ICF International : Q3 2020 ICF Earnings Transcript 94.6 KB

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Q3 2020 ICF International Inc Earnings Call

EVENT DATE/TIME: NOVEMBER 05, 2020 / 9:30PM GMT

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NOVEMBER 05, 2020 / 9:30PM GMT, Q3 2020 ICF International Inc Earnings Call

CORPORATE PARTICIPANTS

Bettina Garcia Welsh ICF International, Inc. - Senior VP & CFO

James C. Morgan ICF International, Inc. - Executive VP & Chief of Business Operations

John Wasson ICF International, Inc. - President, CEO & Director

CONFERENCE CALL PARTICIPANTS

Andrew Owen Nicholas William Blair & Company L.L.C., Research Division - Analyst

Joseph Anthony Vafi Canaccord Genuity Corp., Research Division - Analyst

Marc Frye Riddick Sidoti & Company, LLC - Business and Consumer Services Analyst

Samuel England Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

Tobey O'Brien Sommer Truist Securities, Inc., Research Division - MD

Lynn Morgen AdvisIRy Partners - Founding Partner

PRESENTATION

Operator

Welcome to the Third Quarter 2020 ICF Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded on Thursday, November 5, 2020, and cannot be reproduced or rebroadcast without permission from the company.

And now I would like to turn the program over to Lynn Morgen of AdvisIRy Partners.

Lynn Morgen AdvisIRy Partners - Founding Partner

Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2020 performance. With us today from ICF are John Wasson, President and Chief Executive Officer; Bettina Welsh, Chief Financial Officer; and joining them are Sudhakar Kesavan, Executive Chairman; and James Morgan, Chief of Business Operations.

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 5, 2020, 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 2020 performance. John?

John Wasson ICF International, Inc. - President, CEO & Director

Thank you, Lynn, and thank you all for joining us this afternoon to review our third quarter performance and discuss our business outlook.

There are several key takeaways from our third quarter results that I would like to highlight. First, our diversified business model continues to provide ICF with substantial resilience, enabling us to benefit from broad trends across our government and commercial clients.

Second, we continue to see considerable year-on-year growth in service revenue, which represents the work performed by ICF employees. In the third quarter, service revenue increased 3% and is up 4.1% year-to-date, reflecting increased demand for our services and excellent execution on client programs by our professional staff.

Third, the growth catalysts that we have identified across our markets are driving these higher service revenue comparisons and our exceptional business development momentum. ICF had record third quarter contract awards of $792 million for a book-to-bill of 2.2. Our trailing 12-monthbook-to-bill ratio improved to 1.2 at the end of the quarter, which has set the stage for our continued growth in 2021.

Fourth, we succeeded in generating record year-to-date operating cash flow, which enabled us to pay down debt and reduce our

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NOVEMBER 05, 2020 / 9:30PM GMT, Q3 2020 ICF International Inc Earnings Call

leverage ratio to a level that we had not expected to achieve until the end of the fourth quarter. This performance is aligned with our historical track record of levering up to make strategic acquisitions and then utilizing our strong cash flow to pay down debt in short order.

Year-on-year increase in service revenue we achieved in the third quarter was led by programs for federal government clients and our energy advisory and implementation work for commercial clients, primarily utilities. The decline in total revenue for the period was primarily attributable to a $21 million reduction in pass-through revenues on which we generally earn little or no margin.

We were pleased to report even higher growth in adjusted EBITDA, thanks to a combination of favorable business mix, higher utilization and lower SG&A costs. And while SG&A costs will increase once we emerge from this pandemic, a portion of the cost savings that we have achieved in the last 2 quarters will become permanent. And we continue to work towards optimizing our facility costs. This will help us return to expanding our adjusted EBITDA to service revenue margins in 2021 and beyond.

Our third quarter revenue performance was led by strong growth in our federal government business, which was up 18% year-on-year, reflecting both organic growth and the ITG acquisition. ITG is proving to be an excellent fit, and the combination of their broad IT modernization capabilities with our deep domain expertise and client relationships has provided significant growth opportunities to us.

In the third quarter, we were awarded approximately $100 million in IT modernization work, including a $35 million plus-up on our recompete with the Department of Health and Human Services Children's Bureau that expands the scope of our work to include operating and modernizing its child welfare IT systems. Additionally, we received a new single-award blanket purchase agreement with a $49 million ceiling from the U.S. Food and Drug Administration to provide IT platform advisory and development services for its digital services center and a new $24.4 million contract with HHS' Children's Bureau for engineering and architecture services to develop a new cloud-based National Child Welfare Data Management System. At the end of the third quarter, our business development pipeline and IT modernization alone was a robust $1.5 billion.

The Department of Health and Human Services is ICF's largest client and, including the IT modernization contracts I just mentioned, represented almost 60% of our $792 million in third quarter contract wins. The large recompete contracts, new contracts and BPAs that we were awarded in the third quarter are noted in today's release. Additionally, ICF was chosen for another $12 million in COVID-related work by several government agencies.

