Hello and welcome to the Montrose Environmental Group, Inc. First Quarter 2023 Earnings Call. Please note that today's event is being recorded. I will now turn the conference over to your host, Rodny Nacier, from Investor Relations. Please proceed.

Thank you, operator. Welcome to our first quarter 2023 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, Chief Financial Officer. During our discussion today, we will be referring to our presentation which is available on the Investors section of our website. Our earnings release is also available on the website. Moving to Slide 2, I would like to remind everyone that today's call will include forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ in a material way due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook. We refer you to our recent SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including consolidated adjusted EBITDA, adjusted net income, and adjusted net income per share. We provide these non-GAAP results for informational purposes and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and the reconciliation thereof to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay, beginning on Slide 4.

Thank you, Rodny, and welcome to all of you joining us today. I will provide you with business highlights, Allan will provide you with financial highlights, and we will then open it up to Q&A. I will speak generally to the first quarter earnings presentation shared on our website. But before I begin, I would like to reiterate that our business is best assessed on an annual basis, given the nature of demand for environmental services is not driven by quarterly patterns. This is how we manage our business and how we recommend you view our results as well. I would like to start by highlighting several key themes from our first quarter 2023 results. As I note each quarter, Montrose's successes and our Q1 2023 successes belong to our over 3,000 colleagues around the world. It is because of them that we collectively get to create and benefit from the value that's being created. The first theme is that regulatory tailwinds are substantive and sustained. Our business and integrated approach to environmental solutions are benefiting from growing demand across most of our service lines. In Q1, our advisory services, air measurement services, and environmental lab services all saw strong demand, particularly with greenhouse gas measurement and mitigation. And though there is some expected and planned moderation in our remediation and reuse segment, given the incredible organic surge last year, we see sustained tailwinds for our ECT2 brand, our PFAS water treatment, and renewable energy services, and we continue to believe their trajectory will be very attractive over the coming years. The second theme is absolute EBITDA, which manifested via profitability and EBITDA margins. We will discuss why it is important to anchor on absolute EBITDA dollars, but given questions from our product conversations with you, we will also highlight margins this morning. Our operating segment adjusted EBITDA margin increased approximately 2% year-over-year. Our margin improvements include the benefits of pricing initiatives which we highlighted for you last year. And despite continued and important investments in our business, like with research and development, our total consolidated EBITDA margins also increased even before adjusting for discontinued services and other factors. Including those factors, our consolidated adjusted EBITDA margins increased approximately 1.5%. The third theme is that the CTEH COVID-19 services, which were economically additive but difficult to explain to you, our investors, are effectively behind us. CTEH is back to providing various environmental response services, and the team has been working hard to support our clients with several high-profile responses this year. The fourth theme is acquisitions. We reduced our cadence of acquisitions last year, given our 25%-plus organic growth surge, but the M&A pipeline continued to build. So we expect to harvest that over the course of this year. The transactions remain very accretive strategically and financially. I'm thrilled with the caliber of the teams that have joined us so far, how they have already fit right in, and with the opportunities they present. Finally, we always noted that we are largely insulated from political and economic swings, and we continue to demonstrate that each year. Not only is our business strong, as you can see from Q1 results, our balance sheet and cash flow remained very strong as well. Our acquisitions to date have been funded largely through our cash flow from operations and our balance sheet remains hedged against rising interest rates, which gives us ample flexibility to continue consolidating our industry and investing in our environmental technology advantages. I will now discuss our first quarter performance by segment. Within our Assessment Permitting and Response segment, we were pleased to see solid organic revenue growth as well as the positive contributions from our acquisitions. Margins in this segment were higher year-over-year for two reasons: organic growth in our advisory services, and CTEH's shift away from COVID-19-related revenues. We expect organic growth and acquisitions will be a meaningful part of this segment's narrative over the coming quarters. Within the measurement and analysis segment, demand for our testing services continues to be robust due to public and shareholder interest and growing political will regarding environmental solutions, with greenhouse gas measurement and mitigation, for example. We remain upbeat about continued organic growth in this segment. Annual margins in this segment are expected to remain in the high teens to around 20%, which is where we've always expected them to be. Within our remediation and reuse segment, the year-over-year quarterly decline in revenues and therefore EBITDA for this segment were expected, given the initiation and conclusion of various large water or renewable energy projects. Quarterly trends are not a meaningful reflection of the trends with our water and renewable services within our ECT2 brand, and we remain very bullish on the opportunity for ECT2 over the coming years. Many of our recent R&D successes and patent awards represent growing barriers to entry, differentiation in the marketplace, and exciting organic growth opportunities for Montrose and our shareholders in this segment. We look forward to what we believe will be a very exciting trajectory for this segment over the coming quarters. I will now discuss a few recent regulatory updates and industry trends that support our long-term growth outlook. The U.S. EPA continues to focus on PFAS and recently issued an advanced notice of their intent to designate seven more PFAS chemicals to the list of hazardous substances which triggers reporting and remediation needs, including potential Superfund cleanup status. We expect this action will drive demand across the Montrose portfolio. With regards to methane emissions, the EPA is pursuing high-profile enforcement actions against some of the largest players in the energy industry to reduce releases and increase leak detection frequency. We are working with our clients across our emissions measuring, monitoring, and assessment services. Regarding demand for our environmental consulting services, in April, President Biden signed a new executive order to better protect certain communities from pollution and environmental harm. The EPA has been stepping up enforcement of environmental justice matters and we anticipate this will drive increased demand for our advisory and testing services, with the primary emphasis on air quality testing. As evidenced in these recent actions and those we've discussed over the past several quarters, momentum for environmental protection continues to grow. The needs of our clients due to these announcements are very complementary to our existing service offerings, and we believe Montrose is exceptionally well-positioned to assist our clients in navigating the rapidly-evolving regulatory landscape. So in summary, I want to thank our colleagues around the world for all they've contributed to our business and for the exceptional work they do for our clients each and every day. I remain incredibly grateful to all of you, and thank you. As a result of our Q1 2023 results and the momentum in our business into the second quarter, we are increasing our full-year 2023 EBITDA outlook, which Allan will expand upon shortly. We remain as optimistic as ever in our ability to solve environmental challenges and problems and create value for our shareholders and all of our stakeholders. With that, let me hand it over to Allan. Thank you.

