%. Adjusting for the sale of our commercial marketing group in mid-September and the closure of our commercial UK events business at the end of the second quarter, third quarter revenue growth is estimated at 8.4%. Second, profitability metrics continued to be strong, driven by higher utilization, favorable mix, lower facility costs and scale efficiencies. Third, this was a record quarter for both federal government contract awards, which totaled $700 million, as well as overall contract awards, which reached $875 million, resulting in a third quarter book-to-bill of 1.7 times and a trailing 12-month book-to-bill of 1.3 times. This supports our expectations for considerable growth in recurring revenues in 2024. Looking at our year-to-date results, we continue to be very well positioned in the key growth markets we have identified and have invested in over the last several years. These markets, namely utility consulting, disaster management, climate, environment and infrastructure services, public health and IT modernization/digital transformation, accounted for roughly 80% of our nine-month revenues, adjusting for the sale of CMG and our exit from the commercial UK events business. Our performance in these growth markets is primarily captured in our two major market categories, first energy, environment, infrastructure and disaster recovery, and second, health and social programs, which together accounted for 83% of our third quarter revenues. Looking across these major markets, there are several third quarter highlights worth noting. Revenues in our energy, environment and infrastructure and disaster management market…

Thank you, John. And good afternoon, everyone. I'm pleased to provide additional details on our strong third quarter 2023 financial performance. Total revenues grew 7.2% year-over-year to $501.5 million. Adjusting for the prior-year revenues related to the commercial marketing group, which was divested in the third quarter, and the UK commercial events business, which we exited in this year's second quarter, our total revenues increased by an estimated 8.4%. Our year-on-year growth was driven by strong performance in our energy, environmental and infrastructure and disaster recovery and health and social programs market categories. Subcontractor and other direct cost growth slowed in the third quarter and totaled $136.1 million, which represented 27.1% of total revenue as compared to 28.3% in last year's third quarter. Third quarter gross margins of 35.5% expanded by 120 basis points year-over-year and 60 basis points sequentially, in line with our expectations. This improvement was a result of a more favorable mix, which is more heavily weighted toward ICF direct labor than last year. We expect to see further improvement in gross margins in the fourth quarter. Our indirect and selling expenses increased 11.2% year-on-year to $131.6 million. As a percentage of total revenues, adjusted indirect expenses increased 100 basis points year-over-year to 24.7%, reflecting the timing of certain non-cash charges. On a year-to-date basis, adjusted indirect expenses decreased by 90 basis points and represented 24.7% of total revenues as we continued to rationalize our facility and other expenses as well as experience economies of scale in the business. In the third quarter, EBITDA increased 14.3% to $49.2 million and adjusted EBITDA increased 7.3% to $54.3 million year-over-year. Interest expense of $10.6 million increased from $7.4 million in the third quarter of 2022 due to higher interest rates. However, the interest rate impact was offset in part…

Thank you, Barry. Our year-to-date performance reflects the benefits of decisions we've made over the last two years to strengthen ICF's position in key growth areas and to invest in our long-term growth strategy, while simultaneously improving profitability. Revenues from the key growth markets that we invest organically and through acquisitions represented approximately 80% of our total nine months revenue adjusted for the sale of CMG and the exit of our commercial UK marketing business, up from 55% at the end of 2020. And our year-to-date profitability metrics reflect actions that we've taken to deploy our resources to support these growth markets, strengthening operating efficiency and streamlining our business. Based on our results to date and the recent sale of our commercial marketing group and the exit of our commercial UK events business at the end of the second quarter, we are narrowing our guidance range for full-year 2023 revenue to $1.95 billion to $1.98 billion. And we anticipate subcontractor and other direct costs will be approximately 27% total revenue. Adjusted EBITDA is expected to range from $212 million to $218 million. We are raising our guidance for GAAP EPS to $5 to $5.10, exclusive of special charges, and non-GAAP EPS to $6.40 to $6.50 due to lower-than-anticipated tax rate. We are looking ahead to another year of substantial progress, highlighted by high single-digit recurring revenue growth in 2024, supported by the strong financial and operating metrics we expect for this year. We're also looking ahead to 2024 to be another year in which ICF and its people make a notable positive impact on society through our daily work. We encourage you to read our latest corporate citizenship report, which we are pleased to report has won several industry-leading awards and provides further insights into our people working together to improve outcomes and serve our clients with integrity. Operator, we'll now open the call to questions.

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

This is Jasper Bibb on for Tobey. I was hoping to get any early thoughts on what 2024 might look like from a margin expansion perspective? Is the 10 basis points to 20 basis points annually that you outlined at last year's Investor Day still a good baseline to think about or are there other factors we should consider there?

I think we've consistently guided to 10 bps to 20 bps of margin improvement. And I would expect that that will continue. I would expect to see 10 bps to 20 bps of margin improvement as we look forward for next year.

Really strong bookings quarter. And you also highlighted the IIJA and IRA wins there. Based on what you're hearing from clients, how significant do you think the pickup in bookings activity related to those two bills could be next year?

