Montrose Environmental Group, Inc.

Greetings. Welcome to the Montrose Environmental Group Incorporated first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Rodney Nassier, Investor Relations. Thank you. You may begin.

Thank you, Hillary. Welcome to our first quarter 2021 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer, and Alan Dix, 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 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 final prospectus filed with the SEC on July 23, 2020, 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 adjusted EBITDA and adjusted EBITDA margins. 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 attend to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors and a reconciliation thereof to their most directly comparable gap measure. With that, I would now like to turn the call over to Vijay, beginning on slide four.

Thanks, Rodney, and welcome to all of you joining us today. I'm going to begin by providing a few business highlights. I'll then hand it over to Alan Dix, our CFO for our financial review, after which we'll both open it up to Q&A. For those of you following the presentation, I'm going to speak generally to slides four through eight. And I'm glad to start this update to you by saying we started 2021 on a strong footing following a fantastic 2020. I'm proud of our team for their continued excellence, teamwork, and service to our clients. Our revenue and adjusted EBITDA more than doubled compared to the prior year quarter. Though Q1 reflects a continuation of tailwinds we have seen over the past few quarters, I would like to take a moment to reiterate a theme we've highlighted before, that our environmental services don't map neatly to fiscal quarters. So Montrose is best assessed and managed on an annual basis. That said, given the strength of Q1, we remain very confident in continued performance through 2021 and our long-term expectation for annual revenue growth in excess of 20% is intact, with adjusted EBITDA growing faster than revenue as it has historically. In terms of the drivers behind our strong performance, so far this year, we've seen a steady reopening in the US, and we're excited to be back in front of clients and to be safely seeing each other in person. Our teams in Canada, Australia, and Europe continue to face more COVID-related challenges than here in the US, but I couldn't be more proud of all of our teams in terms of how well they're working together to get through it. And since our last earnings call in March, we've seen many developments that bode well for Montrose, both this year and beyond. So let me walk you through some recent developments and some of the catalysts that we see for our business moving forward. In terms of the political and regulatory landscape, our performance is driven by continued client demand, which we believe has been and will be bolstered by policy tailwinds. Following President Biden's first hundred days in office, We've seen many initiatives related to environmental regulations and compliance starting at both the federal and state levels. As one example, President Biden recently announced an economy-wide goal of a 50% reduction in net greenhouse gas emissions from 2005 levels by 2030. Such a policy would drive demand for our services given client needs to assess, test, validate, and potentially mitigate air emissions. Beyond this, we expect additional funding for large projects like bridges, roads, renewable energy, and the like to drive the environmental assessment market and associated activities such as wetlands identification and mitigation, brownfield reclamation, and renewable energy generation. We are also seeing promising regulatory proposals arise in some of our key geographies, such as Colorado's Regulation 7, which aims to monitor emissions around new oil and natural gas drilling operations. While these newer policy proposals have not yet impacted our financial results, we are starting to see some of our large customers begin to proactively and voluntarily accelerate emissions reduction targets and other environmental initiatives. As one example, a major LNG client's quality supply program pays qualified methane suppliers a premium for their product if they achieve emissions reduction targets. Montrose will participate in establishing emissions baseline data for this effort by our client. We see initiatives like this by our customers as significant to both our mission and to our business. It's important to note that though our business model is resilient and largely insulated from political swings, we are optimistic about the emphasis on environmental stewardship by both the capital markets and regulators. And at a minimum, these new priorities and proposed policies are creating tailwinds for our industry and our business. The magnitude of the upside will depend on the specifics, but these are the reasons why we continue to have conviction in our 2021 outlook and beyond. In terms of the segment highlights, which Alan will certainly touch on more in a few minutes, I'll point to the LTM numbers to help us keep focused on the importance of measuring our performance beyond any one quarter. Q1 2020 revenue on a trailing 12 months or LTM, TTM basis. increased 64% compared to the prior year LTM period. Q1 2021 adjusted EBITDA on a trailing 12 months basis grew 105% compared to the prior year period, given several factors, including revenue growth, favorable shifts in business mix, and better operating leverage at the segment level. Within our assessment permitting and response, or what we call our advisory segment, CTEH is most of that. CTEH is a 60 to 80 million run rate business, revenue run rate business, and this quarter saw us running well ahead, which we are happy to see, of course. In addition to the COVID-19 pandemic response, results in our CTEH business were driven by responses to the Gulf severe winter storm and to a major cracked pipeline in the western U.S. In addition to climate change-related events, on the aging pipeline, we are seeing an aggregate reduction in resources and operating costs within the oil and gas sector, which increases the risk of incidents and an increase in the need for response expertise like CTHs for that sector. Besides CTH, our higher margin advisory and permitting businesses are also seeing a nice uptick driven by recent EPA announcements. An example of such an announcement is the