Good day, and welcome to the Montrose Environmental Group, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. And now, I'd like to turn the conference over to Adrianne Griffin, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, operator. Welcome to our second quarter 2024 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, our Chief Financial Officer. During our prepared remarks today, we will refer 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 on today's call, we 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, 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. On today's call, we will discuss or provide certain non-GAAP financial measures, 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 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, and welcome to all of you joining us today. I wanted to start by introducing Adrienne Griffin, who is our new Head of Investor Relations. She brings stellar depth of IR experience to Montrose. And as we continue to increase our stakeholder engagement, we look forward to introducing her to all of you in the very near future. Welcome, Adrienne, and thank you. I will open my remarks with an update on our business, operations and strategy. Allan will then provide the financial highlights. And following our prepared remarks, we will then hold a Q&A session. While today's call will highlight second quarter and year-to-date performance, it's important to reiterate that our business is best assessed on an annual basis. Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations using annual perspectives. We are pleased to report our second quarter and first half results, which included our highest ever revenue and adjusted EBITDA. Our solid operational performance and ability to capitalize on demand momentum across our business continues to be driven by our dedicated colleagues around the world, and I would like to thank them for their substantial contributions to our collective success. Our stellar quarterly results included 9% revenue growth and 10% adjusted EBITDA growth. Organic revenue growth across most of our businesses contributed to our record performance. Our organic growth trajectory continues to be positively impacted by further IP development and cross-selling success. We expect continued strong organic growth in the back half of the year, and we reaffirm our full year 2024 organic growth expectation of 10% to 12%. Our focus on strengthening and optimizing margins was evident in our quarterly results, as we reported a 20-basis-point increase in consolidated adjusted EBITDA margins compared to the prior year period.…

Thanks, Vijay. We delivered another quarter of strong financial performance as we continue to execute according to plan. Organic growth remained robust, given increased traction with our cross-selling initiatives and continued pricing success. We were also pleased to drive positive contributions from our recently acquired businesses. Our strategic investments better position us to capitalize on demand and our growth drivers remain intact. Moving to our revenue performance on Slide 10. Our second quarter revenues increased to a record $173.3 million, or an 8.9% increase compared to the prior year quarter. First half revenues of $328.7 million increased 13.1% versus the prior year period. The primary drivers of growth in both periods were strong organic revenue growth in our AP&R and the M&A segments and the contribution of acquisitions, partially offset by lower environmental emergency response and water treatment revenues, and the shift away from lower margin revenue in our renewable services business completed in the latter part of last year. Looking at our consolidated adjusted EBITDA performance on Slide 11. In the second quarter, we reported a record $23.3 million, or 13.5% of revenue. This compares favorably to consolidated adjusted EBITDA of $21.2 million, or 13.3% of revenue in the prior year quarter. First half 2024 consolidated adjusted EBITDA was $40.2 million, or 12.2% of revenue, compared to consolidated adjusted EBITDA of $37.8 million, or 13% of revenue. The increase in consolidated adjusted EBITDA was primarily due to higher revenues, driven by organic growth and acquisitions. Consolidated adjusted EBITDA as a percentage of revenues decreased due to Matrix, which despite continued improvement in EBITDA margins since acquisition, has not yet achieved our mid-teens EBITDA margin target. Moving to a review of adjusted net income on Slide 12. We reported diluted adjusted net income per share of $0.20 in the second…

[Operator Instructions] And today's first question comes from Tim Mulrooney with William Blair.

Just to start out, level set here, you guys highlighted robust organic growth in the second quarter several times in your prepared remarks. I don't think I caught what that was.

Yes, Tim, we don't break out our quarterly organic, as you know, but we wanted to indicate that we are well on our way to achieving our annual organic guidance of 10% to 12%. We're feeling like we're in a very good spot, given the cadence of the business both in the first and second quarters and what we can see for Q3 and Q4.

I mean, it must have been strong then. So that's helpful color. Shifting gears, Vijay, I know that water treatment business was lower in the second quarter. Is that something we should expect for the back half of 2024 as well? Just curious, based on what you see in your backlog today or with customer conversations, like when you might expect that to begin to grow again on a year-over-year basis?

