ICF Worldwide, Inc. (ICFI) Q2 2024 Earnings Name Transcript

Begin Time: 16:30 January 1, 0000 5:25 PM ET

ICF Worldwide, Inc. (NASDAQ:ICFI)
Q2 2024 Earnings Convention Name
August 01, 2024, 16:30 PM ET

Firm Individuals

John Wasson – Chair and CEO
Barry Broadus – CFO
James Morgan – COO
David Gold – Advisory Companions

Convention Name Individuals

Joseph Vafi – Canaccord Genuity
Tim Mulrooney – William and Blair
Kevin Steinke – Barrington Analysis Associates
Marc Riddick – Sidoti
Tobey Sommer – Truist Securities

Operator

Welcome to the Second Quarter 2024 ICF Earnings Convention Name. My identify is Steven, and I can be your operator for immediately’s name. Right now, all members are in listen-only mode. Afterwards, you may be invited to take part within the question-and-answer session. [Operator Instructions].

I’ll now flip the decision over to David Gold of Advisory Companions. David, it’s possible you’ll start.

David Gold

Thanks, Steven. Good afternoon everybody and thanks for becoming a member of us to evaluation ICF’s second quarter 2024 efficiency. With us immediately from ICF are John Wasson, Chair and CEO; Barry Broadus, CFO. Becoming a member of them is James Morgan, Chief Working Officer.

Throughout this convention name, we’ll make forward-looking statements to help you in understanding ICF administration’s expectations about our future efficiency. These statements are topic to various dangers that might trigger precise occasions and outcomes to vary materially, and I refer you to our August 1, 2024 press launch and our SEC filings for discussions of these dangers. As well as, our statements throughout this name are based mostly on our views as of immediately. We anticipate that future developments will trigger our views to vary. Please take into account the knowledge offered in that mild. We could, in some unspecified time in the future, elect to replace the forward-looking statements made immediately, however particularly disclaim any obligation to take action.

I will now flip the decision over to ICF’s CEO, John Wasson, to debate second quarter 2024 efficiency. John?

John Wasson

Thanks, David, and thanks all for taking part in immediately’s name to evaluation our second quarter outcomes and talk about our enterprise outlook. As you have seen from our launch, this was one other wonderful quarter for ICF through which we executed properly on current contracts and proceed to put the inspiration for future development.

With respect to key takeaways from the quarter, first, our Vitality, Surroundings, Infrastructure and Catastrophe Restoration shopper market proceed to be a standout performer, reflecting an array of very robust secular development developments in these areas. Second, our profitability metrics elevated significantly once more this quarter, main us to extend our EPS and EBITDA steerage for the total yr. Third, this was an excellent quarter for brand spanking new contract wins, bringing our trailing 12-month book-to-bill ratio to 1.4. And lastly, our new enterprise growth pipeline elevated sequentially by 8.3% to a document 10.5 billion even after document Q2 gross sales, offering us with substantial development alternatives throughout our authorities and industrial shopper units.

Taking a better have a look at second quarter efficiency. Our work within the Vitality, Surroundings, Infrastructure and Catastrophe Restoration shopper market continued to extend considerably with income rising by 14% to account for 45% of our complete second quarter revenues, up from 41% in final yr’s second quarter. All areas of ICF’s industrial vitality work posted substantial income development in each the second quarter and first half of 2024, once more, reflecting constructive secular developments in our markets.

We proceed to see robust demand for our vitality effectivity applications, which stay probably the most price efficient means for utilities to extend their capability. ICF has constructed a superb monitor document on this enviornment, constantly reaching and exceeding confirmed objectives, and we proceed to win new purchasers. On the identical time, the scale and scope of our applications have elevated as our utility purchasers develop their vitality effectivity, electrification and client advertising and marketing applications.

Additionally, we’re more than happy with the efficiency and income synergies related to final yr’s CMY acquisition. Their grid engineering and analytics capabilities are a pure extension of ICF’s work in electrification, utility planning and renewables, enabling us to supply a broader set of providers to utility and developer purchasers. Moreover, there are essential synergies with our local weather and resilience advisory work as we construct in additional detailed local weather analytics into our grid engineering research.

Equally, our vitality advisory work continues to point out robust development, significantly within the space of energy and technical advisory, reflecting rising demand from builders of renewable vitality sources. And development in our surroundings and planning enterprise line is benefiting from rising resilience or for utilities’ undergrounding energy traces for wildfire restoration or for renewable builders in addition to offering ongoing licensing, allowing and compliance providers.

As you realize, we carry out our local weather providers throughout all our shopper classes. This space continued to attain vital development within the second quarter, reflecting the growth of local weather applications at DOE and EPA in addition to an rising variety of utilities, state companies and extra federal entities. We’re additionally seeing an uptick in RFPs for state and native local weather planning to be funded independently of the IIJA and IRA, and we’re benefiting from shopper demand for ICF’s CO2Sight system, our proprietary strategic planning platform that helps utilities and authorities companies obtain their clear vitality and greenhouse fuel emission objectives.

