Greetings, and welcome to the Montrose Environmental Group, Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rodny Nacier, Investor Relations. Thank you, Mr. Nacier, you may begin.

Thank you. Welcome to our fourth quarter and full year 2022 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 latest annual report on Form 10-K 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 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 and then hand it over to Allan for our financial review before we open it up to question-and-answer session. I will speak generally to the updated earnings presentation shared on our website. But before I begin, I would like to take a moment to acknowledge the plane crash in Little Rock, Arkansas, which took the lives of 5 of our colleagues last week. They were on their way to helping our clients, and this is one of those unthinkable events for which there are no words. Our prayers and thoughts go out to the families that lost their loved ones and to our CTEH colleagues, who are mourning deep, deep loss. I am proud of how the collective team has come together. I am also amazed at the poise and grace with which our CTEH team is handling the sudden and unexpected shock. To all of our CTEH leaders and colleagues, thank you for your unwavering fortitude and to our clients and partners who jumped in to help and are joining us to remember those we lost. Thank you. I also remain grateful for the efforts of our colleagues around the world from Australia to North America to Europe. Their results and efforts have resulted in another incredible year for Montrose, and I am really pleased with the execution across all levels of our business. As we have noted before, our business is best assessed on an annual basis, given demand for environmental services is not driven by specific or predictable quarterly patterns. This is how we manage our business and how we recommend you view our results as well. Let me now go to our financial results. We were pleased…

Thank you, Vijay. We are pleased to have closed out another year with strong organic growth in our core business, benefiting from the in-demand nature of our unique environmental solutions, our expanding customer relationships, solid customer retention and exceptional cross-selling success. We are also pleased with the resumption of our typical M&A cadence with the recent closing of our sixth acquisition since the beginning of 2022 and second, so far in 2020. Successful execution of accretive M&A remains one of our key growth pillars, and we are encouraged by the robust pipeline of prospective acquisitions in 2023. Moving to our revenue performance on Slide 12. We were happy to see continued strong organic growth across most of our service lines during the fourth quarter and full year 2022. Full year revenues were $544.4 million compared to $546.4 million in the prior year. However, excluding the revenue impact of the planned exit from legacy wastewater treatment and biogas O&M contracts, revenue was up 1.2%. This top line resilience was exceptional when considering the year-over-year decline in CTEH COVID-19-related revenues of $125 million. This COVID-19 headwind was almost entirely offset by our 26% organic growth in the remainder of the business as well as the positive contributions from acquisitions. For the fourth quarter, total revenues were $139.5 million, compared to $143.8 million in the prior year quarter. This decrease in revenues was driven by significantly lower CTEH revenue, partially offset by organic growth in our measurement and analysis segment, and the remainder of our Assessment, Permitting and Response segment as well as the positive contributions from acquisitions. Looking at our consolidated adjusted EBITDA performance on Slide 13. Full year consolidated adjusted EBITDA was $66.2 million or 12.2% of revenue compared to consolidated adjusted EBITDA of $73.2 million or 13.4% of revenue in…

[Operator Instructions]. Our first question comes from Jim Ricchiuti with Needham and Company.

This is actually Chris Grenga on for Jim. Sorry for your loss and congrats on the quarter. Just perhaps, could you provide a bit more color on what you're seeing in terms of the greenhouse gas monitoring and renewables looking forward into 2023 in terms of how those 2 are going to contribute to growth? And I have one follow-up.

Yes. Chris, why don't I take that? And then Allan, please jump in. The majority of our work on the greenhouse gas measurement is around our Measurement Analysis segment and our Assessment Permitting and Response segment, our advisory work, Chris. We are seeing a material uptick in demand for both of those services with clients asking us to help them think about how to frame the measurements for broader reporting purposes and ESG reporting, but also for compliance purposes. So as we think about our outlook for the measurement and analysis segment, some of our attractive margin growth opportunities and our disproportionate high-margin growth opportunities will be coming from that sector. And we certainly expect that to sustain over the next several years, you'll see us accelerate organically at double digits as we have over the last couple of years. And there are also acquisition opportunities in that space that we'll continue to expand upon once those occur. Does that answer your question, Chris?