requirement for power plants in 12 states to reduce nitrogen oxide emissions. We're also starting to see more request questions from clients related to the recent market drive towards net zero emissions. With our eco-services business, within this segment, we continue to see demand for the National Environmental Policy Act, or NEPA, and California Environmental Quality Act, or CEQA, to support infrastructure planning projects, particularly for Native American tribal governments, municipalities, and developers. We expect demand for NEPA and CEQA to continue with President Biden's infrastructure focus. And as a final example, we're seeing increased demand for air emissions inventories, air emissions statements, and greenhouse gas consulting to support our clients' carbon management needs. We're seeing that our clients continue to have a steady need for environmental advisory and regulatory compliance services to maintain operations regardless of COVID. Within our second segment, the measurement and analysis segment, demand remains very strong. The revenue decline versus Q1 of 2020 is primarily due to the timing of project starts and completions, and on an annual basis, we expect good organic growth in 2021 in that segment. As some examples of where we see opportunity both near-term and long-term, our lab business has added instrumentation, developed specialized analytical capabilities, and received additional accreditations to support our expanding PFAS footprint. We have also seen an uptick in non-regulatory driven lab services, including support for LEED or the Leadership in Energy and Environmental Design indoor air quality testing programs. Additionally, our testing business is seeing an increase in ambient air and community monitoring projects facilitated by both regulatory and non-regulatory drivers. In the first quarter of 2021, as an example, the EPA released a new air test method for PFAS, OTM 45, where we have some differentiated capabilities and where we expect to see continued demand. And finally, in our remediation and reuse segment, we are seeing nice organic growth as opportunities start to slowly open up. Projects that were put on hold are starting to move forward, and in some cases, we are seeing very aggressive timelines to make up for lost time and increased pressures from regulators. For our remediation teams, we are seeing activity in Q1 led by due diligence and site investigation, legacy site remedial design and remediation for industrial clients, and environmental monitoring and assessment assignments for large government agencies. We also want several projects associated with what we consider to be two important growth trends, cleanup support for coal combustion residuals, or CCR, wastes in the eastern U.S., and PFAS investigations in groundwater at several former multiple fire training sites in the southeastern United States. In terms of innovation and growth acceleration drivers, the tailwinds across each of our business segments are validating our investments in technology and innovation related to the environment. Just recently, and independent of Montrose, DuPont issued a public comment to the EPA that Montrose's regenerable resins for PFAS treatment are something the EPA should consider as a regulatory standard. We are grateful for the acknowledgement, but we continue to emphasize that there is no single silver bullet. and that it's going to take continued and sustained effort and focus on science to address these challenging environmental issues. We believe the capital we allocated to research, development, innovation, and commercialization is contributing to our organic growth and benefiting our customers and our shareholders. Our business remains fundamentally anchored to our nearly 2,000 experts, our seller-doers, who serve our clients every day, And so these investments that we're making in innovation are designed to arm them with more information and better tools to continue doing so. We think high mid- to single-digit organic growth plus the contribution of completed acquisitions on an annual basis is a reasonable expectation for our business going forward and consistent with what we've mentioned before. In terms of acquisitions of companies and talent, Montrose is our people, and we remain very encouraged by the caliber of talent we've been able to add to our team over the past year. Our new colleagues have brought a wealth of experience, clients, and importantly, insights into the ways we can continue to improve. We are also very encouraged by the strong retention of our team, especially at the director level or equivalent and above. M&A continues to remain an important part of our business strategy, and last year we more than surpassed our acquisition goal with the acquisition of CTEH, and the integration of that team is going very well. We continue to see a significant benefit from the joining of the Montrose and CTH teams, including robust revenue synergy, which is really encouraging. Most recently, in January, we acquired the MSC Group, which benefits our remediation and reuse segment, increases our environmental service offerings for select U.S. federal agencies, and expands our geographic presence in the southeastern United States. We are very pleased with how MSC is fitting into Montrose, and we're seeing great collaboration between the teams and are thrilled to have their insight into government procurement. The revenue synergy being identified between the Montrose and MSC teams is equally encouraging. And in terms of the remainder of 2021, our acquisition pipeline remains very strong, so we remain confident in our ability to deliver $10-plus million in acquired EBITDA at attractive multiples this year and each year beyond that. As we mentioned several weeks ago, we expect to announce additional acquisition targets in the coming months, and given the balance sheet is strong, which Alan's going to talk about in a few minutes, we can continue to execute on our plans and goals with what we already have. So in summary, I want to end where I started, by thanking our clients and a big thank you to our colleagues around the world to whom these results belong. To the Montrose team, congrats on another great quarter, and to our investors, thank you for your continued support. We look forward to another milestone year and the ongoing discussion and dialogue with all of you. So with that, let me hand it over to Alan.

