Greetings. Welcome to Montrose Environmental Group, Inc. Second Quarter 2021 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rodny Nacier of Investor Relations.

Thank you, Joe. Welcome to our second quarter 2021 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’d 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 final prospectus filed with the SEC on July 23, 2020, 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, including adjusted EBITDA and adjusted EBITDA margins. 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 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 very much, Rodney and welcome to all of you joining us today. I will provide you with a few business highlights and then hand it over to Allan for our financial review and we will then open it up to Q&A. I will speak generally to Pages 4 through 8 of the presentation made available to you. But before diving into them, let me start by saying we are and we are pleased to see what we believe our long-term tailwinds for our business continue driving strong results, including in the second quarter and first half of this year in 2021. We could not have achieved these results without the focused execution of our team members, and I am truly grateful for them. Their dedication to providing excellent service to our clients and supporting each other continues to differentiate Montrose. The second point I would like to make is that though the Q2 and first half 2021 results speak for themselves, our team’s emphasis on quality, safety and teamwork are further highlighted in our inaugural ESG report, which we published at the end of July and which you can find on our website. The report touches on many of the themes we value culturally and the impacts of our culture on our business performance, and we look forward to engaging with all of you on how we can continue to integrate ESG into our operating decisions. And finally, before delving into some of the themes for the quarter, I would like to reiterate our previous message around how we look at Montrose in our business. Because demand for our environmental services does not follow fiscal quarter patterns, Montrose’s best assessed on annual results. This is how we manage and forecast our business and how we expect others to…

Thanks, Vijay. We are extremely pleased to have delivered solid second quarter results, which reflect the resiliency of our entire team, the focused execution of our growth strategy and the in-demand nature of our environmental solutions. We produced strong year-over-year performance from our core businesses and have continued to execute on our M&A strategy with the recent closing of our fourth acquisition in 2021. Moving to our revenue performance on Slide 10, we continue to drive strong growth across our business during the uncertainty of the COVID-19 pandemic. Our second quarter revenue increased 85% to $136.2 million compared to the prior year quarter. Year-to-date, revenues were up 100% versus the prior year period to $270 million. The primary driver of revenue growth was organic growth across all of our business segments, as well as our acquisitions of CTEH in early April 2020 and MSE in January of the current year. As we have discussed on our prior earnings calls, we completed the process of discontinuing service lines early in the second quarter of 2020, which partially offset our year-to-date and second quarter 2021 comparisons. Excluding discontinued service lines, revenues would have increased 88% in the second quarter of 2021 and 106% year-to-date. We don’t discuss organic growth on a quarterly basis as year-over-year quarterly comparisons can be misleading. However, on a year-to-date basis, organic growth was 47%. We also monitor organic growth without CTEH, given the episodic nature of CTEH’s emergency response revenues and the benefit from pandemic response services, which are not necessarily part of the long-term run rate revenues. Year-to-date organic growth without CTEH was 9% on the high end of our expected 7% to 9% annual organic growth expectations. Looking at our adjusted EBITDA performance on Slide 11, second quarter adjusted EBITDA grew 51% to $21 million…

Our first question is from Tim Mulrooney with William Blair. Please proceed.

Good morning, Vijay. Good morning, Allan.

Hi, Tim.

So I just want to make sure I’ve got a couple of things straight. It looks like maybe you raised your guide for organic growth, annual organic growth, for 2021 a little bit maybe. It was mid-single digit to high single-digit range last quarter. And now according to the outlook section of your press release, it looks like the guide is inclusive of more like high single-digit organic revenue growth. So maybe you raised it to the high end of the – of your typical annual range. Is that primarily being driven by the strength in CTEH relative to your prior expectations? Or is that primarily coming from other areas of the business? Thank you.

Hi, Tim, this is Vijay. We are – we continue to assert that we expect the business to grow mid to high single digits. So we’re not kind of changing that narrative. But you are correct, given the strong performance through the first half of this year, we expect to be at the high end of that range this year. But we’re not changing our broader narrative around our expected trajectory vis-à-vis the industry in the medium and long-term. And the high single digits is exclusive of CTEH. That does not include their performance, including CTEH, we are closer to 50% organic. And so the mid to high single digits that you’re referencing and the 9% that we alluded to in the release is excluding CTEH.

