Good morning and welcome to the Montrose Environmental Group, Inc. Third Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Rodny Nacier from Investor Relations. Please go ahead.

Thank you. And welcome to our third 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 the earnings presentation, which is available on the Investors section of our website. Our earnings release is also available on the website. Moving to slide two. 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 reconciliations thereof their most directly comparable GAAP measure. With that I would now like to turn the call over to Vijay beginning on slide four.

Thank you, Rodny. And welcome to all of you joining us today. I will provide you with business highlights. Alan will provide you with financial highlights. And we will then open it up to Q&A. I will speak generally to the third quarter earnings presentation shared on our website. As we have noted each quarter, I would like to emphasize that our business is best assessed on an annual basis given demand for environmental solutions is typically not driven by quarterly patterns. We manage our business on an annual basis and it is how we recommend you view our results as well. Before we dive into the quarter's performance, I would like to thank our approximately 3,500 colleagues around the world for whom I am very grateful. Through their efforts, we were able to produce another quarter of record results and further our leading position in the environmental industry. As for our financial results, we had another quarter of exceptional performance due to reasons consistent with those discussed during the first-half of this year. First, we focused 2023 on delivering on our adjusted EBITDA targets and increasing our adjusted EBITDA margins. As you can see from our results, we are achieving both goals. Second, we continue to see strong organic growth in our business lines. And our long-term organic growth outlook remains as attractive as ever. Our objectives and strategy have not changed in this regard. During the third quarter of 2023, operating segment adjusted EBITDA and consolidated adjusted EBITDA margins were approximately 20% and 14% respectively, which represents an increase in margins versus the prior year for both. The improvement in our adjusted EBITDA margins as a result of organic revenue growth in most of our business lines and our pivot away from lower margin revenue, particularly within our…

Thanks, Vijay. We are very pleased to have delivered strong third quarter results. Our resilient performance throughout the year thus far, reflects the themes we've discussed since becoming a public company over three years ago as new environmental regulations and corporate mandates continue to drive demand for our unique environmental solutions. Our business remains strong and continues to grow given our successful execution of attractive M&A, ongoing cross selling successes, and expanding customer relationships. Moving to our revenue performance on slide eight. We saw organic growth across many of our service lines helped drive revenues to record levels in the third quarter. Our third quarter revenues increased 28.9% to $167.9 million compared to the prior year quarter. Year-to-date revenues were up 13.2% versus the prior year period to $458.5 million. The primary driver of revenue growth in both periods was the positive contributions from acquisitions including Matrix, strong organic growth in our Assessment, Permitting and Response and Measurement and Analysis segments, and an increase in CTEH revenues. This was partially offset by lower revenues in a specialty lab that has been discontinued and the change in our Remediation and Reuse segment given the timing of projects and a strategic shift in our biogas business to focus on higher margin, lower revenue services. Growth in our year-to-date revenue was also impacted by our planned exit from legacy O&M contracts in 2022. Excluding revenue from discontinued businesses, revenue was up 32% to $165.9 million in the third quarter and was up 16.4% to $452.6 million year-to-date. Looking at our consolidated adjusted EBITDA performance on Slide 9, third quarter consolidated adjusted EBITDA was a record $23.3 million or 13.9% of revenue. This compares to consolidated adjusted EBITDA of $17.1 million or 13.1% of revenue in the prior year quarter. The year-over-year improvement was…

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tim Mulrooney with William Blair. Please go ahead.

Vijay, Allan, good morning.

Hey, Tim. How are you?

Good morning.

Doing all right. Thank you. Just a couple of questions. So, I know I completely agree with you that the business should be analyzed on an annual basis and that's certainly how we think about it. But sometimes talking about the quarters can help folks understand what's happening in the business. So, my question is just on the adjusted EBITDA margin, which was very strong and, you know, great to see in the third quarter implied guidance for the fourth quarter is showing that it would be down sequentially in year-over-year. I'm sure there's a good reason for that. If you look at it on a second-half 2023 basis, you guys are right in line with doing what you said you were going to do. So, it's not so much about, you know, are you hitting numbers you're clearly hitting numbers. I'm just curious what's causing that change in the margin profile from quarter-to-quarter or if there is a specific project or something like that.

