Good day, and welcome to the Montrose Environmental Group, Inc. Second Quarter 2023 Earnings Conference Call. Today, all participants will be in a listen-only mode. Please note, that today's event is being recorded. At this time I would like to turn the conference over to Rodny Nacier, Investor Relations. Please go ahead.

Thank you, operator. Welcome to our second 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 earnings 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 second quarter earnings presentation shared on our website. Before we speak to Q2 specifically, I would like to reiterate that our business is best assessed on an annual basis, given demand for environmental services is typically not driven by quarterly patterns. We manage our business on an annual basis and it is how we recommend you view our results as well. I would also like to thank our approximately 3,500 colleagues around the world to whom these stellar results belong. Without their efforts, we wouldn't be here today. To all of you listening, thank you. With that context, 2023 is off to a very strong start, which is a core part of why we are taking up guidance for the full year and Allan will expand on that further in a few minutes. Our Q2 revenue was $159.1 million and our Q2 consolidated adjusted EBITDA was $21.2 million. The second quarter saw continued outperformance, which built on our first quarter strength and momentum. The strength in our business is due to several key factors and themes, which I'd like to highlight further. First, given our highly accelerated organic revenue growth over the past few years, we have focused 2023 on optimizing adjusted EBITDA margins. Our long-term organic growth opportunities are just as attractive as they have always been and our objectives and strategy have not changed. During Q2 2023, operating segment adjusted EBITDA and the consolidated adjusted EBITDA margins were 19.3% and 13.3%, respectively which represent an approximately 2% increase in margins versus last year. This improvement in our adjusted EBITDA margins is the result of strong revenue growth in most of our service lines. In addition, we have further refined our service portfolio and focused on technology advantages, which differentiates us in the marketplace and enhances margin opportunities as our businesses scale. The discontinuation of non-core or low-margin services and our investment in TreaTech in June to bolster our renewable energy offerings are examples of these efforts. The second theme is continued tailwinds given new and anticipated environmental regulations and our clients' voluntary focus on environmental stewardship. These tailwinds continue to create attractive growth opportunities across our business. The third theme is the increase in demand for the environmental response services provided by CTEH. CTEH remains elevated this year compared to their typical $75 million to $95 million per year revenue cadence due to several prominent environmental emergencies. The fourth theme is the continued benefit to our business from investments we made in prior years in organic and inorganic growth opportunities. Our investments into R&D and software have had a notable impact on our testing business so far this year. In addition, the recent acquisitions of Matrix, GreenPath and Vandrensning, which was just announced will continue to provide great opportunities for our teams and clients. And finally, our balance sheet remains strong and we continue to convert well over 60% of adjusted EBITDA into operating cash flow, giving us ample flexibility to continue investing in our people and our business. Our balance sheet remains hedged against rising interest rates insulating us from the current uncertain rate environment. I will now discuss our second quarter performance by segment. Within our Assessment Permitting and Response segment, excluding CTEH we were pleased to see very strong organic revenue growth as well as positive contributions from our acquisitions. We remain bullish on the outlook for our environmental advisory services through 2023 and opportunities longer-term given client focus on environmental stewardship and compliance. CTEH, which is in the segment performed above run rate levels during the quarter as they engaged in numerous high-profile emergency response projects. Our CTEH team has delivered exceptional service as always. Our margin increase in this segment was driven by: one, organic growth in our advisory services; and two, CTEH's shift to higher-margin environmental response services. Within our Measurement and Analysis segment demand and organic revenue growth for our testing services remains very strong, particularly, in areas such