Okay, got it. I wasn’t sure. I know CTEH was strong in the back half of last year. So I wasn’t sure if you were expecting some headwinds there which, I guess, maybe gets me to my next question. You expect – you now expect CTEH revenue to remain elevated in the second half of the year. I was wondering if you could unpack that a little more for us because is this elevated above normalized levels of kind of $20 million a quarter or significantly elevated levels similar to what we’ve seen through the first two quarters of this year?

Yes. It’s – and so Tim, just stepping back, the $20 million per quarter that you referenced was off of the legacy kind of $60 million to $80 million, and we now think it’s more like $75 million to $95 million per year. So I think $20 million to $25 million we believe they will be elevated above their run rate through Q3 and Q4. It’s a base hard to peg exactly what the number will be because of the nature of the response services and the business continuity services they are providing. But the team is doing a great job, and they remain pretty optimistic that the demand cycle will continue through the back half of this year. So when we talk about elevated, we usually reference that vis-à-vis what we would expect to be their annualized quarterly run rate.

Understood. Thank you very much.

Thank you.

Our next question is from Andrew Obin with Bank of America. Please proceed.

Hi, yes. Good morning.

Hi, Andrew.

Hi, Andrew.

Hi, how are you? Just – I guess, I’ll ask more question on CTEH. Look, clearly, there are some structural changes in the business. You sort of talked about more services, better market share. Could it become a more stable business? How do you think about margin profile change? And more importantly, going into ‘22, how should we think about CTEH? Can it stay flat given everything you’ve done to the business so far?

Let me try to parse that a little bit, Tim. The team...

Simple question, simple question.

Yes. Yes. Let me – So let me take that piece by piece. So in terms of more services, more market share, I believe that, that has structurally shifted the business in a very positive direction, and we’ve spent some time with the CTEH leadership team to understand the various levers there. And so let’s take incidents like the pandemic, but like the hurricanes, floods, fires that we’ve referenced before and the increased frequency, let’s take that aside for a second. The structural shifts that they have done an exceptional job of executing on is signing up more MSAs. So as opposed to kind of one-time relationships with many of these clients, these are now long-term strategic partnerships, which give us collectively more of an opportunity to meet those clients’ environmental needs. And then when we talk about more services, Andrew, an example of that is the utilization of their software capabilities, which I’ve alluded to on prior calls, to help administer for our clients, both at the government and private sector level, there various response needs. So it’s a very nimble software architecture and it provides the team with kind of a unique advantage and a real value proposition for clients, and that’s real value that can be monetized. And take kind of those two variables. And that’s why we think structurally, it is both stable and at a higher level vis-à-vis where they were 2 years ago. Now your second question, will they sustain kind of the current run rate as Allan alluded to, they have done kind of north of $130 million through the first half of this year. That is an exceptionally strong year. And no, we don’t expect that to be their new baseline.

Got it. Great answer. Thank you. And just to clarify, you have closed a couple of deals last quarter, can you just tell us what’s the contribution – EBITDA contribution of the deals that you’ve closed so far versus your prior guidance in the second half?

Yes, they vary – Yes. So let me touch on the deal specifically, Andrew. So MSE was very typical of that segment on a run rate basis, kind of high teens EBITDA margin. Vista is within the Measurement and Analysis segment and labs, right, tend to typically tend to run single digits, but this runs double digits on the PFAS testing side. And Environmental Intelligence is in our advisory ecosystems side, and that tends to run kind of 20%ish EBITDA margins. Again, in aggregate, I’m talking about the segments, generally speaking, and these businesses puts and takes a little bit for each individual one, but they largely fall into that very consistent narrative. And so no, they haven’t really – if you think about the acquisitions in the context of our broader portfolio, it’s really going to be a back half of the year impact. And no, it’s not shifting our margin expectations materially. The one variable that’s worth noting is the – as Allan alluded to on the call, because of the outperformance of the CTEH business and their differentiated margin profile. That may impact kind of our annual end of year results because of business mix reasons, but the core the non-CTEH part of Montrose continues to perform exactly as we’ve articulated to you before, Andrew, if that makes sense.

Okay, guys. Great performance. I will talk to you later. Thanks.

Thank you.

Our next question is from Jim Ricchiuti with Needham & Company. Please proceed.

Thank you. Good morning. So a question on the CTEH business is, if we see a little stronger revenue from at least the COVID-related business in the previous quarters, I think a lot of that was testing that went was, in some cases, outsourced to other labs. Should we assume that there will be a similar type of margin profile as that business is a little stronger in the second half?

