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.

Thank you.

Thank you, Vijay. The strong organic growth across most of our service lines continued in the second quarter, reflecting strong economic and regulatory tailwinds and the success we're seeing with our integrated environmental services business model. We continue to see the themes we've discussed since our IPO three years ago play out as the need for environmental solutions has gained significant momentum around the world. Our growth drivers remain intact as we continue to harvest the benefits of our M&A and cross-selling strategies, which help drive our strong revenue growth and margin expansion during the quarter. Moving to our revenue performance on slide eight, we saw growth across most of our business lines drive revenues to record levels in the second quarter. Our second quarter revenues increased 13.7% to $159.1 million compared to the prior year quarter. Year-to-date revenues were up 5.8% versus the prior year period to $290.5 million. The primary driver of revenue growth in both periods was organic growth in our assessment, permitting, and response, and measurement and analysis segments. An increase in CTEH revenues and the positive contributions from acquisitions. This was partially offset by lower revenues in a specialty lab we are discontinuing and the timing of projects in our remediation and reuse segment. Growth in our year-to-date revenue was also impacted by our planned exit from legacy O&M contracts in 2022. Excluding revenue from discontinued businesses, revenue is up 14.8%, to 156.7 million in the second quarter and was up 7.9% to 286.6 million year to date. Looking at our consolidated adjusted EBITDA performance on slide nine, second quarter consolidated adjusted EBITDA was a record 21.2 million or 13.3% of revenue. This compares to consolidated adjusted EBITDA of 15.6 million or 11.2% of revenue in the prior year quarter. The year-over-year improvement was driven by higher revenues and higher business line margins, driven in part by the benefit of pricing as well as the favorable mixed shifts in CTEH. Excluding revenue and EBITDA loss from the lab we are discontinuing, consolidated adjusted EBITDA was 13.5% of revenue compared to 12.1% in the prior year. representing a 140 basis point improvement. Year to date, consolidated adjusted EBITDA was 37.8 million or 13% of revenue compared to consolidated adjusted EBITDA of 31.3 million or 11.4% of revenue. Excluding revenue and adjusted EBITDA from the lab we are discontinuing, consolidated adjusted EBITDA in the first six months of 2023 was 37.8 million compared to 30.9 million in the prior year period, which represented 13.2% and 11.6% of revenues respectively, a 160 basis point improvement. With that said, I'll reemphasize that Montrose's performance needs to be assessed annually as quarterly results are not always indicative of annual performance. Turning to our business segments on slides 10 and 11. As we highlighted last quarter, we remain focused on balancing our absolute dollar targets for adjusted EBITDA, operating cash flow generation, and growth with an eye towards optimizing longer-term margins. With that in mind, we were pleased to see the impact of shifts to our service portfolio, which helped contribute to the 150 basis point increase in operating segments adjusted EBITDA margin to 19.3%. In our assessment permitting and response segment, revenues increased 22.7% year-over-year to $61.4 million. The year-over-year increase was driven primarily by organic growth and, to a lesser extent, the positive contributions from acquisitions. TTH is entirely in this segment, so that business's increase in environmental response revenues are fully captured here. AP&R segment adjusted EBITDA increased 28% year-over-year to $13.8 million, or 22.5% of revenue, up from 21.6% in the prior year quarter, reflecting the benefits of organic growth, favorable CTEH revenue mix, and higher aggregate margins across our other businesses within the segment. In our measurement and analysis segment, revenue increased 18.5% to $50.1 million, primarily attributable to strong organic growth, as well as the benefits from acquisitions completed subsequent to the end of the prior year quarter. M&A segment adjusted EBITDA increased 53.1% to 10.8 million, or 21.6% of revenue, up from 16.7% in the prior year quarter, reflecting strong demand for our testing services and the benefits from our pricing actions. In our remediation and reuse segment, revenues were flat year-over-year at 47.6 million, with the benefit of the matrix acquisition in June fully offsetting the anticipated decline in our ECT2 water and biogas business, as well as the exiting of discontinued O&M contracts in the prior year quarter. The decrease in R&R segment adjusted EBITDA as a percent of revenue was a result of the shift in revenue mix including the dilutive impact of matrix. Our margin optimization efforts are on track at matrix, which is set to improve from the mid single digit to low to mid teens adjusted EBITDA margins by the end of 2024. Moving to our capital structure on slide 12. Year to date, cash flow from operating activities was 24.5 million, which improved compared to cash used in operating activities of 2.9 million in the prior year period. Cash flow from operations includes the payments of acquisition-related contingent consideration of 0.6 million in the current year and 19.5 million in the prior year. Excluding these acquisition-related payments, cash from operating activities was 25.1 million in the first six months of 2023, compared to cash from operating activities of 16.6 million in the first six months of 2022, an increase of $8.5 billion. This increase was driven primarily by a lower working capital build and higher earnings before non-cash items compared to the prior year period. These strong operational cash flows reflect our ongoing focus on balancing the generation of cash with investments in technology, R&D, and corporate infrastructure to ensure continued scalability. Our leverage ratio as of June 30, 2023, which includes the impact of acquisition-related contingent earn-out obligations payable in cash, was at a healthy 1.9 times. During the quarter, we entered into a second interest rate swap on an additional $70 million of borrowing. At quarter end, we had total debt before debt issuance costs of $170.6 million, and 148.3 million of liquidity, including 23.3 million of cash and 125 million of availability on our revolving credit facility. At our current leverage ratio and inclusive of our fixed rate on 170 million of debt under our interest rate swaps, our weighted average interest rate under our credit facility was 4.2% as of June 30, 2023, with no exposure to rising interest rates at current borrowing levels. A Series A2 preferred stock has no maturity date. We have the option, but not an obligation, to redeem the preferred shares at any time for cash. The prepayment penalty expired in April of this year. We view this preferred equity instrument as favorable to the value creation potential in the business, given its flexible dynamics, and the fixed nature of the dividend in a rising interest rate environment. If you include the 182 million balance of the Series A2 equity in our market cap, our total equity capitalization stands at approximately 1.3 billion. Moving to our improved full-year outlook on slide 14. Based on our strong performance in the first half of 2023, we are raising our full-year growth outlook for revenue to be in the range of 590 million to 640 million, up from previously issued guidance range of 550 million to 600 million. And we are raising our full-year outlook for consolidated adjusted EBITDA to be in the range of 75 to 81 million, up from the previously issued guidance range of 70 to 76 million. Our higher revenue and consolidated adjusted EBITDA outlook for the full year represents double-digit growth and margin expansion over the prior year. In addition, looking at the remainder of the year, we expect revenues and adjusted EBITDA to be stronger in the third quarter compared to the fourth quarter of 2023. We remain optimistic about the momentum in our business and our ability to sustainably create shareholder value given the resiliency of our business model and the expanding need for our differentiated environmental solutions. Thank you all for joining us today and for your continued interest in Montrose. And a big thank you to our team members for all their hard work in driving our solid results. We look forward to the opportunities we see ahead and updating you on our progress next quarter. Operator, we are ready to open the lines to questions.