Yes. And with cross-selling now at 35% of revenues, where -- I guess, where do you see that going longer term? And is that -- what's the potential to continue to increase that?

That's where most of our attention is on the business development side, Chris. We have historically talked about focusing on deepening our relationships with customers. And that can come in several forms. It can be additional services to a client at a client site. It can be the same service across multiple client sites. And one of the challenges with the metric we're presenting is the cleanest one to allow for consistent measurement over time is that it's more than one service. And so if we add a second or a third service, Chris, it doesn't count in that metric. So we think over time, our organic growth opportunities sustained by continuing to capture more wallet share across our existing customers. It's less about customer acquisition for us and more about deepening relationships. That measurement, as Allan has mentioned before, should easily go north of 50%. And there's no reason over the long-term horizon, why all of our customers shouldn't be using more than one Montrose service.

Our next question comes from Tim Mulrooney with William Blair.

So the EBITDA margin guide, it kind of implies flattish margin expansion year-over-year. And we were expecting some margin expansion in '23 as you get leverage on some of those fixed corporate costs you layered in last year and maybe as the remediation business scales up, so can you talk about some of those things that are holding margin expansion back in 2023 to that flattish type range? And maybe you could elaborate a little bit on if your long-term margin target of 20% or your time frame around that target has changed at all? That's my only question.

Allan, do you want me to start with that and then you can jump in.

Yes. Yes, please.

Tim, thanks for the question. It's a great question, Tim, and let me perhaps start with -- let me take your question in pieces and let me know if this addresses this. So forgive me, it's going to be a little bit of a lengthy answer. Our long-term outlook around 20% has not changed, and it's driven, as we've talked about by 2 factors. One is operating EBITDA and the second is corporate expenses as a percentage of revenue. And so to get to 20%, Tim, operating EBITDA margins would need to be in the 22% to 25% range, and corporate would need to come down to 3% to 4% of revenue. Corporate will absolutely get there, and you'll see that tick down this year. And so bear with us as we through that out, that's very tightly managed, and we have visibility to that. On our operating EBITDA margin run rate, that will also get to our range. If we think about our Measurement & Analysis segment being at 18% to 20%, we've demonstrated over the years, that is -- and will continue. Our water and biogas business at maturity, getting to the mid-20s. CTEH, you can see their margin has increased getting to the -- getting back to the mid-20s post-COVID and then the advisory and remediation practices being in the teens to 20%. So from a macro perspective, our outlook hasn't changed. And if you think about Slide 5 and 6, Tim, the blue bars, you can see that we are expecting some operating leverage in 2023. But you're exactly right. the pace of that has been challenging for us to predict. And the reason for that Tim is twofold. It's hard for us to predict the acquisition profiles. And I'll explain what I mean by that…

Yes, Vijay.

You want me to add to that, Vijay?

Yes, please.

Yes, let me just add, Tim. We're seeing a lot of growth opportunities more so than 2, 3 years ago. Many of those require some upfront investments like our European expansion, for example. And because we no longer add back start-up losses that obviously has a short-term impact on margins. We're also growing at elevated levels above what we had anticipated. And in a tight labor market and an inflationary environment and a desire to maintain quality is really tough to grow double-digit organically and expand margins at the same time. When revenue slows, as it did in 2020, we demonstrated an ability to expand margins quickly. But we don't think it's prudent in the short term, the focus on margin expansion given the wave of organic opportunities that we're seeing.

Okay. So if that -- Allan, just following that point then, if you plan to continue to grow double-digit organically, is it unlikely that we will see margin expansion in the coming years and that 20% EBITDA margin target is indeed farther away than what we were thinking?

