ICF International, Inc. Q2 FY2021 Earnings Call

Welcome to the Second Quarter 2021 ICF Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. Please note this conference is being recorded on Tuesday, August 3, 2021, 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. Please go ahead.

Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's second quarter 2021 performance. With us today from ICF are John Wasson, President and CEO; and Bettina Welsh, CFO. Joining them is 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 August 3, 2021 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 second quarter 2021 performance. John?

Thank you, Lynn, and thank you all for joining us on today's call to review ICF's second quarter 2021 results and discuss our business outlook. First, let me say that I'm very pleased with ICF's strong second quarter performance and how well we are tracking against the long-term growth catalysts that we have identified. We continue to report strong revenue growth across our markets and client categories and even stronger growth in EBITDA and earnings metrics. At the same time, we are maintaining our backlog with solid awards, the majority of which represent new business, and we ended the quarter with a record business development pipeline of $7.2 billion, representing a $1 billion sequential increase in diversified opportunities across our government and commercial client sets. This reflects funding trends in our markets and supports our confidence in reaching the higher end of our guidance ranges on service revenue, EBITDA, and EPS in 2021, and underscores our strong positioning heading into 2022. ICF's second quarter revenue growth was led by a double-digit increase in revenues from both government clients and commercial energy clients, which together accounted for 87% of our total revenues for the quarter. While commercial marketing services revenues were stable compared to last year, our aviation consulting practice saw a pickup in business. Looking more closely at our client categories, federal government revenues increased 6.7% year-on-year, in large part representing our continued work in the areas of IT modernization, digital transformation, climate change and resilience, and public health and social programs at key civilian agencies. This was also a strong quarter for contract awards in the federal arena, which increased 54% year-on-year and included an important recompete with the U.S. National Cancer Institute to provide digital communication services for its behavioral health programs, with the U.S. National Aeronautical Space Administration, or NASA, to assist with climate change research, and with the Social Security Administration to continue our IT modernization work to automate its physical security processes. In IT modernization, we were also awarded a new project to help modernize the U.S. Federal Transit Administration's oversight tracking system, and we received additional funding to continue modernization efforts for the U.S. General Services Administration. In the first half of this year, our IT modernization revenue is up over 15% year-on-year, in large part reflecting the revenue synergies we have generated since we acquired ITG in January of last year. By combining ICF's domain expertise, robust business development platform, and contract vehicles with ITG's best-in-class qualifications, track record, deep technology partnerships, and leading platform expertise, we have been able to win contracts that neither firm could have won on its own. Additionally, our business development pipeline in IT modernization remains over $1.5 billion. We continued to build our public health presence in the third quarter with our largest client, the Department of Health and Human Services, accounting for 27% of first half 2021 government revenues. We remain in the response phase with respect to the pandemic, and since the onset of COVID-19, ICF has received contract modifications and awards totaling approximately $55 million to provide policy and scientific analysis, research, communications and project management services to government clients. We are writing a tremendous number of proposals in the federal government arena, where our business development pipeline was at a record $4.5 billion, including a large number of public health, health IT, social program, and as I just mentioned, IT modernization opportunities. We're also closely monitoring developments with respect to the infrastructure bill, which is where our environmental impact analysis, project permitting and construction monitoring of infrastructure projects, and our expertise in resilience, mitigation, and clean tech, also come into play. Also, President Biden's fiscal 2022 budget proposal includes double-digit increases for many of the civilian agencies that we serve, most notably a 24% increase for HHS. While it is too soon to say how this will all play out, I do think it's safe to say that ICF will see a significant amount of additional spending in many areas of our addressable market in the coming years, and we are investing in the talent and technology to enable us to capture those opportunities. Revenues from state and local clients increased modestly in the second quarter, reflecting both a robust market for disaster management, resilience and mitigation, advisory and implementation services and opportunities to provide technical assistance and implementation services to state and local governments to help them manage and distribute more efficiently federal dollars received through