Yes, it's a great, it's a great point. And why don't I start and Allan can jump in. So you're exactly right. This is an annual business, and so the quarterly comparisons aren't as meaningful. But if we step back -- just to kind of answer your question explicitly -- we've taken guidance up twice this year, Tim. And so we're feeling really good about the business. And for -- at the midpoint, yes, but for half the range we could very easily be flat to up quarter-on-quarter. So it's not necessarily down. The one wildcard for us is the CTEH, which is unpredictable. And as you know from Q4 of last year, you know, that was the one variable that we had a tough time predicting. And so, that's the only reason why we're maintaining. And we still feel really bullish on kind of how this year has been panning out and what Q4 could potentially look like. Does that answer your question. Tim?

The other part of that on the margin question, Tim, is remember Matrix being a Canadian business is very seasonal. They are already a low margin business, Q4 is at or below their average. So that's certainly going to be deteriorative to margin percentage in the fourth quarter.

Okay. Yes, that is helpful. And that does answer my question. A follow-up on that might be, you guys usually do call out how CTEH performed in the quarter, which is helpful for us for modeling purposes, especially as we model back towards normalization. How did CTEH performed in the quarter, third quarter of 2023. I know in the press release, you said it was up, but can you quantify that for us for modelling…

Yes, yes. And all of this will be in the Q that gets filed later today, Tim. So, they remained elevated in the quarter. Their large response has now tailed off, but did have an impact on the third quarter. So they did $33.8 million in Q3 and that puts them at $103 million year-to-date.

Got it. But expected normalization...

In Q4.

...in the fourth quarter and that $75 million to $95 million range is still relevant.

Yes. Yes, when we say normalization, Tim, I mean we always talk about quarterly averages right so $6 million to $7 million of EBITDA, call it $24 million to 25 million of revenue a quarter, they are demobilizing in Q4. So they will be below their normalized levels if that makes sense. Still an incredible year and a homerun by any set of circumstances, but Q4 will be materially lighter we expect than the rest of the year has been so far.

Got it. Thanks very much. I hop back…

The other -- yes, Tim, sorry, just to add to that. The other point that is worth noting here in the context of CTEH given that this is likely to come up, not just with you but with your peers. They've done a really nice job bundling Montrose capabilities, right? So kind of some of the air monitoring and remediation work that the rest of the platform brings to the table, which has had a positive impact on their performance. And so a lot of credit to that team where this is not just an episodic response portfolio anymore. It's much broader than that. And so next year, Allan and I will work to separate the pure response part of that business, because the rest of it is much more sustained and predictable, if that makes any sense.

It doesn't make sense. It makes me wonder if that $75 million to $95 million is even relevant anymore Vijay, if you're growing another part of it that's what's variable or is it perhaps structurally higher than that. I know you've already raised it from $55 million to $65 million at the IPO.

Yes.

Now we're talking about $75 million to $95 million. Perhaps it's even different, we can take into that more next quarter.

Yes. Yes, I think we've got some great news. The team deserves a lot of credit on that. And so we'll separate that out and be a little bit more transparent with you as we begin to forecast 2024 for you.

Look forward to that. Thanks guys.

Thanks, Tim.

Thanks. Tim.

Thank you. The next question comes from Jim Ricchiuti with Needham & Company. Please go ahead.

Hi. Good morning.

Hey, Jim.

My question -- how are you guys doing?

Good.

Good to hear. Matrix. Wonder if you could talk a little bit about how the integration is going. And Allan, you may have given it and I apologize if I missed it, what the revenue contribution was while I assume we'll see it -- we see it in the Q, and maybe some color around the adjusted EBITDA margins in the business? And then maybe lastly just relating to that question about the implied Q4 guidance that Tim just had, it's a little bit wider range not a whole lot than you normally do. And I'm wondering if some of that might be due to the seasonality of the Matrix business in the December quarter.