as greenhouse gas measurement and mitigation. Our expanding technical and commercial partnerships such as the one with Thermo Fisher announced in May are increasing our market reach. Given the building regulatory pipeline, we remain upbeat about continued opportunities in this segment. Though quarterly segment margins are elevated and increased compared to prior years, annual margins in this segment are expected to remain in the high-teens to 20-ish percent as we have previously discussed. And finally within our remediation and reuse segment, revenue was flat due to the contribution of acquisitions and organic growth in our soil and subsurface remediation business, which offset the expected moderation in our ECT2 technology services, which encompass our water treatment and renewable energy services. Within our renewable energy or biogas business, we have shifted away from higher revenue, lower margin opportunities, for which there is notable demand. We are pivoting to a model that more resembles our approach to water treatment, anchored on intellectual property and therefore more differentiated and more scalable at higher margins. This is why we invested in TreaTech as we have conviction in their team and we plan to help apply their proprietary technology to transform various client waste streams into valuable resources. This shift in approach will temporarily depress year-over-year revenue growth in the segment in coming quarters, but it will enable us to scale and capture the market opportunity in the medium to long-term in more margin-accretive ways. Within our PFAS water treatment business, the recent regulations have been highly favorable to our technology and approach. However, the newly proposed contaminant levels along with hazardous index values are in many cases so low that they are creating near-term uncertainty and challenges for our clients. As a result, our clients are assessing their options and project timelines have shifted out slightly, reflecting the complexity of complying with these new standards. The acquisition of Matrix in June also depressed margins temporarily in the segment. But as we noted earlier, we will use Matrix as a case study of how Montrose increases margins and creates cross-selling opportunities for teams that join us. Allan and I look forward to sharing more details with you about the transition of Matrix into Montrose in the next few quarters. I'd now like to discuss a few recent regulatory updates and industry trends that support our long-term growth outlook. The US EPA continues to focus on PFAS and in June finalized a rule incorporating nine PFAS chemicals into the Toxic Release Inventory program, which triggers additional annual reporting requirements and is likely to increase future demand for our consulting and testing services. With regards to methane emissions, the EPA and Bureau of Land Management have new rules targeting methane emissions such as flares, vents and leaks. These rules are slated to become final in the third quarter, which should support incremental demand for our emissions measurement, monitoring and assessment services. Regarding demand for our environmental consulting services. In July, the EPA launched a $20 billion campaign to advance clean technology and to cut emissions that promote environmental justice in underserved communities across the country. We anticipate these efforts will drive increased demand for our advisory and testing services. These recent actions as well as those we've highlighted over the past several quarters reflect the growing environmental regulatory pipeline impacting our clients. While many of these proposals are in the early rule-making phase, they further underpin the anticipated growth in demand for our services. Before I conclude, I would also like to take a moment to highlight the publication of our 2022 sustainability report, which we issued last week and can be found on our website. Many of you, our investors have asked for more reporting and details on our activities in this realm, so we endeavor to progress our efforts. We look forward to engaging with you on this further. In summary, I would like to once again, thank the Montrose team for their efforts on behalf of our clients. I remain incredibly grateful to all of you. As a result of our strong first and second quarter performance in 2023, and our positive start in this third quarter, we are increasing our full year outlook and guidance for revenue and consolidated adjusted EBITDA. Looking ahead, we remain optimistic in our business and our continued ability to create shareholder value. Thank you for the opportunity to continue doing so. With that, I will hand it over to Allan. Thank you.

