Welcome to the First Quarter 2023 ICF Earnings Conference Call. My name is Grace, and I will be your Operator for today's call. I will now turn the call over to Lynn Morgen of AdvisIRy Partners. Lynn, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us to review ICF's first quarter 2023 performance. With us today from ICF are John Wasson, Chair and CEO; and Barry Broadus, CFO. Joining them is James Morgan, Chief Operating Officer. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations about 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 9, 2023 press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so. I will now turn over the call to ICF's CEO, John Wasson, to discuss first quarter 2023 performance. John?

Well, thanks, Lynn, and good afternoon, everyone. Thank you for joining us to review ICF's first quarter results and discuss our outlook for 2023. Our strong first quarter results reflected ICF's expanded capabilities in the growth markets we have identified and invested in, namely IT modernization, public health, disaster management, utility consulting, and climate, environmental and infrastructure services. These areas have priority spending for our clients and in 2022 accounted for approximately 75% of revenue. Thanks to our deep domain expertise and increased scale, we expect these areas to continue to grow as a percentage of ICF's revenue in 2023 and beyond. In terms of takeaways from our performance in the quarter: First, we reported over 15% growth in service revenue and total revenue increased close to 17%, of which organic growth was north of 8%. Second, we achieved significant year-on-year margin expansion in the first quarter, primarily resulting from increased scale, higher utilization levels and reduced facility costs. This margin expansion is in line with our guidance of 15% adjusted EBITDA to service revenue margin for the full year. Third, we made the decision to exit a small noncore commercial U.K. events service line that was not contributing to profitability. While immaterial from a revenue perspective, it is indicative of our strategy to focus our investment dollars and human capital in areas that are or have the potential to drive growth and are synergistic with the rest of our service offerings. Fourth, this was another quarter of strong contract awards for ICF, up over 13% year-on-year and resulting in a trailing 12-month book-to-bill ratio of 1.3. Also, our business development pipeline increased 16% sequentially after more than $400 million in contract wins, which speaks to the high level of bid and proposal activity we are experiencing as well as the increased value of the contracts we're bidding on. Taken together, these accomplishments represented a strong start to the year and underscore our confidence in ICF's performance in 2023 and beyond. Looking across our client categories, there are several highlights worth noting. Revenues from federal government clients increased over 22%, reflecting a combination of high single-digit organic growth and the contribution from the SemanticBits acquisition, which we closed in July of last year. Our IT modernization and public health markets were key drivers of first quarter growth in this client category, reflecting strong spending trends amongst our civilian agency clients. Both areas have seen robust funding and bipartisan support. A recent Bloomberg analysis cited IT contract spending at federal agencies is forecasted to be a record of $78 billion for 2023, with about 40% of that spend taking place in the fourth quarter. Additionally, the analysis noted that civilian agency procurement is continuing a pattern of steady annual growth not seen since at least 2017. Federal agencies are prioritizing customer experience in digital services along with data access and use, which are directly in our sweet spots. The integration of SemanticBits is complete. In the first quarter, we continued to win additional business from existing clients. Additionally, we are working together on many potential revenue synergies, primarily at the Centers for Medicare and Medicaid Services, an agency that SemanticBits has served for many years. As mentioned previously, this was a strong quarter for our public health work. In the first quarter, we continued to execute on a number of contracts supporting federal agency efforts to address mental health, substance abuse, and infectious