Thanks, Vijay. Our solid overall first quarter performance reflects the strength of our business model and ongoing demand for our environmental solutions. As Vijay mentioned, we are especially pleased with our strong year-over-year margin performance at an operating segment level as a result of the favorable business mix, the in-demand nature of our services, and the early returns from our pricing actions. We also benefited from M&A, which we expect to be more meaningful this year given the resumption of our typical M&A cadence as demonstrated by our recent acquisitions since the beginning of the year. Moving to our first quarter performance on Slide 8. Total revenue for the first quarter was $131.4 million compared to $134.7 million in the prior year quarter, primarily due to lower demand for COVID-19-related services provided by CTEH, lower revenues in a discontinued lab, and the timing of projects in our remediation and reuse segment. Excluding revenue from COVID-19-related services and discontinued businesses, revenue was up 17.2% year-over-year, given strong organic growth in our assessment permitting and response and measurement and analysis segments, an increase in CTEH environmental response revenues, and the contribution of acquisitions. First quarter consolidated adjusted EBITDA was $16.6 million and represented 12.6% of revenue. Excluding discontinued businesses and including start-up losses which we no longer add back, consolidated adjusted EBITDA of $16.6 million compares to $14.4 million in the prior year, an increase of 15.2%, and consolidated adjusted EBITDA margins improved from 11.2% in Q1 2022 to 12.8% in the current year. As we've highlighted on prior calls, Montrose's performance needs to be assessed annually. This is how we evaluate the business due to the stronger predictability of the business on an annual basis. This is consistent with how we hire staff, allocate resources, and manage the company. Turning to our business segments on Slides 9 and 10. We are primarily focused on meeting or exceeding our targets for adjusted EBITDA dollars and cash flow conversion, and we remain pleased with our results. We also continue to drive margin improvement at the operating level, and we were pleased to see operating segment's adjusted EBITDA margin increased 190 basis points to 19.7% compared to 17.8% in the prior year quarter, mainly due to the transition of CTEH away from COVID-19 services, strong demand for our environmental testing services, and the benefits of pricing which more than offset the expected decline in remediation and reuse revenue. Excluding results from discontinued businesses and including start-up losses in the prior year, operating segment's adjusted EBITDA margin increased 290 basis points year-over-year. Beginning this year, organic revenue growth for total revenue and for the assessment, permitting and response segment excludes CTEH to provide a better sense of underlying performance for that segment and our business without CTEH variability. In our assessment, permitting and response segment, revenue increased 14.5% year-over-year to $52.2 million. The year-over-year increase was driven primarily by organic growth and, to a lesser extent, the positive contributions from acquisitions. Within CTEH, a significant increase in environmental response revenues fully offset the anticipated steep decline in COVID-19-related services. AP&R segment adjusted EBITDA increased 48.2% year-over-year to $14.3 million, or 27.3% of revenue, up from 21.1% in the prior year quarter, reflecting the benefits of organic growth and the favorable CTEH revenue mix, given environmental response revenues generate higher margins than COVID-19-related revenues and higher aggregate margins across our other businesses within this segment. In our measurement and analysis segment, revenue increased 7% to $42.5 million, primarily attributable to strong organic growth. While M&A segment adjusted EBITDA increased slightly, the decline as a percent of revenue was mainly due to a decrease in revenues and adjusted EBITDA from a discontinued lab. Excluding the impact of the