Thank you, Vijay. The strong organic growth across most of our service lines continued in the second quarter, reflecting strong economic and regulatory tailwinds and the success we're seeing, with our integrated environmental services business model. We continue to see the themes we've discussed since our IPO three years ago play out as the need for environmental solutions has gained significant momentum around the world. Our growth drivers remain intact, as we continue to harvest the benefits of our M&A and cross-selling strategies, which helped drive our strong revenue growth and margin expansion during the quarter. Moving to our revenue performance on Slide 8. We saw growth across most of our business lines drive revenues to record levels in the second quarter. Our second quarter revenues increased 13.7% to $159.1 million compared to the prior year quarter. Year-to-date revenues were up 5.8% versus the prior year period to $290.5 million. The primary driver of revenue growth in both periods was organic growth in our Assessment Permitting and Response and Measurement and Analysis segments, an increase in CTEH revenues and the positive contributions from acquisitions. This was partially offset by lower revenues in our specialty lab, we are discontinuing and the timing of projects in our remediation and reuse segment. Growth in our year-to-date revenue was also impacted by our planned exit from legacy O&M contracts in 2022. Excluding revenue from discontinued businesses, revenue was up 14.8% to $156.7 million in the second quarter and was up 7.9% to $286.6 million, year-to-date. Looking at our consolidated adjusted EBITDA performance on Slide 9. Second quarter consolidated adjusted EBITDA was a record $21.2 million or 13.3% of revenue. This compares to consolidated adjusted EBITDA of $15.6 million or 11.2% of revenue in the prior year quarter. The year-over-year improvement was driven by higher revenues and higher business line margins, driven in part by the benefit of pricing as well as the favorable mix shift in CTEH. Excluding revenue and EBITDA loss from the lab we are discontinuing, consolidated adjusted EBITDA was 13.5% of revenue compared to 12.1% in the prior year, representing a 140 basis point improvement. Year-to-date, consolidated adjusted EBITDA was $37.8 million or 13% of revenue compared to consolidated adjusted EBITDA of $31.3 million or 11.4% of revenue. Excluding revenue and adjusted EBITDA from the lab we are discontinuing, consolidated adjusted EBITDA in the first six months of 2023 was $37.8 million compared to $30.9 million in the prior year period, which represented 13.2% and 11.6% of revenues respectively, a 160 basis point improvement. With that said, I'll reemphasize that Montrose's performance needs to be assessed annually, as quarterly results are not always indicative of annual performance. Turning to our business segments on Slides 10 and 11. As we highlighted last quarter, we remain focused on balancing our absolute dollar targets for adjusted EBITDA, operating cash flow generation and growth, with an eye towards optimizing longer-term margins. With that in mind, we were pleased to see the impact of shifts to our service portfolio which helped contribute to the 150 basis point increase in operating segment's adjusted EBITDA margin to 19.3%. In our Assessment Permitting and Response segment, revenues increased 22.7% year-over-year to $61.4 million. The year-over-year increase was driven primarily by organic growth and to a lesser extent, the positive contributions from acquisitions. CTEH is entirely in this segment. So that business' increase in environmental response revenues are fully captured here. AP&R segment adjusted EBITDA increased 28% year-over-year to $13.8 million or 22.5% of revenue, up from 21.6% in the prior year quarter reflecting the benefits of organic growth, favorable CTEH revenue mix and higher aggregate margins across our other businesses within the segment. In our Measurement and Analysis segment, revenue increased 18.5% to $50.1 million, primarily attributable to strong organic growth as well as the benefits from acquisitions completed subsequent to the end of the prior year quarter. M&A segment adjusted EBITDA increased 53.1% to $10.8 million or 21.6% of revenue, up from 16.7% in the prior year quarter, reflecting strong demand for our testing services and the benefits from our pricing actions. In our Remediation and Reuse segment, revenues were flat year-over-year at $47.6 million, with the benefit of the Matrix acquisition in June, fully offsetting the anticipated decline in our ECT2 Water and Biogas business, as well as the exiting of discontinued O&M contracts in the prior year quarter. The decrease in the R&R segment adjusted EBITDA as a percent of revenue was a result of the shift in revenue mix including the dilutive impact of Matrix. Our margin optimization efforts are on track at Matrix, which is set to improve from the mid-single digits to low- to mid-teens adjusted EBITDA margins by the end of 2024. Moving to our capital structure on Slide 12. Year-to-date cash flow from operating activities was $24.5 million, which improved compared to cash used in operating activities of $2.9 million in the prior year period. Cash flow from operations includes the payments of acquisition-related contingent consideration of $0.6 million in the current year and $19.5 million in the prior year. Excluding these acquisition-related payments, cash from operating activities was $25.1 million in the first six months of 2023 compared to cash from operating activities of $16.6 million in the first six months of 2022, an increase of $8.5 million. This increase was driven primarily by a lower working capital build and higher earnings before non-cash items compared to the prior year period. These strong operational 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 June 30, 2023, which includes the impact of acquisition-related contingent earn-out obligations payable in cash was at a healthy 1.9 times. During the quarter, we entered into a second interest rate swap on an additional $70 million of borrowing. At quarter end, we had total debt before debt issuance costs of $170.6 million and $148.3 million of liquidity including $23.3 million of cash and $125 million of availability on our revolving credit facility. At our current leverage ratio and inclusive of our fixed rate on $170 million of debt under our interest rate swaps, our weighted average interest rate under our credit facility was 4.2% as of June 30, 2023 with no exposure to rising interest rates at current borrowing levels. Our Series A-2 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 A-2 equity in our market cap, our total equity capitalization stands at approximately $1.3 billion. Moving to our improved full year outlook on slide 14. Based on our strong performance in the first half of 2023, we are raising our full year growth outlook for revenue to be in the range of $590 million to $640 million up from previously issued guidance range of $550 million to $600 million. And we are raising our full year outlook for consolidated adjusted EBITDA to be in the range of $75 million to $81 million up from the previously issued guidance range of $70 million to $76 million. Our higher revenue and consolidated adjusted EBITDA outlook for the full year represents double-digit growth and margin expansion over the prior year. In addition, looking at the remainder of the year, we expect revenues and adjusted EBITDA to be stronger in the third quarter compared to the fourth quarter of 2023. We remain optimistic about the momentum in our business and our ability to sustainably create shareholder value given the resiliency of our business model and the expanding need for our differentiated environmental solutions. Thank you all for joining us today and for your continued interest in Montrose and a big thank you to our team members for all their hard work in driving our solid results. We look forward to the opportunities we see ahead and updating you on our progress next quarter.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Jim Ricchiuti with Needham & Company. Please proceed.

