Good day, everyone, and thank you for standing by. Welcome to the Third Quarter 2024 ICF Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call to Lynn Morgen with Advisiry Partners.

Thank you, Operator. Good afternoon, everyone, and Happy Halloween. Thank you for joining us to review ICF's third quarter 2024 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 October 31, 2024, 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 CEO John Wasson to discuss third quarter 2024 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. I want to echo Lynn's Happy Halloween issues. I'm pleased to say we have no tricks and lots of treats in our Q3 results. So with that said, I'll move this along so those of you who are going out trick-or-treating tonight can get there in a timely way. So this was another strong quarter for ICF. Our staff executed very well on existing contracts, and our forward-looking metrics indicate that we are well-positioned for continued growth. Looking at the key takeaways from the quarter, first, revenue from continuing operations increased 6% year-on-year. Additionally, revenues from continuing operations less pass-throughs increased 10% year-on-year. This is representative of the work done by ICF employees. Second, we outperformed across all profitability metrics, reflecting favorable business mix and tax benefits, enabling us to increase our EPS guidance by $.35 for the full year. Third, we had solid third quarter contract wins, resulting in a healthy trailing 12-month book-to-bill ratio of 1.31. And lastly, we ended the third quarter with a record new business development pipeline of $10.6 billion, providing substantial growth potential for ICF across our government and commercial client sets over the coming years. Third quarter revenue growth, again, was led by our energy, environment, infrastructure, and disaster recovery client market. We're accelerating demand for ICF's multidisciplinary solutions, our analytics, and our program management expertise to over 15.3% increase in revenue. Robust growth in our higher margin revenues from commercial energy clients continued to be a key contributor to our strong performance. Year-on-year growth reflected both the addition of new clients and the increasing scope of work we're performing for existing clients. ICF is a market leader in developing…

Thank you, John, and good afternoon, everyone. I'm pleased to provide you with additional details on our 2024 third quarter financial performance. Our third quarter revenue was $517 million, representing an increase of 3.1% year-over-year, or 6% after adjusting for the divestiture of the commercial marketing business last year. These positive comparisons were primarily driven by 15% growth in our energy, environmental infrastructure, and disaster recovery client market, which benefited from continued strong demand from our commercial energy clients. Revenues from continuing operations, less subcontractor, and other direct costs yielded a 10% increase year-over-year. While our federal business delivered revenue growth of 1% in the third quarter, excluding the impact of lower subcontractor and other direct costs, federal revenue grew an estimated amount of 6% year-over-year. Comparisons continue to be impacted by lower pass-through expenses associated with international development programs with USAID, as discussed in our prior calls. Subcontractor and other direct costs of $127.6 million represented 24.7% of total revenues, down from 27.1% in the third quarter of 2023. The 250 basis point decline in pass-through costs resulted in a shift in our revenue mix towards ICF direct labor, which is more profitable than revenues generated from subcontractor and other direct costs. This favorable mix, higher utilization, and a migration towards more fixed price and T&M contracts, along with higher margin revenue growth with our commercial energy clients, led to 160 basis point improvement and gross margin of 37.1%. Indirect and selling expenses of $132.8 million were up 1% year-over-year, well below our revenue growth, reflecting considerable operational efficiencies. As a percentage of revenue, indirect and selling expenses declined 50 basis points to 25.7% due to our continued emphasis on driving higher utilization rates, maintaining disciplined cost controls, and leveraging our scale, while at the same time ensuring that…

Thank you, Barry. Continued favorable business mix and utilization metrics, together with an estimated full year tax benefit of approximately $0.25 per share, have led us to increase the midpoint of our earnings per share guidance for full year 2024 by $0.35. A revised guidance range for GAAP EPS is $6.05 to $6.15, excluding special charges, and non-GAAP EPS is expected to range from $7.40 to $7.50, representing year-on-year growth of 14.6% at the midpoint. We have adjusted our full year 2024 revenue guidance range to reflect an estimated $50 million reduction in pass-throughs that reflect the slower-than-anticipated ramp-up of work on recently awarded contracts and delays and a few key award decisions. We are confident that these new business awards will be forthcoming in the near term, and the ramp-up on these programs will begin to accelerate in the upcoming months. The reduction primarily affects gross revenue comparisons in our health and social programs client market with no meaningful impact on margins. We are now expecting gross revenues of $2 billion to $2.03 billion compared to our previous guidance of $2.03 billion to $2.1 billion. Our forward-looking metrics point to continued growth for ICF as we enter 2025. We have a strong multiyear backlog, a record business development pipeline, and a solid track record of new business wins. We are experiencing consistent, robust demand from commercial clients for energy and environment expertise and related implementation and technology capabilities. We have excellent credentials in disaster management, resilience, and mitigation work to assist state and local governments with recovery after storms, flooding, and wildfires, as well as with their future resilience planning. The large majority of our federal work is in areas that have bipartisan support, particularly IT modernization, which remains an area of priority spending. And importantly, our people are fully engaged in achieving the objectives and missions of our clients, which underpins our confidence in ICF's future growth potential. With that operator, I'd like to open the call for questions.