Thank you. We will now begin the question and answer session. As a reminder, To ask a question, you may press star then 1 on your telephone keypad. If you are using your speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jim Ricutti with Needham and Company. Please proceed.

Good morning. I was hoping to get a better sense of the expected contribution from Matrix and the legacy mantras, if you will, just as it relates to the changes in your full year guidance.

Yeah, Matrix. Hey Jim, this is Alan. runs at $75 to $80 million of revenue on an annual basis, and about $4.5 million of EBITDA. That tends to be back-end weighted, just in terms of the seasonality of that business. So a little more than half of that $4.5 is baked into the updated guidance.

You may have given it... Did you provide any contribution number for Matrix in the portion of the quarter it was in? I think it was one month, right?

That's right. Yeah, one month. We didn't. It's about $8 million to $9 million of revenue running at 4% to 5% margins in the month of June.

Got it. And just a follow-up question, just as it relates to the timing issues around some of the projects and the remediation and reuse segment, I'm wondering if you could elaborate on that a little bit.

Yeah, Jim, this is Vijay. We're primarily referring to the ECT2 business when we talk about that, which is a combination of our water and biogas business. And so you have to look at that more on an annual basis because quarter in, quarter out, some of these projects would either roll on or roll off, which may cause some slight variance in what the quarterly comparisons look like.

Got it. And as you think about the ECT2 business, looking out over the balance of the year, You know, how are you feeling about that? And I also wanted to just follow up as it relates to EC2 is just on the acquisition you announced yesterday in Denmark. Even as I went through the Google translation function, I'm sure the combined benefits of this business and EC2 are maybe more apparent than the cursory look that I had on their website. So I wonder if you could just give us a sense as to what you're seeing in that part of the business, Vijay.