disease and global health security. We also worked on issues related to health equity, social determinants of health and the future of the public health system. Adjacent to this work was the first quarter ramp-up of a new contract for the Administration for Children and Families, Office of Refugee Resettlement to assist arriving Afghan refugees in getting access to immigration and legal services. Additionally, we continue to experience demand from federal clients for ICF services concerning the Infrastructure Investment and Jobs Act. Under existing federal agency contracts, we've been tasked with more than $45 million in projects to support IIJA activities. ICF is providing a range of support to agencies, including digital modernization, technical assistance and communications and management support for IIJA programs. Also, ICF has seen considerable interest from states and other prospective IIJA funding recipients for a range of environmental support services, including planning and analytical services. Our pipeline of opportunities containing IIJA and Inflation Reduction Act or IRA-related work continues to grow and is currently at approximately $250 million, up from $150 million at the end of 2022. This includes a modest amount of work related to the IRA where we expect to see awards to support Federal agencies' responsibilities under the Act late in the second half of this year. In the first quarter, our revenues from state and local government clients increased 13.3% year-on-year. Its two key business areas: disaster management and environment and infrastructure consulting executed effectively on existing contracts and continued to win new work. In particular, we noted in our release, the award of a new contract with a value of $25.9 million with a U.S. territory to support the implementation of its new energy program that will provide eligible households with renewable energy installations in case of an extended power outage. Also, we continue to win smaller strategic resilience advisory work in new jurisdictions and with new clients in current geographies. We currently are doing mitigation advisory work for over 30 clients across 17 states and three territories, which enables us to build relationships in key markets and to position for downstream implementation and new recovery work. There are significant synergies between our disaster recovery and mitigation work and the resilience and energy-related work we do for state, local and commercial clients. In Q1, we continue to see these synergies pay off with good-sized wins with critical infrastructure clients in Oregon and California. This is a good segue to our commercial energy business, where revenues increased almost 19% in the quarter, with each component of this business posting strong double-digit growth. Our commercial utility program revenue growth was driven by two large energy efficiency projects, the addition of several new marquee clients, as well as the expansion of the projects for existing utility clients. We saw particular strength coming from our innovative offerings related to electrification and grid modernization, behavioral efficiency programs, and dynamic pricing. In Energy Advisory, we experienced strong demand for our services in the areas of decarbonizing energy markets, in particular, demand from renewable energy developers whose business is supported by the IIJA and IRA. We recently introduced EnergyInsite, ICF's technology-enabled service helping developers identify and analyze renewable project locations, and a new power price forecasting subscription service, both of which have received favorable client response. Our environment and planning work grew substantially in the first quarter, led by energy sector-related projects as well as the Blanton acquisition and the general ramping up of environmental projects. Growth in energy projects was strong both for developers seeking to permit new onshore and offshore projects and utilities seeking environmental permits for large infrastructure, reliability and resilience projects, such as the undergrounding of power lines. To sum up, the first quarter was a period of excellent execution for ICF in which we made significant progress in tiers that support our full year 2023 guidance as well as our longer-term financial targets. Now I'll turn the call over to our CFO, Barry Broadus, for a financial review. Barry?

