Good day, and welcome to Montrose Environmental Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Rodny Nacier from Investor Relations. Please go ahead.

Thank you, operator. Welcome to our fourth quarter and full-year '23 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. We 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 SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2023, 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 will now turn the call 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 updated earnings presentation shared on our website. Before I begin, I would like to take a moment to thank our over 3100 dedicated colleagues around the globe. Their efforts drove another year of record revenue, adjusted EBITDA and cash flow by implementing best-in-class environmental solutions. I would also like to reemphasize 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 that is how we recommend you view our results as well. In terms of our financial results and business highlights, 2023 was another stellar year for Montrose. Our performance was driven by the key themes we touched on last year. First, we were thrilled to produce record full-year revenue and consolidated adjusted EBITDA. Total revenue grew by 15% and adjusted EBITDA grew by 19%. Adjusted EBITDA margins increased as planned, and our cash flow was also at record levels. Second, our revenue predictability and consistency continue to increase. Our 95% revenue retention rate with customers in 2023 continues from last year. We also saw a consistent increase in cross-selling with over 50% of our 2023 revenues coming from clients utilizing two or more Montrose services, which was up substantially from last year. Our integrated business model and our IP portfolio enabled cross-selling which further enhances our model. In effect, our flywheel is starting to spin really nicely. A large portion of the organic growth that we've seen over the last few years has been from cross-selling our…

Thanks Vijay. We are pleased with our strong performance in 2023, driven by strong execution, our track record of highly additive M&A activity and our expanding customer relationships, which drove another year of solid revenue retention and cross-selling success. Moving to our revenue performance on Slide 11. We were happy to see continued strong organic growth across most of our service lines during the fourth quarter and full-year 2023. Our fourth quarter revenues increased 18.8% to $165.7 million compared to the prior year quarter. Full-year revenues were up 14.7% versus the prior year to $624.2 million. The primary driver of revenue growth in both periods was the positive contributions from acquisitions including Matrix, strong double-digit organic growth in our AP&R and M&A segments and an increase in environmental emergency response revenues. This was partially offset by our R&R segment where we experienced delays in project timelines as clients await clarity on PFAS regulations. We also executed a strategic shift in our biogas business to focus on higher margin, lower revenue services as Vijay discussed. Excluding revenue from discontinued businesses, revenue was up 20.2% to $162.8 million in the fourth quarter and was up 17.5% to $615.4 million for the full year. Looking at our consolidated adjusted EBITDA performance on Slide 12. Fourth quarter consolidated adjusted EBITDA was $17.5 million or 10.5% of revenue. This compares to consolidated adjusted EBITDA of 17.8 million or 12.7% of revenue in the prior year. Prior year Q4 EBITDA includes $2.2 million related to the discontinued specialty lab, which included a business interruption insurance gain following the cyberattack that impacted that lab earlier in 2022. Excluding the discontinued specialty lab, Q4 2023 consolidated adjusted EBITDA increased 12.2%, driven by higher revenues. Roughly half of the lower Q4 consolidated adjusted EBITDA margin was due to the…

[Operator Instructions] The first question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi, thank you. Good morning. Wanted to go to the cross-selling metrics that you guys are providing? And this may be a tougher question to answer, but is there any way of gauging the impact of some of the success you're having on cross-selling with respect to adjusted EBITDA? And, the other follow-up, if it's related to this cross-selling is, are you seeing any early cross-selling in Canada with the Matrix business, or is that more of a 2024 story?

If you, if you -- The short answer is, it is absolutely having the material impact on our organic, on our EBITDA margins, and on our predictability. What's beautiful about this story for us is that if you kind of go back to our IPO, we were under 10%, of clients purchasing more than one service and that metric, as you can see in the Investor presentation, has been consistently ticking up. We targeted getting to 50% over the next few years, and the teams have done an exceptional job. We've kind of hit that metric now ahead of plan. That's having kind of multiple impacts on our business. If you look at our kind of historical cadence of organic growth and how it's kind of lifted from that 7% to 9% to now, the teens, that is in large part because of the cross-selling efforts. The margin lift that we saw last year and the margin lift we're kind of anticipating in 2024, is in large part because of these cross-selling efforts. And then the other part that we're really happy about is that the recurring nature of that revenue, which impacts our overall predictability and consistency, has now gone up materially as well. And so it's a -- this is kind of one of those narratives for us that we're really excited about. And I think the other point, Jim, that's worth noting is that, that 51% is clients buying more than one service, and we're now -- we are still a fraction of the overall environmental spend of our existing clients. And so there's still a material opportunity for us to continue penetrating the wild share, the market share within our existing customer base. And so we think this trend will continue for us for a while.

Jim, let me just add. This is Allan. It's manifesting itself primarily in our AP&R and M&A segments, where the majority of our clients are. If you look at the organic growth, it was 24% in AP&R and 17% in M&A, so well above the industry growth rates. And if you look at margins, margins are up nicely in both of those segments. So it's absolutely manifesting itself in the numbers.