discontinued lab and including start-up losses in the prior year, segment adjusted EBITDA margin increased to 15.6% from 13.7% in the prior year, reflecting strong demand for our testing services and the benefits from our pricing actions. In our remediation and reuse segment, revenues were $36.7 million compared to $49.3 million in the prior year quarter as a result of the winding down of certain high-dollar-value projects. The decrease was partially offset by revenues from acquisitions. The decrease in R&R segment adjusted EBITDA as a percentage of revenue was a result of lower revenues. Moving to our capital structure on Slide 11. First quarter cash flow from operating activities was $3 million compared to cash used in operations of $18.3 million in the prior year quarter. Cash used in operations in the prior year includes payment of acquisition-related consideration of $19.5 million. Excluding this acquisition-related payment, cash provided by operating activities increased by $1.8 million year-over-year compared to adjusted cash from operating activities of $1.2 million in the prior year quarter. This year-over-year increase was primarily due to an increase in working capital in the current period of $9.7 million versus an increase in working capital in the prior year period of $12.5 million, partially offset by lower earnings before noncash items of $0.9 million. These strong operating cash flows reflect our ongoing focus on balancing the generation of cash with investments in technology, R&D, and corporate infrastructure to ensure continued scalability. Our leverage ratio as of March 31, 2023, which includes the impact of recent acquisitions and the acquisition-related contingent earn-out obligations payable in cash, was at 1.4x. The cash we have on the balance sheet and the interest rate swap we put in place in January 2022 have resulted in almost no exposure to rising interest rates at current borrowing levels. Our Series A2 preferred stock has no maturity date. We have the option but not an obligation to redeem the preferred shares at any time for cash. The prepayment penalty expired in April of this year. We view this preferred equity instrument as favorable to the value creation potential in the business, given its flexible dynamics and the fixed nature of the dividend in a rising interest rate environment. If you include the $182 million balance of the Series A2 equity and our market cap, our total equity capitalization stands at approximately $1.3 billion. Moving to our improved full-year outlook on Slide 13. We have had a strong start to the year. Based on EBITDA performance in the first quarter and momentum in our overall business, we are raising our full-year growth outlook for consolidated adjusted EBITDA to be in the range of $70 million to $76 million compared to the prior range of $68 million to $74 million. Our higher consolidated adjusted EBITDA outlook represents low double-digit growth and margin expansion over the prior year. Our expectation for revenue is unchanged, in the range of $550 million to $600 million, representing mid- to high single-digit growth for the full year. Our revenue and consolidated adjusted EBITDA outlook does not include any benefit from future acquisitions that have not been completed. In conclusion, our improved 2023 outlook reflects our confidence in our ability to execute against our growth strategy. The in-demand nature of our unique environmental solutions, expanding customer relationships, solid customer retention, and cross-selling success all position us well to expand our market share as a leader in the environmental services space. Over the longer term, our investments in R&D are expected to generate significant returns as we look to capture end market and regulatory tailwinds in the greenhouse gas measurement and mitigation, PFAS remediation, renewable energy, and carbon capture spaces. Thank you all for joining us today and for your continued interest in Montrose. We look forward to the opportunities we see ahead and updating you on our progress next quarter. Operator, we are ready to open the line to questions.