As we have mentioned on past calls, we see significant growth opportunities for ICF in the public health arena. We are still in the Response phase with respect to COVID-19 and are active in information dissemination and surveillance and analytics work to better understand how the virus spreads. The Recovery phase, which will come next, is expected to require monetization of disease surveillance systems and associated analytics, and our expanded IT modernization capabilities, together with our public health expertise, will be very relevant to these programs.

Revenues from state and local clients were consistent with our expectations. The great majority of the work we do for state and local clients is either federally funded or funded by municipal bonds to support infrastructure projects, which makes our work more resilient to the vagaries of state budgets.

Disaster management represents approximately 1/2 of the revenues in this client category and remains on track to contribute approximately $110 million in revenues this year. Since the beginning of this year, we have won small but strategic mitigation contracts in 4 states: Missouri, West Virginia, Florida and South Carolina, which represent many of the mitigation contracts that have been let to date, and we are awaiting award decisions on larger contracts in other jurisdictions.

ICF is very competitive when it comes to HUD-funded mitigation opportunities. The combination of our 30-plus years of climate resilience work, our 30-plus years of HUD technical assistance and experience with large-scale mitigation projects has given us key qualifications in this emerging market.

Also, we've already been very active in the very early stages of the response to the weather events of 2020. We have contracts in the Gulf

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NOVEMBER 05, 2020 / 9:30PM GMT, Q3 2020 ICF International Inc Earnings Call

States that have been expanded recently to incorporate initial response and recovery activities for Hurricanes Laura and Delta, for which our innovative drone technology and data management tools have been in high demand.

Revenue from international government clients came in as expected and consistent with the prior quarter. Approximately 2/3 of the negative year-on-year comparison reflected the falloff in pass-through revenues on which we earn minimal profit. Our strategy is to keep costs in check and pivot towards those areas of the business that remain resilient in these challenging times. For example, in the third quarter, we secured a significant contract to support the implementation of a European government energy efficiency program.

Our commercial energy business, which mainly serves utility clients, performed well in the third quarter, led by the continued strength of our energy markets advisory business. This was largely due to strong demand for ICF's financial and technical advisory services to support considerable transaction activity driven by renewables, storage and gas asset development. Work on energy efficiency programs for utilities continued apace, and we are awaiting decisions on multiple submitted proposals in California, with contract awards expected by early in 2021 and start-up in 2021 or 2022. We're also awaiting additional RFPs for which we have been down-selected.

Our distributed energy resources consulting practice also performed well in the third quarter as we advised utility clients on how to address the impact of distributed resources on the grid and developed and implemented pilot testing programs related to distributed energy technology.

Lastly, our commercial marketing services clients are experiencing the pandemic in different ways. Clients in certain verticals are expecting the recovery curve to be longer and deep into 2021, while others are executing on their budgets. We are effectively managing costs in our commercial marketing services business and continue to deploy our resources in growth areas while ensuring that we're ready to scale programs when business conditions improve.

After a record third quarter of contract awards, I am pleased to report that our business development pipeline was a robust $6.8 billion at the end of the third quarter, representing a diversified set of opportunities across our client set. This pipeline, together with a very strong backlog of $2.9 billion, support our confidence in ICF's future prospects. I also would like to highlight the strong improvement in cash flow that we achieved in the third quarter. Our ability to generate substantial operating cash helps us fund acquisitions to support our growth strategy.

Now I'll turn the call over to our CFO, Bettina Welsh, for a review of our third quarter results. Bettina?

Bettina Garcia Welsh ICF International, Inc. - Senior VP & CFO

Thank you, John. Good afternoon, everyone. I'm pleased to provide additional color on the company's strong financial performance and cash flow in the third quarter of 2020, which led to an increase in our full year guidance for both earnings and operating cash flow.

Total revenue for the third quarter of 2020 was $360.3 million, 3.6% below last year's level, primarily as a result of lower pass-through revenues, which accounted for 26.5% of total revenue this quarter compared to 31.2% in last year's third quarter. Like the prior sequential quarter, we saw an increase in service revenue, which was up 2.9% in the third quarter to $264.7 million. On a year-to-date basis, it was up 4.1% compared to last year.

Our gross profit was $137 million, an increase of 0.9% from $135.8 million in the year ago quarter. Gross profit margin on total revenue expanded by 170 basis points to 38% due to lower pass-through revenues year-to-year on which we earned lower margins.

Indirect and selling expenses of $100 million were flat year-to-year, inclusive of the ITG acquisition. As a percentage of service revenue, indirect and selling expenses declined to 37.8% from 38.9% in last year's third quarter, which is due to lower SG&A expenses such as travel.

EBITDA increased 3.6% to $36.9 million from $35.6 million last year. Adjusted EBITDA, which excludes special charges related to severance for staff alignment as well as acquisition-related charges, was up 4.9% to $37.8 million during the third quarter of this year compared to $36 million last year. Adjusted EBITDA margin on service revenue was 14.3% compared to 14% last year.

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