It depends on a number of factors, right? Again, if you look at our guidance for '23, and I'd point you again to Page 6. If you look at our core business, so pulling out CTEH and focusing on operating segment margins. There is about a 100 basis point improvement in '23 versus '22. So you're seeing some margin expansion, but we're also falling at the midpoint for double-digit organic growth, which is above what we had expected certainly at IPO time. So getting to the high teens 20% margin is still absolutely achievable. As Vijay said, the mix of acquisitions can throw that off temporarily and outside organic growth can sort that off temporarily, but the end goal doesn't change. It's absolutely achievable. When we look at the mix of business we have -- and the margin profile of the businesses we have and the underlying market sizes, so we have a sense of where our portfolio should settle out, that 20% is absolutely achievable. Corporate costs, as Vijay mentioned, will come down with acquisitions. You'll see that come down in '23. So it's a little slow out of the gate than we had anticipated. But again, the growth is also faster than we had anticipated. In goal which is still, we believe achievable. Is it 3 years? Is it 5 years? Is it 7 years? It's just really hard to say because we're going to continue to be very opportunistic in driving revenue growth and prioritizing revenue -- quality revenue growth over that contract.

Tim, and just stepping back, because I think you're alluding to our articulation of kind of our expectations at IPO over that 5-year horizon, right? So when we went public in 2020, we were around $230 million of revenue. So -- and what we said is that you should expect us to grow at 20% to 25% a year, 7% to 9% organic, right? Would that be a fair way to say where we started?

Yes, that's exactly.

Yes. So if we -- so if you kind of just do the math on that and just, forgive me I'm doing it on the fly, right? Let's just take the top end of that 25% growth over 5 years, right? That's about a triple starting at $230, you should be at around $700 million to $725 million of revenue. At 20% margins, it's about $140 million of EBITDA. I think what we're trying to say is we're going to achieve both milestones and hit our earnings and EBITDA targets. There's no question about that. What we're also saying is that we're actually outpacing our expectations on revenue. So the margin profile may be different year in and year out, but it should be very additive to our shareholders and sets us up beyond that 5-year horizon. So it's not like our absolute earnings potential or cash potential is any different. It's just that we're outpacing the top line expectations by virtue of some of the advantages we've built with our business model and with our technology. Does that make sense? And so we're anchoring on margin, but it's the absolute cash and absolute EBITDA that we're not all that hesitant about saying we're very confident in hitting.

Yes, and I think that's a good way of framing it for investors, anchoring on the dollars rather than maybe -- I'm little too focused on the margins here, but regardless appreciate all the color you both shared here and I'll get back in line.

[Operator Instructions]. Our next question comes from Andrew Obin with Bank of America.

This is David Ridley-Lane for Andrew Obin. Looking at the 2023 revenue guidance, excluding CTEH, what are the factors that would drive you towards that lower end of 10% or the upper end of 17%. What's driving some of the factors driving that?

Yes. Let me start with that, and Allan certainly jump in. So David, there's a couple of variables there. One is the phasing in and starting of our various water and biogas projects. As we've said before, we're seeing a lot of interest in both of those end markets and demand has been really attractive. But exactly when the projects start and stop is a little tougher for us to predict. So that's going to be one variable that dictates where we fall on that macro trajectory, either low double digits or high double digits. The other variable that's going to be one that we're going to need to watch is the cadence at which our greenhouse gas measurement practice really picks up. And that's another one -- and that's partially a function of some of the regulatory flux that occurred at the very end of last year, where the technology -- the imaging technology that we've been practitioners of for years was recently deemed the best emissions reduction technology by the EPA. So how quickly clients adopt that will partially also dictate our ability to capture share in that part of the market. So those variables are the ones depending on the cadence that will dictate whether we're on the low end or high end of that. But regardless, even the low end is elevated compared to our historical levels. Does that make sense?

Yes, that makes perfect sense. And then the last 2 quarters of CTEH have meaningful levels of COVID-related revenue. I'm just trying to understand the bridge you've been at about $100 million run rate in the second half of '22 to the $75 million to $95 million guidance.

Yes. CTEH is coming if you look at -- Allan, do you want to take that?

Sure. Yes. The -- still meaningful for them in terms of overall Montrose has shrunk significantly certainly by Q4, and we expect that to go away completely as we get into '23. So sequential declines, about 1/3 of their revenue in Q4, but those contracts are largely winding up. So we don't expect to see much more of it in the new year.

