Greetings, ladies and gentlemen, and welcome to the Montrose's Environmental Group Third Quarter of 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.[ Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier of Investor Relations.

Thank you. Welcome to our third quarter 2022 earnings call. Joining me are Vijay Manthripragada our President and Chief Executive Officer; and Allan Dick, 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, 2021, 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. Welcome to all of you joining us today. I will provide a few business highlights and hand it over to Allan Dicks 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 shared on our website. And before I begin, I would like to reiterate 2 themes that we've highlighted before. The first is that demand for our environmental services does not follow fiscal quarter patterns and is best evaluated on an annual basis. The second theme is that these results belong to our colleagues around the world who have managed through a pandemic, macroeconomic shocks and geopolitical turbulence. I am proud of all of our team members whose dedication helped us produce another quarter of great results. With that, let me now take a moment to recap several key themes that are relevant to our third quarter 2022 results. First, as it has all year, our business continues to benefit from growing demand across most of our service lines and in particular, in the areas of PFAS Water Treatment, greenhouse gas measurement and mitigation and renewable energy. The quarter also saw strong performance across our air and lab services and recent acquisitions, which are recurring and are driven primarily by regulations. Our third quarter performance continues to validate the demand tailwinds and regulatory themes we've outlined since our IPO over 2 years ago. Our stellar organic growth, excluding CTEH, reflects the continued demand for our integrated service model and differentiated solutions. Second, in addition to strong organic revenue growth, excluding CTEH, we are pleased with our overall sequential margin improvement. As noted last quarter, we were able to respond with pricing and other initiatives given some of the unexpected inflationary pressures…

Thank you, Vijay. The strong organic growth in our core business continued in the third quarter, reflecting our expanding customer relationships and ongoing cross-selling success. We are also continuing to execute our M&A strategy with the recent closing of our fourth acquisition in 2022. We -- moving to our revenue performance on Slide 10. We saw organic growth across most of our business lines. Our third quarter revenues were $130.3 million compared to $132.6 million in the prior year quarter. This decrease in revenues was driven by significantly lower COVID-19 revenue from CTEH, this COVID-19 revenue dropped by $31.1 million and the exiting of certain wastewater treatment and biogas O&M contracts. The revenue decrease was partially offset by organic growth in our Measurement and Analysis, and Remediation and Reuse segments as well as the positive contributions from acquisitions, which added $7.5 million to the quarter. Year-to-date, revenues were up 0.6% versus the prior year period to $404.9 million. The primary driver of revenue growth in the year-to-date period was organic growth in our Measurement and Analysis, and Remediation and Reuse segments as well as the positive contributions from acquisitions, which added $19.9 million to year-to-date revenue. These year-to-date benefits to revenue helped us to more than overcome the significantly lower COVID-19-related services provided by CTEH. This COVID-19 revenues were down $103.4 million year-over-year as well as our planned exit from legacy O&M contracts. Looking at our consolidated adjusted EBITDA performance on Slide 11. Third quarter consolidated adjusted EBITDA was $17.1 million or 13.1% of revenue compared to consolidated adjusted EBITDA of $20.3 million or 15.3% of revenue in the prior year quarter. Year-to-date, consolidated adjusted EBITDA was $48.4 million or 12% of revenue compared to consolidated adjusted EBITDA of $56 million or 13.9% of revenue in the prior year period.…

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer Session. [Operator Instructions] Our first question is from Tim Mulrooney of William Blair.

Some quick questions, just 2 quick ones for me, numbers related questions. So the revenue of $130 million for the third quarter, that came in below consensus expectations, but you guys don't guide the quarters, you guide the years. And you maintain the guidance narrative for full year, keeping the midpoint. So my question is, was third quarter revenue inline with your internal expectations or did some stuff get pushed out in the fourth quarter?

I'll take that conceptually. Our outlook is exactly the same. And the reason we don't guide the quarters is there is by virtue of some of the projects that we do on the testing side, on our water side, on the renewable energy side. For example, they will ebb and flow. And so by virtue of us not changing our annual outlook, the midpoint as you alluded to, you can see that we have a lot of conviction on what the trajectory looks like through the back half of Q3 and -- sorry, in the back half of Q4 and into this year. So yes, it was very much in line with expectations and our annual expectations, we have a lot of confidence in that as well.

Got it. So consensus got too aggressive, but no change in business as far as you're concerned.

Tim, encrypted in that is the consensus for Q3, if the annual doesn't change its too aggressive, then consensus for Q4 may not be aggressive enough, right? If you were just to take those 2 quarters in isolation. So we don't guide the quarters precisely comparatively.

