Good morning, everyone. I'm George Gianarikas, one of Canaccord Genuity's sustainability analysts. Thank you for joining day two of our 45th Annual Growth Conference here in Boston. We're very excited to have ICF International with us here today. From the company, we have John Wasson, Chair and CEO, Anne Choate, Executive Vice President of Energy, Environment, and Infrastructure, and Lynn Morgen from Investor Relations. Thank you so much to you both for joining us.
Thank you. It's always a great conference, and I really appreciate the time to speak with you.
Thanks. Maybe you can just start broadly with a profile of the company and also maybe what you recently reported in Q2 results.
Sure. So ICF , we're a professional services and technology services company, slightly under $2 billion in revenue, about 9,500 employees. We've been publicly traded on the NASDAQ for, I guess, coming up on our 20th anniversary here soon. We serve a roster of commercial, state and local, international, and U.S. federal clients. We do it in kind of two broad categories of client verticals. The first, what I would call pillars, are work we do in energy, environment, infrastructure, and disaster recovery. That's about 48% of the total company. The second main pillar is in public health and social programs. I think that's about 37% of the total company. Public health and social programs includes education, housing, various social programs to support primarily governments around the world. We're known for our deep domain expertise in those verticals.
We have deep subject matter expertise that allows us to do front-end advisory work for clients, so strategy and program design and policy and economic analysis. We can also help them implement those strategies in those programs. We have very deep technology capabilities, IT modernization, digital engagement, AI, complex program management, change management. With that portfolio, it gives us very good visibility. Each year we start with over 70% of our revenues in some form of backlog. We have very nice visibility. About 30% of our work is commercial. With the commercial work, it's higher margins. As that's growing more rapidly, we get earnings leverage, which we're enjoying right now given all the work we do in the energy arena. Historically, we've been a growth company, both organic and inorganic. We have very strong cash flow. This year is a transition year for us.
About 55% of our business, that's in commercial, state and local, international. We're growing. We will grow and have been growing, including in our Q2 results, about 15% in that piece of the business. We're seeing very nice growth. That is offsetting what I would consider to be a transition here with the U.S. federal. We're down with the shift in priorities and focus of this administration. I'm sure we'll get into that. Net net for the year, I think we're expecting to be down about mid-single digits on revenue. We'll be closer to flat on earnings and expect to return to growth next year.
You mentioned on your recent call that your non-federal business, I think you just mentioned again, should grow approximately 15% this year. What are the components of that growth? What's driving it?
I think, as I said, about a third of our business is in commercial energy. We do work primarily for utilities here in North America and power producers and leads that business. That third of the business, we've been growing north of 25% this year, and we grew 25% last year. That's really being driven by the significant increase in power demand associated with data centers, which I think is going to be a long-term trend here and is driving significant growth in that business. It's the data centers. Obviously, crypto is also power intensive. It's also economic development, obviously helps on the growth side. We see that as a long-term growth driver. As I said, we've been growing 25% the last couple of years. The other components of that 57% are state and local. We have about 18% of our work in state and local.
The largest component of that business is disaster recovery. We help state and local clients rebuild or repair infrastructure or homes after natural disasters. I think if you look at the data, the frequency and severity of these storms is only increasing. I think we see continued opportunity there that will remain a growth area. The last component, about 6% international revenues. We've won some very large contracts here in the last several months with our European Union customers, the U.K. government, that they set us up for 20% growth in that part of the business. I think we're quite bullish on the outlook in that portion of the portfolio.
I'd like to take a step back and understand because it's so relevant for so many of the companies that we cover that sell services to the federal government. What exactly did you see happen in the beginning of the year, and how has that situation sort of stabilized or even improved as we've moved through?
Yeah, no, I think that so about 45% of our total business is with U.S. federal. I think with this administration, as they came into office, they were very focused on cost effectiveness and reducing the spend in the federal government. Those were stood up. With that, we saw significant contract cancellations at the end of the first quarter or into the early second quarter. We had contracts at USAID, which ceased to exist. We've seen cancellations in other parts of our civilian business. We have reported those numbers. In our fourth quarter call in late February, we indicated we'd had about $85 million of 2025 revenue impacted by contract cancellations.
The first quarter around the flip?
In our fourth quarter call at the end of February.
Yeah, yeah.