And then just with respect to Matrix, first, how's the integration going? Clearly have some plans to expand margins there? And, has cross-selling begun to take place there, or is that something we should assume this year?

It is. The integration is going well, Jim. We, on a run rate basis, margins have almost doubled in our hands from the point of acquisition. So we are really happy with the way that's progressing. And so we are ahead of plan a little bit and certainly expect to get to our mid-teens by the end of this year. And, yes, cross-selling is a big focus, that's kind of the main focus of our commercial organization, and it has been -- it has already started, and we certainly expect it to manifest more fully this year in '24.

And then last question. I'll jump back in the queue. Just from an R&D standpoint, are there any key milestones that we should be looking out for in 2024?

We need to spend some more time with you, Jim, walking through what I would consider some incredible successes on that front. We filed for nine unique patents in 2023, both expanding our existing footprint for the treatment of multiple contaminants like PFAS, but other emerging contaminants, but also opening up some new market opportunities. Each of these is sizable and could be material, obviously, because it's moved into development and the early phase of commercialization. We're not calling for anything specific this year, but as we think about the drivers of our organic now, based on investments we made four or five years ago. For example, with PFAS or with methane emissions and monitoring, right, we talked about all this in the past, Jim, we believe some of these opportunities that we're starting to get success with on the R&D side, will provide a similarly sized growth engine for Montrose three to five years out.

Thanks very much.

Thanks, Jim.

Thank you. The next question comes from Tim Mulrooney from William Blair. Please go ahead.

Vijay, Allen, good morning.

Hi, Tim.

Hi. Just a clarification question to start off here. When you say low double-digit organic growth guidance for this year, my question is, is that in spite of the headwind from the lower expected disaster response revenues, or when you say organic, are you excluding both the impact from acquisitions and changes in disaster response revenues?

It is both, Tim. Yes. So it's - call it 10% to 12%, excluding a response, which is again a consistent with what we've always been doing and excluding acquisitions.

Got it. Thank you for that clarification. So really, organic growth, you say core -- your core business, organic growth, you expect to be up double digits?

Yes.

Understood. Okay, so that's still obviously looking very healthy. Could you provide a little more detail on what your expectations are specifically for that remediation reuse segment this year on an organic basis? Reason I asked, Vijay, is, I know we have a lot of moving pieces here. We got this biogas business which maybe has another quarter or two of a headwind before that turns into a tailwind. You've got PFAS, which is, still waiting on these regs. You got Matrix and Epic on the inorganic side. Just any other color you could give us on what's predicated in your guide for that core organic?

Yes, it's a great question, Tim. So we do expect the remediation reuse segment to get back to kind of a healthy organic growth this year. If you kind of break down our, low double-digit expectation for the core business, as Allan alluded to earlier, our AP&R segment has been on fire, right, 24% organic. Last year, we certainly expect elevated organic for them again this year. Same with the M&A segment. At 17% last year, we think they'll be a healthy double digits this year. And then we think the remediation reuse segment, in our estimates, we're assuming kind of mid to mid-high single digit organic. So that's a back to a nice cadence. Some of that, Tim, is going to be predicated on kind of how this regulatory environment evolves. Obviously, if it comes in more favorable, there's going to be more upside opportunity and long term upside opportunity. If it gets delayed, that could swing that a couple of points. But we've baked that into our assumptions this year. Does that answer your question?

Yes, that completely answers my question. I guess, when you say kind of dependent upon regulatory, are you speaking specifically about the MCLs and CERCLA and that kind of thing? And if so, could you…

Yes, ECT2, that's a big part of it, Tim. Right? So if you look at '22 versus '23, that water and biogas part of our business coming off of. Obviously, triple digit organic in '22 was down about 20% ish. And we think they're back to a nice, healthy organic growth cadence this year. We do expect to kind of see some of that, kind of at the end of Q2, Q3, Q4, because a lot of that, especially on the PFAS side, is going to be predicated on some of the regulatory clarity.

Understood. Thanks so much, guys.

Thanks Jim. Thanks Jim.

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

This is David Ridley-Lane on for Andrew Obin. To follow up on that last question, understand clients are sort of waiting to see the final regs on PFAS. Any color, though, on sort of the funnel or the breadth of client discussions that you're having?

Yes David. I mean as we are, the funnel has expanded materially. I think the expectation that the treatment limits are as low as they're expected to be and the number of molecules that are being covered is substantive. And now that the test methods and the rules on how to measure this has been promulgated, there is a lot of attention now on how best to treat. We are, as, working on some of the largest. We've already built and are building some of the largest PFAS treatment facilities in the world. We're seeing that even outside of the industrial space. We're working on some of the largest PFAS treatment facilities on the waste and landfill leachate side. And that's a function of anticipatory activity by a lot of our clients related to these PFAS regulations. And so across the globe, we've seen a real uptick in activity in Europe. We've seen a real uptick in activity here. The challenge for us is predicting exactly when the wave crests and breaks.

And then, can we get a little bit more color on the two acquisitions so far this year, Epic and Two Dot? How do they fit with your strategy? And, I guess, relative scale?

