Good morning, ladies and gentlemen, and welcome to the Montrose Environmental Group, Inc. First Quarter 2024 Earnings Call. This call is being recorded on Wednesday, May 8, 2024. I would now like to turn the conference over to Rodny Nacier, Investor Relations. Please go ahead.

Thank you, operator. Welcome to our first quarter '24 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 the 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, 2023, 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 these measures, and a 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. We will then open it up to Q&A. And I will speak generally to the updated earnings presentation shared on our website. We have had and continue to have a strong start to 2024. Our results are the byproduct of that momentum, and I want to start by acknowledging the exceptional efforts of our colleagues around the world. I would also like to remind our listeners that while we discuss quarterly results, our business is best assessed on an annual basis. Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations on an annual basis. With that, let me start by highlighting a few key themes related to our first quarter 2024 results. First, we are seeing secular tailwinds and strong performance across our segments and service lines, resulting in record first quarter revenues and consolidated adjusted EBITDA. Second, our solid performance during the quarter is primarily attributable to strong organic growth. Our organic growth continues to be driven by cross-selling success and R&D successes. There were also a number of key regulatory updates from the U.S. EPA that present significant opportunities for our business. And those updates have increased our confidence about our future. I'll provide additional details on that shortly. Third, M&A remains a key component of our growth strategy and the cadence of opportunities has increased this year relative to our recent past. We are thrilled to welcome the teams from Epic, Two Dot and ETA. The addition of these teams brings stellar talent to Montrose. They also increase our geographic and service capabilities. We have a robust acquisition pipeline, and we expect continued M&A momentum in 2024. Our strong track record of successfully acquiring and integrating in complementary businesses remains a bright spot for Montrose. Allan and I have committed to providing more details about Matrix, which are in our public presentations. Their margins have already improved significantly, and the return on capital has been much stronger than we expected as the margin increases have occurred without revenue degradation. Matrix is just one example of the value creation we're able to offer to our shareholders. I will next discuss our first quarter performance by segment. Within our Assessment, Permitting and Response segment, this segment contains both our advisory business and our CTEH environmental response business. Excluding our response business, during the first quarter, we were pleased to see solid organic revenue growth in our advisory services supported by continued cross-selling success across multiple service lines. The increase in margins for this segment was primarily driven by strong organic growth. For the response side of this segment, our emergency response revenue last year was $23.2 million, and this year is $15.7 million given the major derailment from 2023. This created a tough quarter-on-quarter comparison, and the strength of our overall segment performance is particularly encouraging given this dynamic. Within the Measurement and Analysis segment, we continue to experience strong organic revenue growth, particularly in our lab services, driven by PFAS and air testing services. For example, around greenhouse gas measurement mitigation and increased regulations around hazardous air pollutants. Margins during the quarter were slightly lower year-over-year, primarily due to business mix, but our annual outlook is unchanged. We reiterate our expectation for annual margins in this segment to be around 18% to 20%. Within our Remediation and Reuse segment, revenue growth for the quarter was primarily driven by our acquisition of Matrix. This was partially offset by lower revenue from our biogas business, given our pivot from Q3 of last year to higher-margin services. The biogas pivot is complete, and our outlook for this year is the same. So this is more about quarter-on-quarter variance to this time last year. Margins in this segment during the quarter were lower, also mainly due to the impact of the Matrix acquisition. Matrix typically breaks even or loses money in the first quarter given Canadian weather. With that said, I would like to reiterate that we are pleased to see the excellent progress made by the team on increasing Matrix's margins for the full year, and our outlook is unchanged. Given recent regulatory updates as well as the improvements in Matrix margins, we expect organic growth and margin expansion in this segment for full year 2024. Next, I will discuss recent key regulatory developments and industry trends that support our optimistic long-term growth outlook. The U.S. EPA finalized its first-ever national drinking water standards for PFAS pollutants in April. The U.S. EPA also designated PFOA and PFOS as hazardous substances under CERCLA. These long-awaited regulatory actions set legally enforceable maximum contaminant levels for several PFAS chemicals and commit $1 billion of investment to address PFAS and drinking water. The rules also require the reporting of any spills and increase the likelihood that new or legacy superfund sites will need to be investigated and remediated. We expect both of these regulatory updates to open up an approximately $200 billion addressable market for Montrose based on third-party research. PFAS remediation remains a significant opportunity for growth and value creation across all of our segments, and we anticipate demand will ramp up steadily over the coming quarters. With regards to methane emissions, in March, the EPA published landmark rules under the Clean Air Act to regulate methane emissions from the oil and gas industry. These rules set standards for new or modified sources and provide emissions guidelines for states to implement similar standards for existing sources. While the new regulations only apply to new facilities built after December 2022 at this time, this rule is expected to expand and cover existing sources within the next few years. This regulatory framework presents long-term tailwinds for our emissions measuring, monitoring and assessment solutions as clients evaluate their environmental impact. In terms of regulations tracking and targeting other air pollutants, the EPA finalized their national emission standards for hazardous air pollutants in April. This new rule requires approximately 200 facilities to reduce air toxic emissions to help protect people living near chemical plants. Montrose remains uniquely positioned given our differentiated ability to measure and communicate quality data, particularly via our software capabilities to industrial partners and local communities. While the compliance deadline was extended since this rule's initial proposal, we expect this action will provide long-term tailwinds to our business as companies review the impact of their facilities and work to meet emission standards. In summary, we remain upbeat given our organic growth, our patent development and commercialization, our strategic acquisitions and the broader regulatory tailwinds from Montrose in the quarters and years to come. In early March of this year, we increased our guidance, and we remain confident in our ability to achieve those numbers and goals for 2024. These results and our optimistic outlook belong to our approximately 3,500 colleagues around the world, and I would like to once again thank them for the tremendous work that they've done. I would also like to thank our shareholders for their support, and I would like to welcome our newly added shareholders from April's capital raise. Allan and I look forward to updating you on our progress next quarter and in the quarters to come as we collectively reimagine ways to simultaneously support human development and protect our shared environment. With that, I will hand it over to Allan. Thank you.

