Hello and welcome to the Montrose Environmental Group, Inc. First Quarter 2023 Earnings Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to your host today, Rodny Nacier, Investor Relations. Please go ahead, sir.

Thank you, operator. Welcome to our first quarter 2023 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, Chief Financial Officer. During our discussion today, we will be referring to our presentation which is available on the Investors section of our website. Our earnings release is also available on the website. Moving to Slide 2. I would like to remind everyone that today's call will include forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ in a material way due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook. We refer you to our recent SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 which identify the principal risks and uncertainties that could affect any forward-looking statements as well as future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including consolidated adjusted EBITDA, adjusted net income and adjusted net income per share. We provide these non-GAAP results for informational purposes and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and the reconciliation thereof to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay, beginning on Slide 4.

Thank you, Rodny and welcome to all of you joining us today. I will provide you with business highlights, Allan will provide you with financial highlights and we will then open it up to Q&A. I will speak generally to the first quarter earnings presentation shared on our website. But before I begin, I would like to reiterate that our business is best assessed on an annual basis, given the nature of demand for environmental services is not driven by quarterly patterns. This is how we manage our business and how we recommend you view our results, as well. I would like to start by highlighting several key themes from our first quarter 2023 results. As I note each quarter, Montrose's successes and our Q1 2023 successes belong to our over 3,000 colleagues around the world. It is because of them that we collectively get to create and benefit from the value that's being created. The first theme is that regulatory tailwinds are substantive and sustained. Our business and integrated approach to environmental solutions are benefiting from growing demand across most of our service lines. In Q1, our advisory services, our air measurement services and our environmental lab services all saw strong demand particularly with greenhouse gas measurement and mitigation. And though there is some expected and planned moderation in our remediation and reuse segment given the incredible organic surge last year, we see sustained tailwinds for our ECT2 brand, our PFAS water treatment and renewable energy services and we continue to believe their trajectory will be very attractive over the coming years. The second theme is absolute EBITDA which manifested via profitability and EBITDA margins. We will discuss why it is important to anchor on absolute EBITDA dollars but given questions from our product conversations with you, we will…

Thanks, Vijay. Our solid overall first quarter performance reflects the strength of our business model and ongoing demand for our environmental solutions. As Vijay mentioned, we are especially pleased with our strong year-over-year margin performance at an operating segment level as a result of the favorable business mix, the in-demand nature of our services and the early returns from our pricing actions. We also benefited from M&A which we expect to be more meaningful this year, given the resumption of our typical M&A cadence as demonstrated by our recent acquisitions since the beginning of the year. Moving to our first quarter performance on Slide 8. Total revenue for the first quarter was $131.4 million compared to $134.7 million in the prior year quarter, primarily due to lower demand for COVID-19-related services provided by CTEH, lower revenues in a discontinued lab and the timing of projects in our remediation and reuse segment. Excluding revenue from COVID-19-related services and discontinued businesses, revenue was up 17.2% year-over-year, given strong organic growth in our assessment permitting and response and measurement and analysis segments, an increase in CTEH environmental response revenues and the contribution of acquisitions. First quarter consolidated adjusted EBITDA was $16.6 million and represented 12.6% of revenue. Excluding discontinued businesses and including start-up losses which we no longer add back, consolidated adjusted EBITDA of $16.6 million compares to $14.4 million in the prior year, an increase of 15.2% and consolidated adjusted EBITDA margins improved from 11.2% in Q1 2022 to 12.8% in the current year. As we've highlighted on prior calls, Montrose's performance needs to be assessed annually. This is how we evaluate the business due to the stronger predictability of the business on an annual basis. This is consistent with how we hire staff, allocate resources and manage the company. Turning to…

[Operator Instructions] And the first question comes from Tim Mulrooney with William Blair.

This is Sam Kusswurm on for Tim. I guess I'll focus my questions more on the Matrix Solutions acquisition. I guess to start, can you give us a sense of the size of this acquisition? We noticed Matrix had I think 570 employees and CTEH had 170 [ph] employees when you first acquired it. So it seems like this might be a pretty sizable acquisition.

This is Vijay. That acquisition is in the process of shareholder vote and for Canadian law is expected to close kind of in the back half of the second quarter. So I'm not going to say too much about it. But the aggregate size of that business will not materially move our overall profile in the way CTEH did. It is a lot of people but it is not as impactful from an EBITDA perspective.

Well, maybe more of a broad question then. I think your last 2 acquisitions, we noticed they're both headquartered in Canada. Maybe you could just share your thoughts, I guess, on the market opportunity in Canada and how you would characterize that relative to the United States.

Yes, it's a great question. We are still heavily oriented towards North America. And a lot of our clients have a substantive presence in the Canadian market. And for all the reasons we've talked about before as it relates to environmental policy, methane measurement mitigation, both the provincial governments, in Alberta in particular and the broader Canadian federal government, are very forward-leaning. And so we've been bullish on that market in aggregate for a long time now and this is just an extension of that same policy. So we think there's going to be a lot of client-based opportunity across both geographies. And we're also really excited about what the Canadian market unto itself presents once these teams join us.

Maybe one last one for me then related more to the guidance, I guess. Can you maybe share what you expect GreenPath to generate revenue for the remainder of 2023 and its approximate EBITDA margin? I guess we're trying to figure out how much of the EBITDA guidance raise today was attributable to that acquisition.

I would think of that business as kind of around $1 million in terms of contribution this year. So about a half, little under half of the guidance raise is due to the GreenPath acquisition and the rest would do to the organic performance of the business

And the next question comes from Jim Ricchiuti with Needham.

This is Chris Grenga on for Jim. You had mentioned that the assessment and permitting segment margin benefited from mix and pricing. How are you thinking about that margin level improvement on a go-forward basis? And how should we be thinking about the durability of that margin?