Thank you so much. [Operator Instructions]. Our first question is from the line of Joseph Vafi with Canaccord Genuity. Please proceed.

Nice to see the strong margins. Maybe we'll ask a question on margins. Clearly, you've got some favorable mix shift going on, I think probably especially out of your utility and energy practice. Just wondering how you see the next few quarters. Perhaps do you still think of favorable mix shift continues to play out from here, or do you think that perhaps some of the other practice areas, growth may accelerate a little bit and we don't see as much of a mix shift moving forward the next few quarters? And then I'll have a quick follow-up.

I think, Joe, we certainly expect the commercial energy business to continue to have quite strong growth. And we also expect that other components of business will also pick up their growth as we look into 2025. But I think given that the energy group will certainly is experiencing the highest growth and has the highest margin, I think there's some more room for margin improvement even as other parts of the business also increase their growth. So I think we would expect that to continue into next year. I think, as you can see from the results, I mean, our margin, our adjusted EBITDA to revenue is up 50. We expect it to be up 50 basis points for the year. We've generally been guiding 10 bps to 20 bps. And so I think you can see the power of the commercial energy business in our margins.

Sure. That's great to hear, John. And then anything notable coming out of these last set of storms, I guess, here in the month of October? Is there anything we should read through on disaster recovery this year that might be different than previous years? Thanks a lot, guys.

Well, I think, as I said in my remarks, I think we still continue to do significant work in Texas and Puerto Rico. And those remain important clients or long-term clients for us. We've had the recent hurricanes, Haleen and Milton. We have picked up, as I said, numerous small opportunities to do disaster assessments, to do quick analyses of the potential damage in areas. It is allowing us to develop relationships and get people on the ground. I expect there will be significant opportunities. As we've talked about in the past, it usually takes 12 months for those opportunities to develop and get to the RFP stage. So I would say in the second half of next year, we would expect to see opportunities in Florida and the Carolinas related to disaster recovery.

Thank you. One moment for our next question. That comes from the line of Tim Mulrooney with William Blair. Please proceed.

Hey, this is Sam Kusswurm for Tim Mulrooney. Thanks for taking our questions here. I guess regarding, first, your climate services, we've been receiving more questions just around some of the work being done, particularly with respect to your federal clients. I believe this business has been growing in the double digits, and I think investors would like to understand a bit better just how much of that growth is coming from federal clients versus more your state and commercial clients.

I would say that the climate business has certainly been growing double-digit here in total and sees robust demand. As you know, we do have a business there that spans our commercial client set, our state and local client set, our federal government client set, and our international government client set. So we truly have a diversified portfolio and are a market leader in that market. I think all in, if you look at that business, the federal component is, I would say, 15% to 20% of the business. The remainder is primarily in commercial and state and local. And so, federal is an important component, but it's 15%. And so we are seeing strong growth, and we have scale in commercial markets and in state and local in that area, and so it's a diversified business. And I think, I'm not sure if your question is trying to direct here, but I would say that, we would expect that we'll continue to see strong growth opportunities, regardless of kind of what happens with the presidential election in the federal market. I think we have confidence that we can grow that business and grow it robustly on the back of our state and local and commercial and international clients. And honestly, in prior administrations, to the extent that federal focus shifted on climate, state and local governments stepped forward. And so I think we would look for and focus on that possibility as we look forward if needed.

That was very helpful, color, and kind of the angle I was approaching that with. Appreciate that. Maybe pivoting a little bit to the federal IT side, we noticed you announced another large contract on the federal IT side. And I know a piece of your IT strategy is to really increase the share of some of these larger contracts compared to maybe more of your historical average of 10 million to 25 million, a project, let's say. Can you help us understand if there's a mixed shift occurring here in your average contract size and then how you think your project's mix might look like a few years from now?