Our catastrophe administration space additionally continues to do properly. The Authorities of Puerto Rico’s Public-Non-public Partnership Authority lately awarded ICF an $84 million recompete contract to supply skilled grant administration providers over the following three years, and we’re ready closing phrase on different alternatives within the territory. ICF is at present executing almost 50 catastrophe restoration applications in 16 states and two territories, and we’re supporting over 30 purchasers’ mitigation efforts in 10 states and one territory. As an entire, we see double digit development forward for our Vitality, Surroundings, Infrastructure and Catastrophe Restoration shopper market over the following a number of years.

Growing bodily impacts, enhancing financial fundamentals, public commitments by firms and legislative and regulatory actions concerning clear vitality are driving coverage and funding assist for decarbonization applications, together with vitality effectivity and versatile load administration electrification. The rising load development from new knowledge facilities and transportation electrification is forcing utilities and regulators to shortly assess and deploy additions to the utility useful resource combine, together with provide, demand administration and resilience choices.

Renewable growth is continuing at a fast tempo, and we proceed to see electrical utility purchasers improve spending to switch growing older infrastructure to underground energy traces to enhance resilience and to develop the facility grid, creating demand for ICF’s grid engineering, environmental and catastrophe administration groups.

In our judgment, there is no such thing as a firm higher positioned to learn from these developments than ICF. We now have long-standing relationships with utility, developer and authorities purchasers, multidisciplinary experience throughout vitality, local weather, transportation and well being, plus industry-leading analytical instruments that assist our advisory providers in addition to know-how platform options that underpin our implementation work.

And we proceed to see IIJA and IRA grant funding being launched to candidates for quite a lot of authorized infrastructure wants. Examples embody system grants to states, territories and tribes for vitality infrastructure and grid reliability upgrades and award of aggressive grants for clear vitality manufacturing infrastructure. ICF’s IIJA and IRA-related wins so far have reached nearly 140 million and our lively pipeline of IIJA, IRA alternatives is now at 275 million. These metrics signify work primarily for presidency purchasers because it’s troublesome to tie industrial initiatives to particular laws.

Shifting to our Well being and Social Packages shopper market. As anticipated, this market had decrease year-on-year gross income comparisons, primarily reflecting three components: the impression of final yr’s divestitures, anticipated falloff in small enterprise contracts that had been held by the acquisitions we made over the past couple of years in IT modernization and decrease pass-through revenues primarily in public well being.

The discount in pass-through revenues alone on this shopper market was roughly $7.5 million within the second quarter. We should always see improved gross income comparisons from federal authorities purchasers within the second half of the yr, however the improve won’t be of the magnitude we had initially anticipated. We’re assured that the robust development in our Vitality, Surroundings, Infrastructure and Catastrophe Administration shopper market will proceed to greater than offset the impression of lower-than-expected income development in Well being and Social Packages.

We proceed to execute successfully throughout our federal authorities shopper base and stay properly positioned and have a wholesome pipeline of alternatives in our 2 key areas: public well being and IT modernization. In public well being, we expanded our assist for CDC’s BioSense program within the second quarter, and we’ll start creating further performance to incorporate hospital admission knowledge and hospital discharge and switch knowledge to the platform.

As it’s possible you’ll recall, BioSense was entrance and heart throughout the pandemic because it tracks knowledge for greater than 75% of hospital emergency room visits nationwide, offering CDC and public well being officers with insights into components impacting the well being of People at each the nationwide and native stage and we gained our $237 million re-compete contract with the US Company for Worldwide Improvement Bureau for World Well being to proceed to ship the Demographic and Well being Surveys Program.

ICF has long-standing relationships at six key companies inside the Division of Well being and Human Providers and we have now deep material experience in areas which have bipartisan assist, together with most cancers analysis, psychological well being, diabetes prevention, overdose prevention and schooling on the impression of prescription opioids.

IT modernization additionally stays a bipartisan precedence, and ICF is now a acknowledged chief in probably the most extensively used low-code, no code and open source platforms within the federal authorities. The US federal IT providers market is rising at a CAGR of 8.5% and is predicted to succeed in $95 billion by 2027. And ICS’ focused areas, consulting and software providers are rising at CAGRs of 14% and 9%, respectively.

We had two essential contract wins within the second quarter on the Facilities for Medicare and Medicaid Providers and are seeing elevated traction on alternatives the place we’ll have the ability to mix our know-how and area experience, significantly when the scope features a knowledge or AI focus.

We lately accomplished work with a federal company shopper to leverage Gen AI options for regulatory growth assist and public remark evaluation. This was a really thrilling challenge for our groups as inside three months from inception to supply, we proved the viability of utilizing Gen AI to supply sooner insights into quite a few regulatory feedback.

Additionally FEMA awarded us a brand new $17 million contract to construct a cloud-based knowledge alternate platform to enhance the effectivity and cost-effectiveness of their catastrophe restoration and response efforts. We are going to leverage our main catastrophe administration experience, together with cloud computing, generative AI and different types of AI and superior analytic capabilities in a superb instance of how ICF’s multi-disciplinary method is profitable new enterprise.

