Montrose Environmental Group, Inc.

Good day and welcome to the Montrose Environmental Group, Inc. Second Quarter 2023 Earnings Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that today's event is being recorded. At this time, I would like to turn the conference over to Rodney Nacier. Investor Relations, please go ahead.

Thank you, Operator. Welcome to our second quarter 2023 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 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 31st, 2022, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as a 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. Alan will provide you with financial highlights, and we will then open it up to Q&A. I will speak generally to the second quarter earnings presentation shared on our website. Before we speak to Q2 specifically, I would like to reiterate that our business is best assessed on an annual basis, given demand for environmental services is typically not being driven by quarterly patterns. We manage our business on an annual basis, and it is how we recommend you view our results as well. I would also like to thank our approximately 3,500 colleagues around the world to whom these stellar results belong. Without their efforts, we wouldn't be here today. To all of you listening, thank you. With that context, 2023 is off to a very strong start, which is a core part of why we are taking up guidance for the full year, and Alan will expand on that further in a few minutes. Our Q2 revenue was $159.1 million, and our Q2 consolidated adjusted EBITDA was $21.2 million. The second quarter saw continued outperformance, which built on our first quarter strength and momentum. The strength in our business is due to several key factors and themes, which I'd like to highlight further. First, given our highly accelerated organic revenue growth over the past few years, we have focused 2023 on optimizing adjusted EBITDA margins. Our long-term organic growth opportunities are just as attractive as they have always been, and our objectives and strategy have not changed. During Q2 2023, operating segment adjusted EBITDA and the consolidated adjusted EBITDA margins were 19.3 and 13.3% respectively, which represent an approximately 2% increase in margins versus last year. This improvement in our adjusted EBITDA margins is the result of strong revenue growth in most of our service lines. In addition, We have further refined our service portfolio and focused on technology advantages, which differentiates us in the marketplace and enhances margin opportunities as our businesses scale. The discontinuation of non-core or low-margin services and our investment in TREATEC in June to bolster our renewable energy offerings are examples of these efforts. The second theme is continued tailwinds given new and anticipated environmental regulations and our clients' voluntary focus on environmental stewardship. These tailwinds continue to create attractive growth opportunities across our business. The third theme is the increase in demand for the environmental response services provided by CTEH. CTEH remains elevated this year compared to their typical 75 to 95 million per year revenue cadence, due to several prominent environmental emergencies. The fourth theme is the continued benefit to our business from investments we made in prior years in organic and inorganic growth opportunities. Our investments into R&D and software have had a notable impact on our testing business so far this year. In addition, the recent acquisitions of Matrix, Greenpath, and Van Drensening, which was just announced, will continue to provide great opportunities for our teams and clients. And finally, our balance sheet remains strong, and we continue to convert well over 60% of adjusted EBITDA into operating cash flow, which is giving us ample flexibility to continue investing in our people and our business. Our balance sheet remains hedged against rising interest rates, insulating us from the current uncertain rate environment. I will now discuss our second quarter performance by segment. Within our assessment permitting and response segment, Excluding CTEH, we were pleased to see very strong organic revenue growth as well as positive contributions from our acquisitions. We remain bullish on the outlook for our environmental advisory services through 2023 and opportunities longer term given client focus on environmental stewardship and compliance. CTEH, which is in the segment, performed above run rate levels during the quarter as they engaged in numerous high-profile emergency response projects. Our CTH team has delivered exceptional service as always. Our margin increase in the segment was driven by one, organic growth in our advisory services, and two, CTH's shift to higher margin environmental response services. Within our measurement and analysis segment, demand and organic revenue growth for our testing services remains very strong, particularly in areas such as greenhouse gas measurement and mitigation. Our expanding technical and commercial partnerships, such as the one with Thermo Fisher announced in May, are increasing our market reach. Given the building regulatory pipeline, we remain upbeat about continued opportunities in this segment. Though quarterly segment margins are elevated and increased compared to prior years, annual margins in this segment are expected to remain in the high teens to 20-ish percent as we have previously discussed. And finally, within our remediation and reuse segment, revenue was flat due to the contribution of acquisitions and organic growth in our soil and subsurface remediation business, which offset the expected moderation in our ECT2 technology services, which encompass our water treatment and renewable energy services. Within our renewable energy or biogas business, we have shifted away from higher revenue, lower margin opportunities, for which there is notable demand. We are pivoting to a model that more resembles our approach to water treatment, anchored on intellectual property, and therefore more differentiated and more scalable at higher margins. This is why we invested in Treya Tech, as we have conviction in their team and we plan to help apply their proprietary technology to transform various client waste streams into valuable resources. This shift in approach will temporarily depress year-over-year revenue growth in the segment in coming quarters, but it will enable us to scale and capture the market opportunity in the medium to long term in more margin-accretive ways. Within our PFAS water treatment business, the recent regulations have been highly favorable to our technology and approach. However, the newly proposed contaminant levels, along with hazardous index values, are in many cases so low that they are creating near-term uncertainty and challenges for our clients. As a result, our clients are assessing their options and project timelines have shifted out slightly, reflecting the complexity of complying with these new standards. The acquisition of Matrix in June also depressed margins temporarily in the segment, but as we noted earlier, we will use Matrix as a case study of how Montrose increases margins and creates cross-selling opportunities for teams that join us. Alan and I look forward to sharing more details with you about the transition of Matrix into Montrose in the next few quarters. I'd now like to discuss a few recent regulatory updates and industry trends that support our long-term growth outlook. The U.S. EPA continues to focus on PFAS, and in June, finalized a rule incorporating nine PFAS chemicals into the Toxic Release Inventory Program, which triggers additional annual reporting requirements and is likely to increase future demand for our consulting and testing services. With regards to methane emissions, the EPA and Bureau of Land Management have new rules targeting methane emissions such as flares, vents, and leaks. These rules are slated to become final in the third quarter, which should support incremental demand for our emissions measurement, monitoring, and assessment services. Regarding demand for our environmental consulting services, in July, the EPA launched a $20 billion campaign to advance clean technology and to cut emissions and promote environmental justice in underserved communities across the country. We anticipate these efforts will drive increased demand for our advisory and testing services. These recent actions, as well as those we've highlighted over the past several quarters, reflect the growing environmental regulatory pipeline impacting our clients. While many of these proposals are in the early rulemaking phase, they further underpin the anticipated growth in demand for our services. Before I conclude, I would also like to take a moment to highlight the publication of our 2022 sustainability report, which we issued last week and can be found on our website. Many of you, our investors, have asked for more reporting and details on our activities in this realm, so we endeavor to progress our efforts. We look forward to engaging with you on this further. In summary, I would like to once again thank the Montrose team for their efforts on behalf of our clients. I remain incredibly grateful to all of you. As a result of our strong first and second quarter performance in 2023 and our positive start in this third quarter, we are increasing our full year outlook and guidance for revenue and consolidated adjusted EBITDA. Looking ahead, we remain optimistic in our business and our continued ability to create shareholder value. Thank you for the opportunity to continue doing so. With that, I will hand it over to Alan.