We've seen about $85 million of cancellations by the end of February. We then did our first quarter call in early May. We were up to about $115 million, so we added another $30 million. We just did our call for Q2 in August. We only added $2 million, so $117 million of total impacts. I think that's, I think we think that certainly the energy is going out of the effort and the kind of contract cancellation. I think we've seen what we're going to see. I don't think we're expecting any more material contract cancellations. The issue here going forward is, you know, when does this administration turn its focus to what they want to do from a policy and program perspective and when are they going to start to build back some of the efforts in the client sets that we support?
Renewable energy sustainability are incredibly important to our coverage. I'm curious as to what you're hearing from your clients as maybe the shift moves from federal government support to more state and local government support.
Yeah, Anne, do you want to?
Sure. They're important to our business as well. I think that the fact that the one big beautiful bill has passed actually has provided a little bit more clarity and a little less, I think that the uncertainty that we were experiencing the first half of the year, both with respect to the M&A activity and also with respect to the robustness of investments in whether it was solar or wind or battery storage or whatever, and the extent to which the federal government was sort of turning away from sustainability. I think there's been a question of, will utilities continue to care about sustainability? Will the state governments still continue to be interested? I think we're seeing very much what we saw in the first Trump Administration, where there's a leadership transition that's taking place.
I think that we've seen there's more understanding of what the tax credits will or will not be. There's also, I think, a strong forcing function understanding that we need all forms of power. We're going to need it now or soon. The things that are financially viable are going to continue to move forward with or without those credits. I think that the shift, the portfolio itself is shifting, but I think there's still a lot of interest and a lot of public sentiment that sustainability, however you want to define it, and renewable energy has a very strong role to play there. We're seeing it in states. We're seeing it with the utilities. Some of these utilities have come out and said, last year they would have said sustainability was their number one topic.
Now they're saying resource adequacy or sort of providing to meet the demand is number one, but sustainability is still in the top three. That's interesting because they could very well have turned away, but we're not seeing that, especially so in Maryland, for instance, is one of the states where they've really been out in front. They seem to be staying out in front. That's not, everyone knows California tends to lead, New York tends to lead, but we're seeing it in these other states as well.
Is there any impact to your business from this acceleration in interest, at least, in nuclear?
We were involved in the first restart of a nuclear plant in Michigan. That was a Department of Energy-funded project. Our job was to basically do the projections for that, you know, to look at whether that would be viable. What would the, if they were to invest in that, what would the return be? I think that was successful. We expect to see more of that. That was through the DOE Loan Program Office. The DOE Loan Program Office will continue. They're interested in geothermal. Their interest has shifted from purely renewable, with the exception of this nuclear restart, to a lot more geothermal, nuclear gas restarts, etc .
Yeah, I think in the longer run, I do think we do a lot of generation planning for utilities. As part of that, if they're considering nuclear, we can certainly advise them on that and understand the market and the economics of that. We also do a lot of work on the permitting side, so we could potentially support that. I do think you're still five to ten years away on nuclear small modular reactors, but we certainly have skills and capabilities to inform utilities' thinking on that. If they decide they're going to make an investment or potentially make an investment, we can advise them on that.
You also have a significant business in disaster recovery. Can you talk about what you're seeing in terms of contract activity there?
As John said, we are seeing continued frequency, increased frequency, increased severity of the storms. There is a fair amount of uncertainty in terms of how the federal government is going to move forward, in particular with FEMA and how they'd like to fund disaster recovery. The shift to state responsibility has been, you know, it's actually, we're well set up for that because we've been working with these states and territories for a very long time. The extent to which the federal rules will be overseen by the federal government or whether they'll be overseen and implemented at the state or the territorial level, I think that we're well set up for that. In many cases, we worked with the federal government to design those rules, for instance, for HUD and to some extent FEMA.
Our ability to basically administer those programs in line with expectations to avoid fraud, waste, and abuse, that's why we've been hired in the past. We have not seen states turned away, with the exception of Maryland. That's the only one that's been rejected in terms of a disaster declaration that was requested under the new administration. I'm right about that?
Yeah, no, that's fine.
There is a lot of talk, a lot of discussion about this, but they're continuing to declare disasters, and they're going to have to continue to respond when those disasters take place. I think one of the things that's beneficial for us is that we have been working, we've spent a lot of time in the last couple of years making sure that we diversified our disaster portfolio. By that, I mean working in more states. We're working in 20 states where our disaster business was very concentrated before. We're very focused on expanding that so that we had more coverage and, frankly, so that when you have disasters hit in states where we had not been doing disaster recovery previously, we're already in there and we've been providing support to the agencies who will then be entrusted with responding.
