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.