Montrose Environmental Group, Inc.

Greetings and welcome to the Monroe's Environmental Growth and Fourth Quarter 2022 earnings call. At this time, all participants are in listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raghuveer Nasir, Investor Relations. Thank you, Mr. Nasir. You may begin.

Thank you. Welcome to our fourth quarter and full year 2022 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 latest annual report on Form 10-K, which identified the principal risks and uncertainties that could affect any forward-looking statements, as well as future performance. We assume no obligation to update any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including consolidated adjusted EBITDA, adjusted net income, and adjusted net income per share. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and a reconciliation thereof to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay, beginning on slide four.

Thank you, Rodney, and welcome to all of you joining us today. I will provide you with business highlights and then hand it over to Alan for our financial review before we open it up to question and answer session. I will speak generally to the updated earnings presentation shared on our website. But before I begin, I would like to take a moment to acknowledge the plane crash in Little Rock, Arkansas, which took the lives of five of our colleagues last week. They were on their way to helping our clients, and this is one of those unthinkable events for which there are no words. Our prayers and thoughts go out to the families that lost their loved ones and to our CTH colleagues who are mourning a deep, deep loss. I am proud of how the collective team has come together. I am also amazed at the poise and grace with which our CTH team is handling this sudden and unexpected shock. To all of our CTEH leaders and colleagues, thank you for your unwavering fortitude. And to our clients and partners who jumped in to help and are joining us to remember those we lost, thank you. I also remain grateful for the efforts of our colleagues around the world, from Australia to North America to Europe. Their results and efforts have resulted in another incredible year for Montrose, and I am really pleased with the execution across all levels of our business. As we have noted before, our business is best assessed on an annual basis given demand for environmental services is not driven by specific or predictable quarterly patterns. This is how we manage our business and how we recommend you view our results as well. Let me now go to our financial results. We were pleased to report another exceptional year in 2022, and I'll highlight a few key themes. First, we achieved record organic revenue growth of 26% in our core business, representing approximately two-thirds of the growth in the blue bars on page five of the presentation. As a result, Our average organic growth over the past three years has been approximately 18% compared to the 7% to 9% at the time of our IPO in mid-2020. Historically, acquisitions represented more than half of our annual revenue growth, but recently, organic revenue growth has been a greater contributor to our overall growth trajectory. Second, our organic revenue growth outperformance in core services helped mitigate the impact of the anticipated $125 million decline in CTEH COVID-19 related revenues from 2021 to 2022. Given the incredible surge in CTEH revenue in 2021, we expect it to be down in 2022. But revenues held steady on the back of strong organic growth outperformance in the rest of our businesses. Three, What is particularly encouraging for us is that our organic growth outperformance was broad-based and across segments. It is primarily driven by demand for our PFAS water treatment technology, greenhouse gas measurement and mitigation, and renewable energy services. Fourth, we were also thrilled to see customer revenue retention and cross-selling revenues increase to record levels. Customer revenue retention increased to 96% in 2022. As a reminder, the 4% isn't necessarily lost revenue, but more a function of project frequency. Our customer relationships remain as strong as ever. In addition, cross-selling revenues, which are defined as revenues from clients using more than one Montrose service, nearly doubled to 35% of total revenues. In essence, our organic growth outperformance is less about customer acquisition and more about deepening existing customer relationships. Growth in these metrics reflects the success of our business development efforts and, as importantly, our integrated service offerings. Finally, and fifth, we are also happy with the strength of our balance sheet and continued strong cash generation. Our acquisitions were and continue to be funded through our operating cash flows. Our balance sheet remains effectively hedged against rising interest rates and it provides us with ample flexibility to continue consolidating our industry and investing in environmental innovation. As it relates to acquisitions, which remain a core part of our strategy, we believe our slower pace during 2022 was prudent as we focused on executing against our accelerating organic growth opportunities. So far in 2023, we have increased our cadence of M&A activity, and though small, We believe they are very additive to Montrose, and we are very pleased to have added the teams from Frontier Labs, UCO Consulting, and Environmental Alliance to our family. We expect more announcements in the near future, and as you can see to the quick start this year, we expect 2023 to be back to our historical cadence of strategic acquisitions. As Alan shares more about our 2023 outlook, I think it is important to highlight where we came from. which is what slides five and six are meant to depict. Revenues and total operating segment adjusted EBITDA from our core business have seen very strong and sequential growth each year since our IPO in 2020. During that same time, we invested in our corporate infrastructure to transition to public company life and to transition out of our emerging growth status more quickly than anticipated. Regarding 2022 expectations, our revenues came in consistent with expectations primarily due to organic growth outperformance as discussed earlier. But our operating segment EBITDA was a little lower than expectations for three primary reasons. First, as our water treatment and biogas services scale, their margin profile, though very attractive at run rate levels, is immature at this time as we invest to capture organic growth opportunities. So, though I am oversimplifying, the revenue that replaced the CTEH COVID-19 revenues from 2021 was lower margin in the short term. However, it grew faster than we expected, and importantly, it represents more consistency and higher margin opportunity in the long term. Our recent acquisitions in our consulting and engineering service lines have been lower, mid-teens margins, but very strategically additive. In addition, we purchased a few small testing businesses that were also lower margin. We expect margins for these businesses will increase as part of Montrose over the coming years. These acquisitions have also been very financially