On the subject of recent enterprise, as I discussed earlier, this was a document second quarter for us by way of contract awards, which reached $810 million representing a book-to-bill ratio of 1.8 for the quarter. New enterprise wins accounted for about 55% of our first half awards, demonstrating how properly ICS’s capabilities are aligned with shopper spending priorities.

Moreover, an elevated share of the worth of our year-to-date awards represented contracts that had — that included an AI part, a superb indication of our acknowledged experience on this high-demand space. In abstract, it is a very robust quarter for ICF by way of execution, profitability and metrics that set us up for future development.

I will now flip over the decision to our CFO, Barry Broadus, for our monetary evaluation. Barry?

Barry Broadus

Thanks, John, and good afternoon, everybody. I am happy to offer you further particulars on our 2024 second quarter monetary efficiency. Whole revenues elevated 2.4% to $512 million or 6.2% in comparison with the second quarter of 2023 after adjusting for the divestiture of our industrial advertising and marketing enterprise final yr. Our second quarter income development mirrored lots of the identical enterprise drivers as this yr’s first quarter and was led by income development of 24.8% from our industrial vitality purchasers and by a mixed 5.9% development in revenues from our state and native and worldwide authorities purchasers.

Gross revenues from our federal authorities purchasers had been flat within the second quarter. This was primarily as a result of a discount in pass-through revenues of roughly $9 million, which unfavorably impacted our year-on-year income development by roughly 450 foundation factors. As we glance in the direction of the way forward for our federal authorities enterprise, the will increase in our federal contract awards, together with an increasing new enterprise pipeline bodes properly for future sustained development in our federal enterprise.

ICF had $625 million in contract wins on this shopper class year-to-date, far outpacing our 2023 and 2022 first half awards, which averaged about $350 million. As well as, our federal new enterprise pipeline has grown to over $7.5 billion, which is a 13% improve for the reason that begin of 2024. Subcontractor and different direct prices declined within the second quarter to $132.8 million, representing 25.9% of complete revenues, down from 27.5% within the prior yr. Second quarter gross margin was 35.7% of complete revenues, up 80 foundation factors year-over-year. This enchancment was primarily pushed as a result of a good income and direct price combine as we noticed robust income development from our higher-margin industrial advertising and marketing industrial vitality purchasers and fewer subcontractor revenues.

Oblique and promoting bills elevated 0.4% year-over-year to $127.1 million, significantly lower than our year-over-year income development. As a share of complete income, oblique and promoting bills had been 24.8%, 50 foundation factors decrease than the 25.3% reported within the prior yr. We stay centered on driving efficiencies all through the group and proceed to appreciate advantages from increased utilization, managing our oblique prices and our elevated scale.

The favorable income combine I discussed earlier, mixed with these components drove EBITDA development of 17.2% year-over-year to $55.6 million. Adjusted EBITDA grew 9.9% to $56 million, considerably outpacing our income development. Moreover, our adjusted EBITDA margins stands at 10.9% of complete income, a rise of 80 foundation factors as in comparison with the second quarter of final yr. Curiosity expense of $7.7 million decreased $2.4 million from the identical interval final yr as a result of a decrease common debt steadiness.

Our tax price was 26.3% in comparison with 4.4% within the prior yr interval. The decrease tax price within the prior yr second quarter mirrored tax optimization methods we had been capable of make use of at the moment. Our tax price within the second quarter of 2024 was in keeping with our expectations, and we proceed to anticipate a full yr tax price of 23.5%.

Web earnings was 25.6 million and diluted EPS of $1.36 per diluted share elevated 26.1% and 27.1% respectively versus the comparable interval final yr. Final yr’s second quarter internet earnings included $3.5 million or $0.13 per share of tax-effected particular costs.

Our non-GAAP EPS grew 7.6% year-over-year to $1.69 per share. Now turning to our money circulation. Our working money circulation within the first half of this yr was 50.6 million greater than double the 19.9 million reported within the first half of 2023 reflecting increased internet earnings and the execution of our money administration initiatives. Our days gross sales excellent had been 72 days in comparison with 73 days final yr.

Yr-to-date capital expenditures had been $10.4 million down from $13.1 million final yr as a result of timing and the divestiture of our industrial advertising and marketing enterprise. On the finish of June, our debt was $433.9 million in comparison with $601.8 million on the finish of June 2023 which displays 168 million of debt discount. Roughly 63% of our debt is at present set at a hard and fast price. Our adjusted internet leverage ratio was 2.01x at quarter finish in comparison with 3.11x on the finish of final yr’s second quarter, demonstrating the corporate’s capacity to make the most of our favorable money circulation from operations to shortly ship.

