Good day, and welcome to the Montrose Environmental Group Inc Third Quarter 2024 Earnings Call. All participants will be in the listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Adrianne Griffin, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Thank you, and welcome to our third 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 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, 2023, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as our 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 such as 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, Adrian, and welcome to all of you who are joining us today. I will start with an update on our business and our outlook, and I will then speak generally to the third quarter earnings presentation shared on our website. Allan will provide the financial highlights and following our prepared remarks, we will host a question-and-answer session. While today's call will highlight third quarter performance, it is 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 perspective. Before we dive into the quarter's performance, I would like to welcome our new colleagues from Origin's Laboratory, an environmental lab serving Colorado and the US Mountain States, who joined us in September. I would also like to take a moment to express my gratitude for the approximately 3,500 Montrose colleagues around the world. Through their continued dedication and service to our customers, in many instances, despite the personal and community challenges caused by two major hurricanes, we were able to produce another quarter of record results and further our position as a leader in the environmental industry. As for Q3 2024, we are very pleased to report another period of record results. Our quarterly revenue reached $178.7 million, and our consolidated adjusted EBITDA reached $28.3 million. Our consolidated EBITDA margin was 15.8%, which was a 190 basis point improvement over the prior year quarter. This exceptional performance was driven by robust organic growth across most of our business lines as well as positive impacts from recent acquisitions. During the third quarter, we were particularly encouraged by the progress of Matrix in Canada, which is set to achieve our targeted mid-teen EBITDA margin, an impressive improvement from their 4.6% EBITDA…

We were pleased to deliver another quarter of strong financial performance as we continue to execute our growth strategy. Our solid results during the third quarter were driven by organic momentum from cross-selling activity and expanding customer relationships and the positive contributions of acquisitions. Our focus on higher-margin services and operational efficiency continues to benefit our business, reflected in a notable improvement in our overall profitability to record levels. Moving to our revenue performance. Our third quarter revenue increased to a record $178.7 million or a 6.4% increase compared to the prior year quarter. Revenue for the first nine months of $507.4 million was a 10.7% increase versus the prior year period. The primary drivers of growth in the third quarter was strong organic growth in our Assessment, Permitting and Response and Measurement and Analysis segments as well as positive contributions from acquisitions, partially offset by lower environmental emergency response revenue. The drivers of revenue growth in the first nine months were solid organic growth of 7% compared to the prior year-to-date period and the positive contributions from acquisitions, partially offset by lower environmental emergency response and treatment technology revenues. Our consolidated adjusted EBITDA performance in the third quarter reached a record $28.3 million or 15.8% of revenue. This compares favorably to consolidated adjusted EBITDA of $23.3 million or 13.9% of revenue in the prior year quarter. The significant increase in quarterly profitability despite a substantial reduction in high-margin emergency response activity was driven by organic growth, the impact of acquisitions and lower corporate expenses, which is partially timing related. First nine months 2024 consolidated adjusted EBITDA was $68.5 million or 13.5% of revenue compared to consolidated adjusted EBITDA of $61.1 million or 13.3% of revenue. Diluted adjusted net income per share of $0.41 in the third quarter of 2024…

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

Vijay, Allan, good morning.

Good morning.

Hey, Tim, how are you?

Doing well, thank you. You actually addressed a lot of the questions I had in the chamber for the call today. You actually addressed a lot of them in your prepared remarks. So I'm actually going to move to a couple just more targeted questions. The first one is just on the Trump election win. I was wondering if you could -- which of your businesses did well under his prior administration, if you could highlight some of those? And what business lines would you expect to continue to perform well and thrive in this type of environment?

Tim, why don't I start with that? And Allan, you can certainly jump in. Just as a quick reminder, we've been through our prior Trump administration before, as you alluded to, Tim, and we doubled in size and we went public during the Trump administration. So our business is, by definition, designed to go through -- grow and go through these political cycles. And as it relates to our revenue mix, where we saw a significant uptick in demand was in our consulting and our treatment side of our business last time, Tim, and some modulation on the testing side. And the reason for that is that the Trump EPA deemphasized new regulations and deemphasized certain forms of enforcement. And as a result, as we kind of look across our business mix, we are feeling quite optimistic about the opportunity to continue our organic growth cadence that we've kind of talked about with you in the past, and our outlook is largely unchanged. The other dynamic that I think is important that is different from where we were in the prior Trump administration is that approximately 20% of our revenue is now ex US. And as we think about Canada, Europe and Australia, we're seeing exceptional performance across all of those geographies. And we certainly don't expect that to change all that much either. So we're -- we're feeling quite upbeat Tim, and I don't know, if that answers all of your questions.