Thanks, Vijay. Our strong results in the first quarter reflect the strength of our business, strong organic growth through our cross-selling strategy as well as the contribution of strategic acquisitions. In addition, we further strengthened our capacity for accretive growth through the successful completion of our follow-on equity offering in April. Moving to our revenue performance on Slide 9. We were happy to see continued strong organic growth across most of our service lines during the first quarter. Our first quarter revenues increased 18.2% to $155.3 million compared to the prior year quarter, primarily driven by strong organic revenue growth in our AP&R and M&A segments, and the contributions of acquisitions, partially offset by lower environmental emergency response service revenues, the exiting of a discontinued specialty lab in December 2023, and the shift away from lower margin revenue in our biogas business in the latter part of last year. Looking at our consolidated adjusted EBITDA performance on Slide 10. First quarter consolidated adjusted EBITDA was $16.9 million or 10.9% of revenue. This compares to consolidated adjusted EBITDA of $16.6 million or 12.6% of revenue in the prior year quarter. The increase in consolidated adjusted EBITDA was driven by higher revenues. Lower consolidated adjusted EBITDA as a percentage of revenues was primarily driven by seasonally low margins from Matrix, which we acquired in June 2023 and therefore was not included in the comparable prior year period. And to a lesser extent, a large, higher-margin environmental emergency response project in the prior year period, which did not occur in the first quarter of this year. Moving to a review of diluted adjusted net income per share on Slide 11. Adjusted net income per share was $0.16 for the first quarter compared to $0.17 in the prior year quarter. The decrease was mainly driven by higher interest and higher depreciation in the current period versus the prior year, partially offset by higher EBITDA, lower income tax expense and lower dividends paid to our Series A2 preferred shares. Please note, our diluted adjusted net income per share is calculated using adjusted net income attributable to stockholders divided by fully diluted shares. We believe diluted adjusted net income per share is the most helpful net income metric to Montrose and to common equity investors. As an update, we made a change to our tax methodology for adjusted net income as reflected in the adjusted net income reconciliation table in the appendix for the current and prior periods. Turning to our business segments on Slide 12. In our Assessment, Permitting and Response segment, first quarter revenue increased 12.2% year-over-year to $58.6 million, driven by strong organic growth. The year-over-year increase was partially offset by an expected decline in revenues from emergency response services following a significant event in the first quarter of 2023 that did not recur in the current year. AP&R segment adjusted EBITDA increased 14.1% year-over-year to $16.3 million or 27.8% of revenue, up from 27.3% in the prior year quarter, reflecting the benefits of organic growth and business mix. In our Measurement and Analysis segment, revenue for the quarter increased 7% to $45.5 million, primarily attributable to organic growth. First quarter M&A segment adjusted EBITDA was flat year-over-year, and as a result, adjusted EBITDA margins were down slightly to 14.3% compared to 15% in the prior year quarter, primarily due to business mix. Our outlook for annual margins in this segment remains unchanged at 18% to 20%. In our Remediation and Reuse segment, first quarter revenues increased 39.7% to $51.3 million, primarily due to the acquisition of Matrix, partially offset by the shift in our biogas business to focus on higher-margin revenue projects. The decrease in R&R segment adjusted EBITDA margin was due to the dilutive impact of Matrix, which has historically generated no or negative earnings in the first quarter of every year, given seasonality in that Canadian