stimulus and relief programs. We extended and expanded our work in Puerto Rico during the second quarter. ICF was awarded an additional $13.7 million to extend our FEMA-funded grants management work and another $13.1 million to expand the implementation of their housing authority's rehabilitation, reconstruction, and relocation program for single-family homes damaged by Hurricanes Irma and Maria. Also in the second quarter, ICF was awarded a new $9 million contract by the government of the U.S. Virgin Islands Department of Labor to implement a new workforce development program that will train local workers to support the territory's recovery from the 2017 hurricanes. Additionally, in state and local, we continue to support our environmental services clients, particularly in transportation, water, energy, and planning and development. We are busy on a broad range of projects that include high-speed rail, conservation planning, new reservoir planning and permitting, and renewable energy projects. As noted in our earnings release, revenues from international government clients increased substantially in the second quarter, primarily reflecting a sizable short-term project that includes substantial pass-through revenues, which we expect to wind down throughout this year. ICF continues to make good progress on climate-related work internationally with extensions being secured for many of our existing wins, plus a number of new opportunities where we are recognized for expertise in climate advisory and implementation services. Additionally, the European Green Deal is yielding many opportunities in policy design and green finance, with a strong pipeline of work on clean energy transition in the European Union. We continue to expect our international government revenues in 2021 to show considerable growth compared to 2020 levels, but not at the magnitude we saw in the first half of the year. Moving to a review of our commercial businesses, commercial marketing services revenue was steady in the second quarter, up just under 1% year-on-year. The healthcare and consumer packaged goods market continued to show strength, while those markets that have been hardest hit by the pandemic are in an early recovery phase. Our commercial marketing group continues to win awards and recognitions for their work, including being recognized as a strong performer among loyalty solution providers in the Forrester Wave. I'm also pleased to report that our commercial marketing group has been engaged by large brand clients, including Skittles and Miller Lite, on campaigns that promote social inclusion and acceptance during Pride month. Our commercial energy markets business had another great quarter, with revenues up 11.4% year-on-year. This represented very strong performance across the group, led by the startup of new energy efficiency programs and the expansion of existing contracts. We continue to win energy efficiency work in California with multiple new awards this quarter and anticipate additional opportunities as the state makes progress towards its goal of 60% or greater outsourcing. We're also monitoring developments in several other states as energy efficiency-related programs are instituted or expanded to address state climate targets. For example, in New York, ICF implements the Clean Heat program for all the New York investor utilities. This innovative program is designed to replace fossil fuel heating systems with electric heat pumps. We expect similar electrification programs, including the expansion of state electric vehicle programs, in several other jurisdictions. Commercial energy advisory service business, which now includes distributed grid services, also had a strong quarter. A main driver of this growth was our power and technical advisory business, which is associated with continued high demand for financial and engineering due diligence services around the development and deployment of renewable resources and energy storage. And our environmental services work for commercial energy companies remained steady, with new contract wins with utilities and renewable energy developers. We also continue to pursue construction and compliance monitoring contracts for new or rebuilding energy infrastructure, including environmental studies for large offshore wind projects. Key trends affecting the energy sector include decarbonization, electrification, distributed energy resources, resiliency, energy equity and the change in utility business models. And all of these are closely aligned with the current administration's priorities, and all represent growth opportunities for ICF. To summarize, this was another quarter of very strong performance for ICF, building on the positive momentum we experienced at the end of 2020 as well as in this year's first quarter. Following 3 consecutive quarters of record contract sales, in the second quarter we were awarded $398 million in contracts, 41% ahead of the prior year, and our trailing 12-month book-to-bill was at 1.48x, the highest in recent memory. Also, we have replenished our business development pipeline to a record $7.2 billion, adding $1 billion since the end of the year's first quarter. These are strong indications of the growth potential we have on the horizon. At the same time, we are prioritizing greater engagement with our employees and increasing our investments in people, recruiting, and technology to ensure that ICF is well positioned for future growth and success. And with that, I'll turn the call over to Bettina Welsh for a financial review. Bettina?