We’re working with the team to kind of mitigate the impacts of the testing services through the CTEH P&L, Jim. And so we’re hoping that, that’s not a continued trend. We don’t believe it will be. But into the foreseeable future, I think that’s from a modeling perspective, I think that’s a fair assumption for the back half of the year for now.

Got it. And I know...

Sorry. And just to reiterate, we do expect over time for those margins to normalize back to their historical run rates.

Got it. Thanks, Vijay. Yes, I know it’s early days as far as discussions and speculation about the infrastructure bill and what it could mean for Montrose. I’m curious, first, how you guys are looking at it internally? And the second question I have is, yes, I don’t normally necessarily think of you as doing a lot of outreach, but is this an area where it might lend itself in some ways to outreach as you start seeing needs arise in certain markets?

But what do you mean by outreach, Jim

Okay. First of all, let’s take a step back and say, what – as you look at the infrastructure guys yes, look, you’ve had a chance to maybe go through parts of it. Where do you see the biggest opportunities, number one, for you?

So we – The infrastructure build to us represents opportunities primarily on the advisory and on the testing side, Jim. And what I mean by that is the enactment of initiatives related to upgrading or building bridges or roads or water infrastructure creates inherent assessment and testing needs for our clients. And so we expect to see downstream demand from the start of those initiatives. In select instances, aspects of those programs may result in the need to redevelop or remediate existing water tables or soil and that also represents opportunities for us. And so we’re adjacent to, as you know, we’re not going to build a road or bridge, but the environmental assessments, remediation and testing associated with that activity is beneficial to us. And so that’s where we see the near-term opportunity. Does that make sense?

It does. But you would assume that it would be more demand flowing in, not necessarily you seeing opportunities and maybe reaching out to clients to at least talk about what you might be able to bring to. Okay.

Well, we are – well, it’s just as a slight point of clarification, are through the investment and commercialization efforts that we’ve made, we are very active in dialogue with clients around our capabilities. And we’re seeing – I’ve alluded to this on prior calls, just the increased ability to not only cross-sell services but to provide kind of an integrated set of solutions for our clients. And so that is occurring independent of the infrastructure build, Jim. But certainly, as a result, of activities related to the bill, we’re going to – we expect to be beneficiaries of that.

Okay. And last question for me is just on the one of the acquisitions caught my eye, the California Environmental Intelligence and obviously, given your expertise wildfire mitigation, which unfortunately continues to be in the news. And I guess what I’m wondering is, to what extent are there potential synergies opportunities with your other lines of business, I’m even thinking with respect to something like a CTEH.

Yes. Yes. I mean – well, I think there is a couple of levers of opportunity, which, again, we tend to think of transactions over the long-term, Jim. So in the immediate term, it’s going to be more about integration of that team and cultural simulation, which we’re really excited about. It’s a great group of folks, and we’re thrilled to have them as part of Montrose. But – The – if you think about what they specialize in, which is ecoseromiological services, particularly related to higher mitigation for the utility industry. It’s very complementary to some of the capabilities we have in the northern part of California. And the demand for just the fundamental service continues to increase, which is really encouraging for us. The next immediate set of opportunities we believe will more likely be, Jim, on the testing side, right? So as a result of fires, for example, or the mitigation process there is going to need – there is going to be a need for both data analytics, which is going to be very complementary to our recent acquisition of the SensibleIoT platform, but also testing, right? You can imagine the impact on air quality as a result of some of these fires and then potentially the ongoing remediation. The other part that some of our customers have started to talk to us about, though it’s not immediately actionable for us right now is a lot of these fires are put out by compounds that have PFAS. And as you know, that’s an area where we’re strong. And so I would see both of those as near-term opportunities. CTEH is response expertise is certainly very value add. The question becomes kind of who the customer is. As you know, we tend to focus a little bit more on the private sector. And the allocation of liability and risk in an instance like a fire is a little less clear. And so there is certainly opportunity, but I would consider that more long-term. And I would anchor a little bit more on the testing and the immediate remediation capabilities as near-term cross-selling synergies, if that makes sense to you.

It does. Got it. Thank you.

There are no further questions at this time. I would like to turn the call back to Vijay Manthripragada for closing remarks.

Thank you and thank you again to all of you for joining us this morning. We’re incredibly excited about what the future holds, and we appreciate all of your support. Take care and be well.

This concludes today’s conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.