Thank you, Vijay. Our exceptional performance in the first quarter reflects the continued strength and resilience of our business model. We are thrilled with our strong year-over-year and sequential quarterly performance. Our core businesses are strong. We are benefiting from accretive M&A, and we are executing on our cross-selling strategy. Moving to our first quarter performance on slide nine, We continue to drive strong growth across our business during the COVID-19 pandemic. Our revenue increased 119% to $133.8 million compared to the prior year quarter. The primary driver of revenue growth in the first quarter was acquisitions, most notably our acquisitions of CTH and MSE. CTH especially has experienced favorable tailwinds given client demand for pandemic response services. As mentioned on prior calls, at the end of the first quarter of 2020, we did decide to discontinue certain service lines and completed that process early in the second quarter of 2020. The loss of revenues from these discontinued service lines partially offset our revenue growth. Excluding discontinued service lines, revenues would have increased 129% in the first quarter. First quarter adjusted EBITDA grew 203% to $16.8 million, and adjusted EBITDA margin expanded 350 basis points to 12.6%. This improvement was primarily driven by higher revenues and operating leverage from lower corporate expenses as a percentage of revenue. I'll reemphasize Montrose 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 our business segments on slide 10, the work we are asked to do by our clients is captured across the three segments by which we report our financials. In our assessment, permitting, and response segment, revenue grew to 75.3 million and adjusted EBITDA improved to 15.8 million. The significant year-over-year increases in both revenue and adjusted EBITDA were mainly driven by the acquisition of CTEH in April of 2020. Since April, CTEH has also seen an acceleration in demand to provide pandemic response-related services. The decline in segment-adjusted EBITDA margin to 21% was a result of lower-margin COVID work performed by CTEH. In our measurement and analysis segment, revenue decreased 8%, as expected, to $33.4 million primarily attributable to discontinued service lines and the timing of compliance projects in the current versus the prior year. Adjusted EBITDA margin declined to 14.5% due to lower revenues, business mix, and the reinstatement of certain costs that had been temporarily suspended at the outset of the COVID-19 pandemic. Finally, in our remediation and reuse segment, revenues increased 25% year-over-year to $25.1 million. reflecting the acquisition of MSE and organic growth, partially offset by the impact from discontinued service lines. The slight decline in remediation adjusted EBITDA margin to 9.9% was as a result of business mix. Adjusted EBITDA margin also reflects the impact of elevated fixed costs in anticipation of growth and geographic expansion in this segment. Moving to our capital structure on slide 11, looking at the quarter, Cash flow used in operating activities was $13.9 million, a decrease of $4.9 million compared to the prior year quarter. Cash flow used in operating activities in both quarters included the impacts of seasonality and the payment of annual bonuses. Additionally, the change in working capital in the first quarter of 2021 increased by $18.6 million when compared to the prior year quarter. as a result of the significant increase in revenues in the current quarter versus the fourth quarter of 2020. We expect strong cash flow from operations for the balance of the year and continue to expect a long-term conversion of adjusted EBITDA into operating cash flow at a rate in excess of 50%. This incorporates our expectation that as a growing company, we will continue to be very focused on balancing the generation of cash and investments in technology, R&D, and acquisition integration. As of March 31st, 2021, we had cash of 10.6 million and total debt of 179.5 million. Our net leverage ratio at March 31st, 2021, as reported under our credit facilities, was 3.1 times within our longer-term target leverage range of between 2.5 and 3.5 times. In April, we entered into a new sustainability linked credit agreement, which has several benefits to Montrose stakeholders. The new facility expands our borrowing capacity to 300 million in the form of 175 million term loan and 125 million revolving credit facility. This new debt structure reduces our cost of borrowings from 5.5% at March 31st, 2021 to LIBOR plus 2%. Furthermore, By entering into the new credit facility, Montrose receives up to a nominal basis point pricing adjustment based on our performance against certain sustainability and ESG-related objectives. Optimizing our capital structure is an important part of our long-term strategy, and we are very pleased to do that while aligning financial incentives with sustainability goals for Montrose. As a reminder, our Series A2 preferred stock has no maturity date. And we have the option to redeem the preferred shares at any time for cash, subject to a make-hold payment in the first three years. We view this preferred equity instrument as favorable to the value creation potential in the business, given its flexible dynamics. If you include the $182 million balance of the Series A2 equity in our market cap, our total equity capitalization stands at approximately $1.7 billion. Moving to our four-year outlook on slide 12. It is important to note demand for environmental services is not driven by specific or predictable patterns in one or more of our fiscal quarters. Our first quarter results and a positive start to the second quarter reinforce our expectations for continued strong performance in 2021. Accordingly, we are increasing our annual guidance for 2021 and currently expect adjusted EBITDA to be in the range of $63 to $70 million. which is up from previous guidance of 61 to 67 million. Our updated guidance implies adjusted EBITDA growth of 16 to 28% year-over-year. This outlook is based on a combination of mid to high single-digit organic growth, excluding CTH, plus the contribution of completed acquisition. Looking at our top line, we continue to expect annual revenue growth in excess of 20% year-over-year for the full year 2021 consistent with our historical track record. This growth outlook is expected to be weighted towards the first half of 2021, primarily attributable to the timing of exceptionally strong first quarter revenues and a strong start to the second quarter. I'll also mention that our outlook does not include future acquisitions, which represent upside to our current forecast. Although our full year margins are expected to be stable year over year, Margins could be impacted by the surge in CTH COVID-related work, which is at lower margins than CTH's typical margins, and the resultant mix for 2021. We are obviously excited about the higher than expected revenue growth in our businesses. Given the very different margin profiles that each of our segments generate, we will continue to articulate our margin expectations as the year progresses. Our 2021 outlook reflects our optimism in our business to deliver exceptional service and value to our customers through our best-in-class environmental solutions. We see an immense addressable market, and we are always open to accretive M&A opportunities that allow us to enter new geographies and bring additional services to clients. We also expect to continue to invest in unique technologies and processes as we build and continuously improve our portfolio and market share. We're excited for the years ahead with our goal to becoming the leading environmental solutions brand. We sincerely appreciate your interest in Montrose. I want to thank all of you for joining us today. Operator, we are ready to open the lines to questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please note, we ask that you limit yourself to one initial question and one follow-up per person. One moment, please, while we poll for questions. Our first question is from Jim Rashudi of Needham and Company. Please state your question.