Thank you, John. Good afternoon, everyone. I'm pleased to share a more detailed view of our strong second quarter 2021 financial performance that puts us on track to achieve the upper end of the full year guidance for service revenue, EBITDA and EPS that we provided at the start of the year. Second quarter 2021 total revenue was up 10.9% to $392.5 million year-on-year driven by strong performance in both government and commercial markets, which increased 13% and 6% year-over-year, respectively. Service revenue grew 7.7% year-over-year to $281.4 million. Pass-through revenue increased this quarter and accounted for 28.3% of total revenue, in line with our expectation that pass-through revenues for the full year will be approximately 28% of the total revenue. Keep in mind that in the fourth quarter of last year, we had an exceptional increase in pass-through revenues that was one-time in nature and related to the completion of a large contract. Gross profit increased 11.7% on a year-on-year to $145.9 million. Gross margin on total revenue expanded 30 basis points to 37.2%, while gross margin on service revenue grew 180 basis points to 51.8%. Indirect and selling expenses were $106.2 million compared to $99.3 million in the year-ago quarter. As a percentage of service revenue, indirect selling expenses were 37.7%, down 30 basis points from last year's second quarter. We had significant growth in EBITDA and adjusted EBITDA in the second quarter with EBITDA up 26.7% to $39.7 million and adjusted EBITDA, which excludes special charges, up 23% to $40 million. Adjusted EBITDA margin on service revenue expanded 180 basis points to 14.2%. This strong performance reflected several factors, including service revenue growth, favorable business mix, high utilization, lower indirect costs as a percent of service revenue and the pull forward of energy efficiency project work and energy incentive fees from the second half of this year. We are very pleased with these results as they were achieved while we continued to invest in our business in anticipation of increased activity in our high-growth markets. Operating income of $32 million was up 40.3% from the $22.8 million reported in the second quarter of 2020. Our tax rate was 30.7% compared to 29% in the second quarter of 2020. Net income for the quarter was $20.3 million or $1.07 per diluted share, up 48.7% from the $13.7 million or $0.72 per diluted share in the second quarter of 2020. On a non-GAAP basis, excluding the impact of amortization of intangibles and severance/staff realignment charges, earnings per share increased 33.7% to $1.19 year-over-year. As you can tell from our reaffirmed full year guidance at the upper end of our initial ranges, we are expecting EPS performance in the second half of this year to be similar to that of the first half as the contracts we won late in 2020 and early this year continue to ramp up. Shifting to the cash flow statement, our operating cash flow of $6.3 million was in line with our expectations, and we continue to anticipate operating cash flow for the full year of approximately $100 million. Capital expenditures for the first half of the year were $7.5 million compared to $9 million in the prior year. Days sales outstanding for the second quarter were 82 days compared to 88 days in the similar period last year. Our capital allocation strategy remains a balanced approach. We will continue to invest in organic growth and acquisitions, pay down debt, as well as return capital to shareholders in the form of dividends and share repurchases. In the second quarter, we repurchased 21,800 shares for $2 million to offset the dilution of our employee incentive programs. Also, today we declared a quarterly cash dividend of $0.14 per share payable on October 13, 2021, to shareholders of record on September 10, 2021. For modeling purposes, here are updated metrics for 2021. Depreciation and amortization expense is now expected to be in the range of $19 million to $20 million, slightly below our initial expectations. Amortization of intangibles should be in the range of $11.8 million to $12.2 million. Full year interest expense should range from $11 million to $12 million. Full year tax rate will be no greater than 28%, whereas we previously noted no greater than 27%. We expect fully diluted weighted average share count of approximately 19.1 million for 2021. And capital expenditures are anticipated to be approximately $20 million. As I mentioned earlier, our expectation for cash flow is approximately $100 million. With that, I'll turn the call back to John for his closing remarks.