Thank you, John. Good afternoon, everyone. In the first quarter of 2023, our total revenues were $483.3 million, up 16.9% compared to the same period last year. This represented a balanced contribution from organic and acquisition growth. We benefited from broad-based revenue increases from our government clients, up 16.3% year-over-year, and revenues from our commercial clients, which increased 18.8% compared to the first quarter of last year. Service revenue grew 15.3% to $351.3 million. Our first quarter total revenue benefited from a one-time media buy pass-through of approximately $6 million. Even after adjusting for this, our year-on-year growth in total revenue was firmly in the double-digit range at over 15%. Pass-through revenue for the first quarter accounted for 27.3% of total revenue compared to 26.3% in the first quarter of 2022. Gross margin was 35.3% of total revenue and 48.6% of service revenue compared to 37.6% and 51% in last year's first quarter, respectively. The year-over-year variance mainly reflected a combination of factors, which included the timing of revenue recognition on fixed-price contracts and energy incentive fees. Also, the SemanticBits acquisition, similar to our Creative acquisition, generates a lower gross margin but higher EBITDA margin than we typically experience. As a percentage of service revenue, our indirect and selling expenses on an adjusted basis declined to 33.9% of service revenue, 320 basis points below last year's levels as we continue to benefit from higher revenue, greater scale, and reduced facility-related expenses. In absolute dollars, indirect and selling expenses increased 5.3% year-on-year, reflecting our ongoing investments in people and technology to support our long-term growth initiatives. Interest expense was $9.5 million as a result of higher debt balances and higher interest rates compared to last year. As I mentioned on our last call, we have implemented a number of initiatives as an offset to our higher interest expense, including reducing our facility costs, prioritizing high utilization, managing our other non-direct billable expenses and executing our tax efficiency strategies, which will manifest in the second half of this year. Our strong service revenue growth, together with the initiatives I just mentioned and economies of scale drove a 24.1% increase in EBITDA to $46.4 million and a 21.8% increase in adjusted EBITDA to $51 million. We're also pleased to report our adjusted EBITDA margin on service revenue of 14.5%, representing an 80-basis point improvement over the 13.7% reported in the year-ago quarter. Net income totaled $16.4 million and diluted EPS was $0.87 per share in the first quarter, inclusive of $3.5 million or $0.18 of tax-affected special charges. Of this, approximately $0.09 represented charges associated with the company's decision to discontinue its small noncore commercial U.K. events service line. The remainder represented severance, acquisition-related expenses, and facility consolidation costs. While we may have other opportunities on the horizon to further reduce our facility costs, they would be substantially less than what we incurred in 2022. Our first quarter net income compared to the $17.9 million and $0.94 per share in the first quarter last year inclusive of $0.17 of tax-affected special charges. Non-GAAP EPS increased 8.4% to $1.42 per share from the $1.31 per share reported in the first quarter of 2022. Moving to cash flow statement and balance sheet. We used $17 million of operating cash for working capital needs in the first quarter of this year, which is in line with our historical trends and our increased scale. Capital expenditures totaled $6.4 million, essentially the same as the period a year ago. Days sales outstanding for the quarter improved to 71 days compared to 79 days in last year's first quarter as a result of our cash management initiatives. Our debt at the end of March was $598 million compared to $556 million of debt at the end of 2022. This increase was driven by the cash seasonally required in the first quarter for year-end bonuses, stock repurchases, as well as the timing of an extra payroll cycle this quarter. Our adjusted leverage ratio was 2.98 at quarter end compared to 2.86 at year-end. Approximately 50% of our total debt is at a fixed rate. Consistent with our capital allocation strategy, we plan to focus on debt reduction as well as paying dividends, repurchasing shares to offset the impact of employee incentive programs, and making smaller opportunistic acquisitions. In the first quarter, the company used $18.1 million to repurchase 180,000 shares, which is sufficient to entirely offset the forecasted 2023 dilution. We still have $93.7 million remaining under the current authorization plan. We also announced today a quarterly cash dividend of $0.14 per share payable on July 14, 2023, to shareholders of record on June 9, 2023. Now, to help you with your financial models, there are a few important metrics that are unchanged from our guidance in early March. Our depreciation and amortization expense is expected to range from $23 million to $25 million. Amortization of intangibles should be approximately $36 million. Interest expense will range from $32 million to $34 million. Our full year tax rate will be approximately 23.5%. Our operating cash flow is projected to be $150 million. We expect our fully diluted weighted average share count to be approximately $19.1 million, and our capital expenditures are anticipated to be between $26 million and $28 million. You may have also noticed that we have streamlined our total revenue breakout by market, aggregating smaller end markets under the category of Security and Other Civilian and Commercial Markets. And with that, I will turn the call back over to John for his closing remarks.