Hi, good morning. I was hoping to get a better sense of the expected contribution from Matrix and the legacy Montrose as it relates to the changes in your full year guidance?

Jim, this is Allan. Matrix runs at $75 million to $80 million of revenue on an annual basis and about $4.5 million of EBITDA. That tends to be back-end weighted just in terms of the seasonality of that business, so a little more than half of that $4.5 million is baked into the updated guidance.

Did you provide any contribution number for Matrix and the portion of the quarter was in? I think it was one month right?

Yes. That's right. It was about one month. We didn't provide a specific number; however, it's about $8 million to $9 million of revenue running at 4% to 5% margins in the month of June.

Just a follow-up question. Just as it relates to the timing issues around some of the projects and the remediation and reuse segment, I'm wondering if you could elaborate on that a little bit.

We're primarily referring to the ECT2 business when we talk about that, which is a combination of our water and biogas business. You have to look at that more on an annual basis because quarter in quarter out some of these projects would either roll on or roll off, which may cause some slight variance in what the quarterly comparisons look like.

How are you feeling about the ECT2 business looking out over the balance of the year, and I also wanted to just follow-up as it relates to ECT2 is just on the acquisition you announced yesterday in Denmark?

Let me take the first part of the question. When we provided guidance at the beginning of the year, we talked about that business being flat this year, the combination of our water and biogas business. We've been pivoting the biogas part in particular towards more of a technology-anchored long-term solution. If we fully pivot to the technology solutions, the biogas part in particular will be down year-on-year, but the long-term outlook for us is as bullish as ever. That's just part of our ongoing margin optimization efforts. As for Vandrensning, which we just announced, it's a very small team slightly outside of Copenhagen. They're very complementary to our ongoing efforts already on the ground in Scandinavia. We're really excited about not only what they're doing with PFAS today, but how they can continue to grow with our team, utilizing the technology that we've talked about with you before.

Got it. I'll jump back in the queue. Thanks.

Our next question comes from Tim Mulrooney with William Blair. Please proceed.

Hey. This is Sam Kusswurm on for Tim. Thanks for taking our questions here guys. I guess to start, I know you shared you expect to bring Matrix margins up to low to mid-teens range by 2024. Now that you've had some time to work with the acquisition more, would you mind sharing what changes specifically you're trying to make to drive that margin expansion?

The Matrix business is very similar to many businesses we have in the US and to a lesser extent, a smaller business that we run in Canada. The margin profile really should be similar to those businesses and they tend to run in the mid-teens. We have aligned pricing, conducted a deep dive on pricing, aligned KPIs, and the benefit of cross-selling and cross-utilization should enable us to improve some of those key performance indicators for them.

Sam, I would just add Allan's exactly right. I would add that we've historically talked about how this is a revenue synergy story and not a cost story. The management team at Matrix is exceptional and 100% aligned with these efforts. This is a collaborative effort and we're really excited to share more of this with you.