And David, why don't the -- just to add on to that, the team has done an exceptional job pivoting away from that part of the business to the traditional environmental side. And they had -- even with the $125 million drop, you can see their overall reduction was less than that, and that's because the core business for CTEH, their core response and [indiscernible] business has really started to pick up nicely and certainly has done so, so far in 2023. The team has just been on a very nice cadence already so far this year, independent of the COVID work.

Got it. So the $75 million to $95 million does include growth in sort of core CTEH and the target number is just -- not the ending of COVID-related revenues. Is that the right way to think about it?

I think the right way to think about it is their cadence is $75 million to $95 million. And it's a matter of -- they have a very talented teams and an ability to flex up and down, but it's a matter of the mix of the work and where they're deployed. So as COVID winds down, they reallocate those resources to their more traditional work.

Our next question from Stephanie Yee with JPMorgan.

Can you remind us of the synergies between Montrose and CTEH its business outside of the COVID-related work?

Yes. They are a really critical part of our overall story, Stephanie. So just at a macro level, as clients think about ways to deal with various environmental opportunities and challenges. One of those is dealing with various incidents that occur due to changes in our climate or aging infrastructure. So the macro demand for their services, which is something our clients need is independently very additive. In addition to that, because they are the advisers working with Incident command when something happens, there is substantive testing work, monitoring work, advisory work in toxicology and public health impact work and then downstream remediation work that occurs when something unfortunate happens, right, whether it's a hurricane or a flood or a fire or a derailment. And so as they're helping these communities and helping incident command, the Montrose services that flow downstream of those -- that initial event make it very synergistic. So when we talked about maybe 2 years ago, Stephanie, one of the early indications of how synergistic it was, we referenced the oil spill in California and how 5 different Montrose teams deployed alongside CTEH to support that client doing natural resource damage assessments, monitoring in addition to the response and that is certainly the case as well with some of the recent incidents that have occurred so far at the end of '22 and early part of '23.

Okay, okay. That makes sense. I was just asking because I guess we're hoping that we wouldn't be talking about the COVID-related revenues tied to CTEH in 2023. I know that was a lot explained in 2022. But it looks like there's still a little bit of that rolling off in 2023. So I just wanted to be reminded of why they're coming together, the 2 companies was a good deal in the first place? So thank you for that.

Yes. And again, the COVID services -- forgive us, we're having a really hard time. We had a hard time predicting exactly when those will start to stop. Going back to '21, we thought it would slow down, and it didn't continue into '22, and it was certainly substantive in the early part of '22. But it's really behind us now, Stephanie. As we look at the 2023 guidance, that's a nonfactor. With what we know so far.

Okay, and just one other question. Can you talk about how maybe the economic environment, it seems -- it's the employing a little bit of uncertainty. How that factors into your intention of increasing the pace of acquisitions in 2023, if at all?

It doesn't, it doesn't. In fact, what we were alluding to and following on Tim's question, Stephanie, what we're saying is that the macroeconomic challenges have impacted our acquisition targets more than they've impacted us. As Allan talked about in his comments, we've been fortunate with our pricing discipline to be able to take up prices so that the cost pressures -- the inflation-related cost pressures have not really had an impact on us. And because of the diversification of our end markets, we're broadly insulated from any major economic shifts to the upside or downside. So it's a very steady business. But our -- but some of the smaller companies that we're buying have certainly been battered. We see that candidly as a really attractive opportunity, which throws off again, the short-term profile but we think it will be very attractive long term. So we're not all that worried about it. And our balance sheet is hedged against those increased rate environments and has been for a while. So for us, it's really more a matter of making sure it's strategically additive and us being opportunistic. Allan, is there anything else you would add?

No, I agree with all that, Vijay.

[Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to Vijay Manthripragada for closing comments. Please go ahead.

Thank you, and thank you all again for your time, for your interest and for your support of Montrose. We're thrilled and excited about 2023, and I'm sure we'll be talking soon. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.