As for our capital allocation priorities, our robust monetary place permits us to fund natural development initiatives, take into account strategic acquisitions, paying down debt, repurchasing shares to keep away from dilution from our worker incentive plan and paying quarterly dividends. Right this moment, we introduced a quarterly money dividend of $0.14 per share payable on October 11, 2024, to shareholders of document on September 6, 2024. Now that can assist you together with your monetary fashions please be aware the next:

We’re decreasing our steerage for depreciation and amortization expense, curiosity expense and CapEx. Our depreciation and amortization steerage has been decreased and is now anticipated to vary from 22 million to 24 million. Steering for our curiosity expense has been lowered and we now anticipate to vary from 30 million to 32 million. Our capital expenditures are anticipated between 22 million and 25 million. We’re sustaining our steerage for all different metrics.

As a reminder, amortization of intangible steerage will stay at roughly 32 million to 33 million. Our full yr tax price expectations stay at roughly 23.5%. We proceed to anticipate a totally diluted weighted common share depend of roughly 19 million shares and we proceed to anticipate the total yr working money circulation of 155 million. And with that, I will flip the decision again over to John for his closing remarks.

John Wasson

Thanks, Barry. Our first half outcomes have put us on monitor to attain our full yr income steerage for 2024 and have enabled us to considerably improve our EPS and EBITDA steerage. We’re happy to extend our steerage for GAAP EPS to $5.60 to $5.90 and for non-GAAP EPS to $6.95 to $7.25, up $0.35 from prior steerage and representing year-on-year development of 32.2% and 9.2%, respectively, on the midpoint. Adjusted EBITDA is now anticipated to vary between 225 million and 235 million up from our prior steerage of 220 million to 230 million.

Additional, we’re additionally more than happy to notice that reaching the midpoint of our elevated EBITDA steerage vary will lead to ICF attaining the 3-year EBITDA goal we supplied in our 2022 Investor Day, adjusted for the 2023 divestitures. And we anticipate to perform this with considerably fewer acquisitions than initially contemplated. A rising multiyear backlog and our document enterprise growth pipeline of $10.5 billion on the finish of the second quarter assist our expectations for continued robust development in 2024 and provides us confidence in ICF’s capacity to proceed to develop at a excessive single-digit price over the following a number of years.

We’re experiencing robust demand from industrial purchasers for our vitality and setting experience and implementation abilities. We now have wonderful credentials to help state and native authorities purchasers to fulfill their planning, resilience and mitigation targets and have expanded our capabilities in areas within the federal authorities which have bipartisan assist significantly IT modernization which stays an space of precedence spending. And we have now the key sauce the fervour and dedication of our folks which helps our confidence in ICF’s future success. With that, operator, I want to open the decision for questions.

Query-and-Reply Session

Operator

Thanks. Right now we’ll conduct the question-and-answer session. [Operator Instructions]. Our first query comes from the road of Joseph Vafi of Canaccord Genuity. Your line is now open.

.

Joseph Vafi

Hello, guys. Good afternoon and good to see the EPS revision increased. So congrats on that. I simply thought we would simply perhaps simply drill down first and perhaps the federal enterprise. I do know in your commentary John you had been speaking about a few of the well being sector being a bit weaker and for proper now. Simply questioning the way you’re anticipating to see perhaps a few of these — a few of that well being enterprise over the following yr or so by way of what you are seeing by way of your bids submitted and stuff that is within the pipeline. After which when you may evaluate and distinction that to perhaps a few of your different areas. I’d think about IT modernization is doing fairly properly. And so it would be helpful to get a taste of perhaps how they’re doing relative to a few of your different elements of the federal enterprise. After which I’ve a follow-up?

John Wasson

Positive. No. Nicely, thanks for the query, Joe. I will begin on the highest stage I believe when you have a look at the forward-focus metrics our gross sales are trailing 12-month book-to-bill ratio, the pipeline, these had been clearly very robust within the quarter and have been very robust for this yr. Definitely, the federal part of that pipeline and people gross sales has been very robust. I believe Barry talked about a few of the specifics on the federal market. And so after we have a look at these outcomes, they provide us confidence that we’ll see robust development in federal over the following yr and past. We proceed to see vital proposal exercise and vital alternatives within the federal enviornment. We proceed to see awards occurring. And so I would not say we have seen any change there. And clearly, as you realize the 2 key development drivers there are public well being and IT modernization and the proposal, the wins and the book-to-bill are robust and we had been clearly robust within the quarter. With that stated, I believe within the quarter and I believe we talked about this final quarter, I believe we’re — our federal enterprise, I imply I will simply evaluation the numbers once more.

Our federal enterprise was primarily flat for the quarter. And I believe that — and as we stated I believe a giant a part of that was pass-throughs within the federal enviornment had been down materially year-on-year, 9.1 million. However when you have a look at our income, when you have a look at our complete income much less the pass-throughs, the expansion was about 5%. And so complete income, much less pass-throughs, that is subcontractors and direct prices, is the work finished by ICF. And so forth that metric, we’re at mid-single-digit development for Q2. And I believe for the primary quarter — and for the primary half of the yr, there’s just a few issues which are particularly impacting our federal enterprise right here, definitely within the first half of the yr. I believe it should proceed into the second half of the yr. However I do not assume they’re long-term points. These are contract-specific points. We have been — the ramp-up of labor underneath a recompete contract we gained this quarter, one of many largest contracts, our massive USAID Demographic well being survey, we’re rolling off our — the prior contract. We have gained the recompete for the brand new contract. There’s at all times a few quarters after we make a transition with that contract the place pass-throughs and the work slows down a bit. So we’re seeing that.