Thank you, Barry. We are very pleased with our first quarter results. The strong award and pipeline growth we continue to achieve is a clear demonstration of how well aligned ICF's capabilities are with client spending priorities. Similarly, we are pleased to reaffirm our guidance for 2023, which represents substantial year-on-year growth across key financial metrics. ICF has the capabilities and the scale to capture the considerable growth opportunities on the horizon, and we will continue to make the requisite investments in people and technology to build upon our competitive advantages and expand our addressable market. While doing so, we'll remain mindful of maintaining the collaborative culture we are known for and continue to advance the positive impact that our work has on society. Operator, I'd like to now open the call to questions.

Our first question comes from Joe Vafi at Canaccord Genuity.

Nice results. I thought maybe we just kind of first go back to your comments, John, on the IIJA and the IRA pipeline growing. But it sounds like it's mostly IIJA in the pipeline growth at this point and not IRA. Do you expect to see that the IRA contribute more to that kind of combined pipeline over the next few quarters? And then I have a couple of follow-ups.

Your observation is accurate that IIJA is primarily driving the sales and a large part of the pipeline. I anticipate that IIJA will continue to be the main contributor this year, though not overwhelmingly so. As we previously noted, I expect the IRA to start contributing to the pipeline towards the end of the second half of the year, with a larger impact in 2024 and 2025. The IRA does present considerable potential for us, but its effects will be seen in the later years. For this year, we will see more opportunities arising from IIJA, as its funding is more advanced, making it a more immediate part of the pipeline.

Sure. In the commercial area, particularly in energy, could you provide a more detailed breakdown? I know that historically, you've worked a lot with the utilities, but it seems like your business is diversifying. It appears you are engaging more with alternative and green power producers. Can you give us an idea of how significant the overall business is outside of the core utilities and your perspective on how this market is evolving for these newer entrants?

Sure, Joe. I would like to mention a few points. We discussed this at our Investor Day last year, and I believe it still holds true. The majority of our business focuses on energy efficiency, accounting for about 75% to 80%. As I noted earlier, we saw significant achievements in this area last quarter, and we are continuing to experience growth in the mid- to high single-digit range. However, the new opportunities in decarbonization, electrification, and flexible load management represent the remaining 15% to 20% of our business and offer much greater growth potential in the long run, particularly in double digits. We are definitely seeing some progress, especially related to decarbonization electrification. There are many opportunities arising from our collaborations with developers on renewable solar and wind projects. Although this segment is smaller, it is expanding at a faster pace. I anticipate that over time, a larger share of our business will come from these new areas, which will help boost the growth rate of our energy division. Additionally, we had a strong first quarter for our environment and planning business, which handles some environmental projects related to solar and wind, as well as broader infrastructure initiatives. Overall, we are quite happy that our energy business had double-digit growth in every quarter of the first quarter, which gives us a very positive outlook.

Our next question comes from the line of Tobey Sommer with Truist Securities.

This is Jack Wilson on for Toby. I just want to ask a quick one. So can you speak to headcount growth and hiring in 1Q?

I believe we are fundamentally a professional services firm, and to achieve our projected 8% organic growth this quarter, we need to increase our headcount by 6% to 7% on an annualized basis. While we aim to boost efficiency and utilization from our current staff, we are definitely in a phase of headcount growth. I expect this to be in the range of 6% to 7% alongside our 8% organic growth. Additionally, the SemanticBits acquisition last year added to our headcount from a nonorganic perspective. We are investing significantly in recruiting and have been quite successful in attracting talent and expanding our workforce. Therefore, I feel confident that we will be able to add the necessary staff to meet our growth objectives.

Okay. And then shifting gears a little bit. Is there an opportunity for ICFI in the mitigation space?

I'm sorry, you said mitigation what space? I'm sorry, I missed that.

I meant the mitigation space.

I'm not sure I know what PSAG is. I mean, we do a significant amount of mitigation work on disaster recovery and mitigation work on climate change. And so for all of our clients across from federal state or local to commercial, we do both mitigation and resilience work. We have significant deep expertise on that. But the specific reference you're making, I'm not sure I'm familiar with.

Yes, I'm truly referencing substances so EPA. I know it's making sort of, putting emphasis on that.

Our next question comes from Kevin Steinke with Barrington Research Associates.