Yes. Let me step back and give you some of the themes, Tim. And then I'll talk specifically about first half, second half, and year-over-year. So, our -- and this is something we alluded to in earlier conversations. The cadence of our discussions related to treatment has picked up materially. And as we think about the adoption curve extending through the latter part of this year and into the next several years, that curve certainly has lengthened, but the opportunity set seems much bigger than it was for Montrose. And so we're pretty excited about what the long-term outlook looks like for us. PFAS water treatment, specifically for us, is up in the second half of the year versus the first half of this year. So we're already expecting some growth in that business through the back half of this year. And that's in the guidance numbers that we've provided to you. And then, as we think about our broader treatment technology business, of which the water treatment is a part, Tim, the water treatment and renewables part, that business is up nicely year-on-year as well. And so, we're kind of looking at a nice set of secular tailwinds in that business, but the timing of that is not really quarterly for us. We're thinking about that more in the medium to long-term, if that makes sense. And then, just to reiterate, PFAS for us is not just water treatment. It's in our advisory and our testing business. And a lot of the strong organic growth you're seeing in those 2 segments is driven in significant part because of our prominence in the PFAS advisory and testing markets.

Yes, Vijay, if I could just sneak 1 more in. Sorry. But on that point, as more and more water systems begin implementing PFAS testing programs over the next few years, I'm just curious if you've already seen a step up in demand there yet in your labs business, or if it's just too early to say that there's been an impact there from the...

No, we have. If you look at our testing segment, Tim, that growth is all organic. We haven't, I don't believe, completed any acquisitions in that segment, and PFAS is a big part of that.

And the next question comes from Jim Ricchiuti with Needham & Company.

Two questions. First, and I know it's still very early in light of the Supreme Court ruling, but what I'm wondering is, as you think about '25 and possibly even '26, and think about M&A in a post-Chevron world, are you thinking about it any differently? And maybe even before we talk about the M&A point, are you considering any changes in the way you allocate resources across the business lines in light of the ruling?

In light of Chevron, Jim, no. And the reason is for us, the bottom line is we think there's actually going to be more opportunity than risk as a result of Chevron. The regulations that impact Montrose seem pretty clearly within the statutory authority of the EPA. And as we think about the regs across our segments, most of them have been decades old. And even as we look at the recent regs around PFAS and methane, a lot of that has been written in via Congressional Act. And so, we are not -- we don't expect and we don't anticipate much flux in the business due to Chevron. There may be challenges for other reasons, as there always has been in the past, and we've seen this for many, many years, around the technicalities of specific regulations, but that's par for the course for us. And so, no, our actions there are unlikely to change. The other dynamic, Jim, that we are always have been looking at and perhaps would look at a little bit more, is that Chevron likely shifts a little bit more influence to state and local regulators. And that's where we tend to shine because of our ability to service the local markets and with local expertise. And so, we will continue to and anticipate more activity in select markets where we see a lot of opportunity to continue to provide services for our clients. And then, the last part of this, Jim, and I think you've known this; I mean, for several years now, we've expanded our footprint largely at the behest of our clients internationally. And we have about 20% of Montrose's revenues now ex-U.S., which is not really impacted by Chevron at all. So as you kind of look at the diversity of our business, which has been in play now for years, our path is largely unchanged. And in many ways, we think long-term, Chevron actually introduces more certainty. Because if there's major changes in the Executive branch in terms of political philosophy from 1 to the other, there's not going to be as much change because if it's under statutory mandate, the agencies can't just decide what they're going to do. So, for all those reasons, we're staying the course and we're feeling as good as ever.

Follow-up question, actually separate topic. I wanted to ask about gross margins, which I know you don't guide to. But the fact is, these are the highest gross margins that I can recall. And so, I wonder if you could talk perhaps to the improvement in the quarter and, yes, any color in perhaps how we should be thinking about gross margins going forward.

Yes. Gross margins, Jim, are closely tied to our operating EBITDA margin, right? So the drivers of operating EBITDA margin, which you've seen increase year-over-year, and if you do the math, the back half margins will be even stronger of an increase year-over-year. Some of that is business mix, but it also reflects the impact of some of the pricing success that we've had. It reflects the operating leverage that we're seeing in some of our businesses, like our labs. And then, as we've built scalable support functions, we're increasingly able to relieve our operating teams of a lot of the back office support that they were providing. So if you look at our SG&A, you strip out acquisitions, SG&A within operations is flat in dollar terms. And so, we're getting the benefit of operating leverage in [indiscernible] as well. So all of those drivers are increasing gross margins, and they should continue to improve over time similar to our EBITDA margins.

And the next question comes from [indiscernible] with Stifel.