No, it did answer my question. Thank you, Vijay. Another one I wanted to ask about was in your 8K, I noticed in your 8K that the COO, Joshua LeMaire is leaving the organization. I was just curious if you could share any more details about that decision and how that kind of impacts your organization.

Yeah. No Josh is still part of the organization. He's a friend and an exceptional colleague. For personal reasons, he's going to be stepping down from the COO role but he's going to stay with us, help us transition with new -- with the new leader both selecting and onboarding the new leader, Tim. And we're likely going to focus on someone with a deep bench of industry experience. But he's still part of Montrose. He was a core part of the founding team. And he's going to be working closely with me and Allan and the rest of the team going forward. So we're actually really thankful for everything Josh has done. And we're -- and we're excited to kind of see what his next chapter looks like for him.

Got it. Okay. Thank you for the color on that. That's helpful. Just one more for me. I know you're pausing acquisitions but would just love to hear how some of these recent ones are going. Could you comment on origins and spirit in a little more detail? How are those going? Thank you, Vijay.

Yeah, both are actually going very well. Origins is a lab that really focuses in on Colorado and the Mountain States Tim and the recent regulatory regime in those states has created a really nice set of tailwinds for that business. And it is performing exceptionally well. The team is excellent and integration is going well. And what's been really encouraging for us is that some of our cross selling of our clients into their business is progressing really nicely. So we're really pleased with that. And then the same goes for spirit. They've been very additive as a air permitting powerhouse with an exceptional team. They've really been additive to our broader consulting and testing footprint and have already really hit stride with working across our service lines and our clients. And so I couldn't be more pleased with both of those. And even with some of the earlier transactions, I like Epic and dot they are going incredibly well as well. So we're kind of as we look across our portfolio of acquisitions from this year. Notwithstanding some of the things we talked about earlier, which are normal as you integrate. You know acquisitions we're really happy. And all of those transactions and aggregates have been really accretive to our growth profile to our margin profile. And we think we'll stay that way long term.

Helpful color. Thank you, Vijay.

Thank you. The next question comes from Durgesh Chopra from Evercore ISI. Please go ahead.

Hey team. Good morning. Thanks for giving me time.

Hey, Durgesh, how are you?

Hey, Vijay, good morning. Hey just on this you know deemphasizing acquisitions and new equity. Can you just kind of help us with time? You know like is this for a what time period is that over? Is what where I'm trying to go with? This is this first half of 2025 no equity all of 2025. I get to the 2026. How should we think about that?

Yeah, Durgesh, we're going to be deemphasizing acquisitions and really focusing on the redemption of the Oaktree prep and on organic growth we're excited to kind of demonstrate the kind of the engine that drives our organic growth profile and our cash flow profile. We're in aggregate just to kind of step back. Our thesis is unchanged. So there is still a very robust pipeline of a creative transactions that we think will be very additive long term. And so we're going to, let the business over the next couple of quarters demonstrate the power of the organic engine and allow us to repay the press. And then we're going to try to we're going to target kind of that three-ish times leverage, right? For select transactions, we may pop up above 3 to 3.5. And we're kind of you know well in the twos right now. And so we're going to keep it to kind of those parameters. Durgesh, it's a little tough to predict exactly what deal flow looks like but our intent over the next couple of quarters is to de emphasize the acquisitions and as it relates to the equity issuance and this and our specific focus on repaying the prep. We do not intend, to issue any equity to repay that. Q – Durgesh Chopra: Got it now.

Allan, I don't know if there's anything else you would add as it relates to the balance sheet.

No, that's exactly right. We've got certainly the leverage capacity and the financing capacity to take out the prep, the next 60 is due in April, anyway. So you'll see us take that out before that, and then the final $62 million likely shortly, after that again depending on how the year is progressing. But that would be our expectation. Q – Durgesh Chopra: That's helpful guys. But just to be clear, you're not saying no acquisitions, all you're saying is, you're probably, kind of manage within that leverage metrics there will -- there could be still more acquisitions but you're not tapping the equity market. Is that fair?

That's the broad thesis Durgesh. And just to be clear, for the immediate future, we will likely not transact but it doesn't mean, we never will. And going back to my earlier point, a core part of our strategy is to consolidate select parts of this market given our business model, and use that consolidation to drive accelerated organic growth and that thesis is unchanged. It's just where our focus is going to be through Q4, Q1 and Q2. Q – Durgesh Chopra: Okay perfect. Thank you. Appreciate the time.

Thanks, Durgesh.

Thank you. [Operator Instructions] The next question comes from Jim Ricchiuti from Needham & Company Please go ahead. Q – Jim Ricchiuti: Hi, good morning.

Hey, Jim. Q – Jim Ricchiuti: Just a question on the decision regarding M&A, I'm just wondering is there any risk that this decision, potentially could represent lost opportunities for you guys.