Yes. Yes, 10.4%. Okay. On the EBITDA margins for the fourth quarter now, the midpoint of your guidance, Vijay. I mean, it implies pretty strong EBITDA margin expansion in the fourth quarter following several quarters where EBITDA margins have declined year-over-year. So can you just kind of walk us through the puts and takes on why you expect that margins would inflect into such a positive expansion territory in the fourth quarter?

I'll take that conceptually, Tim. We don't look at the business on a quarterly basis. And so again, it's influenced by revenue mix and various initiatives that we would implement over the course of the year. This year, part of the reason for this sequential improvement was because of the cyber-attack that we talked about in Q2 as an example of kind of anomalous impacts that we had earlier in the year. And then because of the inflationary pressures in Q2 that we then try to redeem over the course of 3 and 4, and we've had a lot of success doing that, we've seen really positive momentum on the margin side. And so we're expecting sequential margin improvement as a function of those efforts. But again, as you look over the course of the year, Tim, our outlook is very consistent with where it was given at the beginning of the year.

The next question comes from Andrew Obin of Bank of America.

Just a question -- just more of a sort of bigger picture question. As you're getting bigger, what are the sort of system challenges have you run into in sort of trying to manage the company? And what have been any actions that you have taken to sort of change your approach to how you manage the systems, how you manage complexity as you continue to make acquisitions? Or does the current setup continue to work?

Yes. Let me try that, Andrew, this is Allan. As you know, certainly after IPO in late 2020, we replaced our ERP, precisely in anticipation of the continued growth we were expecting. And in particular, some of the business mix that we were seeing that was more project oriented and needed a system that could handle more complex projects. So that system has now been in place for 2 years and is operating really well. The training, the SOPs, the KPIs around those systems are now well implemented and incentive plans have been built around those. At the same time, we implemented our new CRM as we've talked about. So between those 2 systems, we are operating as well as we've ever been, and I'll bring in through those single systems, right? We don't operate multiple systems. And also, as we've discussed, when we acquire companies, we integrate those company systems at our systems pretty quickly. So we feel really well fit from a system perspective.

Yes. Andrew, I would take -- I totally agree with Allan. I would perhaps highlight a couple of other considerations. So you're right, we are more than double the size we were at IPO, but we have stronger organic growth, higher margins, better cash flow generation and lower leverage. And so hopefully, by virtue of our results, you can see that even though we are a larger, more complex business, by any objective measure it's a much stronger business. The variables we're considering now as we enter this new phase of our growth are more related to some of the externalities that we face, all of which you guys obviously are very close to. We have gotten a lot more disciplined with pricing. As Tim alluded to, we're seeing -- you're already seeing the benefits of those efforts, right, with our sequential margin expansion. We've gotten a lot more disciplined system-wise and infrastructure-wise with our cash management and our sales and marketing efforts, which were non-existent in the -- in a coordinated set right at that P&L which we talked about in a formal way, have resulted in us seeing materially higher cross-sell activity, right? So over 18% of the revenue last year and increasing is coming from clients purchasing multiple services, and so we're largely harvesting our clients and working more closely with them as opposed to try and acquire new clients. And so those are all examples of us operating in a more complex environment, but with a series of new capabilities, which are largely a function of the infrastructure systems we put in place and which Allan alluded to. And so as we think about getting from $500 million to $600 million of revenue to $1 billion, a lot of what we talked about in terms of the corporate investments we made this year, right, which were a function of our accelerated growth, we think will position us well in a similar way over the next couple of years.

Got you. And just a follow-up. Can you just provide more color on price cost and specifically, how does the equation on sort of labor availability, labor scale and wage inflation work against your ability to go to your customers and continue to raise price and the fact what appear to be a tight labor market, maybe not. If you could provide color there. Thank you.

No, it's a very tight labor market. I mean we are very sensitive to it. It's something we've spent a lot of time on. And through our ESG report, you see us -- we disclose all of our retention rates. And I think we said this on earlier calls, Andrew, we feel really good about the efforts we've made and the quality and strength of our team, particularly at the senior levels, the ones interacting with our clients regularly. Our retention is strong. They're heavily expertised and continue to be heavily engaged as is the management team. Where we are more sensitive and really need to do a better job candidly is at the more junior levels, the entry-level staff, the hourly staff. And we need to continue focusing there. So we have a series of efforts initiatives through our human resources team and all of our operating leaders that engage more, be more flexible with the work environment and think about creative ways to compensate and incentivize. And so that's a huge focus. Last year with that preamble, our labor costs, which aren't just valoring including benefits, went up 5% as opposed to our historical cadence of around 3%. And so our pricing this year reflected that. And then we had to take pricing up against in Q2, Q3 because of some of the variable costs we alluded to earlier. But because it's primarily a services business, as long as we are really disciplined with translating that labor cost increase to our pricing algorithms, we'll be able to offset that increase. But it is a very -- this is something that we are spending a ton of time on in ways that we weren't 4, 5, 6 years ago.