I just wanted to ask about your state and local government business. It had a nice sequential pickup in revenue there. Just wondering the sort of opportunities you're seeing both on the disaster recovery side, what more could be in the pipeline as well as on the mitigation side of things.

We observed significant growth in our state and local business sectors, which are primarily driven by our disaster recovery and environmental planning services for large infrastructure projects. Both areas are experiencing robust growth, and we have a strong pipeline for disaster recovery. We continue to find opportunities in mitigation across several regions. We have a substantial pipeline in Puerto Rico and are actively engaged in Texas, working with over 30 states on various mitigation advisory projects. This sector shows promising funding and potential for growth. Additionally, we are pursuing our traditional disaster recovery efforts, with opportunities in Puerto Rico, the Gulf Coast, and Texas, where the pipeline remains strong. On the environmental planning side, the increased focus on infrastructure investment through the IIJA and advancements in clean energy technologies is contributing to a well-developing pipeline. We are optimistic about the ongoing trends and future prospects in these areas.

In terms of the international government business, it seems you have been cautiously optimistic about the pipeline and the potential for that business to grow as we move forward. Can you provide any updates on the trends in international government?

We have indicated that we expect the international government business to return to growth in 2023, projecting low to mid-single-digit growth. Last year, we faced challenges due to the conclusion of a significant implementation project from 2020 to early 2022, which we completed at the end of the first quarter. Moving ahead, we believe that this sector should return to growth in the low to mid-single-digit range.

Okay. And then obviously, you spoke to the IT modernization opportunity and a lot of momentum there. And I believe you've mentioned before that you have, I think, the capabilities in place to address that opportunity, but just wondering if there, as this opportunity continues to grow and evolve, if there are any other pieces that you need to add to the mix in terms of your service capabilities, specifically when thinking about M&A.

Yes, I believe we have a solid foundation to address the IT modernization market in the federal sector, as we have discussed in previous quarters. Over the last couple of years, we made three significant acquisitions that provided us with a comprehensive range of low-code capabilities. Additionally, the acquisition of SemanticBits has equipped us with open-source capabilities to serve that market. While we have what we need at the core, the market is continually evolving, with new players and platforms emerging. Consequently, we are always on the lookout for potential acquisitions. I anticipate that if we pursue more acquisitions in the IT modernization space, they will likely be small to medium-sized deals that either introduce new platforms where we need additional skills or enhance our capabilities in areas like artificial intelligence, data analytics, and machine learning. Therefore, I see these efforts as more of a tuck-in strategy rather than seeking large-scale acquisitions to gain critical mass. I believe we already have the critical mass and essential capabilities necessary to effectively engage in that market.

Okay. And just lastly, I don't know if this is outside of your control obviously, but just any thoughts on the negotiations going on around the debt ceiling and if that's something investors should even have in mind, I mean, these things typically get resolved, but just wondering if you could offer up any thoughts on that?

Yes, Kevin, I don't have any specific insights on how the debt ceiling will be resolved. It's not the first time we've faced this issue, and we're monitoring it closely. Historically, there can be some instability over the next month as the situation is addressed, but I expect it will ultimately be resolved. Generally, the risks highlighted in the headlines seem more severe than the actual outcomes once a deal is reached. We're keeping a close eye on it, and I believe it will be worked out. As for the impact on the budget, I want to emphasize that our focus areas in federal markets, such as public health, health issues, and IT modernization, have consistently been high priorities for both Republican and Democratic administrations. Therefore, I expect these key growth markets to remain priorities and not be the first areas for budget cuts. We're monitoring the situation carefully. The positive aspect is that over the last two years, we have seen significant momentum, with strong civilian budgets and a solid backlog, so we feel optimistic despite the ongoing developments.

I would now like to turn it back to John for closing remarks.

Thank you all for participating in today's call. We look forward to connecting at upcoming conferences and events. Thanks for participating today. Take care.

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