Sure. Yeah. Let me take the first question, the first part of the question, which is when we provided guidance at the beginning of the year, Jim, we talked about that business being flat this year, right? The combination of our water and our biogas business. And we spoke over the last couple of quarters about our desire to pivot the biogas part in particular towards more of a technology-anchored long-term solution. So we're kind of doing exactly that. So that business will be flat. And if we fully pivot to the technology solutions, the biogas part in particular will be down year on year. But the long-term outlook for us is as bullish as ever, Jim. And that's just part of our ongoing margin optimization efforts. And then as it relates to Van Drensening, which we just announced, it's a very small team, slightly outside of Copenhagen. And it's, they're just a very complimentary group to our ongoing efforts already on the ground in Scandinavia. And we're really excited about not only what they're doing with PFAS today, but how they can continue to grow with our team utilizing the technology that we have, that we've talked about with you before.

I'll jump back on the queue. Thanks. Thanks, Jim.

Our next question comes from Tim Mulrooney with William Blair. Please proceed.

Hey, this is Sam for Tim. Thanks for taking our questions here, guys. I guess to start, I know you've shared you expect to bring matrix margins up to low to mid-teens range by 2024. Now that you've had some time to work with the acquisition more, would you mind sharing what changes specifically you're trying to make that will drive that margin expansion?

Sure, yeah. Hey, Sam, it's Alan. The matrix business is very similar to many businesses we have in the U.S., and to a lesser extent, a smaller business that we run in Canada. And so the margin profile really should be similar to those businesses, and they tend to run in the mid-teens. So aligning pricing, we've done a pretty deep dive on pricing, aligning KPIs. And then the benefit of cross-selling and cross-utilization should enable us to improve some of those key performance indicators for them. And if you combine all of that, you get their margins up to where we run all of our other businesses. So that, obviously, early days, but we've been incredibly impressed by the caliber of the Matrix team and the integration activities are on track and going well.

Sam, I would just add, Alan's exactly right. I would add that we've historically talked about how this is a revenue synergy story and not a cost story. And what's particularly compelling about the matrix narrative is that the management team there is not only exceptional, but 100% aligned with these efforts. So this is a very collaborative effort, and we're really excited to share more of this with you, and we expect to do so when we report Q3 earnings.

Gotcha. Appreciate that. Maybe pivoting to biogas, just in relation to the biogas business, I was wondering if you or your clients even had any thoughts on the EPA's recent finalization of the renewable fuel standard and what that might mean for your business going forward through the year and maybe even beyond.

Yeah, that has a broader effect on the market right now, Sam, and our business today is primarily – the conversion of ag waste to the negative CI RNG. With the investment in TREATEC, we are pretty excited about the fact that that gives us access to many more waste streams, including industrial waste streams. And so we just see broader, you're exactly right, we see broader kind of tailwinds in the market and a broad-based demand cycle here, which is why we've been in it and we've been talking about it. And we're pretty bullish on what that looks like for us over the next couple of years.

Gotcha. I'll leave it there. Thanks, guys. Thanks, Sam.

Today's next question comes from Andrew Obin with Bank of America. Please proceed.

Yes, good morning. Can you hear me?

Hey, Andrew.

Yep.

Hey, how are you? Just switching to PFAS, I think recently there's been these settlement talks in the news, DuPont, Chemours, and, of course, the big one, 3M with water authorities, right? And I think the structure of the settlements, the upfront loaded in terms of state water authorities actually want to do remediation sooner rather than later. Are you having any conversations with the water authorities about these sort of cleanup projects and any sense of the timeline? I appreciate this is not sort of next quarter, but we're finally starting to see a large amount of money coming into the system, notwithstanding the issues you sort of highlighted. about the fact that nobody can detect PFAS. That aside, there are actual money for remediation coming in. Can you just give us some color, how you expect this to play out over the next two, three years? Thank you.