It's hard to provide specific numbers on that. I think as I said in my remarks, I think we're seeing positive trends and the speed of the flow of the money continues to increase. I did note we won $30 million of IIJA and IRA-related work in the third quarter. We're up to $100 million. We're certainly seeing the funds flowing to our federal, state and local clients. We're seeing greater flow of those funds. As we've discussed, I think that as we look to 2024, 2025 and beyond, I think that those will certainly represent important growth opportunities for us. And as we've said before, I think if that plays out well for us, that is a path by which we could go from a high single-digit organic growth to low double-digit organic growth as we look forward.

Last question for me. Obviously, long-term yield has continued to move up. Just any color on what 2024 could look like from an interest rate or interest expense perspective will be helpful?

I think that the priority of the company, as we stated previously, is to delever. And absent of any acquisition activity, the expectation is that interest expense will go down year-over-year as our debt goes down.

Our next question comes from Joseph Vafi with Canaccord.

Really nice results once again. It is kind of a broken record of consistency. So congrats on that. But I know you're preliminarily looking at, like, I guess, high single-digit revenue growth. Looking at that, is headcount growth still going to be linear to revenue growth? Or is there any emerging leverage to growing revenue ahead of headcount? Or how are you thinking about staffing for next year? And then I have a follow-up.

I think as we've talked about in the past, Joe, I would generally expect that headcount will track with revenue. As you know and we've talked about, we're always looking to increase utilization as we grow. But in general, I think if we're growing 5% – let's pick a number. For growing 5%, we're looking at 4.5% headcount increase. I think that's the nature of the business, and it will generally track. I don't see a shift in that as I look out to next year.

I might have missed it. Did you call out the IT modernization growth rate? I know you were talking about some segments and their growth. I'm not sure if you called that out? And would IT modernization still be like a main area of acquisition activity for you at this point?

I think we called out the federal organic growth rate in the results, Joe. I'd say a couple of things. I think what I would emphasize there is we won $150 million of IT modernization work in the quarter, which we're very pleased with. A substantial percent is new work. I think it's going to really set us up nicely as we go into next year for continued strong growth there. And so, we feel very good about that. In terms of acquisitions, I think as we've talked about, I think we have the core business that we need to provide those services and be a leader in that market from the low code/no code capabilities to the open source native capabilities. We're also looking at the data analytics platforms and building our capabilities there. So I think we have the core of what we need. I think to the extent that we are looking for acquisitions there, it's more likely to be tuck-in niche acquisitions that fill specific skills and capabilities. And so, I think that's how we're thinking about that market. I think that's the story with IT modernization.

Maybe I'll just sneak one more in on IT modernization. What are clients thinking or saying right now about all this generative AI going on? Do they want to use it? It feels like in the health business, so much data, there could be some opportunities. Just wondering like how fast you think federal clients may move forward with this kind of technology?

We're certainly seeing increased interest in AI from our clients, particularly in the federal sector. Honestly, we've been doing AI for some time. Obviously, not generative AI. But we're certainly seeing interest in it from our clients. We have 1,800 technologists who certainly have taken advantage of AI capabilities that are embedded in these platforms and are certainly in discussions with clients on generative AI. And so, there's a lot of interest. We are working with clients on it. We're also looking for how we can use it internally. I wouldn't say it's a material portion of our growth in IT modernization, but we're seeing a lot of interest with it and are engaged with clients on it.

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

I was wondering if you could touch a little bit on sort of client activity levels? And maybe you could talk a little bit about if there are any pockets that you've seen accelerate more recently? And if there are any that you're seeing clients kind of pull back and delay action or projects?

I would say that I don't think we've seen any significant change in our clients' activities in terms of leaning forward in new areas or pulling back. I think as we've talked about, Marc, we have the five key growth drivers. I think we continue to see a lot of opportunity there. I think the pipeline is good and the sales are good. We have the backlog. We haven't seen any shift in our client activities in the last quarter. And I would say in the federal space, it's business as usual. And we were quite pleased with our sales coming in quite strong at the end of the third quarter, and we haven't seen any shift in that space. So, no, I wouldn't highlight any significant shifts here in the last quarter with our clients and the areas of focus around the business.

I noticed a couple of days ago, you had the announcement of the disaster recovery when – I believe it was Oregon. I was wondering if you talk a little bit about maybe what you might be seeing pipeline-wise with disaster-related opportunities and whether or not there was anything that we should be aware of that might be on the horizon in the near-term?

Well, we were pleased we picked up additional work in Florida in the last quarter from Hurricane Idalia. We were pleased with that. I think we are tracking some opportunities in Hawaii that are still in the early stage related to the fires there. And I think we're taking a hard look at that. And so, I think the pipeline for disaster recovery is respectable and we're looking at hard. As I said, I think the newer opportunities that we're focused on, I would say, are in Florida and potentially Hawaii.

Last one for me, this might be a little odd, but I was wondering if there are any particular ballot initiatives coming up that we should be aware of or anything that you guys are kind of tracking that might lead to some opportunities down the road?

I'm sorry, Marc. I missed it. What kind of initiatives? You just broke up there for me.

Any ballot initiatives coming up with election day? Are there any areas or say anything that might create some opportunities for you?

Nothing comes to mind immediately for me. I'm looking – I don't know, if James or Barry, do you have any...?

No.

Yes. There's no ballot initiatives that come to mind immediately, Marc, that I think would be material for us.

At this time, I'm showing no further questions. I would now like to turn it back to John for closing remarks.

Okay. Thank you. We appreciate you participating in today's call, and we'll see you in our Q4 call. Thank you.

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