We now have one other contract with USAID that ended on the finish of the yr the place we have been awaiting award on that. We thought we would have it within the first half of the yr. It appears like we’re not going to have a — could have a call on it till Q3. In order that’s impacting us. After which we even have talked about we’re rolling off some small enterprise contracts from our acquisitions on the IT modernization entrance in 2022, once more, which we anticipated it and had been a part of our steerage and rationalization after we did these offers. And so these three points are actually what’s impacting our federal enterprise right here for just a few quarters. I believe as we have a look at the long term and look down the highway, given the chance, given the wins, given the book-to-bill, given the gross sales, we really feel — I am fairly assured. And to your level, I believe we’re — definitely the IT modernization, we proceed to see vital alternative. As you realize, that is been a bipartisan resolution throughout — for a while. I believe that is still a bipartisan resolution. It is one of many few issues that the Trump administration put an actual emphasis on, and the Biden administration has continued it. And so I believe, definitely, that may proceed to be a major source of development for us as we glance ahead.

Joseph Vafi

Nice. Thanks for all that further coloration, John. That is useful. After which I suppose, simply on that IT modernization entrance, once more, I simply — I did see you win a pretty big contract lately with DoD in IT modernization. I used to be questioning when you may sort of drill down into that just a little bit. And if there’s any sort of urge for food to proceed to attempt to develop the DoD enterprise and IT modernization given the huge measurement of the budgets that there are over there. Thanks loads guys.

John Wasson

Positive. No. So I believe we did only recently announce that we have gained a big DoD knowledge functions and knowledge providers modernization BPA, a $1.4 billion BPA in the event that they need to sort of award winners to assist DoD on IT modernization, particularly with an HR and Gen AI analytics focus. And so definitely, we have now vital HR, human capital, capabilities that we’ll look to marry with our IT modernization capabilities. And so we’re enthusiastic about this. I believe there’s alternative for us down the highway. We anticipate that the duty orders will begin to circulation later this yr. And I believe there was — I believe was it 10 winners. 10 firms gained a place on this BPA. And so I believe there will be alternative for us there. And I believe it is definitely proper and we’ll look to develop the enterprise as we glance ahead.

Joseph Vafi

Nice. All proper. Thanks very a lot, john

Operator

Our subsequent query comes from the road of Tim Mulrooney of William and Blair. Please go forward.

Tim Mulrooney

Sure Good afternoon. Good quarter, guys.

John Wasson

Thanks.

Tim Mulrooney

I believe this query might be for Barry. Are you able to simply give just a little extra element on the first components behind the EPS steerage increase on a consolidated foundation? Is that this primarily as a result of a better profitability outlook? Or is it additionally associated to increased prime line expectations relative to your prior expectations?

Barry Broadus

Hey, Tim, thanks for the query. Sure, when you have a look at the steerage improve on the EPS and adjusted EBITDA, that actually has to do with the combo that we have now. We talked about that throughout the remarks, particularly in our industrial vitality market and the combo, not simply from a standpoint of margins, that are vital in that market sector. It is the price combine as properly. So we’re extra reliant on our direct labor versus subcontractor and in order that’s boosting.

So we are able to hold our revenues. The steerage on that hasn’t modified. However due to the upper margin profile of that enterprise and the throughput of that, we’re capable of improve the steerage for EPS and — each on a GAAP and non-GAAP foundation and our adjusted EBITDA.

Tim Mulrooney

Okay. That is useful. So no change there. Nonetheless a few 10% improve in income on the highest line, extra of a combination. Okay. That is useful. The opposite query I had, perhaps for — properly, for anybody actually. I do know it is early, however I am getting this query loads. I believe most buyers are curious the way you all take into consideration the Supreme Courtroom’s current overturning of Chevron and the way which may or may not have an effect on your corporation.

John Wasson

Sure. Nicely, thanks for the query, Tim. I believe — properly, I’d say the punchline for us is that total, given the Chevron resolution and associated Supreme Courtroom selections on the regulatory entrance, we do not actually see any vital or materials impression to our enterprise from that call. And actually, if I believe, if something, it has the potential to create new alternative, a brand new enterprise potential for us simply because given that call, the regulatory companies, after they do their rulemaking, so they are going to should do rather more detailed and fact-intensive work. And as they do this, I believe they will want assist with that. And so I believe our regulatory assist apply is definitely — I believe there was a view that there might be extra work for us on that entrance.