Yes. Why don't I start with the first part of that question and then Allan can talk about the contribution, and then we can talk about the range, Jim. So, the Matrix integration is going really well. If you recall that business at acquisition was around $75 million of revenue and 4.5%-ish EBITDA margins. Those margins have been nicely accreting up on the back of the team's efforts, not just with integration but with pricing discipline, higher utilization and operating performance. And so, we're looking forward to sharing a case study with you and others about how well that's been going in the very near future. We are well on track to achieve our goal of mid-teens or higher EBITDA by the end of next year. So the short answer is going really well. It is a seasonal business. But if you look at it on an annual basis, it's going to be a really nice year-on-year comparison, 2023 and 2024. Why don't I let Allan answer kind of the numbers part of that question and then we can jump to the range.

Yes. So, Jim, we don't break out individual business line revenues. But again, you'll see in the Q that in the third quarter acquisitions contributed $27.6 million to revenue. The majority of that was Matrix. Just to remind you, Matrix does about $75 million of revenue a year, but very seasonal right, so about 55% of that is in the back half of the year and large chunk of that is in Q3. Their margin profile follows that seasonality and again averages in the kind of low to mid-single-digits currently. So although seasonally the Matrix margins were better than average in Q3, it was still margin deteriorative to operating margins in the quarter.

And Jim, so to wrap up, the last part of your question around range. This is the first time Montrose has had Matrix in our portfolio, which is Q4 in Q4 of a year. So that plus the CTEH variability is exactly why we're keeping the range, why even though we're feeling really good about how the business is performing so far.

That makes sense. And you'll be talking I guess about this early next year. But, yes, I'm just wondering as you look out over the next couple of quarters, how we should be thinking about the PFAS water treatment business, the biogas business, particularly on the biogas side where you've made some adjustments in terms of the way you're pursuing that market.

Yes, we're bullish on it. We're bullish on it Jim. So this goes back to some of the discussions we've had with you around organic. Other than the Remediation and Reuse segment, the rest of our business is seeing double-digit organic growth. And that a lot of what you're alluding to is that -- is the conscious pivot we made this year to focus on margins and cash flow, and to pivot away from some of the lower margin work in our biogas business following our investment in what we think is very compelling early stage technology. So next year, as we think about not only harvesting all the margin success we've had this year, but then getting back to our historical cadence of double-digit organic, we feel really good about that. And we think that will be part of our story next year, as it's been so far.

Good. Thanks very much guys.

Thanks, Jim.

Thank you. The next question comes from Andrew Obin with Bank of America. Please go ahead.

Hi, this is David Ridley-Lane on for Andrew Obin.

Hey, David.

Hi, David.

Good morning. So just to follow-up on that last comment on the Remediation and Reuse. So, is first quarter 2024 kind of when you'd fully lap those portfolio optimization efforts. Is that a good like-for-like comparison or does it some of lower margin projects have a bit of a longer tail.

Yes, it's really I would think of it more as a second, third quarter lap. The tail is coming off now.

Got it. And then just because your gross margin progression was quite strong, it looks like Matrix might have pretty good gross margins relative to the EBITDA margin. And I kind of I'm sort of leading into, into the results here. But is some of the margin improvement less about gross margin and more about sort of the cost structure.

The Matrix does have good gross margins, but they are less of a contributor to the year-over-year increase. Again the biogas pivot that was very low gross margins given the large equipment sale component. And then we're seeing really strong utilization across the business and that's certainly helping.

Yes, David we, when we say pivot if you think about some of the advantages we have on the water technology side, right. So, intellectual property, high barriers to entry, strong moats we've effectively moved our renewable energy since the biogas side of the business more into that type of model, which means it's more anchored on technology implementation and the engineering associated with it and less around the part that Allan just talked about. So that that's really when we say pivot the margin flow through not only on the gross margin side but also on the EBITDA margin side and cash flow ultimately was heavily impacted by that pivot, which we did consciously, and you're seeing it in the results.

And then last one from me, I know you don't normally talk about kind of bookings or backlog, but those metrics part of the reason you have the confidence to reiterate your guidance for the full year. And any update on sort of the European PFAS pilots.

Yes. Europe is going really well and the acquisition of Vandrensning has been very additive to that portfolio. We still have a small footprint, David, but that's going to be a really nice story that we'll share with you as we talk through 2024. The war notwithstanding, the continued momentum in that market is quite positive. And so we're really happy that we made the investments that we did. As it relates to our Q4, yes, we don't, we don't really talk about bookings and backlog, it's not relevant to every part of our business. But we do have strong visibility on an annualized basis. And given the trajectory of the company so far, we're feeling quite good about the Q4 outlook.