There are examples of that in California, in Oregon, and other places where you're seeing wildfires, which is sort of a new flavor of disaster.
Yeah, I think the nice thing about that business is typically when there's a major natural disaster, Congress will pass a special appropriation with money dedicated to help with the rebuild, address the impacts on either public infrastructure or homes. It ends up being a dedicated stream of money. It can't be reprogrammed somewhere else. Typically, it's been passed on a bipartisan basis. A lot of these disasters tend to happen in red states, just given the location of where they occur. Given the severity and frequency of what we're seeing, I think there will continue to be opportunity there.
I think you guided for your non-government work to be about 55% of your revenue this year. How do you see that mix changing over the next several years? Should we expect that to continue to grow faster and become a bigger part of your overall business?
Yeah, I think that, so absolutely, you should expect that. I think, you know, our view is if we look out over the next five years, we'll continue to have double-digit growth in the commercial, state and local, and international component of the business. You know, we've been growing 15% or north of 15%. I mean, you know, I think we will maintain double-digit growth. If you just do the mind experiment, if you grow 15% for five years, you'll double that portion of the business. We'll go from 55% - 70%, north of 70% of the business, which would be great. That's the point of having our portfolio. Some things are up, some things are down. We've always, since the founding of the company, had both public and private sector work. That percentage has moved up and down with the opportunities.
I think we certainly expect that portion of the business will lead the way. Really, commercial energy is what's really going to lead the way here with kind of north of 25% growth. Maybe you want to say a few words about our energy efficiency business because that's such a huge component. It could be helpful for people to understand how that's funded.
When we talk about our energy business, about 75% of it is designing, running, implementing, and executing these energy efficiency programs. For the most part, ours are focused on residential and commercial. Some other folks are more focused on industrial energy efficiency. Our focus is really in the residential and the commercial. The type of work that we do is, for instance, you may have in 30 or so, 30, 35 states, there are small charges that are put onto customers' bills, which you all get, that will say this amount is to cover these programs. Those programs are a very cost-effective way for the utility to manage load, especially in peaks. The Public Service Commission has endorsed these programs. Our job is to then go in there and run the program to meet the goals of the program. The utility executives are held accountable for meeting those goals.
The better we do at achieving the goals, the more likely that we're going to get follow-on assignments. Our recompute rate is very, very high, I think close to 100%. Our strategy, which we stated at an investor day several years ago, was that we were going to put a lot of emphasis on trying to expand our portfolios within particular utilities because running one program is one thing, but running a whole suite of programs, we are able to gain some scale. We actually can build more trust with the utility. We understand the customer base better. That allows us to get to a place where we can try out new things, try out electrification, try out flexible load management programs, do work with customer behavioral programs. These utilities are sort of redefining their relationships with customers.
As they do that, I think the effectiveness of our marketing, the effectiveness of our outreach is very important, more important than it was 10 years ago. Now the utilities are not the only game in town, and they're starting to realize that. That relationship becomes really important. That's been very good for us. That's one of our stated goals for growing as of several years ago. It's allowed us to grow pretty quickly and to be effective in competition. The other part outside of that 75% of the commercial energy business is really more about energy analytics, grid modernization, a lot of technical engineering due diligence, financial due diligence around energy development projects. Whether that's for developers or whether it's for utilities, understanding capacity constraints, understanding how you would optimize your generation resources within a particular region, working to understand interconnection queues, all of those kinds of analytic assignments.
There's also the permitting, which I don't think that our investors pay very much attention to, but anytime they're putting down any sort of linear infrastructure, whether it's for transportation or for energy, there's a lot of environmental work that needs to be done. We do that work for utilities. There's also the addition of CMY, which we bought a year and a half ago. That added some engineering capabilities that we did not have previously that are more about the hard designing, like a substation or working with a utility to understand how they're going to meet new capacity. An integrated utility will come to us and have us help them think about, for instance, some of these data center corridors and how they're going to meet that demand.
For anyone listening that doesn't realize that interconnection queues and permits are a massive bottleneck to everything in energy, it takes years and years and years to get these things going. Maybe to focus on IT.