Well, I think we're certainly focused on trying to expand the size of contracts we're bidding on and move up in terms of the average size of our IT modernization contracts. I would say our sweet spot historically in the last couple of years has been in the $10 million to $25 million range. We are winning contracts north of 50 million. I think we're certainly bidding contracts worth of 100 million. And so you're absolutely right. That is part of our strategy. I think we're focused. I think that it doesn't happen overnight. I mean, I'm sure as you know, when you bid these large IT modernization contracts in the federal government, you have to get them in capture and spend 18, 24 months positioning to win them. So the pipeline, I think, is showing good progress. We did win a very nice contract. We just talked about in our commentary with the U.S. territory. And so we're seeing positive signs, positive developments, but that's exactly the strategy. We do believe we have reached a size and a scale where we can bid larger IT modernization contracts and certainly where we can combine our domain expertise with the technology capabilities. We can also differentiate ourselves, at least in civilian markets. And so I think we're making good progress. We've had some early wins and the pipeline's looking good and we feel pretty good about it.

Thank you so much. One moment for our next question. And it's from the line of Toby Sommer with Truist Securities. Please proceed.

Thanks. In the commercial energy space, the press release and your comments talk about the elevated demand growth that utilities are now forecasting for a host of reasons. What do you expect the impact to be on ICF with respect to maybe the rate of growth of that business as well as sort of the length of period of time that you expect to have kind of good growth?

Yes. Well, I think there's no question that these utilities are seeing significantly increased potential low growth as they look down the road. Given five or six different broad trends, certainly including the latest with AI data centers. And our clients are certainly seeing that. And so that impacts our business in multiple ways. I mean, we do front-end advisory work for utilities. We help them on their load forecast, their load demand growth. We help them think about their portfolio of generation assets to meet that growth, how they can manage it with programs like energy efficiency and electrification. So it moves into the program side of the business. And we can help them with resilience. And so I think that significant future long-term growth, low growth, will create long-term opportunity for us to help our clients on the advisory side come up with their strategies and their approaches to meet that growth or manage that growth or support that growth. And it's not just utilities, but it's also governments -- the Department of Energy, and other federal agencies that are part of this. It's state PUCs and state energy agencies. And so we're seeing a lift and a focus both on our advisory work and our energy implementation work. And I think it's a long-term trend. I mean, I think I've said before that it's like a once in 100-year trend. This is going to take decades to work through and come up with solutions. So I think it's a long-term opportunity for us, Toby. I mean, you can just look at our growth in commercial energy. We grew 15% in 2022 and 2023. We're growing close to 25% in 2024. And I think that's in part due to some of the ramp-up of opportunity here. And so I think there's very significant long-term growth attempts on this market. Now, I mean, there's a law of large numbers. It's hard to cut a 25%, 35% growth forever as you get larger. But I mean, I think there's significant opportunity for us here. We're working across many parts of this market at scale. And so I think we're quite excited about it.

Thanks. A couple of things helped profitability in the quarter and for the balance of year. This uplift in direct cost percentage, is that episodic or sustainable? And then is the annual rate down closer to 20% a good proxy for future tax rates? Or will we lap this next year?

Hey, Toby. This is Barry. I'll touch on the tax rate. As I said in my remarks, we believe that the tax rate of approximately 21% is something that we'll be able to achieve next year in 2025 and certainly, I think, maybe in 2026. So we're comfortable that the things that we're doing right now from an optimization perspective will stick, I guess, for the fourth quarter right in the next couple of years.

Direct labor?

And from a direct labor perspective, if you think about the shift in the business towards more ICF labor, directed revenues, that certainly is pushing the improved margins. And we think that that's going to continue as our advisory services continue to expand, especially in the energy sector in that client market. So we think that obviously, we're pleased with that. We're pleased with the growth from a revenue perspective that is derived from our labor. So I think that that certainly is positive.

Yes. I agree with everything Barry said. I mean, I think in our energy business, the pass-through ratio is generally not as high. ICF's doing more of the business. It's a very profitable business. It drives more profit. I do think we're in a period where our pass-through rates have been down in the health and social program area the last couple of quarters. You can look at our pass-through ratio last year or this year for the company, and I think it's down 250 basis points. It's in our federal health and international health businesses. But I think we do expect that pass-through ratio to see more pass-throughs next year as we ramp up these handful of contracts that we're focused on. But with that, I still expect that there will be longer-term improved profit with the rapid growth in our energy business. I mean, we've been gotten to 10 bps to 20 bps if we've been down margin improvement for many years, I think. Obviously, again, I would say you see the power when the commercial business is really growing. We're 40 bps, 50 bps higher right now.

