ICF International : Q1 2019 ICF Earnings Transcript

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EDITED TRANSCRIPT

Q1 2019 ICF International Inc Earnings Call

EVENT DATE/TIME: MAY 02, 2019 / 8:30PM GMT

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MAY 02, 2019 / 8:30PM GMT, Q1 2019 ICF International Inc Earnings Call

CORPORATE PARTICIPANTS

James C. Morgan ICF International, Inc. - Executive VP & CFO

John Wasson ICF International, Inc. - President & COO

Sudhakar Kesavan ICF International, Inc. - Executive Chairman & CEO

CONFERENCE CALL PARTICIPANTS

Joseph Anthony Vafi Loop Capital Markets LLC, Research Division - Analyst Kevin Mark Steinke Barrington Research Associates, Inc., Research Division - MD Lucy Guo Cowen and Company, LLC, Research Division - VP

Marc Frye Riddick Sidoti & Company, LLC - Business and Consumer Services Analyst Samuel England Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

Timothy John McHugh William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst Tobey O'Brien Sommer SunTrust Robinson Humphrey, Inc., Research Division - MD

Lynn Morgen AdvisIRy Partners

PRESENTATION

Operator

Welcome to the ICF International First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Thursday, May 2, 2019, and cannot be reproduced or rebroadcast without permission from the company. I would now like to turn the program over to Lynn Morgen of AdvisIRy Partners.

Lynn Morgen AdvisIRy Partners

Thank you, Vanessa. Good afternoon, everyone and thank you all for joining us to review ICF's first quarter 2019 performance. With us today from ICF are Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; and James Morgan, CFO.

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 May 2, 2019, 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, Sudhakar Kesavan, to discuss first quarter 2019 performance. Sudhakar?

Sudhakar Kesavan ICF International, Inc. - Executive Chairman & CEO

Thank you, Lynn, and thank you all for participating in today's call to discuss our first quarter results and our business outlook.

As you saw from our release, we achieved considerable year-on-year growth across all key financial metrics in the first quarter. The double-digit increase in first quarter government revenue was led by state and local clients, where strong year-on-year comparisons reflected work on disaster recovery contracts. As you know, the contracts are to assist with the rebuilding process following the 2017 hurricanes. Revenue from both federal and international government clients was stable year-on-year, after adjusting for the effect of the U.S. government shutdown and the impact of foreign exchange translation.

Revenues from commercial clients increased at a high single-digit rate, led by growth in commercial marketing services and supported by the steady performance of energy markets. First quarter revenue growth demonstrated the benefits of our diversified business model, which gives ICF the visibility of a multiyear backlog and the upside associated with higher margins in commercial engagements and certain state and local government projects. The underlying growth catalysts in several of our key markets drove higher year-on-year revenues and a favorable business mix that led to a significant increase in first quarter profitability.

As we look ahead, we see these growth catalysts benefiting our full year 2019 performance and setting the stage for continued growth in

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MAY 02, 2019 / 8:30PM GMT, Q1 2019 ICF International Inc Earnings Call

2020. As a reminder, the 4 catalysts we are referring to are: one, ICF's strong position with federal government clients, where we see growth potential across multiple agencies; two, ICF's expertise and experience in disaster recovery; three, our increasing scale and body of work in marketing and digital transformation services and the ability to lever these capabilities across our client base; and four, strong demand for our energy market services, as outsourcing of energy efficiency programs continues and as the utility industry adapts to a changing business model.

Our business development pipeline was a record $6.4 billion at the end of the first quarter and was well balanced, with each of our client categories showing significant growth on a year-over-year basis.

The rebranding of all our marketing and communications services under ICF Next has been well received internally and externally, and provides us with a strong growth platform to offer integrated services in digital transformation and engagement to government and commercial clients.

Also, we see disaster recovery and resilience work as developing into an ongoing revenue source for ICF. There is increasing government focus on resiliency planning to reduce the cost of rebuilding after each event, and this is an area in which ICF has considerable expertise. While the size of potential opportunities is much greater after a major event, we believe that the increasing focus of the government on these planning efforts will allow us to leverage our recovery and response expertise even in years with no major disasters.

As we move forward in 2019, we continue to explore opportunities to deploy our financial resources in ways which we have successfully done in the past, by investing substantially in business development to generate organic growth and by considering acquisitions in our areas of domain and functional expertise. We do not anticipate any changes in areas of interest for acquisitions, namely government services businesses, firms serving the utility industry, and companies in the marketing and digital transformation sector.