business. Our margin optimization efforts are well underway, and we remain pleased with Matrix's increased profitability, which is on track to achieve a double-digit adjusted EBITDA margin by the end of 2024. Moving to a review of our cash flow and capital structure on Slide 15. First quarter cash flow used in operating activities was $22 million compared to cash generated of $3 million in the prior year. The year-over-year change in cash flow used in operations was primarily due to a temporary higher investment in working capital, which was driven primarily by an increase in receivables at Matrix and CTEH given recently awarded cross-divisional projects as well as lower accrued payroll as a result of the payment of larger bonuses in the current year versus the prior year. For the balance of the year, working capital should moderate. And as a result, we expect to produce cash flows from operations in line with our long-term conversion of adjusted EBITDA into operating cash flow at a rate in excess of 50%. We voluntarily redeemed $60 million of principal on the outstanding preferred stock in January. The associated dividend savings are an estimated $5.4 million annually and represent a proactive step towards simplifying our capital structure. Following this redemption, the principal balance of the preferred stock outstanding was reduced to $122.2 million. As a reminder, our convertible and redeemable Series A2 preferred stock has no cash maturity date and no cash redemption obligation, but we have the option to redeem the preferred shares at any time for cash. As we highlighted last quarter, in February, we upsized our credit facility to $400 million, adding $100 million to our available liquidity on the same terms as our pre-existing facility. $50 million of the increase was added to our term loan and the other $50 million increased our revolver capacity to $175 million. In April, we completed a follow-on equity offering, raising net proceeds of approximately $122.4 million. Following this offering, we had $218.8 million of liquidity, including $43.8 million of cash on hand and approximately $175 million of availability on our credit facility. Pro forma for the equity raise, our leverage ratio is 2.1x, well below our longer-term target leverage of below 3.5x. The capital raise significantly enhances our liquidity, granting us further flexibility to continue to invest in additional M&A, which we expect to be the primary use of proceeds. Moving to our reiterated full year outlook on Slide 17. Based on our strong start to 2024 and the tailwinds we see in our business, we reiterate our recently increased outlook for full year 2024 revenues to be in the range of $690 million to $740 million and consolidated adjusted EBITDA to be in the range of $95 million to $100 million. Our 2024 outlook remains anchored on the expectation for low double-digit organic revenue growth and margin expansion over the prior year, and includes an unchanged expectation for full year emergency response revenues to be in the $50 million to $70 million range. We expect the first quarter to be our low point for revenue and adjusted EBITDA for the year, with both metrics increasing sequentially into the second and third quarters of 2024. Based on the timing of business activity this year, we expect to generate roughly 60% of our full year 2024 adjusted EBITDA in the back half of the year. The more heavily weighted back half compared to 2023 is primarily due to significantly improved profitability at Matrix and a substantive emergency response in the first half of last year. In conclusion, we had a strong start to 2024 with record results in our key operating metrics. As we look to the remainder of 2024 and beyond, we are incredibly optimistic given the demand momentum for our integrated environmental solutions and the material regulatory tailwinds. With the success of our cross-selling strategy and integration of newly acquired businesses, we are confident in our ability to achieve our full year goals. 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.