Thank you. Good afternoon, Vijay and Ellen. First question. How are you guys? So the first question I have is for you, Alan. If I look at the SG&A line, it's scaled up a bit from Q4, but still below, around the mid-year levels that we saw back in 2020, the June, September quarter. So the question I have is, to what extent have you really layered in some of those temporary cost savings? Did that hit in Q1? Should we assume... further scaling of those temporary savings looking at Q2 and Q3, or is the bulk of it, you know, has been realized in Q1?

Jim, the costs that you're referring to and that we indicated were put back in the first quarter were largely operational related. So those were the temporary savings labor costs that we variabilized early in the second quarter of 2020. So those were put back at the beginning of the year and are in the full quarter of Q1. And so largely impacted our operational margins and not so much the corporate or SG&A.

So even the pickup and travel and whatnot is still, that wasn't a big factor, I guess, is what you're saying.

Q1 is outside of CTH is typically a slower travel quarter. Certainly as the business picks up, and we started to see that already in the second quarter, you will see an uptick in travel to more normalized levels. And then there are additional, the balance of the costs that we took out in 2020 have been put back early in the second quarter. So you'll see the full impact when we report the second quarter results. But in the first half of the year, all of those costs will have been put back.

Okay. Thank you for that. And then my follow-up question is just as it relates to the remediation and reuse business segment and then the measurement and analysis segment business, clearly some project timing related issues in those businesses. So it doesn't sound like you're overly concerned with the decline in EBITDA margins that we've seen in those businesses. But I guess what I'm wondering is, to what extent are you going to be able to respond to the pickup that you're anticipating as some of the client work picks up again? Are you able to to move quickly enough to begin to address that stronger demand?

So let me, Jim, this is Vijay, let me start and let me let Alan jump in as well. On the back half of your question, are we going to be able to respond to the pickup? The answer is yes. We've talked about this before. The business is not linearly linked to needing to add headcount as demand picks up, right? We are confident in how we've built a scalable model. And so as demand starts to accelerate, our teams are well positioned to take advantage of that. You know, on the margin point, I would characterize it quite a bit differently. I think of this as kind of a two-pronged answer. As we look out for 2021, we are quite optimistic about our ability to generate strong organic growth across our segments, specifically in the remediation reuse, which is where our PFAS water work, our renewable energy work, and our remediation business sits, and then within measurement analysis where our testing footprint sits. I think we shared this with you last year, Jim. That service line, specifically around measurement and analysis, was running way ahead of expectations or what we would consider normal, right? So that business, on a run rate basis, should do kind of high teens EBITDA margins, and we were in the mid-twenties. And so this normalization is exactly what it is. It's not a point of concern. Candidly, we're excited as our teams get going that the business starts to look more like it did before the pandemic hit. So we'll keep kind of anchoring you on don't look at it quarter on quarter. You've got to look at this annually. But I think it's important to really kind of hear us on the annual trends where we have quite a bit of optimism across the segments.