Our first half performance has firmly positioned ICF to report full year 2021 service revenue, EBITDA and EPS that are at the upper end of the guidance ranges we provided at the time of our fourth quarter 2020 earnings release. Also, I am pleased to report that in the first half of this year, over 60% of ICF's service revenue represented work in key areas in which we expect growth rates in the aggregate to be at least 10% over the next several years. This universe accounted for 55% of annual revenues in 2020. These high-growth areas include IT modernization, public health, disaster management, and utility consulting as well as climate, environment, and infrastructure, which align well with the current administration's priorities. This positioning, together with our robust backlog and pipeline, supports our confidence in ICF's organic growth prospects over the next several years. Additionally, we have the financial resources to pursue acquisitions that can further expand our addressable market. The problem-solving nature of our work has enabled ICF to attract an exceptional group of people who are dedicated to making a positive difference and who share our commitment to carbon neutrality, diversity, social justice, and equality. We appreciate their contributions to our success and encourage you to visit our website to learn more about how ICF addresses its ESG responsibilities. Operator, I'd now like to open the call to questions.

And we have our first question from Tobey Sommer with Truist Securities.

I was wondering if you're able to parse out these strong contract awards, the extent to which the influence of the change in administration is, a, driver or if this is still representative of bids and momentum that may, in fact, have sort of predated the election and change in administration.

Yes. No, sure, Tobey. That's a good question. I would say, generally, I think the award drivers remain opportunities that predated the administration that we've had in capture and subsequent proposals over the last several quarters. They are in the key growth areas that we've emphasized prior to this administration and that certainly those growth drivers continue, IT modernization, public health, disaster recovery utility programs. But the awards we're seeing today and have had year-to-date, really predated the administration in terms of the capture and the proposal efforts and now getting to awards.

Okay. Great. Now you cite a lot of sort of key markets as having good outlooks, and that's terrific. Is there, if asked to sort of rank order the areas where you think you're going to have the fastest growth over some sort of time period, doesn't have to be near term, it can be over some sort of medium or long term; how would you answer that question?

We are pleased with the variety of growth drivers in our markets right now. As I mentioned, there are four key areas we’ve seen: IT, public health, disaster recovery, and utility programs. We've also talked about climate, which I believe will become a major growth driver, along with infrastructure, which has potential as well. We see all of these as markets growing by double digits. Over 60% of our revenues in the last quarter came from these areas, all growing more than 10%. IT modernization has been expanding by over 15% for the past five or six quarters, especially since we completed the ITG acquisition. I would categorize all these areas as having growth above 10%. I don’t want to rank them, as they all show strong growth potential, and we are very excited about them. We are confident they will continue to drive growth for the next several years.

That's work left for us to do then. You completed the ITG acquisition recently and mentioned the superior growth you've experienced since then. How would you express your eagerness to pursue more acquisitions? Also, if possible, could you indicate areas of interest?

Sure. As you know, over the last 15 years we've been a publicly traded company, and acquisitions have been a key aspect of our strategy. Our average compound growth has been around 15%, with half of it being organic and half inorganic. M&A continues to be a vital part of our strategy, and we are primarily focused on companies in the key growth markets I mentioned. We are looking for high-quality companies that are a good cultural and strategic fit, where we can see a path to significant synergistic revenues when we combine their capabilities with ours, similar to our experience with ITG. We are in an active period in the M&A market with a lot of activity. The valuations are high, but if we can identify a high-quality company that aligns well with our strategic and cultural values and offers potential for synergistic revenues, it can be transformative. ITG has significantly expanded our IT modernization market over the past 16 to 17 months. We are currently concentrating on the federal side in health, health IT, and IT modernization, as well as commercial energy markets. We would also consider opportunities in disaster recovery if they arise. This reflects our present approach to M&A.

We'll have our next question from Joseph Vafi with Canaccord.

Great results and it's wonderful to see the broad-based strength in the business. To start, John, you mentioned that it’s clearly a good bookings quarter, but you also pointed out that the pipeline is actually quite strong, and we are currently in the midst of the federal budget cycle. I’m curious about where you are seeing additional pipeline strength at this stage in the federal budget cycle. Additionally, Bettina, you mentioned that there was some pull forward in the energy business. I’m wondering what the second half and the upcoming quarters might have in store regarding that pull forward. I will have a quick follow-up after that.

Yes. Regarding the IT question, on the federal side, IT modernization is definitely a major factor driving our pipeline. Public health and social programs at HHS account for about 27% of our federal revenues, and we're seeing significant opportunities there. We're also starting to see more prospects in the energy and environmental sectors. These areas are our main focus in federal. Additionally, we have seen strong performance in commercial energy markets, with impressive results in the first half of the year regarding awards, pipeline, and revenue growth. We're observing significant opportunities across our commercial energy business, including utilities, energy efficiency, decarbonization, electrification, renewable energy, and resilience in the utility of the future. Moreover, in disaster recovery, we've announced several awards in Puerto Rico and anticipate double-digit growth in this area this year.