Right. Thank you very much.

Thanks.

The next question comes from Wade Suki with Capital One. Please go ahead.

Good morning, everyone, and thanks for taking my questions.

Hey, Wade.

Hi, Wade.

Just, just a follow-up, I think it was on Tim's question earlier. And I hate to put you on the spot. But as we think about margins heading into 2024 maybe you could walk us through why margins in 2024 might be lower than, let's say the, you know, Q2, Q3 average. I mean is it just a function of CTEH normalizing or am I thinking about it the wrong way…

Yes, right. No, that's -- if you heard that that's not what we're saying. We're not ready to guide to margins or EBITDA next year. We're very bullish on the topline given the momentum in the business. But we're feeling pretty good about where margins are and the ability over time to continue to move those up.

Yes. Wade, I would say, it's the opposite. We are not calling for lower margins and we haven't guided 2024. But what I was saying earlier, is that the work we've done this year with the conscious focus on improving margins and cash flow, we think that we will continue to harvest that the benefits of that into 2024, and we'll couple that with getting back to our accelerated organic growth trajectory.

Awesome. Very helpful, thank you. And then again, just to kind of follow-up on Tim's question earlier on water treatment you know last quarter you discussed, some of the sort of uncertainties related to the low contaminant thresholds that were being proposed. And I'm wondering if you could give us an update on what if any changes you're seeing in customer behavior along those lines. And maybe just taking a step back, I mean is this a business that's been pushed out maybe a couple of quarters or you know when do you expect sort of a major inflection point in this part of the business.

Yes, we -- it's a great question Wade. We just met with some of our large clients and they are also looking for a little bit more clarity from the regulatory agencies before they really jump into this. But they're certainly prepared to do so. So we've seen I think what we would consider forward progress on the projects, but not yet ready to pull the trigger, which is why we say that as we kind of think about our ECT2 business, which is a combination of our water and biogas business that really in the Q2, Q3 timeframe of next year is when we think you'll start to see some of this uncertainty unwind and getting back to a positive foot. With the one caveat there being, it is dependent on the regulatory confirmations, which are expected towards the end of this year and early part of next year.

Got you. Great thank you all very much. That's all I had.

Thanks, Wade.

[Operator Instructions] The next question comes from Stephanie Yee with JP Morgan. Please go ahead.

Hi, good morning.

Hey Stephanie.

Could I ask about -- you had made a comment about how the EPA finalize the rules about the toxic chemicals and requires additional reporting from companies that manufacture PFAS. Can you kind of talk about Montrose's role in that regulation like are you working with companies like Dow and 3M to help them in measuring and reporting those requirements.

Yes, so yes we don't talk about our specific clients, Stephanie. But yes, we are working with many of the Fortunate 100, Fortune 1,000. The rule effectively goes back I think to 2011. And if you've transported, manufactured or sold products with PFAS in it, you have to report on the potential impact and the potential toxicity of it. And that requires a combination of our advisory services and so you'll see a positive impact on our consulting part of the business and it does require some of the reporting and testing sides of it as well. So it is a broad incremental tailwind over time for both of our Measurement and Analysis and our AP&R segments.

Okay. That is helpful. Thank you. And can I just ask on how you're pricing or how do you feel your pricing is aligned your their cost structure at this point in time, and as we kind of head into 2024.

So I think we spoke about this with you earlier. Our pricing has been very disciplined and credit to Allan, Todd, Josh and the team for that. We have a lot of the margin benefits you're seeing this year are a combination of both the organic growth. And that organic growth was partially driven by the pricing solutions that we've implemented over the last, actually 18-months. And we expect that that trend will continue into 2024. So some of our bullishness Stephanie on our ability to continue margin accretion is partially predicated on the impact of pricing on our overall performance.

Okay. I appreciate the color. Thank you.

Thanks, Stephanie.

Thank you all very much. This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Vijay Manthripragada for any closing remarks. Please go ahead, sir.

Thank you and thank you all for joining us today. We were thrilled to spend the time with you and we're excited to share how the rest of the year unfolds and to speak with you again as we look forward to a stellar 2024. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a good day.