I’d say, simply to place the context right here, solely about 1% to 2% of our complete revenues are what I’d take into account regulatory-related work, both doing regulatory assist or implementing serving to — implementing applications or doing implementation to adjust to rules. It is actually a small share of our work. We actually — and we solely do this work actually at EPA and FDA and I believe on — and DOT. And so it is about 1% to 2% of our income, however it’s — of that 1% to 2%, lower than half of it’s what I’d take into account regulatory or regulatory evaluation or regulatory implementation. So it isn’t materials. And in the end, I believe it is — it should — it has as a lot chance to create alternative for us as having an opposed impression, however any impression won’t be materials to our enterprise and to our outcomes.

Tim Mulrooney

Okay. I admire you framing that for me, John. Once more, congrats on a pleasant quarter, and we’ll speak to you all quickly.

John Wasson

Okay, take care. Thanks, Tim.

Operator

Thanks. Our subsequent query comes from the road of Kevin Steinke of Barrington Analysis Associates. Your line is now open.

Kevin Steinke

Sure. Good afternoon. Thanks. So, in circling again there on the rise to the profitability steerage metrics, you talked there about favorable utilization metrics. And in response to considered one of Tim’s questions, you talked extra about extra use of your individual labor versus subcontractors on a few of the industrial vitality effectivity aspect. Is that simply the only driver of the higher utilization metrics? Or is it sort of extra throughout the board on your complete firm, simply higher utilization of consultants, I suppose?

John Wasson

Barry? Go forward.

Barry Broadus

Sure, thanks for the query, Kevin. Sure. So with that exact providers that we offer within the industrial vitality enterprise, that’s extra associated to our employees in addition to the contract. Not simply the combo of price, but additionally it is extra fixed-price work than a few of our different purchasers, particularly like within the authorities purchasers. So that allows us to handle the price and enhance margins. So not solely is the kind of work that we’re doing extra conducive to having extra direct labor, much less contracts — subcontractors, but additionally the kind of contracts that we deploy additionally assist with with the ability to handle the upper margins. As well as, on the revenue will increase, one factor I want to point out is that, as I famous in my remarks, we’re decreasing our curiosity expense steerage in addition to our depreciation and amortization expense steerage. And in order that’s additionally serving to increase our EPS as we undergo the remainder of the yr.

John Wasson

Okay. I believe Barry did a pleasant job of summarizing. I imply I do — I imply traditionally and for a very long time, I imply, our vitality enterprise, our industrial vitality enterprise is simply — in the end, it is extra worthwhile than our authorities enterprise. So in reality, that is rising extra quickly. After which as Barry stated, who is aware of, there’s not as many pass-throughs to different companies that these are each driving the margin up, Kevin.

Kevin Steinke

Okay. Nice. And clearly, industrial vitality has been a properly rising enterprise for the previous couple of years. However there at all times appears to be an acceleration happening right here the final couple of quarters by way of the expansion. I do not know if there are any particular catalysts or developments within the utility market that’s driving sooner development that you just need to spotlight and what appears to be sort of an acceleration in development happening there.

John Wasson

Sure. I suppose what I would say, Kevin, is I imply I’d say that vitality markets in the US proper now are present process a once-in-a-century transformation proper now. I imply simply we’re seeing — and it is multipronged. I imply we’re seeing a major discount in the price of carbon-free vitality as a result of know-how innovation. And in that enviornment, we’re seeing state-level regulatory actions round renewable portfolio requirements and local weather planning and mandating vitality effectivity applications that is serving to to drive this. We’re seeing the electrification of transportation with EVs and buildings driving change. We’re seeing — I imply, I am positive you have been studying, I imply the fast rise within the load from knowledge facilities supporting AI, it is simply unprecedented. Then you might have the general public commitments on — from each residents and firms round carbon neutrality, together with the hyperscalers, the Googles and the Metas and the Amazons. And so there’s simply — that is going to create a number of — that is creating a number of demand given what is going on on with knowledge facilities. And so I believe it is a distinctive time within the vitality {industry}. I believe the challenges round how we will meet electrical demand and we will deal with and make progress on clear vitality and decreasing carbon footprints, it is simply — there’s simply large alternative there. And I believe as I stated in my remarks, we have been in these companies for 30 or 40 years, and we are able to have a look at it from each angle. We are able to have a look at it from the vitality, from the environmental, from the well being, from the know-how, from the regulatory. So I imply, it is only a long-winded method, I believe it is a distinctive time, and it’s accelerating. It’s accelerating. And I believe that is what’s giving us confidence that we will see robust double-digit development right here for a while when there’s simply large alternative.

Kevin Steinke

No, that is nice. That is actually useful coloration. Lastly, I simply wished to ask about one of many feedback you made about an rising share of the worth of your year-to-date contract awards, together with an AI part and your experience there. Perhaps when you can sort of elaborate on the AI part of the awards you are seeing and how one can apply your experience to these contracts?