Does that make sense? It does, DJ, and thanks for clarifying that and pointing it out. I think it's useful. Thank you.

Our next question is from Andrew Obin of Bank of America. Please state your question.

Hi, guys. Good afternoon.

Hey, Andrew. Hey, Andrew.

Just a question on assessment permitting and response and just the impact of CTNH. You guys clearly have warned us that we will see quarters like this, but just the scope of the beat is quite impressive. So, you know, how familiar are you now with this business? You know, what are the chances of seeing a similar beat next quarter? And what are the chances of this being a pure pull forward from the other quarters? And I appreciate sort of that the business model is very uncertain quarter to quarter, given what happened. But, you know, based on what I'm hearing, what you've described, it's not necessarily pull forward. It's just one-time events that will not necessarily repeat. So sort of pull forward versus just business normalizing. That's, I guess, question one.

Hey, Andrew, this is Vijay. Let me take that. So in terms of our familiarity with the business, which is where you started, we have spent a lot of time with the CTH team and have a ton of respect for the leadership team there and just are thrilled with not only how they're operating, but how they're fitting into Montrose. I would characterize our familiarity as very high and rapidly continuing to increase, just an exceptional fit into Montrose. The reason I say that to you is I can say with full conviction that the concept of pull forward does not exist at CTEH, right? It is a response business, right, by and large. And so the way to think about that business is a run rate $60 to $80 million per year business that has spikes off of that. And just as you have spikes up, you'll have some spikes down as you kind of roll quarter on quarter. But over the course of a year, on a normalized basis, we think that they are the beneficiaries of long-term secular drivers like climate change-related events. and aging infrastructure. So in the context of the beat in Q1, the way I would characterize that is, yes, it is substantial. So if you kind of think about, you know, the 60 to 80 run rate on an annualized basis, you would think they would do 15 to 20 million per quarter. And they were kind of well in excess of three times that level in Q1. And the COVID-related response work that drove that beat, primarily drove that beat in Q1, we expect to continue, as we told you a couple of weeks ago, through the first half of this year. But we think the business, short of another environmental emergency or response need, begins to kind of look more normal in the Q3, Q4 timeframe.

Gotcha. And I guess question number two, I mean, you sort of went over very positive trends for your business. I assume that others in the industry are seeing similar trends. So how does this change M&A environment and conversations that you're having with potential targets? And I'm wondering if you have sort of to pull back away from some conversations as maybe targets are getting more and more optimistic. So how do you price in this optimism as you talk to potential acquisitions? Thank you.

So we, you know, in the context of larger acquisitions, we certainly are seeing what the broader market expectations are. So they tend to be frothier, but that's really not what we do. Andrew, as you know, the vast, vast majority, candidly, outside of CTH, every transaction Montrose has really consummated is much more of a smaller business that's very strategic and more of a bolt-on type strategy. And in that market, which is where we tend to play, we have not seen multiple accretion. The sellers tend to be motivated by mission, by a desire to grow their business and stay and integrate into the Montrose engine. And that's where we've kind of built our reputation and where we see a ton of opportunity. And given how fragmented the market is, that's where we hope to continue playing. We think it's right for us where we are today in terms of strategy as well. So in the space where we want to be, in the 10 plus million that we've signaled to you and the street, we don't anticipate shifting off of our legacy discipline around acquisition multiples. But certainly for the larger deals, and we've seen a fair amount of that come through, valuation expectations are very frothy. And as a result, we probably will not play.

Terrific. Thank you so much. Thanks, Andrew.

Our next question is from Tim Mulrooney of William Blair. Please state your question.

VJ, Alan, good afternoon.

Hey, Tim.

Good to talk to you guys. Two quick ones for you. On the leak detection business, I saw an article the other day where the Senate voted to restore some regulations around stricter monitoring on oil and gas emissions. does this have any near-term impact on that business, do you think, or is this just another regulatory change and kind of a long line of slow evolution towards better leak detection standards? And maybe this would be just a good opportunity to talk about how that business is faring year-to-date.