Your first question is from Tim Mulrooney from William Blair.

Thanks for all the color with the recent finalization of the EPA's regulations for maximum contaminant levels and CERCLA. I appreciate all the details on the market sizing. But I wanted to ask about timing. How do you consider the near-term 1- to 2-year impact of these rulings across all three of your separate business lines?

Yes, that's a good question, Tim. So if you step back, the regulations are structured in a way where the implications for testing have a 3-year window, and implications for treatment have a 5-year window. Those are the formal regulatory mandated time frames. But what we're seeing is a significant amount of activity picking up given our earlier discussions, in anticipation of these regulations and the need to conduct some testing and remediation regarding existing PFAS levels in various water matrices that a lot of our clients have been working on. So the way I would think about it near term for Montrose is it will be a steady increase. We are already seeing increased activity on the testing and assessment side, and the volume of inquiries on the treatment side has picked up significantly as well. We anticipate that through the back half of this year and certainly next year, we'll start to see visible momentum, meaning financial visibility on the treatment side, but we are already noticing momentum on the assessment and testing side. This is partially why we were forward-leaning on our view for what the rest of this year looked like earlier this year with you all.

Okay. Yes, that's very clear. I guess as my follow-up, I was hoping you might offer a bit more insight into your portfolio of PFAS remediation solutions. I know your regenerable resins technology gets a lot of attention, but I also know you have an entire suite of solutions. How much do you expect to focus on the drinking water side versus the more heavily contaminated industrial Department of Defense sites, airports, etc.?

Yes. If we reflect on our portfolio of services, we have experts—regulatory experts, PhDs, toxicologists—assisting many of our clients in modeling how to think about risk, exposure, liability, and treatment. We have dedicated PFAS labs that are well-equipped to address, Tim, not just drinking water testing but also testing of other water matrices, including air. As you think about what happens after PFAS is removed—for example, if you're looking to incinerate it—you need to validate that these molecules are effectively destroyed. Our testing capabilities are seeing momentum not just with water, but across various environmental media, including air, water, and soil. On the treatment side, as we now look at parts per trillion thresholds across six molecules, some of which are challenging to remove, our anchor regenerable resins are seeing more activity, including a bit on the drinking water side, though that isn't our main focus. Our foam fractionation is with increased interest on landfill leachate. We've also received inquiries due to our technology for replacing AFFF foams, which affects a whole different constituency. The drinking water limits are in place, and municipal drinking water treatment is likely to begin. However, all sources of upstream contamination are currently in focus because they partially explain why some of these levels are elevated in drinking water. It's all interconnected, and our suite of services is upstream of many of these issues, pulling us downstream into the drinking water market due to some life cycle costs advantages our technology provides. Does that answer your question, Tim?

It does, yes. It sounds like you have technologies that can address drinking water systems, which is not your primary focus. But the maximum contaminant levels will have upstream impacts that will materially affect your business. Is that a good summary?

Yes. It already does, and that's exactly right.

I apologize for any background noise. But I wanted to ask two questions. First, we didn't have a chance to discuss the revision to guidance that we raised for full-year earlier. Perhaps you could spend a moment detailing what really drove that? I mean, it sounds like you're seeing an improved performance from Matrix, but I'm curious if that's the main driver or if other parts of the business are also influencing this.

Yes. Let me take that, Jim. Just philosophically, we've learned since our IPO in 2020 that we are best served to be transparent with you and the broader investment community so that there are no surprises quarter to quarter. The reason we have been more forthcoming—not just when we increased guidance, but if you look back at our February annual 2023 readout, the first time we provided '24 guidance—we offered much more detail on what the quarters would look like. The reason for that is due to several dynamics that are topical and highly relevant to the financial outcome. Firstly, the regulatory landscape has shifted remarkably during Q1 and in the early part of Q2, which has impacted our outlook for the back half of the year and our organic trajectory positively. That resulted in our increased optimism, not just for this year but for future years. Secondly, the impact of Matrix is significant, as that business operates differently in terms of revenue and EBITDA weighting between the first and second halves of the year. Lastly, we also consider the influence of recent acquisitions and the transition away from the significant emergency response in last year's first quarter. Given these numerous variables, we wanted to be open about what is driving the business. Fundamentally, the increase in guidance stems from the structural resilience we see in the business, making us optimistic about the upcoming quarters and years.