We're here to help.
Yeah, the more complicated it is, the better it is.
Our companies need help with that. I can tell you that.
Okay, good.
IT modernization seems to be a stated goal of the current administrations. Maybe you can talk about a little bit what you're seeing there and whether or not that could help blunt any negative impact that you've seen in the beginning of the year.
Yeah, sure. As I said, our federal business is about 45% of our business. Half of that 45% is IT modernization. We're basically helping the federal government modernize ancient systems, 40- 50 years old, and bring them into this century. That has been a bipartisan area of focus and spend over the last three or four administrations, including the first Trump Administration. I will say this time around, I think they have a very clear view of how they want to go about that. They will make significant investments, but they're going to do it their way. Their way is they're going to lead with AI. They want AI to be at the forefront. They want it to be done in an agile way with rapid prototyping on commercial platforms, not complicated federal procurement rules driving the process. They want automation. They want to eliminate waste, fraud, and abuse.
They have a very clear vision of that. The good news for us is our IT modernization business we've built out in the last 10 years, I think it's very aligned with that. We're leading with AI. We do 80% of our work in an agile framework. The significant majority of our work is either fixed priced or performance-based, meaning very specific definition of what you need to deliver, which aligns with this administration. We have expertise around waste, fraud, and abuse. We think there's opportunity there. That business has been down 5%- 10% this year, more because of all the DOGE reviews and this administration resetting the priorities. We haven't had any contracts canceled.
We do certainly expect to return to growth on that piece of the business next year because I do think in some ways we're aligned in the sweet spot of what this administration wants to do in that business.
Can you hire any of the DOGE folks? I hear that some of them are, maybe too.
We're always looking for good, yeah.
I know you have some business with the Department of Health and Human Services. Can you sort of talk about what's happening there in the programmatic work cadence?
Yeah, I think so. The other half of our federal business is more programmatic, leveraging our domain expertise, basically designing and implementing complex programs that the government is required to run or implement by legislation or because of their mission. The Department of Health and Human Services is our largest client, about 22% of our revenues. We're running, we design and implement public health campaigns, programs for CDC and NIH on chronic diseases, combating opioid abuse, vaping.
Childhood obesity.
Childhood obesity, you know, and so that's a portion of it. More broadly across the government, we run programs like the Head Start program, early childhood education. We ran the Energy Star programs for energy efficiency. We've run various housing programs. In that part of the business, with the shift in priorities and emphasis in the Trump administration, we've been down, in the Department of Health and Human Services, we're down north of 25% this year, given the contract cancellations and the shift in focus. As I said, I think we've taken that hit here in the first half of the year, and the pace of cancellations has essentially stopped. I think we've kind of reached the floor. The issue here is, how does it rebound going forward? I think that will, obviously we need to see how the budgets play out.
I do think this administration is going to want to have some programs and emphasis in the health area. I mean, Kennedy is out there talking about childhood diseases, chronic diseases, food additives, pesticides in food. Those are all areas we could support. I think they just need to decide what exactly it is they want to do, and there'll be opportunity for us. As I say, with that, given that we have 57%, 55% of the business growing north of 15%, if technology and modernization returns to growth next year, even if we're down 10% or 15% in that programmatic piece, we'll still be growing next year. I think we certainly have confidence we can return to growth, given the significant opportunity in the larger half of the larger component of the business.
I think the message here is that ICF International is a growth company, and 2025 is just an outlier.
We like to say transition year.
Maybe last question, just to sort of talk about the margin trajectory. I think you guided for margins, EBITDA margins, stay flat this year. Maybe talk about the investments you're making and how we should think about those margin improvements over the next couple of years.
On the margin front, we did guide to maintain our margins even with all the changes going on in the federal arena and cutbacks we've seen. We're actually, I think, running, I mean, in the second quarter, we were 20 bps ahead of our margins for last year. I think part of that is the mix. We're seeing very significant growth in the commercial energy. Our commercial business tends to be 25% higher margin than our public sector business. We also took steps to right-size our infrastructure this year, given the shifts in the business. I think we got out in front of that. As we look forward, we would expect the margins to continue to increase. We look at that from an adjusted EBITDA out of revenue perspective. We've been adding 10 - 20 bps for years.
I think we can certainly continue to do that as we go forward.
That's a great place to stop. Thank you for joining.