Yeah, let me take that, Tim. So there's been a fair amount of activity around methane emissions specifically and some of the restrictions that both Congress and EPA are putting around various flaring rules methane leaks and methane mitigation and so there's been a couple of bills I don't know exactly which one you're referring to but in aggregate they are all very additive to our business we've seen a lot of client engagement around this topic some of the voluntary emissions reductions narrative that was in my opening remarks speaks specifically to some of the demand driven by the types of initiatives you just cited. And as we look at the 2019 versus 20 growth in that business in North America, so in the United States and Canada, and as we project forward into 2021, we remain quite bullish about what that business will do, and we think that that trend will continue into the around the European shutdown of American natural gas purchase because of a lack of clarity around methane emissions reduction. That type of effort obviously resonates in the market, or that type of action, sorry, obviously resonates in the market, and it's something our customers here in the United States pay a lot of attention to. And our capabilities around fence line monitoring, ambient monitoring, leak detection, quantification, right? This is where our integrated model really plays nicely. So if you're hearing optimism from us, that's exactly what it is. We think that this secular trends in that broader space are quite attractive. And it's not just leak detection for us. It's kind of our broader air quality management business.

Right. Gotcha. Okay. Thank you for that. And then if I could pivot, I was hoping to get a little bit more detail, Vijay, on your recent investments in IT and commercialization. And I know you've talked about this before, but I know it's an important area of focus for you right now. Can you maybe walk through some of the more significant investments? And although it's early, if you're seeing any initial benefits or what type of benefits you'd hope to see from these investments, I'm kind of thinking about addressing pricing and efficiencies or cross-selling, for example. Thank you.

Yeah. So let me, you know, look, let me give you kind of a very tangible example, Tim. And, you know, look, on pricing, we've said this before, the Salesforce, the CRM implementation will give us much more visibility and data to share with you over time. But it's going to take us a couple of quarters given we just implemented a Gen 1 this year. It's going to take a couple of quarters for the data to saturate and saturate in a way that we can kind of quantify and reflect back to you. But one area where that investment in a CRM and in a system where our various experts can see what others are doing across our 5,000 customers has resulted in a notable uptick in cross-selling across our segments. And so we've been really encouraged by how the teams are starting to see collaboration opportunities and cross-selling opportunities And as a simple example, the recent acquisition of MSC, by virtue of both the system and the way that business was integrated, has resulted in just kind of a flurry of activity across remediation, testing, measurement, permitting compliance, so on and so forth. And so as just a simple, tangible example, there's at least a half dozen cross-sell opportunities that we talked about over the last a couple of months that arose because of the way our teams were able to collaborate, because of the investments we made in the infrastructure and systems over a year ago. We've added, as we said to you, kind of a little over a dozen business development personnel to supplement kind of our seller-doer model, and that's also starting to pay some attractive dividends for us. It's core to our thesis, Tim. If you're really focused on one specific area, to your point, like leak detection, and you're dealing with methane issues, and the client's broader concern are around upcoming regulations, a shift in where the Congress is focused or the EPA is focused, and you have to mitigate, it makes a ton of sense that our teams collaborate across our various service lines, and that's what that team's meant to do. So we're seeing kind of, again, a validation of our strategy and our model. The more and more we get visibility into where our folks are touching our clients across our business lines.

Great example of your integrated approach.

Thank you, Vijay. Appreciate it. Thanks, Tim.

Our next question is from Noel Diltz of Stiefel. Please state your question.

Hi, guys. Good afternoon. Congrats on a good quarter. Hey, Noel. Hey. So my question is somewhat related to your conversation with Tim, but I'm curious how you're thinking about the market for sort of benchmarking monitoring and measuring greenhouse gas emissions. I'm thinking about this from expanding outside of utilities and heavy manufacturing and oil and gas into other industries, given public policy and how society is pushing for a greener economy. Any thoughts on how that overall market could develop?

Josh, that's a great question, Noel. This is probably an answer that's going to warrant a much, much lengthier conversation. Your broader question sits at the intersection of a couple of different and very related demand drivers within our client base. There's the broader ESG push. There's the carbon measurement mitigation, the race to net zero, and then the impact that renewables can have on that. And these are all different ways that a business can either reduce, measure, or mitigate their ongoing impact from a carbon or climate perspective. So as we look at where Montrose sits today, there's a host of opportunities within our advisory segment, our assessment permitting response segment, where we have, where we are, and this is where a lot of our recruiting energy has been in terms of bringing experts and expertise in-house. And these are folks helping boards and C-suites figure out how to think about some of these issues, where to set the baseline or the benchmark, right? So what is point zero? How do I compare it to where others are? And then where do I want to be, given some of the commitments that have been made publicly? And then that feeds beautifully into our testing business, like some of what we talked with Tim about, Noel. And that can come in many different forms, right? The The historical, regulatorily driven differentiation between source emissions and leaks and fence line monitoring and ambient air monitoring start to blend as folks begin to assess comprehensively across their facility or production cycle where their carbon footprint's coming from. And then on the remediation side, some of the work in the renewable energy space can serve as an offset, and then there's various other technologies that can be used to capture, for example, some of the emissions So we are kind of sitting beautifully across all three, but I want to be careful to state that we have yet to formalize a product that specifically helps address a singular need that a client may have. For example, a need that says, I want to get to net zero by 2035. Can you help me do that? So the elements are certainly there, but we're in the process over the next year or two to formalize that. in a way where it can be a little bit more of a turnkey solution, specifically targeting the questions coming from our customers. But we are actively involved in many, many projects, both at discussion stages and also fully in implementation, where folks are either voluntarily saying, look, I have to begin to measure my emissions and my carbon footprint so I can at least set a baseline and so that the boards and C-suites can then begin to achieve their targets, and then others saying, you know, help us formulate a plan to get us there. So it's kind of The ambiguity you're sensing from my answer is a function of a rapidly evolving marketplace with no defined kind of end goal yet.