Sure. To remind everyone, we have recently implemented fixed-price energy contracts related to energy pull forwards and incentive fees. Revenues from these contracts are recognized on a straight-line basis throughout the year, while costs will increase as the program advances. This, along with the timing of energy incentive fees on several contracts, positively impacted our second quarter gross margin by approximately 70 basis points. As a reminder, we experienced a similar situation last quarter, but at a higher rate. However, we do not anticipate significant pull forwards moving forward. Previously, we mentioned expecting a gross margin of around 37% for the full year, and we maintain that expectation.

I just want to add that I agree with everything Bettina stated. The outcome of this pull forward is that our plan for the year has changed. Initially, we anticipated a significant growth spike more towards the latter half of the year. However, with the energy work pulled forward into the first quarter, we now expect consistent revenue and earnings growth each quarter throughout the year. We are guiding towards the upper end of our guidance range, indicating a service revenue growth of approximately 7.5% to 7.6% along with double-digit earnings growth. This suggests our growth will be steady rather than the spike we previously expected.

Sure. That makes sense given the nature of the contract structure. And then just one follow-up, maybe more of a strategic question. ITG acquisition, clearly looks like it's working out pretty well. The combination of the technology capability and the subject matter expertise coming together for some synergies. And I know you're really not that focused on DoD, but just across the civilian government, do you think you have a big enough footprint now kind of from a strategic level with what you have now? Or is there room for more potentially M&A on the IT side?

Yes, I would say that there is certainly more potential for mergers and acquisitions in the IT modernization sector. We have significantly increased our scale in IT modernization. However, we are continually looking to add more platforms. We have made progress with ServiceNow and Appian, but there are other platforms that we are interested in scaling as well. In today's business environment, having the necessary scale and workforce is essential to demonstrate the ability to deliver larger programs. I believe we still see a considerable opportunity in civilian IT modernization and the broader IT sector. Since 95% of our revenue comes from this area and we have strong relationships with those agencies, I see significant growth potential for us there, especially given our focus on our domain expertise. On the defense side, we lack that level of expertise and market presence. Therefore, we will primarily concentrate on our civilian markets. However, I want to note that our second largest client, which is the Department of Defense, accounts for about 5% or 6% of our revenues. We will certainly pursue opportunities there where we believe we can compete and offer unique services. Ultimately, I think there is still considerable room for growth in our core civilian markets in the IT space.

We have our next question from Sam England with Berenberg.

The first one, I was just wondering how you're viewing the opportunity from future pandemic-related health projects now. I know you've mentioned in the past that you thought it could be comparable or greater to the work you did around HIV and AIDS. So I just wondered what your latest view is there.

I think we're still optimistic about the longer-term opportunities around the pandemic. I think we still are in the immediate response phase. I think that the pandemic continues. There's a lot of focus on the Delta variant. We continue to support the immediate response phase. But I do think once we move beyond that, I mean there have been bills in Congress to look at how the government can be better prepared for future pandemics and what programs and governance might look like. We still have conversations with our clients around those types of issues. But I would say that everybody is still in this immediate response phase.

Okay. Great. And then the next one, it's been a pretty busy labor environment so far this year. I just wondered what you're seeing in terms of wage inflation in 2021 and also what you've been seeing in terms of headcount churn. And then I suppose linked to that, how do you see your hiring plans developing over the second half of 2021?