Yeah, so a couple of themes that I think are worth highlighting, Andrew. We are close to many of the folks you talked about, and so we are engaged more broadly in treatment efforts. The settlements primarily impact municipal drinking water matrices, and that's just not an area we've historically been focused in. So, no, the short answer is that's not a key focus for us, Andrew, and hasn't been and likely won't be. Where our technology will really play well is when there's high concentrations of PFAS and concerns around short-chain and long-chain molecules and a desire to kind of focus on a lower footprint and impact as part of the treatment process. So the short answer is that's not a key focus, hasn't been and is not a key focus for us. But we do think there's going to be a sustained push. You know, one of the interesting themes that Al and Todd and I have been talking about is the regulations that have come out have very much been in favor of kind of our broader technology portfolio. But how our clients react to the uncertainty on the regulations and the ability to measure it is going to be something we watch closely. So short answer is no. The settlements don't really swing our outlook all that much this year or next.

Gotcha. No, thank you. And just a follow-up for remediation and reuse. I think just looking at our model, you know, just implies material acceleration into the second half. And, you know, just sort of, I think you've touched on it, but just to confirm, you have visibility, obviously, on the projects to sort of support this view. A, is that the right way of thinking about it? And B, you know, how is the pipeline near term?

Yeah. Hey, Andrew, it's Alan. Yes, we expect. How are you? Good, thanks. We do expect the back off of the year for that segment. to be up over the front half, but Matrix is driving a pretty substantial part of that. As Vijay has said, our biogas business with the pivot will likely be down year over year, and then the UCT2 business, the water business, is likely to have a similar back off to the front half of the year.

I'll take it offline. Thanks so much.

Thanks, Andrew.

The next question comes from Stephanie Yee with JP Morgan. Please proceed.

Hi, good morning.

Hey, Stephanie.

I wanted to ask about the comment around some of the PFAS projects being pushed out by the clients. I think maybe I missed it last quarter, but I thought some of the project timing shifts was due to the tremendous growth that you guys saw in the prior year. And so giving the team time to kind of absorb some of those projects. So I was just wondering if kind of project timelines that we're hearing about this quarter, it was something that developed in the quarter, or was it just something that was ongoing that you didn't necessarily call out in the prior quarter?

Hey, Stephanie, this is Vijay. Why don't I take that one? You're exactly right. We grew, call it over 100% organically in 2022. So when we talked about at the end of last year and the early part of this year, even as part of the guidance discussions, what this year would look like, we wanted to make sure that that team got their legs under them, just given the incredible growth last year and the fact that the team size almost tripled and the project scale and scope and geographies expanded materially. And our desire was really not only for team reasons, but also for quality and systems control reasons. So that is absolutely still true. What we were alluding to regarding the regulations is that as the certainty around those continues to expand, which has happened, right, not only in Q1, but also in Q2, and there's more clarity on how the EPA is going to regulate it, being able to measure at four parts per trillion or lower or getting down to all the short-chain and long-chain compounds the analytics capability there is a little stretched. And so what our clients are talking to us about is, even with these compliance standards, how do I know I'm there? And how is this going to get regulated? And how do I think about these solutions going in? As a result of that, even though our demand cycle is higher, the execution and start of these projects is slower, if that makes any sense. And it's largely around it's largely around trying to react to not only what the standards are, which absolutely favors us, but now a more practical question of like, how do I get there and how do I even measure it and know that I'm there?

Okay. Okay. That's very helpful. Thank you. And then just on the acquisition that you announced in Denmark, does that kind of double the size of ECT to presence in Europe? And Does it kind of give you a platform for further action in Europe?

Yeah, our European footprint is still very small. So we're talking about, you know, kind of a dozen people or so working on very select projects. You know, we've been very cautious, Stephanie, as you know, expanding into the European geography. more for operational reasons, really. There's a lot of demand there, clearly, and they're very forward-leaning on regulations, particularly PFAS regulations. But the short answer is yes, it does increase the size of that team, our project reach, and our ability to continue expanding there. Absolutely.

Okay. Thank you. Thanks, Stephanie.

The next question comes from Wade Stuckey with Capital One. Please proceed.

Good morning, everyone. I've been called worse. Just hate to dwell on Matrix too much, but I was wondering if you could talk a little bit more about revenue, top line synergies. And I gather there may be parts of the business, I might be misunderstood on this, but maybe parts of the business that are more or less attractive and just trying to think about that sort of in the context of growth looking out to 2024?