We are keenly interested in the government arena broadly defined, given the specialization and scale needed to win large, multiyear contracts. In the commercial energy space, we are looking to deepen our expertise and broaden our offerings as the industry undergoes massive structural change. And in marketing and digital transformation services, we are interested in opportunities that strengthen our ability to respond to the digitization imperative of our clients in the government and commercial sectors.

With that, I will turn the call over to our President, John Wasson, who will provide further insight into our first quarter performance and outlook for the remainder of 2019. John?

John Wasson ICF International, Inc. - President & COO

Thank you, Sudhakar, and good afternoon, everyone. This was another strong quarter for ICF, in which we achieved double-digityear-on-year growth, reported solid contract wins, and significantly increased our business development pipeline.

First quarter revenue growth was led by our government work, which increased 16% year-on-year and represented 66% of total revenues for the period. Revenues from federal government clients were slightly ahead of the similar year ago period when you factor in the estimated $3.4 million in delayed revenue resulting from the partial government shutdown that continued through most of January.

Additionally, and as expected, there was some lag time associated with getting projects back on track at the agencies impacted by the shutdown, and thus some work moved to the right, particularly at USAID and EPA. With a strong backlog and a pipeline that is considerably higher than it was at the end of last year's first quarter, our federal government business is positioned for low to mid-single digit revenue growth in 2019.

Revenues from international government clients were slightly up in the first quarter on a constant currency basis, which was impressive considering the difficult comparison with last year's first quarter, when revenues increased 44% year-over-year. With a solid backlog and a growing number of opportunities, we are expecting another year of positive year-over-year performance from our international government business in 2019.

A major contributor to the first quarter year-on-year increase in government revenues was significant growth in business from state and

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MAY 02, 2019 / 8:30PM GMT, Q1 2019 ICF International Inc Earnings Call

local government clients, which accounted for 19% of total first quarter revenues, up from 10% 1 year ago. As you might expect, this growth was driven by our disaster recovery work in Puerto Rico, Texas and the U.S. Virgin Islands as we executed on contracts that we were awarded in mid-2018 to assist with recovery efforts following the 2017 hurricanes. We included a mention in today's earnings relief

--release of ICF's most recent award, another contract in Texas, this one with Harris County, which encompasses metropolitan and suburban Houston, to assist with housing and infrastructure programs in the aftermath of hurricane Harvey. This is our third disaster recovery contract award in Texas, and we now count the state of Texas General Land Office, Harris County, and the city of Houston among our clients.

This latest award brings the total value of the post-2017hurricane-related disaster recovery contracts won to roughly $270 million over 3 years. We continue to wait additional award decisions in Puerto Rico expected over the next several months that represent a significant opportunity for us. Thanks to the size and nature of the contracts we have already won, however, we are well-positioned for substantial growth this year and over the next several years. We believe that the affected jurisdictions are being judicious in the award process, with a view towards expanding contracts with those firms that are effective -- executing effectively on the ground. This bodes well for ICF. We have deep expertise as well as broad experience in handling these types of contracts, and the feedback we've gotten so far from the clients we are working with has been encouraging.

As Sudhakar mentioned earlier, we do see disaster recovery as an ongoing business opportunity for ICF. Our acquisition of DMS last year has broadened our capabilities in this area to include the development of comprehensive risk mitigation strategies and has brought us disasTRAX, a project management software that significantly improves the efficiency of disaster management programs.

Moving to our commercial clients, the 8% increase in revenues in the first quarter was driven by strong results from marketing services, which included some project-based work that was pulled forward into Q1 from Q2. Results also benefited from our expanded strategic marketing capabilities in Europe. The breadth of services we can offer from advisory through technology platform implementations is aligned with the end-to-end buying behavior that we are seeing in the marketplace.

Since launching ICF Next, our commercial marketing services team has witnessed a significant increase in qualified inbound leads. Also, we have maintained our position as a leader, the highest possible category, in the Forrester Research ranking for loyalty marketing services and technology. Their comprehensive assessment of the loyalty technology marketplace evaluated 13 provider services against 28 criteria, helping marketers understand the state of the market and select the right providers for their needs.

Energy markets had stable performance in the first quarter as growth in energy efficiency and advisory work was offset by the wind down of certain large energy infrastructure projects. New energy efficiency projects that started in Q4 2018 are expected to benefit year-over-year comparisons, beginning in the second half of 2019. Also, we had a robust pipeline of energy efficiency opportunities at the end of the first quarter.