And the first question comes from Tim Mulrooney with William Blair.

This is Sam Kusswurm on for Tim. I guess I'll focus my questions more on the Matrix Solutions acquisition. I guess to start, can you give us a sense of the size of this acquisition? We noticed Matrix had, I think, 570 employees and CTEH had 170 employees when you first acquired it, so it seems like this might be a pretty sizable acquisition.

This is Vijay. That acquisition is in the process of shareholder vote and for Canadian law is expected to close kind of in the back half of the second quarter. So I'm not going to say too much about it. But the aggregate size of that business will not materially move our overall profile in the way CTEH did. It is a lot of people, but it is not as impactful from an EBITDA perspective.

Well, maybe more of a broad question then. I think your last two acquisitions, we noticed they're both headquartered in Canada. Maybe you could just share your thoughts on the market opportunity in Canada and how you would characterize that relative to the United States.

Yes, it's a great question. We are still heavily oriented towards North America. A lot of our clients have a substantive presence in the Canadian market. For all the reasons we've talked about before concerning environmental policy, methane measurement mitigation, both the provincial governments, particularly in Alberta, and the broader Canadian federal government are very forward-leaning. And so we've been bullish on that market in aggregate for a long time now, and this is just an extension of that same policy. So we think there's going to be a lot of client-based opportunity across both geographies. We are also really excited about what the Canadian market presents once these teams join us.

Maybe one last one for me then related more to the guidance. Can you maybe share what you expect GreenPath to generate revenue for the remainder of 2023 and its approximate EBITDA margin? I guess we're trying to figure out how much of the EBITDA guidance raise today was attributable to that acquisition.

I would think of that business as contributing around $1 million in terms of revenue this year. So about half, a little under half of the guidance raise is due to the GreenPath acquisition, and the rest would be due to the organic performance of the business.

And the next question comes from Jim Ricchiuti with Needham.

This is Chris Grenga on for Jim. You had mentioned that the assessment and permitting segment margin benefited from mix and pricing. How are you thinking about that margin level improvement on a go-forward basis? And how should we be thinking about the durability of that margin?

That segment comprises both of our classic consulting business, Chris, as well as our CTEH business. The CTEH business, as Allan noted in his comments, has shifted away from COVID-19 towards the more traditional environmental response. So that margin is run rate and durable, as we've highlighted for you before, kind of as you think about that business. I would continue to think about that as having a $75 million to $95 million top-line and 25%-ish EBITDA margins. The other part of that business is our more traditional environmental consulting practices, and they have just been benefiting from incredibly strong organic growth and pricing efforts that we've undertaken over the course of the last couple of quarters. So I would say, in aggregate, that margin profile is quite durable.

Could you maybe expand on what end markets you're seeing the most activity from? It sounded like oil and gas were seeing a lot of activity. Are there any other areas that are worth highlighting in terms of activity levels?

It's a good question. The activity level is not just oil and gas, it fluctuates year-in, year-out but around 10% to 15% of our revenue. As you can see, our broader profile and portfolio across our services are just in fantastic cadence. We're seeing broad demand cycles across our testing business, that's our field testing and our lab business. We're seeing a really nice demand cycle across our advisory services, which span across all the different industries, both of which span all the different industries. And then, as you know, we're incredibly excited about our long-term water and biogas technology practice as well. So I would not say that this is anchored on one industry. This really is broad-based, not only in terms of our end markets but also in terms of our own internal segment definitions. Does that make sense, Chris?

And the next question comes from Andrew Obin with Bank of America Merrill Lynch.