Well, sure. I mean I think you've touched on several issues there. So let me take them one at a time, and please remind me if I forget one of them. I would say in terms of the kind of labor availability and recruiting, I mean there's no question the current labor market is certainly tight. And as you know, every company is, including, I believe every company in our comp group and more broadly in the economy, is experiencing recruiting challenges in a tight labor market. It's not entirely a new problem. I mean, in certain areas, even prior to the pandemic, IT modernization, energy, cyber, certainly we saw it in components. But certainly, it's more broad now. In the past several quarters, we have significantly increased our investment in recruiting to ensure we attract talent in a timely manner. We have hired more ICF recruiters and are investing more in contract recruiters to find staff. Given this investment and our leadership position in core markets, which enhances our brand, we have generally been able to meet our recruiting needs. One metric we track is the time to start, which measures the duration from when we post a job opening to when a candidate begins work at ICF. Pre-pandemic, our average time to start in 2019 was 51.1 days, while so far in 2021, it stands at 53.3 days across the firm. Although this is an increase of a couple of days, I am satisfied with this metric considering the circumstances. There are certainly some highly competitive markets where these numbers might be higher and challenges more prevalent, but some of these issues existed before the pandemic. Overall, it is a tight market, and I believe we are performing well in recruiting and will continue to invest considerably. We have definitely felt the upward pressure on wages, similar to others in the industry, and we are closely monitoring these wage trends in our markets. We aim to stay competitive to address any wage-related challenges. Our strong culture and mission-driven focus help us retain talent, but we are still experiencing inflationary pressures. Most of our contracts include escalation clauses, which assist in managing these pressures. Additionally, we are realizing savings from the pandemic through reduced travel and entertainment expenses, some of which will carry over in the long term, alongside a smaller facilities footprint. Even with the pressure on wages, I don’t anticipate a significant impact on our profitability. Regarding turnover, we've noticed an increase, but I believe we are handling it effectively. Pre-pandemic, our core turnover rate was around 14.6%, and it has risen to approximately 15.5% in the first two quarters of 2021. We are monitoring this closely and have implemented programs to keep our frontline employees engaged. A key reason employees are leaving during the pandemic is a lack of engagement with their frontline managers, so we are addressing that. I've mentioned our efforts concerning compensation and culture. Overall, I feel we are doing everything possible to manage these issues.

We have our next question from Andrew Nicholas with William Blair.

First one, I wanted to just kind of follow up on commercial marketing. Just wondering if you could add some color to what you're hearing from customers in that business? Are they giving you any indications on timing of ramping up project activity there? And how are you kind of expecting the rest of the year to play out in that business?

In Q2, our business showed little change, increasing by less than 1%, which is an improvement from previous quarters where we experienced declines, particularly during the first year of the pandemic. We are now over a year into the recovery, and the business is essentially stable. As I mentioned earlier, we are observing stronger opportunities in healthcare and consumer packaged goods. However, sectors such as hospitality, travel, and tourism, which were hit hardest, are still in the early phases of recovery with no significant improvement to report. They are stabilizing but not progressing. As we mentioned during our guidance, we did not anticipate a major improvement for 2021, and I believe that was a reasonable expectation.

Got it. And then for my follow-up, I was hoping to touch on margins quickly. Another really strong quarter there. Just wondering how you're thinking about the medium-term opportunity on that front given recent performance. And maybe if it's possible to quantify how much cost you'd expect to come back into the cost structure as things like travel and entertainment start to come back online, whether it's later this year or early next, that would be great.

I would say that overall, regarding margins, we have been guiding for some time to adjusted EBITDA relative to service revenue. Our guidance for this year is 13.5%, which is a slight decrease from last year's 13.7%. However, aside from that figure, 13.5% would be the highest we've had since I joined the company, indicating an upward trend. We have stated our commitment to achieving a year-on-year improvement of 10 to 20 basis points based on factors like service mix, leveraging our back office, and managing utilization. On the travel and entertainment side, these costs have been significantly lower in the first half of the year, but I expect that to increase as we engage in more face-to-face interactions with clients. Long-term, we anticipate achieving at least a 25% savings in travel and entertainment expenses, as well as considerable savings on facilities and space. Some of these savings will be reinvested into business development and our team, especially given the growth opportunities we are currently pursuing.

Our next question comes from Kevin Steinke with Barrington.

You specifically called out aviation consulting as having a good quarter. So I don't know if there's anything behind that or to read into that in terms of a recovering economy and recovering travel or maybe it's kind of more one-off? Any color on that would be helpful.

Yes. First, I want to remind everyone that our aviation consulting practice is relatively small, contributing about $25 million to $30 million in revenue. However, there are some opportunities emerging in a few areas. Specifically, we are engaging in aircraft leasing arrangements with investment banks and leasing companies, where we have noticed an increase in demand. Additionally, we are working with more international clients, particularly European and Middle Eastern airlines, and we've seen progress in our strategic initiatives. We also conduct environmentally focused projects related to greenhouse gas emissions. Overall, we are observing signs of improvement in this segment over the last two quarters, and we remain optimistic about its potential. While it is a small business, it can be very profitable.