No, Jim we're staying very close to our core target opportunities. And at this time, there is absolutely no risk to us losing anything that we really want. Q – Jim Ricchiuti: Okay. And look, I know that this decision was obviously something that preceded the election. But I'm also wondering, does this perhaps reinforce the decision on M&A leveraging just in until there's more clarity on how the regulatory environment might evolve, if there's any change at all? And it doesn't sound like you think there is, but it's -- do you feel more comfortable with this decision now?

I mean we're certainly in a -- we want to see how the new Trump administration and President Trump and his EPA progress, Jim and then we want to see kind of what the state decisions are, we don't expect honestly with what we currently do much to change. And we know folks that were in the prior Trump administration, that are involved with a lot of the planning processes now. So we don't expect much to change, but yes, I think the focus on driving organic and harvesting what we already have in hand, while we wait to see what the next couple of months look like. We made the decision independent of that, but we certainly think it's going to be very additive given the current circumstances. Yes. Q – Jim Ricchiuti: Got it. And just final question from me, I'm wondering, how we should be thinking about the -- your selection by the Army Corps of Engineers. Are there -- regarding that announcement, are there any expected milestone awards that you're tracking that are in the line of sight for the next year or two? I'm just wondering how we should think about the announcement. Thank you.

Yeah it was great because it kind of validated, Jim. As we've talked about with you in the public sector our strategic thesis and it enabled us to kind of leverage both our advisory testing capabilities and our engineering and remediation capabilities. And so yes, there will be milestones as that contract process progresses and we'll certainly keep all of you abreast of that. And obviously, that's not the only one. There's others that we're quite optimistic about. So we'll stay close to you, as that progresses. I think the only point of highlighting that, is that the broader opportunity set is incredibly strong and our relative advantage to harvest that broader opportunity set, which is expanded also seems to be manifesting really nicely. So we'll stay very close to you as those awards start to come to fruition and translate into revenue.

Got it. Thank you.

Thank you. The next question comes from Aadit Shrestha from Stifel. Please go ahead.

Hi Aadit.

Hi Good morning. Thanks for taking my questions. Just going to sort of the outlook for 4Q 2024. I think you talked about revenue growth being 10 to 15%. Could you just elaborate about how much of that is from acquisitions and emergency response? I think your guidance kind of improves yours likely up 20% plus, so -- for a strong quarter and then acquisitions looks like at around 9% in 3Q 2024. Does this temper down slightly in 4Q?

Yeah, let me speak about kind of 4Q and the year a little bit more broadly a bit because I want to make sure we're kind of keeping in line with all of the publicly disclosed information. Most of our business lines are seeing double-digit organic growth, which we're really excited about and the two variables that are swinging Q4 in the numbers you just referenced are one, the temporary delays in some of the treatment technology projects and two, the relative magnitude of the response business. And so despite those two, right the responses, we kind of think about year-on-year, as Allan alluded to in his comments, are down the core organic plus the impact of acquisitions is driving some of our optimism into Q4 and 2024. And so that's the reason we're maintaining our guidance. On the response side, specifically, the team has done an exceptional job this year. We're still expecting that to be in the $50 million to $70 million range. It was a little lighter in Q3 we expect given the hurricane and recent events that it may be on the higher end of that $50 million to $70 million in Q4, but it's very tough to predict as you know. And so that's the one reason for that range that you saw in the public comments that Allan provided. Does that does that make sense of it?

Yeah, thanks a lot. And maybe if you could just elaborate on matrix margins how did that perform in 3Q 2024? I know you discussed you know you remain on track of attaining mid-teens margin, do you actually see that in 4Q?

Yes, Allan, do you want to take that?

Yeah, they ran at mid-teens margins. It's a really solid Q3 performance. Year-over-year, they are expected to have tripled their margins from the time of acquisition that team is performing exceptionally. And all of the initiatives to drive that margin which is pricing, operational excellence, if you will, and then the cost savings through the integration activities, are all going to plan and that is resulting in us being. Exactly where we would have hoped at this time.

And then just as a follow-up, are you seeing a strong organic growth within matrix too?

We are seeing really solid organic. We had expected that with the pricing that was taken that we would not see much growth that there would be some volume attrition. We have not seen that and credit are going to the metric team. So, they're seeing really nice organic growth for them and not all of that counts in our organic growth, right? Because the first five months was still considered acquisition growth. But certainly in the back half of the year they're seeing really nice organic growth.

All right. Thanks a lot.

Thanks Aadit.

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

Thank you and thank you all for taking the time this morning. We really appreciate your continued support. Allan and I and the Montrose team are really excited about the year, the quarter, and our outlook into 2025. And so we certainly look forward to sharing more with you in the very near future. Thank you and take care.

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