That segment comprises both of our kind of classic consulting business, Chris, as well as our CTEH business. The CTEH business, as Allan noted in his comments, has shifted away from COVID-19 towards the more traditional environmental response. And so that margin is run rate and durable, as we've highlighted for you before, kind of as you think about that business. I would continue to think about that as a $75 million to $95 million top-line, 25%-ish EBITDA margins. And then, the other part of that business is our more traditional environmental consulting practices and they have just been benefiting from incredibly strong organic growth and pricing efforts that we've undertaken over the course of the last couple of quarters. And so I would say, in aggregate, that margin profile is quite durable.

And could you maybe perhaps expand on what end markets you're seeing the most activity from? It sounded like oil and gas we're seeing a lot of activity. Are there any other areas that are worth highlighting in terms of activity levels?

It's a good question. The activity level is not just oil and gas. That comprises -- it fluctuates year-in, year-out but around 10% to 15% of our revenue. And as you can see, our broader profile and portfolio across our services is just in fantastic cadence. And so we're seeing broad demand cycles across our testing business. So that's our field testing and our lab business. We're seeing a really nice demand cycle across our advisory services which span all the different industries, both of which span all the different industries. And then, as you know, we're incredibly excited about our long-term water and biogas technology practice, as well. So I would not say that this is anchored on one industry. This really is broad-based, not only in terms of our end markets but also in terms of our own internal segment definitions. Does that make sense, Chris?

Yes. Thank you.

And the next question comes from Andrew Obin with Bank of America Merrill Lynch.

This is David Ridley-Lane on for Andrew. I understand the project timing and remediation reuse can lead to kind of quarter-to-quarter volatility. But based on the project pipelines and current project timelines, should we expect growth in the remediation and reuse revenue for the full year to be kind of in line with the aggregate revenue guidance for 2023?

Yes, it's a great question, Dave. I wouldn't read too much into the quarters. Let me just step back and give you kind of my broader perspective on this. Our water and biogas business grew triple digits organically last year. So as we've talked about with you and Andrew and others, we expected this year to be moderated. So we kind of planned for 2023 to be kind of flat to 2022, knowing that the 2023 to 2025 outlook remains incredibly strong for us. And despite that, right, despite the way we thought about it leading into this year, our overall business will remain at elevated organic growth level. So this, again, speaks to the underlying strength of the broader portfolio that we just talked about with Chris. So no, I would not think of that segment's growth in the same way that I would think about the aggregate business because of the incredible cadence and trajectory last year. We want to make sure we reset, anchor on quality and performance and make sure that team which tripled in size, is feeling good as the new opportunities continue to build on a global level for us. Does that answer your question, Dave?

Absolutely, yes. And then I know that Montrose's services are highly insulated from kind of broader economic trends. But is there any sensitivity around CapEx projects maybe in the assessment and permitting area? Any sort of way you're thinking about potential slowdown in, say, construction activity and how that would influence your business?

No. We don't have a lot of exposure to discretionary spend, Dave. And so we're always attuned to that and we're staying very close to our clients on this. But as you can see, in the way we've come out of the gates this year and in our outlook for the rest of the year despite the broader macroeconomic uncertainty, a lot of the work that we do is fundamental and is in many ways necessary for our clients. And so we're not as exposed to it, nor are we as worried about it.

[Operator Instructions] And the next question comes from Wade Suki with Capital One.

Great to see results today. Wonder if you could expand a little bit on the greenhouse gas, methane management side of the house. Obviously, very deliberate moves here with GreenPath and I think, last month's agreement with Sensors. Can you talk about how these businesses are sort of integrating synergistic? And where do you see this? How big can you see this business for you all in 2, 3, 5 years?

Wade, this is Vijay. Thank you for that. As we think about kind of our multi-year outlook, Wade and we've highlighted this for you in the past, the greenhouse gas measurement and mitigation is a key part of our thesis. The questions our clients are dealing with, both from a regulatory perspective as well as their commitments related to net 0, are substantive and they span across our industrial end-market base. Those questions often necessitate testing and our capabilities as one of the leading air testing firms in the world and one of the biggest in North America, puts us in a really unique position to enable testing across multiple sources, the fence line of a facility, the source of emissions, leaks across a portfolio. And so we're able to couple our testing capabilities with the broader advisory work that our teams are doing. And as we will continue to share more as this progresses but our technology team out of ECT2 has developed some really compelling patents. And again, this is early stage so it may not work out but they're entering pilot phase with our clients that actually remove the CO2 from the industrial production process. And so, like PFAS, as an example that we've talked about historically, Wade, we think that the broader greenhouse gas measurement mitigation opportunity is very substantive for us over the coming years. To kind of anchor you on the numbers, in Q1 you saw the measurement analysis revenue growth kind of quarter-on-quarter look very strong. That's mostly organic and a substantive part of that organic surge was due to our greenhouse gas measurement business in particular. So even with the moderation on the water side and the biogas side which we, again, planned for to give that team a little bit of a break, we remain pretty excited about what the organic growth opportunity for Montrose looks like in aggregate because of this and other factors.

And just to dovetail on one of the maybe prior questions on AP&R, margins are obviously very strong in the quarter. Can you give us a sense for how this might play out for the rest of the year? Any color you can give us on what more directly contributed to those margins would be very helpful.

Yes, let me take that. This is Allan. What we've said historically is that segment should run 25% to 30% margins and we expect, for the full year, it should be right in that [indiscernible]; so strong Q1. We expect something similar over the next couple of years.

Thank you. And this concludes our question-and-answer session. I would like to turn the floor to Vijay Manthripragada for any closing comments.

Thank you all for your time and thank you again for your interest in Montrose. We look forward to engaging with you through the course of this year. Thank you and take care.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.