This is David Ridley-Lane on for Andrew. I understand the project timing and remediation reuse can lead to kind of quarter-to-quarter volatility. But based on the project pipelines and current project timelines, should we expect growth in the remediation and reuse revenue for the full year to be kind of in line with the aggregate revenue guidance for 2023?

Yes, it's a great question, Dave. I wouldn't read too much into the quarters. Let me just step back and give you kind of my broader perspective on this. Our water and biogas business grew triple digits organically last year. So as we've talked about with you and Andrew and others, we expected this year to be moderated. We kind of planned for 2023 to be kind of flat to 2022, knowing that the 2023 to 2025 outlook remains incredibly strong for us. Despite that, right, despite the way we thought about it leading into this year, our overall business will remain at elevated organic growth levels. So this again speaks to the underlying strength of the broader portfolio that we just talked about with Chris. So no, I would not think of that segment's growth in the same way that I would think about the aggregate business because of the incredible cadence and trajectory last year. We want to reset, anchor on quality and performance, and make sure that team, which tripled in size, is feeling good as the new opportunities continue to build on a global level for us. Does that answer your question, Dave?

Absolutely, yes. And then I know that Montrose's services are highly insulated from broader economic trends. But is there any sensitivity around CapEx projects maybe in the assessment and permitting area? Any sort of way you're thinking about potential slowdown in, say, construction activity and how that would influence your business?

No. We don't have a lot of exposure to discretionary spend, Dave. We're always attuned to that and staying very close to our clients on this. But as you can see in the way we've come out of the gates this year and in our outlook for the rest of the year despite the broader macroeconomic uncertainty, a lot of the work that we do is fundamental and is in many ways necessary for our clients. We're not as exposed to it, nor are we as worried about it.

And the next question comes from Wade Suki with Capital One.

Great to see results today. Wonder if you could expand a little bit on the greenhouse gas, methane management side of the house. Obviously, very deliberate moves here with GreenPath, and I think last month's agreement with Sensors. Can you talk about how these businesses are sort of integrating synergistically? And where do you see this? How big can you see this business for you all in two, three, five years?

Wade, this is Vijay. Thank you for that. As we think about our multi-year outlook, Wade, and we've highlighted this for you in the past, greenhouse gas measurement and mitigation is a key part of our thesis. The questions our clients are dealing with, both from a regulatory perspective as well as their commitments related to net zero, are substantive and span across our industrial end-market base. Those questions often necessitate testing, and our capabilities as one of the leading air testing firms in the world and one of the biggest in North America puts us in a really unique position to enable testing across multiple sources, the fence line of a facility, the source of emissions, leaks across a portfolio. We are able to couple our testing capabilities with the broader advisory work that our teams are doing. As we will continue to share more as this progresses, our technology team out of ECT2 has developed some compelling patents. And again, this is early stage, so it may not work out, but they're entering a pilot phase with our clients that actually remove CO2 from the industrial production process. Like PFAS, as we've talked about historically, we think the broader greenhouse gas measurement and mitigation opportunity is very substantive for us over the coming years. To kind of anchor you on the numbers, in Q1, you saw the measurement analysis revenue growth kind of quarter-on-quarter look very strong. That's mostly organic, and a substantive part of that organic surge was due to our greenhouse gas measurement business in particular. So even with the moderation on the water side and the biogas side, which we again planned to give that team a little bit of a break, we remain excited about what the organic growth opportunity for Montrose looks like in aggregate because of this and other factors.

Just to dovetail on one of the maybe prior questions on AP&R, margins are obviously very strong in the quarter. Can you give us a sense for how this might play out for the rest of the year? Any color you can give us on what more directly contributed to those margins would be very helpful.

Yes, let me take that. This is Allan. What we've said historically is that segment should run 25% to 30% margins, and we expect for the full year, it should be right in that range. So, strong Q1. We expect something similar over the next couple of years.

Thank you. And this concludes our question-and-answer session. I would like to turn the floor to Vijay Manthripragada for any closing comments.

Thank you all for your time and thank you again for your interest in Montrose. We look forward to engaging with you throughout this year. Thank you and take care.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.