California remains an important growth catalyst for energy efficiency work, and we expect to see larger RFPs in the second half of this year aligned with the state's mandate to have 60% of the investor-owned utility energy efficiency budgets be expended by non-utility third parties like ICF by 2022. As expected, we have already been very busy responding to smaller requests for qualifications and smaller requests for proposals in Q1 that are not statewide, but instead cover specific utility service territories that are also being driven by this 60% mandate.

We also see growth potential in the further penetration of distributed energy resources such as solar, storage and electric vehicles, especially as selected states seek to further decarbonize their energy supply chains. This trend offers both advisory and program implementation opportunities for us.

Taken as a whole, we continue to expect at least mid-single-digit growth in our revenues from commercial clients this year.

In summary, we are pleased with our first quarter performance. These results, together with our strong backlog and record pipeline, position us well for another year of substantial growth in 2019. We also continue to expand our margins, thanks to high utilization rates and our expectations that ICF's commercial business and our state and local disaster recovery work in the aggregate will account for an

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MAY 02, 2019 / 8:30PM GMT, Q1 2019 ICF International Inc Earnings Call

increasing percentage of this year's revenues.

At the end of Q1, our business development pipeline was at a record high of over $6.4 billion. There were about 55 opportunities larger than $25 million and 100 opportunities between $10 million and $25 million. Our annual personnel turnover rate was 17.4%.

Now I'll turn the call over to James Morgen, our CFO, for a financial review. James?

James C. Morgan ICF International, Inc. - Executive VP & CFO

Thank you, John. Good afternoon, everyone. I'm pleased to report on ICF's strong first quarter results, which have positioned us well to achieve our full year 2019 guidance.

Total revenue for the first quarter of 2019 was $341.3 million, a 12.7% increase over last year's $302.8 million, comprised of 15.6% revenue growth from our government clients and 7.6% revenue growth from our commercial clients. In addition to absorbing the impact of the government shutdown, this strong first quarter revenue performance was achieved with one less day in the first quarter of 2019 compared to the prior year, which reduced revenue by more than $5 million, equivalent to roughly 160 basis points of year-over-year growth.

Service revenue increased 7.8% to $241.4 million, up from the $223.9 million reported in last year's first quarter. Pass-through revenue was 29.3% of total revenue, more representative of the level of pass-through revenue we would expect in 2019 and up from the 26.1% in last year's first quarter.

Gross profit increased 10% and amounted to $125.3 million in the first quarter of 2019, compared to $114 million in the year ago quarter. However, as a result of higher pass-throughs, mostly related to our disaster recovery work, our gross margin declined 90 basis points year-on-year to 36.7%. Conversely our gross margin on service revenue expanded 100 basis points to 51.9% in this year's first quarter.

While indirect and selling expenses for the first quarter of $96.5 million increased 7.6% from $89.7 million a year ago, as a percentage of total revenue, these costs declined 28.3%, representing a 130 basis-point improvement over last year.

Our higher revenue base, favorable business mix, and cost discipline drove operating income growth of 24.5% to $21.9 million, more than 3x the rate of service revenue growth.

GAAP EBITDA for the first quarter was $28.8 million, 18.5% above last year's $24.3 million. Exclusive of special charges related to severance expense for staff realignment and a positive adjustment related to a bad debt reserve, adjusted EBITDA was $28.5 million in this year's first quarter compared to $25 million in the first quarter of 2018. Adjusted EBITDA margin on service revenue expanded by 60 basis points to 11.8%, up from 11.2% in the first quarter of last year.

Net income for the quarter was $15.3 million, or $0.80 per diluted share, after absorbing an estimated $0.05 per share negative impact related to the federal government shutdown that continued for 28 days in January. This performance represents 23.4% year-over-year growth from the $12.4 million, or $0.65 per diluted share reported last year. Note that these results benefited from a lower tax rate of 19.5% in this year's first quarter versus 22.5% last year. The first quarter of 2019 tax rate was below our expectations and annual guidance, mainly driven by the deductibility of equity-based compensation expense and nontaxable gains associated with an increase in the cash surrender value of life insurance policies, which was driven by stock market gains in the first quarter of 2019. We now expect our effective tax rate to be approximately 27% for the full year 2019. Thus, based on our current expectations, our average quarterly tax rate for the remainder of the year will be nearly 29%.

Non-GAAP diluted EPS of $0.87 increased 13% from the $0.77 reported in the first quarter of 2018. Our non-GAAP calculation excludes charges related to amortization of intangibles and cost of staff realignment, which were partially offset this quarter by a positive adjustment related to a bad debt reserve.

In the first quarter, we had negative operating cash flow of $12.7 million compared to negative operating cash flow of $5.8 million in the

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