I was wondering if you or your clients even had any thoughts on the EPA's recent finalization of the renewable fuel standard and what that might mean for your business going forward through the year and maybe even beyond?

The recent developments have a broader effect on the market right now. Our business primarily focuses on the conversion of ag waste to negative CI R&G. With the investment in TreaTech, we are excited about having access to many more waste streams, including industrial waste streams. We see broader tailwinds in the market and broad-based demand cycles, which is why we've been discussing this with you.

Thanks guys.

Today's next question comes from Andrew Obin with Bank of America. Please proceed.

Can you hear me?

Hey Andrew, yes.

Just switching to PFAS. I think there have been settlement talks with DuPont and others. Can you give us some color on how you expect this to play out over the next two, three years?

We are close to many of the folks you talked about. We are engaged broadly in treatment efforts. The settlements primarily impact municipal drinking water, which is not an area we've historically focused on. Our technology will play well when there are high concentrations of PFAS and concerns around short-chain and long-chain molecules. Although there is sustained push for treatment, the settlements don't really swing our outlook all that much this year or next.

Just a follow-up for Remediation and Reuse. I think our model implies material acceleration into the second half. Is that the right way of thinking about it?

We do expect the back half of the year for that segment to be up over the front half, but it's Matrix driving that. Our Biogas business with the pivot will likely be down year-over-year, and the ECT2 Water business is likely to show a similar back half to the front half of the year.

Thanks so much.

Thanks, Andrew.

The next question comes from Stephanie Yee with JPMorgan. Please proceed.

Hi. Good morning. I wanted to ask about the comments around some of the PFAS projects being pushed out by the clients. Can you elaborate on project timelines and if this developed in the quarter?

We grew over 100% organically in 2022. We wanted to ensure that our team adjusted well to the significant change. The increase in projects is based on the new regulations, which create a demand cycle, but implementation is slower as clients assess how to comply with the standards.

Does the acquisition in Denmark double the size of ECT2 presence in Europe? Does it provide a platform for further expansion?

Yes. Our European footprint is still very small. The acquisition increases our team size, project reach, and ability to expand in Europe, which is essential given the regulations.

Thank you.

Thanks, Stephanie.

The next question comes from Wade Suki with Capital One. Please proceed.

I dislike focusing too much on Matrix, but could you elaborate a bit more on the revenue top line synergies?

This team is an exceptional group of scientists and engineers, very similar to our teams in the U.S. and Canada. We are looking to leverage their expertise, especially in energy and utility companies. Revenue synergies involve collaborating between U.S. and Canadian teams to meet demand cycles. Their depth of expertise is highly attractive; we expect to expand both markets as a revenue synergy story.

You've put out some teasers about software. What are you doing on that front?

With the acquisition of Sensible EDP, we began formally discussing the aggregation of environmental data for clients across media starting with air. We can present real-time measurements to clients. This technological advantage is starting to impact our Measurement and Analysis segment positively.

Thank you very much.

Thanks Wade. Thank you.

The next question is a follow-up from Jim Ricchiuti with Needham & Company. Please proceed.

Allan, I just want to ask about the step-up in SG&A in the quarter. How much of that is due to the increase in M&A activity, or just broad strokes how we might think about SG&A going forward?

There's a robust breakdown in the Q that will be available later today. At a high level, it’s driven by G&A from acquisitions and changes in the classification of back-office functions. Yes, acquisition costs are higher than last year due to higher activity this year.

On a go-forward basis, is there anything to keep in mind about your SG&A with the scaling of the business?

We aim to keep corporate SG&A at or below 6%. For this year, we expect it to be lower than 6% and declining in future years. The SG&A in operations is more fixed and driven by bulking up on operational support.

Just wondering about the emergency response work's contribution to CTEH’s performance this quarter.

The environmental response work is higher margin than last year. They were closer to 38% for the quarter; this is significantly elevated compared to their typical cadence, returning to normal levels in the back half of the year.

Okay. Thank you.

Thanks, Jim.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Vijay Manthripragada for any closing remarks.

Thank you. Thank you all for the time and for the interest in Montrose. We're really excited about the rest of the year, and we're looking forward to our next conversation with you. Thank you again.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.