Right. Okay. Does that make sense? Yeah, it does in terms of where you sit and where you might be looking to go with that. Great. Yeah, that's great. My second question is a little bit simpler, but I think we're starting to get a somewhat better sense of what an infrastructure bill could look like. You know, when you look at some of the proposals within the bill, maybe could you touch on where you think are the areas that could potentially have the most impact for Montrose, you know, perhaps around PFAS or any of the other energy initiatives? That would be great.

The, you know, the two areas where we actually are seeing the most impact is not in our remediation and reuse segment, though certainly there are with some of the Brown-Freen reclamation and some of the increase in spend around cleanup. We anticipate that. We're starting to see that. But most of the opportunity for us that we've seen, given what's already come down the pike, is on the assessment side. So these are the comments I made related to the NEPA and CEQA assessments that our teams do and the eco-services work that our teams do, Noelle. So more on the advisory, what is the impact of some of these changes, or if I'm building a new road or a bridge, how do I assess what the environmental impact is? So we're seeing an impact within our AP&R segment, and then the resultant testing work that comes with that, we're seeing an impact there as well. Less at this point on the remediation side that we certainly expect that as that ticks up and as the spend begins to increase and formally roll out, and this obviously will take some time, Over the next couple of years, we expect to see some nice tailwinds within our remediation reuse segment as well. And then, you know, look, it's not just the infra bill. Even the COVID relief bill, for example, had some elements there around industrial hygiene, wastewater treatment, sanitation. And so there were elements of that that are, again, adjacent to the spaces in which Montrose placed. And so it's very hard to predict exactly how government spend will roll out, but if there's one theme that's pretty consistent for us, it's that there's clearly tailwinds that are going to get created as a result. But we have yet to really fully see that. That's not baked into our numbers, nor is it baked into our projections, just to be explicitly clear about that.

Okay. Perfect. Thank you.

Thanks, Noel. Our next question is from Stephanie Yee of JP Morgan. Please state your question.

Hi, good afternoon.

I'm good. How are you guys?

Thank you. I just had a question on, it's a clarification question really on the remediation segment. So I was wondering if you can give an idea of how much of the growth in the first quarter was due to the acquisition of MSE and And whether it's a low margins that we're seeing in the first quarter, it's really because you've been making investments upfront, like in PFAS and with restricted travel to Europe and Australia still, you're just not able to get your people out there. And so maybe the margin pickup we would expect from that segment would be more back half weighted as kind of the COVID situation gets more under control in Europe and Australia.

Yeah, let me take that, Stephanie. Let me answer the second part of your question first. You're exactly right. The inability to travel is certainly having an impact. Recall, we're still comparing a COVID-impacted quarter with a non-COVID-impacted quarter, and the remediation reuse segment has been impacted more so than the other two segments. And yes, we certainly... have maintained the the capacity and capability in that segment just given the expertise we have in-house and and the very strong belief we have in in the future growth in this particular segment so those margins towards the back end of this year you should start to see tick up what we've said is on a long-term basis this particular segment should run kind of low 20% to 25% margins. We won't get there this year, but in the back half of this year, you'll see us start to tick up closer to those levels. On your first question, MSC contributed $4 million to EBITDA in that particular segment, and then the rest was organic, of revenue, sorry, of revenue, and the balance was organic growth.

Okay. Okay, perfect. And then also a clarification on kind of your CRM system and the sales people. I know Vijay just mentioned you've added a dozen or so business development people. I was wondering if you guys divide up, you know, how they're oriented. Are they focused by industry or by the three segments of your business to kind of promote cross-selling? If you can kind of comment on the structure and how, yeah, just what their expertise are in order to kind of further penetrate the client base.