JohnWasson

Sure. Positive. So I believe — I imply, I’d say, definitely, in our federal enterprise, we’re seeing elevated curiosity and new enterprise alternatives on the AI entrance and from our federal purchasers. And I believe we’re properly positioned to learn that. And actually, I believe we’re discovering that our programmatic purchasers, who’re finishing up their missions are more and more keen on how they will leverage AI to attain their objectives and obtain their missions. And that — and as a part of that, I believe what we — on condition that we have now each area consultants working with these purchasers and people programmatic people as they perform the work plus we have now a deep know-how bench who can carry the know-how functionality round AI, we’re discovering that with many of those alternatives, we have to have each side of the home. We have to have the area folks and the know-how folks working aspect by aspect with our purchasers on AI to actually maximize the profit and determine probably the most revolutionary answer. And so a number of these alternatives are coming from the federal companies and the programmatic folks. So the vitality coverage folks or the general public well being consultants, the epidemiologists, the toxicologists or the general public well being consultants, who’re speaking to our area folks need to determine tips on how to leverage AI.

After which we are able to usher in our know-how folks to bear on it. And I believe that is one thing we are able to do significantly properly. And so we have now a tiger group of AI consultants in company that may work with our area folks to reap the benefits of these alternatives shortly. And I believe there are a number of buckets that we’re the place we expect they’ve the potential. The use circumstances may probably be materials to our enterprise, I imply, grants administration and coaching and technical help, analysis and analysis on the industrial aspect maybe rebate processing. Anyway, we’re a set of use circumstances that we expect we’re significantly related however we’re seeing a number of curiosity. Clearly, we even have 1,800 people who find themselves doing IT modernization work and the important thing platforms we’re working with, ServiceNow, Salesforce, Appian are all constructing AI capabilities into their platforms. And so our technologists are supporting purchasers on that. And clearly, we’re utilizing it to enhance the productiveness of our technologists. We’re additionally discovering that we — AI may also help us create content material for our advertising and marketing actions for purchasers. And so sure, various fairly a distinct and a big selection of issues we’re , as I stated, I believe sort of each making an attempt to leverage our area experience and our know-how experience. And I believe it is also — we’re actually making an attempt to determine what are the use circumstances that might be most impactful for our purchasers and impactful for our enterprise.

Kevin Steinke

Okay, that is nice. I admire all of the perception. I’ll flip it again over. Thanks.

Operator

Thanks. Our subsequent query comes from the road of Marc Riddick of Sidoti. Your line is now open.

Marc Riddick

Good afternoon. So I wished to the touch just a little bit on the — one of many feedback within the ready remarks and the press launch talked concerning the catastrophe restoration shopper market and the expansion that you just’re anticipating within the second half of the yr. So I ponder when you may speak just a little bit about perhaps — we have definitely seen a few of the bulletins. However perhaps you possibly can speak just a little bit about what you have seen open up on the catastrophe restoration entrance and form of what’s driving that.

John Wasson

Sure. I believe that on the catastrophe restoration entrance, I imply, clearly, as you realize, we have talked about over the past a number of years, I imply, we’ll proceed to be fairly lively in Puerto Rico. We now have — we simply introduced a recompete contract there to assist FEMA-related catastrophe restoration. We are also nonetheless fairly engaged and fairly busy on the housing aspect in Puerto Rico proceed to win follow-on work. And we have now a number of new contract alternatives within the pipeline we’re ready phrase on. And so I believe we’re nonetheless — they’re a major shopper. There’s materials alternative in entrance of us there. We’re nonetheless very busy in Texas supporting Texas catastrophe restoration significantly round mitigation-related work. And there continues to be a major long-term alternative for us in Texas. Together with probably in each Puerto Rico and Texas the potential for us to introduce and now play a bigger function on the know-how aspect round catastrophe restoration, which we’re enthusiastic about. I do know we have mentioned up to now, we’re doing our first main wildfire catastrophe firm effort for the State of Oregon. That is going properly and that is an incredible qualification for us.

In my remarks, I famous the variety of catastrophe restoration purchasers we have now and the variety of mitigation shopper, I imply it is a powerful quantity, a powerful listing. However I’d say — after which we proceed to be busy in Louisiana. I believe that as you realize, additionally, Marc, it is — the frequency and severity of those occasions is barely is definitely rising. I am positive you noticed the story. NOAA put out their 2024 Atlantic hurricane prediction. They had been saying 17 to 25 tropical storms, together with 4 to 7 main hurricanes, which is a major improve. After which we’re seeing extra wildfires. And we’re additionally seeing the potential that warmth occasions are going to turn into — be thought of eligible for catastrophe restoration funding. And properly, I do not know, I believe when you reside anyplace in the US, you are experiencing some warmth occasions this summer season. So I believe that enterprise, we’re rising, we’re doing properly. And I believe there’s going to be vital alternative there as we glance down the highway. And we actually are an {industry} chief in that enviornment.

Marc Riddick

Nice. After which the one different factor I wished to form of contact on is — you definitely lined loads already. I used to be questioning when you may contact — give us perhaps an replace on what your ideas are round potential acquisitions and perhaps what the acquisition pipeline appears like at present so far as what you assume could also be accessible on the market high quality and amount clever. And perhaps ideas on valuation after which perhaps the probabilities of a few of these issues perhaps shaking you lose ought to we get some rate of interest cuts. Thanks.