Got it. Yes. But ultimately, the pricing pressure is still there on labor, but you feel comfortable being able to keep up or stay ahead of it.

We feel comfortable being able to keep up or stay ahead. Yes.

The next question comes from Stephanie Yee of JPMorgan.

I wanted to ask, I appreciate that you highlighted a lot of the business is tied to regulations and even kind of in this environment of uncertainty, still see very robust growth for the business. Have you seen any projects or customers kind of pulling back to shift maybe in timing? Just any color in terms of maybe some hesitancy in terms of client demand because of the environment?

We haven't, definitely no. As we talked about -- the only company we really saw that was in 2020 when the government effectively shut down the ability to move, either within state cities or between states. And then some of those projects got pushed as we talked about with you and others into other quarters. But no, this year, we haven't really seen much of that. I mean there is the natural scheduling variances that occur all the time, which is why we talk about ours not being a quarterly business, so a project that may be scheduled for late Q2 may move into early Q3 or something like that. We have this all the time. But no, in aggregate, we haven't really seen much movement of projects in around --

Okay. Okay. That's awesome. And in terms of the comment about some of the acquisitions being lower margin than the company's business impacting kind of the assessment segment, I guess, over time, do you expect some of these acquisitions, the margins to come up to the company level as you integrate them as you drive more synergies for them? Or is it there structurally, I guess, lower margin on the company, but the acquisitions are accretive from a strategic standpoint?

Yes, it's a great question. So we -- what we were alluding to is perhaps we weren't clear, Stephanie. So my apologies, is some of the recent acquisitions we've done in the consulting advisory space, having been at that 35-plus percent margin cadence that we've historically talked about. And so those – so in the commentary we alluded to the fact that, that had some impact on the quarterly variance quarter in, quarter out for that specific segment. There are some smaller acquisitions we may do, for example, on the testing side that are similarly lower margin than they would be on a run rate basis. In select instances, we certainly expect margins to rise as I think it integrated into our systems. But as you know, ours is really an organic revenue play, right? This is not a cost synergy play. But as we continue to cross-sell services as the revenue trajectory increases, the natural organic and operating leverage in the business for cost margins to accrue. So the recent acquisitions, for example, Environmental Standards, TriAD, AirKinetics, those relative to our existing segment margins weren’t necessarily margin accretive, which is what we were alluding to in the commentary, if that makes any sense. But yes, over time, we have no change in our expectations around margins.

Stephanie, does that conclude your questions?

Yes. That was helpful. Thanks.

Thank you. [Operator Instructions] The next question comes from Noelle Dilts of Stifel.

Hello there, thank you for taking the call. So I was wondering if you were to take out adjust for CTEH and if you were to kind of look at the -- what I would characterize as the legacy businesses versus the higher growth that you're seeing in PFAS and biogas and CO2. Could you give us a sense of kind of how to think about the growth trajectory of each of those groups in 2022? And how you're thinking about how we should be thinking about sort of the mix of growth for 2023?

Yes. Good question, Noelle. We highlight PFOS, biogas and greenhouse measure with the mitigation because those are at elevated levels of organic growth, as you know, right, as you can see from our numbers. But that doesn't mean that the rest of our core environmental services are also growing very attractively. We just don't highlight them as much by virtue of the math. But as we look at our core testing business, for example, the organic growth trajectory in that business is amongst the best it's ever been on the back of some of the regulations that have already been implemented and some that are expected to be implemented our clients are heavily engaged with us across our testing business, our field services and our labs. We're seeing some really nice trajectory. Across our engineering remediation and consulting businesses, we're seeing some really nice growth opportunities. As we look at our recent acquisitions, for example, on the West Coast, the work we're doing in utilities, on fire mitigation, I alluded to our team out of Pennsylvania of Environmental Standards those two, as an example, are seeing exceptional organic growth opportunities ahead of them. And they are indicative of kind of our broader sentiment in that group. And so as we look forward, we're really, really feeling great about what the 3 to 5 year outlook looks like. And then obviously, we talk a lot about the PFAS Water Treatment, the biogas, renewable energy and the greenhouse gas mitigation business. And the reason for that is those addressable markets have been increasing in size and the velocity and client demand in those business lines as it's something you guys are going to take a lot of attention to, and we're naturally benefiting from that already. So we're feeling great. I think the -- and again, as you said, excluding EPS, obviously, the best business, it's tougher for us to predict year in, year out, but the fundamentals there are already strong. So you can see that I think as investor presentation around -- that's the blue bars, which we would call core Environmental Services. You can see that trajectory, that cadence is incredibly strong and has been in the last couple of years. And as we look out over the next 3 to 5 years, we're feeling really bullish on it. Does that answer your question?