Yes. This -- So Epic is an incredible team. They are kind of environmental experts with an incredible brand and presence within the Australian market. We love it for two reasons. One, the credibility that team brings in terms of their overall knowledge of and access to the broader Australian market is very complementary to our treatment technology efforts. And that team's expertise also gives us a lot of visibility into how potential regulations and opportunities are evolving as we think about other ways for Montrose to offer services in Australia. So that's been -- it's going to be a, I believe, an exceptional addition to our team this year. And then Two Dot is an environmental consultancy in the Rocky Mountain region. They've got expertise in the energy and renewable energy space in the Rocky Mountain area, and that's for us an area we need to continue doing more in. David. It's -- as you look at kind of the Montrose footprint, that's a geography in which we are underrepresented, given the market opportunity there. So that's always been a focus. You'll see us continue to build that out also an incredible and exceptional team. So we're really excited about both of these.

Thank you. And one last quick one since you mentioned it. As you develop client relationships that are deeper and spanning multiple service lines, are you also starting to have kind of higher relationships at more senior levels of management, right, that would enable you to take that more holistic basis and access greater wallet share for the total company?

Yes.

In other words, is that -- it's great that you're winning and winning and winning more, but are you taking that next step to, perhaps have a kind of firm-wide basis?

Yes, yes. Look, a large part of our effort to expand and part of our thesis around really expanding within the advisory services space, which was an area we were, if you go back, to our inception or even to our IPO, was a relatively underrepresented part of our business that has been growing really nicely. And our focus on that, David, is precisely for this point. These top tier, highly credentialed and deeply experienced experts in the environmental space are advising, general counsels, CEO, CFOs and heads of environmental, and that obviously gives us a bird's eye view as to different ways that we can help solve our client's challenges. This is what I was kind of alluding to, David, on the flywheel concept, which is, if we can have the relationship at the local level and at the executive level, then we can understand what the needs are and we're uniquely positioned to address those needs because we're integrated across the portfolio. So that's exactly why we are expanding in the advisory side. And yes, we are seeing really nice success there.

Thank you very much.

Thank you.

[Operator Instructions] The next question comes from Brian Butler from Stifel. Please go ahead.

Hi, good morning. Thank you very much for taking the questions.

Hi, how are you?

Good. I guess, I'll start just on the M&A path, as well. Could we talk about maybe, what does the capacity look like with the expanded revolver and, taking out the preferred? What's left, I guess, on the capacity side and then just maybe some color on the market and what areas are attractive at this point?

Yes, let me take that. So, at the end of '23, our revolver, which was $125 million at the time, was unused. So we've added $50 million to that. And then the additional $50 million term loan gave us $225 million of capacity, of which 60 has gone to pay down the first tranche of the preferred, and the rest is fully available to us to consider to acquire and invest.

Okay. And when you talked about, I guess, on the cash flow side and the conversion, can you give a -- can you just remind me where we're expecting cash flow conversion in 2024?

Yes. What we've historically said is expect us to convert 50% to 60% of our adjusted EBITDA into operating cash flow. The last couple of years, we've been north of 70%, and I'm particularly proud of the team's ability to manage working capital. We don't talk a lot about this, but our DSO has dropped three days in the core business this year, and that was certainly a contributor towards that strong organic cash flow generation, and that's expected. So we think that 50% to 60% target, we're likely to be on the higher end of that range. So very healthy conversion and certainly above where we had expected to be a few years ago.

Yes. And our maintenance CapEx, as is, always harbors around 1% to 1.5% of revenues. The business is still a very capitalized business. And so our ability to continue investing, given how strong cash flow has been, is as good as it's ever been.

Okay. And then just maybe one last one. Can you maybe just kind of wrap it up? I know we've touched on a bunch of different ones, but when you think about the quarters in 2024, are there any really tough comparisons, kind of by segment, that everyone should be aware of and just kind of make sure that we don't miss anything in, like the headwind in R&R. Is there anything else that we should be focused on?

Yes, we think -- it's a great question. As we think about the profile of the year, we gave additional color in the prepared remarks on Q1. So revenue is going to be up over every quarter in the year. Q1 has the toughest comparables on an EBITDA basis, mainly because of the large emergency response in the prior year. The rest of the year. So Q2, Q3, Q4 will follow a similar seasonal pattern, although Q2 will have two more months of Matrix that was acquired June 1st of 23. But you'll see a similar across the year in those quarters. Similar profile. And then, margins are typically significantly higher in Q2 and Q3. And you'll see that as you look across 2023. We expect that to continue. And again, Q4 will follow similar margin seasonality as the prior year. So in every quarter, we will be up on revenue, and margins will be up; the seasonal profiles should be fairly similar year-on-year.

Great. Very helpful. Thank you very much. Congratulations on a good quarter.

Thank you. Thank you.

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

Thank you. And thank you to all of you for joining us this morning. We're really excited about the year, and we're looking forward to continued dialogue with you as the year unfolds. Talk soon and take care.

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