Okay. Understood. That's helpful. When we think about IT modernization in the pipeline there, what does the pipeline specifically look like for some of the larger deals, $100 million plus as that pipeline continues to build and develop?

The pipeline has definitely been growing and is quite strong. I don't have a specific breakdown available right now, Kevin, but a deal worth over $100 million in IT modernization represents a significant opportunity for us. Our main focus has traditionally been in the range of $25 million to $50 million, but we have been seeing an upward trend in larger deals. While I don't have the exact figures, I believe they're increasing. As I've mentioned before, there are certainly deals exceeding $100 million and even some around the $250 million mark. However, to secure those larger deals, it's crucial to show that we have the necessary talent and resources on platforms like ServiceNow or Appian to handle such substantial projects.

All right. That makes sense. I also lastly wanted to ask just about the California energy efficiency pipeline. I think you mentioned you continue to win some new deals there. But should we still think about maybe 2022 as when some of the larger opportunities come through and just the pipeline with regard to California energy efficiency?

Yes. I believe the pipeline in California looks promising. We are ramping up a number of awards this year, and there are additional awards we expect to see later this year that will be more related to 2022. Another development regarding California is the plan to outsource 60% of the work by 2022 or 2023, but there is now a possibility that this number could increase significantly, with the outsourcing potentially reaching 100% by 2025 or a couple of years beyond that. This suggests that the addressable market in California is likely to grow beyond 2022 and 2023. Therefore, we will likely be discussing developments in California for the next four to five years instead of just a couple of years.

And our next question is from Marc Riddick with Sidoti & Company.

I was wondering, you covered quite a bit already, but I was wondering if you could go back and talk a little bit about the strong pickup in activity with health and human services. And maybe you could walk us through sort of how that played into whether it was the messaging or the various needs around the pandemic in sort of how we should think about that, that would develop as the messages may need to change or be altered as we go forward with new challenges/discoveries?

I would say that our pipeline at HHS is pretty broad-based. I mean I think part of the story there is we are winning IT modernization work on the IT front within HHS and we're leveraging our relationships. That is our largest client. And so a significant portion of what we've been talking about in terms of ITG and we've been doing there is IT modernization related. In the last three to four quarters, our book to bill and awards have shown that we've secured substantial contracts, including some recompetes that come with increased funding on the human services side. For instance, we've had a long history of supporting the Head Start program at HHS, and in recent recompetes, we maintained contracts in four or five regions while also securing a new region over the past six to nine months. Additionally, we won a recompete for the child welfare information gateway with increased funding and have been involved in work related to social services during the pandemic, focusing on areas such as education, homelessness, child abuse, and school lunch programs. I would say that our involvement in social services at HHS, including our pandemic-related efforts, has been beneficial for us. We have been sharing details about the pandemic work we have secured and our outlook as we enter the immediate response phase. Additionally, it's worth mentioning that HHS budgets have increased significantly during the Trump administration, and the Biden administration is expected to propose even larger increases. As these budgets grow, they have the potential to positively impact all areas within HHS. James, do you have anything to add?

No, you covered key points.

Okay. Great. I wanted to shift over to the commercial side and note that we've seen encouraging commercial activity. Is there any particular insight from the mix of client activity regarding specific groups, clients, or verticals that have been more active than others? Are we beginning to observe any benefits from the leisure sector, and similar areas?

I don't believe there has been anything major. I would say energy efficiency continues to be the most important aspect of our business. We have observed very positive trends in this area, having secured a significant amount of energy efficiency projects, recompetes, additional work, and new contracts during the first half of this year. There are early signs that states which previously had not focused as much on energy efficiency are starting to reevaluate it due to climate concerns. Our advisory business has been very active in areas such as electrification, decarbonization, and distributed energy, which is encouraging. This advisory segment typically has high margins. Overall, the trends in terms of pipeline and opportunities within the energy sector are broad-based.

And thank you. We have no further questions. I will now turn the call over to John Wasson for closing remarks.

All right. Well, thank you for participating in today's call. We look forward to meeting with you at upcoming events and seeing you all soon. Thanks for participating.

And thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.