Sure does. And then just on the PFOS remediation services, is there any way you could kind of talk about how many programs you have at this point that are in, say, beta testing and kind of how we should think about your historical hit rate in terms of moving those tests into full-scale deployment?

Yes. The -- we don't disclose the number of pilots that we have ongoing, Noelle, that will give you kind of some structure at that point, that may be helpful. We -- as we think about PFOS in aggregate representing Montrose’s percentage of revenue right from single digits to this year, it will be closer to 20%. As we look across the next 3 to 5 years, we think that has the possibility of increasing well beyond that 20% of full revenue mix. And that's a function of a series of pilots that are underway. The reason we're not disclosing pilots we're disclosing pilots or disclosing exactly when they'll start is that's a little unpredictable for us. It's about an 18- to 24-month cycle from when the initial water testing is done, a lot of which started at the end of last year to when the pilots get implemented to when those pilots become scaled. And some of that, especially when dealing with the Department of Defense, Airports, which are public partnerships is also predicated on public funding segments. And so over the 3- to 5-year horizon, we're feeling really, really good about the growth trajectory, but we're not in a position today to disclose exactly how many pilots we have nor how many of those will convert to full scale systems next year in 2023.

Thank you. Ladies and gentlemen, as we have no further questions in the conference line -- my apologies, We've got another question coming from Tim Mulrooney of William Blair.

Thank you for snaking me in. I just wanted to build on the last conversation that you were having with Noelle. Given that your PFOS remediation technology, VJ and Allan, is particularly well suited for certain applications. I'm curious if there are certain markets where there's a greater near-term opportunity near term, I think, like 3 to 5 years, whether that be military bases or airports or large industrial sites? Are there particular set of customers in specific end markets where you're seeing outsized demand at the moment as you think about those pilot programs?

Yes, it's a great question. -- plans for us have already been adopting the technology, and we expect we'll continue -- so that is probably our #1 focus point, Tim, these tend to be more complex water streams, so I’m talking about industrial wastewater, specifically, more complex water streams with short-chain or long-chain PFOS that benefit from our technology and regeneration. We're demonstrating pretty consistently that if you have high concentrations in short chain that the life cycle costs are lower with our system and the efficacy is stronger with our system, again, speaking of generality, and we've shared a lot of the technicalities with you and publicly Tim. We're also seeing similarly a lot of both, inquiries and demand from Department of Defense site, specifically our Air Force bases. Not surprisingly, when training occurred with the spring of firefighting foam on Air Force bases as an example, and obviously, meaning to a lesser extent, 80 sites that -- the PFOS from that [indiscernible] the water streams and now required remediation. And these Air Force Base as a simple example, which we took you to and others to, Tim, as an example, now we're seeing a lot of demand picking up from that sector. And then that's consistent -- has been consistent in Australia and is now increasingly consistent across Europe. And so we are seeing just a consistent uptake from those two constituencies in particular. And going back to Noelle's question exactly when that starts at full scale at the velocity many expect is a little tougher to predict. But it's already, as you can see in our organic growth and our margin accretion at the remediation of new sets is already in our numbers, it has been at the end of '20 over the course of '21 through this year as well. And we certainly expect over the next 3 to 5 years that those 2 constituencies, the industrial wastewater and the DoDs across the world will be our primary sources of engagements.

Thank you. Ladies and gentlemen, this does now conclude our question-and-answer session. I will now turn the call over to Mr. Vijay Manthripragada for closing remarks.

Wonderful. Thank you. Thank you all for the time again this morning. Allan and I and the team are thrilled with the quarter, and we're looking forward to speaking with you about the end of the year and 2023. So thank you, again. Take care and be well.

Thank you. Ladies and gentlemen, you may now disconnect your lines. Thank you for your participation.