Congratulations on a good quarter. So just going back to sort of your guidance, you reaffirmed it, but just looking back, you've spent $27 million on Paragon and Spirit since you actually raised guidance back in April, and you mentioned they were accretive. Maybe you could just provide some color on like how much -- I know you don't disclose this, but maybe what you sort of expect to get them in the guidance and what is offsetting that contribution. I mean, if it's -- maybe it's nothing that large, so that's why a guidance raise is not warranted, but if you could provide some color?

It's a great question. It's a great question. Those were small acquisitions. And so, for those 2 in particular, our aggregate average multiple hasn't moved. But for those 2 acquisitions in particular, they were a little bit higher than our historical cadence of mid to high single-digit. And as a result, when you look at kind of the annual contribution and you take just the back half of this year, it's a de minimis amount of contribution and not enough to move our annual guidance. When we started 2024, just to kind of reset where we were, we were at $90 million to $95 million, and we took it up to $95 million to $100 million on the back of very strong organic performance and the impact of -- the strong impact of acquisitions that had already been completed. And so, we feel like a lot of the expectation for this year was baked into that guidance, and these 2 transactions were too small for us to kind of increase it further. Though, as the year progresses, there may be opportunity to relook at that as we get through Q3.

And just to follow up, it's not related, but with Matrix, the target mid-teens margins, what's left to get it there, and do we actually start seeing that in 3Q?

Yes. I mean, look, what you've seen -- again, just to kind of reset so that we know where we started. When we purchased Matrix, that business was around 4.5% to 5% EBITDA margins. And we knew, of course, that there was lots of opportunity for us to influence that. And that is now trending to low double-digits and is well on its way to achieving its mid-teens by the end of this year. And so, we're feeling really good about the trajectory of that business. And obviously, the returns to Montrose are exceptional. All the things we've done to get from 5-ish-percent to the low double-digits are things like pricing, staffing optimization, the optimization of overhead costs. And those efforts have largely been put in place and have almost been completed. And the increase between now and the end of the year is just a continuation of what's already well in flight. There's just a timing issue, but the efforts are all in place.

[Operator Instructions] And the next question comes from Stephanie Yee with JPMorgan.

Could you give us an update on the renewable service business, how that's progressing? I think you're going to lap the pivot that you started in the back half of last year as we enter into the third quarter this year.

Yes. That's progressing really well. So that business, similar to what I was describing earlier, last year to this year, should see nice growth. First half -- the second half of this year should see nice growth, and '24 to '25 should see nice growth. And so, we're back on offense in that business. It is part of our treatment technology portfolio, and it's the same team as we've talked about before. And the combination of our water treatment and renewables business, we think is on a really nice upward trajectory over the next couple of years.

And I have a question on capital allocation. So, you've done 5 acquisitions year-to-date. I think, are you thinking maybe you might surpass your goal of acquiring $10 million in EBITDA in any given year? And then secondly, would you consider buying back your shares at the current stock level then to offset the dilution from more shares outstanding?

Let me take the first question, and Allan, you'll take the second one [indiscernible] as well. So yes, we have surpassed our goal this year of acquiring $10 million a year, and the opportunity set ahead of us remains quite significant, Stephanie. And we talked about this in the context of the capital raise. Our selection as a preferred acquirer by many of the companies that we're talking to remains as robust as ever. And the opportunity for us to continue adding value for our shareholders and for our business is as robust as ever. So we expect to see continued activity through the back half of this year, and we'll stay close to you as those progresses. And then the outlook for next year remains quite strong as well.

Yes. And on the potential buyback, it's something, honestly, we've discussed internally. But being a high-growth company, that doesn't seem to fit with the thesis. And while we agree this looks like a pretty attractive entry point, it's just not where our focus is, right? The investments in acquisitions have very strong ROIs, it fits with our strategy and thesis. And so, we're going to stick to running the business that way. But certainly something we've knocked around internally.

Yes. Stock price for us, Stephanie, as you know, is something we're -- we don't fully control. And it looked like the stock price reacted to the Supreme Court Chevron decision. So we're looking forward to getting back. We were in the midst of a quiet period, getting it back in front of investors to talk through it. And as we mentioned to you, look, we can buy businesses at mid to high single digits. The value that creates for all of our shareholders are contrasted with buying back Montrose stock at -- even at these depressed prices, mid to high teens multiples. It's ultimately our fiduciary responsibility to all of you, and we'll always make sure we execute on that. But we're feeling pretty good about the plan, and we do think the markets will be rational over the medium to long-term.

Thank you. And that does conclude the question-and-answer session. I would like to turn the conference over to Vijay Manthripragada, CEO, for any closing comments.

Thank you all again for your time, and we look forward to sharing more progress and have a fantastic day.

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