John Wasson

Sure. No, good query. Nicely, I’d say that as apparently begin — to start with, I believe as Barry famous our steadiness sheet is in a robust place. I imply our leverage ratio is down to 2. We’re producing vital money. We’ll definitely proceed to try this. We now have excessive confidence for that.

I believe, and as you realize, acquisitions have been a key a part of our technique over the past a number of — 20 years. I believe there’s been three or 4 occasions the place we have positioned a strategic guess whether or not in federal markets or IT modernization or digital engagement, levered up, acquired key strategic sources capabilities after which paid the debt down within the subsequent two or three years and levered up once more. I believe that, stays a key part of our technique, and I believe we have mentioned this earlier than. I believe definitely within the vitality space, given all the chance and the breadth of that chance by way of the big selection of abilities and capabilities required to assist it, we’re definitely wanting rigorously at alternatives in that market. And that will be of curiosity.

I believe we have continued to have a look at alternatives within the federal market extra round knowledge and analytics and maybe smaller tuck-in know-how acquisitions, however I believe we will do it. After which catastrophe restoration, I believe if one thing got here alongside that gave us better geographic attain or introduced instruments and techniques that we thought had been complementary to our enterprise, we would have a look at these. And so I’d say the deal circulation is enhancing. We’re seeing extra potential alternatives. I believe the valuations are enhancing a bit. And I believe there’s loads to deal with. And to your be aware, I believe rates of interest, maybe, these will come down. And so I imply we’re out there. We’re wanting. I believe we’re — as you realize, we’re fairly disciplined. We now have a really clear set of standards, and we’ll keep on with that. However I imply it stays a part of our technique, and we’re definitely out out there, having a look at potential alternatives. I do not assume — if we had been to do something earlier than the tip of the yr, I believe it would be extra on the small tuck-in selection although.

Operator

Our subsequent query comes from the road of Tobey Sommer with Truist Securities. Your line is now open.

Tobey Sommer

I used to be questioning when you may speak about your billable worker headcount development and perhaps remark about what attrition has been like year-to-date. In a number of the businesses which have reported earlier than you might have talked about that rebounding to pre-pandemic or perhaps even higher than that ranges. Do you see continued alternative for even higher retention?

BarryBroadus

Sure. Thanks for the query. Our retention price has definitely improved, definitely year-over-year and quarter-over-quarter. We’re in just a little bit lower than the 12% from a turnover perspective. So we’re joyful about that. We’re seeing just a little bit ease from a expertise perspective. And our headcount, from a year-over-year perspective, has been rising and we really feel good that we have the — capable of get the expertise to execute on the applications that we have now and retain the expertise.

James Morgan

Sure. I imply to offer you just a little bit extra coloration on that, Tobey, that is James Morgan. The — from a billable headcount perspective, year-over-year, we’re up like mid-single-digit ranges. That is the place it mainly is and positively, as Barry talked about, retention is considerably down, just a little bit underneath 12% as from an attrition perspective, which is lowest it has been in years.

Tobey Sommer

I admire that. From a contract award and pipeline perspective, are there any discernible developments that you could possibly name out by way of the margin of the bids that you just’re submitting or plan to in profitable and or any form of combine shift that could be implied by the composition of these bids in the direction of — and I am considering primarily of like every sort of a change in agency mounted value, etcetera.

John Wasson

I believe from a pricing perspective, I do not throughout the important thing markets, I do not assume we have — I believe the pricing has been fairly steady. And I do not assume — we’re not underneath vital stress to decrease our margins. Or I believe the margins have been fairly steady. I do assume that we proceed to see, I’d say, mounted value contracts. I’d you say that, our share.

Barry Broadus

Sure, when you have a look at our mounted value contract share of all of our contracts, it is going up considerably. And that is changing our price reimbursable contracts, which is definitely serving to with the margins. In order that’s good. I’d say that so far as the combo of our direct labor versus subcontract associated, that actually hasn’t modified considerably and we’ve not seen huge shifts in any of that.

John Wasson

I would say the opposite factor is the scale of our offers has been going up, I imply, our proposals and given the alternatives and focus in IT modernization. And actually, within the vitality space, significantly the vitality implementation aspect with vitality effectivity and a few of the applications there, which are typically mounted value and really helpful to us. So the scale of the offers that we’re bidding is definitely on the uptick.

Tobey Sommer

Thanks very a lot.

Operator

All proper. Thanks. I’m exhibiting no additional questions presently. I’d now like to show it again to John Wasson for closing remarks.

John Wasson

Okay. Nicely, thanks for taking part in immediately’s name. We sit up for connecting at upcoming conferences and occasions. Have a superb remainder of the summer season.

Operator

All proper. Thanks on your participation in immediately’s convention. This does conclude this system. You might now disconnect.