That makes sense, Vijay. That's helpful. A final follow-up question: you're discussing the growing M&A pipeline. There was additional capital you added back in April. Historically, you have executed more smaller deals than a few large ones. How should we perceive M&A activity moving forward? Will you need to add additional resources, or do you feel your current infrastructure can accommodate a potential increase in M&A?

We are comfortable with the resources we currently have to achieve our objectives for this year, Jim. Historically, our cadence has revolved around $10 million of EBITDA for businesses that we're purchasing at favorable multiples, which amounted to a handful of transactions yearly. Over the past few years, we have undertaken larger acquisitions like Matrix, but lately, we have been a little more cautious in our capital allocation. What we're finding now is that although the pipeline never disappeared, we're uncovering robust opportunities that are quite strategic and attractive for our long-term growth plans. In fact, we've already closed three transactions within the first four months of the year, with more imminent. We aimed to ensure our balance sheet can absorb these strategic and attractive transactions, and I can confirm that our team is equipped to handle this increased cadence. There is nothing large imminent, no alterations to our strategy, and no need for additional resources at present. This is simply an increase in transaction frequency relative to what we've seen in the past.

You've touched on the M&A approach, but could you provide more insight into what types of services you are looking for across segments and where those opportunities might arise?

Yes, Brian. Our transaction ideas or leads mostly come from word of mouth, either from our clients or our internal teams. The primary driver for acquisitions is geographic expansion or the addition of particular service lines that can complement our existing offerings for clients. To illustrate, Epic represented a continuation of our existing services; it was a fantastic team expanding geographically. Two Dot served the same purpose of geographic expansion for our current service line, and ETA was a smaller transaction where we brought in-house a partner of Montrose already serving existing clients. Geographical expansion is the primary driver, along with cultural fit and financial accretion. While we've been more cautious, the pipeline is robust, and our current approach is rewarding. In terms of PFAS revenues, it's a fluctuating process based on project cycles. To provide context, it was roughly $15 million to $20 million when we approached our IPO, rising to approximately $75 million to $100 million currently. We've seen a significant growth trajectory in recent years and believe that this will continue to multiply its size over the coming years. Returning to PFAS, I want to emphasize that this isn't solely a treatment issue. It influences every aspect of our business across all three segments. As for the R&R business excluding Matrix, margins would have decreased slightly. As noted, the pivot in biogas is visible and will commence ramping nicely, particularly in the year's second half. Our overall guidance reflects that we generally continue focusing on year-over-year comparisons rather than individual quarterly performances.

Could you discuss what you think your normal cadence for organic revenue growth might look like over the next few years? Historically, you've mentioned mid-single digits to high single digits. Do the new PFAS regulations imply that we should expect growth in the high single digits to low double digits for Montrose moving forward?

Yes. Let me address that, and Allan can certainly provide input as well, Stephanie. To clarify, when we refer to organic growth, we exclude the impacts of acquisitions and our emergency response business entirely. You should evaluate the core performance to analyze our organic growth trajectory accurately. When we went public, we discussed an organic growth quarterly cadence of approximately 7% to 9%. Today, however, we've averaged closer to 15% annually since our IPO. Our guidance for this year indicates an organic growth expectation of about 10% to 12% for 2024. In comparison to the 7% to 9% benchmark, our outlook signals an elevated organic cadence for the foreseeable future. The ongoing regulatory tailwinds will positively impact our performance as well.

That clarification makes sense. Thank you! Can you elaborate on the progress in your biogas business after finalizing the pivot? What kinds of projects are in progress now? You mentioned anticipating growth in the second half, so any additional insight would be appreciated.

Yes, the pivot has been completed. There may be quarter-on-quarter variability as we've finalized the transition in Q3 of last year. As we reflect on 2023 versus 2024, we expect substantial revenue and margin growth in this area as part of the aggregated ECT2 footprint, primarily involving biogas in conjunction with our PFAS water treatment business.

Within biogas, it's not necessarily new projects; instead, it's the specific components of the projects we service that have changed. We are now focusing on higher-margin design, engineering, and installation, rather than oversight of construction and equipment procurement.

There are no further questions at this time. I will now hand the call back to Vijay Manthripragada for closing remarks.

Thank you very much for your time today. We're really excited about the current prospects and look forward to our Q2 updates in the near future. Take care, everyone.

Thank you. Ladies and gentlemen, the conference has now concluded. Thank you all for joining. You may now disconnect.