Yes. What parts of the government business specifically are declining, and how large are they?

Well, I think, I mean, we're seeing the decline. You can see the decline in the health and social programs market area. That market area was down 5.2% in the quarter on total revenues. I think it would be higher on service revenue than the work done by ICF. I think, and so we're generally flat the low single digit, I think, in that market on the work done by ICF. I think that we're seeing, I mean, our USAID business right now, we're not seeing the pass-throughs for a variety of reasons. We expect those to ramp back up. But certainly, the USAID business has been down this year. I think that's the biggest driver. Barry or James, is there anything else you have to add?

I would agree with that. Yes, I would say if you look at the client market segments, the energy environmental infrastructure and disaster recovery area for the U.S. government on a year-to-day basis is growing quite nicely. We're getting new contracts with a variety of federal agencies. And so that market is continuing to grow. I would say in the health and social programs, I think that the issue that we've seen there is with the contracts that we've talked about, where some of the programs just haven't been ramping up as quickly as we thought. We're waiting for some key awards that we think are forthcoming. We think that that business is going to turn around. And if you look at the security and other civilian commercial areas, that business is growing as well. And so we're pleased with that. So all standing, I think there's a lot of potential on the federal government arena. I think that once we get some of the ramp up and some of these awards pushed through, that you'll see the turnaround in the federal market space in that one client market area. But the other client markets, there's real solid growth there. And we're pleased with that.

Thank you so much. [Operator Instructions]. We have a question from the line of Mark Riddick with Sidoti. Please proceed.

So I wanted to touch on, and thank you for the commentary on the tax rate and the efforts there to bring that to the levels that you're looking at for the current period and the next couple of years there. I wanted to shift gears a little bit as far as there's been significant amount of debt reduction. And I did want to sort of touch on maybe kind of where you were looking at as far as comfort levels. And then it seems as though that would position you well for any potential acquisition activity. So I was wondering if maybe you could bring us up to speed on your views on the current pipeline availability, quality of assets that might be out there that would be interesting to the company.

Thanks for the question. As far as the debt reduction is concerned, I think as I said in my remarks, our favorable cash flow that we've had this year certainly are contributing to the debt reduction. We'll continue to do that. And I see that we can have our leverage, that leverage ratios continue to be reduced throughout the end of this year. We have plenty of capacity to look at different M&A opportunities. We are considering a number of things. And as those come through and they meet the various attributes that we're looking for from a capabilities perspective, a culture perspective, the customer sets, contracts that they have, we'll take a good look at that. But I think that our ability to de-lever, and we're certainly comfortable where we are right now for sure, gives us plenty of flexibility to pursue different acquisition opportunities as they present themselves. So we'll continue to pay down debt, give us plenty of headroom from a capacity perspective to go out and acquire companies. So we'll continue to go on that road.

And I just would, I agree with everything Barry said. I would just say from a market perspective, I think obviously we're focused on acquisition. It's been a key part of our strategy. I think we've obviously been paying down debt here over the last couple of years. But I think within our growth drivers, I think there was an interesting assets and energy around federal health IT. We would certainly look at them. So we're out of the market. We're looking. But we have very clear criteria and we're disciplined. And so we'll stay out of the market. But I think those are the areas where we're focused from a strategic standpoint.

Great. And then I was wondering if you, and this might be a bit of a squishy question, so I apologize in advance. But do you feel as though the valuations that folks are, are they a little more reasonable or about the same as they were maybe a year ago? How do we feel about that spread at this point?

I think the valuations generally have been lofty. Lofty, I think there's been some movement that they've made some progress in coming back into alignment. I mean, it really depends on the market. I mean, look, in the energy area right now, and the types of work we do, there's tremendous opportunity and there's a lot of interest. I mean, we're seeing all kinds of new and different entrants looking at these markets. And so the valuations are going to be challenging there. In federal, I think it really depends on what the focus of the business is. I think in the high interest, high value-added areas, the valuations are still rich, but I think they're workable for the right asset. And really, it comes down to do you see the synergistic value? Can you find synergies, at least for us on the revenue side, to justify the opportunity.

Thank you. And with that, I will close the Q&A session for today and turn the call over to John Wasson for final remarks.

Okay, great. Well, thank you for participating in today's call. We certainly look forward to connecting at upcoming conferences and events, and we appreciate your interest. Thank you.

Thank you all who participated in today's conference. You may now disconnect.