So it's kind of a it's a two pronged strategy, Stephanie. And so we're not going to be adding a ton of headcount for this. But the purpose of adding to that team, step one was to facilitate our seller doer model, right? The inherent risk or weakness in a seller doer business model is that when you're busy doing, it's harder to sell. And so we wanted to supplement existing teams where we saw a ton of tailwinds like some of the leak detection or methane mitigation work that we were talking about with Tim and Noel. We wanted experts in that space to further penetrate in areas where we think some of our technology advantages that we've talked about with you before will play nicely. So these are folks kind of targeted at that specific client base But the broader push is not only to supplement or support our seller-doers, but as importantly, if not more importantly, collaborate across our service lines. When you're a deep technical expert dealing with or solving a technical problem for a customer, you tend to be an advanced scientist or an engineer, and you tend to be less comfortable speaking about technical areas where you may not have as much expertise. The hope was, as we added some of these folks, they could help facilitate those conversations and introduce the right experts into the mix as needed for customers so that our integrated offering seemed more of a turnkey solution. And so that longer-term strategy is really what this is all about, and we are just in the early, early stages of putting that in place. So just to be explicit about answering your question, the vast majority of that dozen or so that we've added are right now allocated at the business line level, But their managers have been specifically mandated to connect the dots, so to speak, across our service lines. One of the disadvantages of being kind of one of the first movers in this fragmented market is we're playing in the fragmented market, right? So for us to unfragmented, we have to shift the dialogue with the customer. But we're seeing some really nice early indications of that. And I'm excited going back to the earlier questions around giving more data from the CRM kind of this time next year. sharing some explicit examples of that with you. We already have a few. It's just too preliminary to really talk about it. Does that make sense?

Yeah.

Yeah, that was super helpful. Thank you.

Our next question is from Jim Rashudi of Needham & Company. Please state your question.

Hi. The follow-up is... relates to what you're seeing from your clients in terms of how they're responding to some of the changing regulatory actions, whether it's at the state or federal level. What I'm wondering is if that's causing you to look at your M&A pipeline a little differently in terms of where you might be looking to put resources.

It's a great question, Jim, and the short answer is yes. It's a rapidly evolving and dynamic regulatory landscape, and obviously there's always, and we've said this to you before, just as a shift to the downside doesn't necessarily result in a lot of lost business, the introduction of new regulations will likely get challenged, litigated, and modified. but it's a signal for our clients and for us as to where the market's moving. And so as we begin to start to see some of these rules unfold, on the more tactical level, right, increased NOx standards or an unwind of a prior stay on a regulation, those are easy. Those are expected, and those don't really – clients are already accustomed to those types of changes, and that increases demand. We can respond to it. But with some of these newer community monitoring mandates or voluntary reductions – exactly how they're framed, how they're communicated, and how they're quantified is not fully fleshed out. And so that, for example, will change areas where we may look to acquire talent or technology capabilities or software capabilities, for example. So it is absolutely impacting where Jose and the strategy team are focused, both on the M&A side and also on the recruiting side. And we're pretty... I would say in the immediate term, two areas of focus for us is better capability on the testing side, given some of the new regulations we're seeing from Administrator Regan and his priorities, and bolstering our eco-services capabilities. Those are – we anticipate areas that we just need to continue to bolster not only our internal ability, but more broadly, the offerings we provide to our clients. And so that's a little bit of a pivot from where we had historically. looked. But we think, again, very consistent, very additive with our vertically integrated strategy.

That's helpful. And the last question I had is just as it relates to what you've seen with CTEH in the last couple of quarters. And I realize some of that business is not necessarily going to lend itself to your other businesses. But I have to believe within that client base that's been utilizing CTEH more fully, there are increased cross-selling benefits from the experience that some of these clients have had with them in the last couple of quarters.

That's right. That's right. So some of what we alluded to on the last earnings call, Jim, our increased footprint in the technology media telecom industry, for example, is a function of some of the efforts and the success that our colleagues at the CTH team have had. And that represents a host of of new conversations that we can have as a collective combined team with those organizations. I mean, part of the challenge, candidly, is they are doing such a great job that they are just all out right now, right? The bandwidth and the capacity to take on new conversations and work is strained. It's limited, and that team's been working really hard, and clearly from the results you can see over the last couple of quarters has had exceptional success, but that comes and a cost to kind of employee fatigue and morale. And so we absolutely long-term see excitement and opportunity in terms of being able to cross-sell. We just have to take it one step at a time, hopefully give them a chance to catch their breath in the back half of this year, and then we can begin to up the cadence on some of the dialogue with their leadership team and our business development team.

Yeah, that makes sense. Thanks. Congrats on the quarter. Thanks, Jim. Thank you.

We have reached the end of the question and answer session. I will now turn the call back over to Vijay Mantharapargata for closing remarks.

Thanks all. Thank you again for joining us today. We really appreciate all of your support and look forward to sharing more continued progress and success over the coming quarters. Thank you for your time. Stay well, be safe, and talk soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great rest of your day.