accretive. And finally, when we last spoke in November, CTEH had a near record October of 2022, so we expected fourth quarter 2022 outperformance. However, the fourth quarter ended lower than we expected. The CTEH business is challenging to predict over months or quarters, as we have noted before. CTEH remains core to the Montrose strategy and had a spectacular overall year, as you can see on slides five and six. So this is more of a short-term phenomenon. Given all these factors, our 2023 outlook on pages 5 and 6 reflects our bullishness, particularly with our core services. We expect double-digit organic revenue growth in 2023 for our core business, which will offset the continued wind-down of the CTH COVID-19 services. Those services remain meaningful, particularly in early 2022. We also expect strong double-digit operating segment adjusted EBITDA growth for our core services, which will offset a slight decline in CTEH. Finally, we expect to be back to a regular M&A cadence, and Alan will expand further on these trends. Overall, our long-term strategy remains unchanged. We are confident in our ability to create shareholder value, as we have been doing given our ability to innovate and capitalize on strong demand for our environmental solutions. Next, I will discuss broader regulatory and industry trends. We continue to see market drivers as government policy initiatives are catching up with public and private sector demand for better environmental stewardship. We remain well positioned to capitalize on these tailwinds. Specifically, and first, on PFAS, the U.S. EPA continues to be focused on the issue of PFAS and added several more PFAS chemicals to the toxic release inventory in January. The EPA also proposed rules regarding lower thresholds for chemicals of special concern. both likely increase future demand for our consulting and testing services in particular. In addition, the US EPA plans to publish final drinking water limits for PFAS by the fall of 2023. Their recent memo also includes recommendations for at least quarterly testing of wastewater and technology-based treatment, both of which are expected to continue driving demand for Montrose's testing and treatment capabilities. With regards to methane emissions, Late last year, the EPA released a supplemental proposal for the oil and natural gas sector to reduce methane emissions for facilities among other emission reduction requirements. The proposal expands the scope of requirements and requires states to reduce methane emissions from hundreds of thousands of existing sources nationwide for the first time. In addition, the U.S. Bureau of Land Management published a proposal that requires operators of federal and tribal oil and gas leases take steps to avoid the waste of methane. If adopted, we expect to see increased demand for our emissions measurement, monitoring, and assessment services. Third and finally, regarding demand for our environmental consulting services, in January, the US EPA announced availability of $100 million, which builds on previous investments from the America Rescue Plan to support projects that address various aspects of pollution, emissions, and climate matters in disadvantaged communities. In addition to the demand we have started to see from the American Rescue Plan, we have also seen increased demand from industrial clients partnering with communities as a result of these new efforts to monitor air quality in particular. This creates tailwinds for our consulting and testing services. Also in January, the US EPA released a document on how to ensure cumulative environmental impacts are considered with permitting, remediation, waste management, environmental emergency response, and other decisions. If implemented, we expect this proposal will help increase demand across our services. So in essence with regulations, while many of these actions are in the early rulemaking phase, the macro demand drivers for environmental services remain on the rise. And though we are highlighting U.S. regulations as that is most of our business, the same general trends are true in Australia, Canada, and Europe, which we expect will collectively represent a greater percentage of our revenue in the coming years given stellar growth opportunities. Next, I would like to discuss our performance by segment. Within our assessment, permitting, and response segment, excluding CTEH, we were pleased to see solid organic revenue growth in other services in the segment. In addition, we were able to add small but strategically and financially accretive acquisitions to the segment. These trends are harder to see given the expected $125 million decline in CTH COVID-19 revenues, which overshadowed the segment. We see a lot of future opportunity in building other services within this segment. Also, going forward, we expect to reduce CTH variability through investments in the organic growth of their non-response services as well as acquisitions. The team is very strong, so we remain long-term bullish on opportunities related to CTEH. Margins in the segment were primarily impacted by the shift in business mix and the lower margins of our recent acquisitions. Within the measurement and analysis segment, demand for our testing services remained very strong and drove solid organic growth. Given the regulatory momentum I just discussed, we remain upbeat about continued growth in this segment given our position as a market leader. Our margins remain in the high teens to 20% as expected. Finally, within our remediation and reuse segment, our organic growth outperformance for the full year was primarily driven by demand for our PFAS water treatment and renewable energy services. As we've reiterated on prior calls, margins remain below what we consider normalized levels given our ongoing investment into this business. We were pleased to see sequential margin improvement in this segment during the fourth quarter, also as expected. In terms of our research and development and technology achievements, we were awarded and have filed for eight and 14 patents respectively. We are particularly excited about our progress with PFAS destruction and carbon dioxide capture. Given the early nature of these innovations, they may not succeed in the field, but they show promise and they speak to our team's ability to identify and capture long term environmental opportunities for our clients. In addition, we are actively working on partnering with next generation technologies for waste to energy and real time air monitoring services, which we believe will contribute to our continued long term value creation and growth. In summary, These results belong to approximately 3,000 Montrose colleagues around the world. To those of you that are listening, congratulations on another solid year. To our investors, thank you for your continued support and for giving us the opportunity to create value for you, for our clients, and for our employees. As we look forward to 2023, we believe we are well-positioned to achieve our objectives given our strong track record. We remain as optimistic as ever in the future for Montrose Environmental. With that, let me hand it over to Alan. Thank you.