Yes, I'll talk conceptually about the revenue side and then Alan certainly jump in on kind of what the outlook looks like. This team is an exceptional team of scientists and engineers weighed a lot like what we have on the remediation and consulting side here in the United States. And so as we look at, I'll give you a couple of simple examples. As we look at our energy and utility companies on the West and some of the expertise that we need as we continue to meet demand cycles in the United States, or we look at some of the energy companies and the work we're doing both stateside and in Canada, these teams are very complementary to each other, right, in terms of the depth of expertise and understanding as to how the hydrogeology works or how the environmental regulations work. And so when we talk about revenue synergies, we're talking about cross-utilizing staff for our clients in projects that kind of switch between both the Canadian and the U.S. marketplace. Does that make sense?

Yes, absolutely. That's great.

Okay. And then they also – and when you say parts of the business that we find attractive, they are – we find all of the business attractive. I mean, they are not only – remediation experts, but they also have a depth of expertise and a growing portfolio with things like greenhouse gas assessment and mitigation with water and water resource management. And so we talked a couple of quarters ago about acquisitions we had made, small but very strategic ones. In Northern California, folks are very similar issues. And so that's another example of where there's going to be complementarity between the two teams. So we're really bullish for a host of reasons, and we continue to see that as a platform for us to expand both in the Canadian and U.S. markets. As far as outlook for next year, our focus right now, Wade, is really more on getting their margins to where the rest of our business is. But the revenue synergy is already in flight. The teams are already working really well together, and we expect that to continue.

Okay, perfect. Thank you.

Just switching gears a little bit here, you've put a couple of teasers out here in the press release and presentation on software. I'm wondering if you could expand a little bit more on what you're doing on that front. That would be fantastic.

Yeah, it's a fair question. We haven't talked about it as much. We, you know, we With the acquisition of Sensible EDP, we began more formally talking about the aggregation of data and the presentation of environmental data for our clients across environmental media, starting with AIR, Wade, and what we're seeing is that on the real-time measurement of greenhouse gases and other contaminants like ethylene oxide, that capability is really playing to our advantage. And so what I mean by that is, you know, we are one of the largest air testing firms in the world, and we're able to put together our source leak fence line ambient capabilities, and we're able to present that information in real time to our clients and as needed to communities that the clients are around. And so that's a pretty substantive technological advantage, and it's manifesting itself in our numbers. And the reason we talk about it more now is because it's starting to show up in a more meaningful way, and it's moving the dial on our measurement analysis segment. Does that make sense?

Absolutely. Thank you very much. Appreciate it. Congrats, guys. Thanks, Roy. Thank you.

As a reminder, if you do have a question, please press star then one on your touchtone phone. The next question is a follow-up from Jim Ricchiuti with Needham & Company.

Please proceed. Hey, Jim.

Hello, sir. You're in line as live. Sorry about that. Alan, I just wanted to ask about the step-up in SG&A in the quarter. How much of that is just possibly due to the the increase in M&A activity or just maybe in broad strokes how we might be thinking about SG&A going forward?

Yeah, Jim, there's a pretty robust breakdown in the queue that will be filed later today. But at a high level, it's driven by G&A from acquisitions. It's driven by there was a change that we've made In the classification of certain of our back office folks that used to be very decentralized, and as we've centralized those functions, they're acting more like G&A than as an operational cost of sale. And so there is a switch this year versus how it was classified in the prior year. And again, those numbers are broken out. And then, yes, acquisition costs. are higher than last year, just given the higher activity this year.

And then on a go-forward basis, is there anything we should keep in mind about your SG&A, just with the scaling of the business?

Yeah, again, the way we look at it, Jim, is separating out kind of the corporate SG&A. And again, our commitment has been to keep that at or below 6%. And for the full year this year, we do expect it to be lower than 6% and declining, as we've said, um, uh, in the, in the future years. Um, and then the, the SG&A that resides within operations, um, that is slightly more fixed, right? Again, given, um, given the nature of, um, uh, you know, fixed rentals, um, and the, uh, uh, the back office support folks that still reside in operations. Those that you've really just got inflationary increases that drive those. It's not, not so much driven by an increase in revenue. So you should see that also be a more modest increase year over year going forward.

Final question for me. And I apologize if you gave this, I've got a couple of calls going on, but just wondering about if you can, if you gave any color of a nature and a contribution to, of the emergency response work that contributed to the performance of CTH in the quarter. And I guess the other thing to keep in mind here is the profile, the margin profile of this business, the work that they're doing is better margin, certainly than we've seen in the recent past. Is that correct?

Yeah, that's right. That's right, Jim. The environmental response work is higher margin than last year, particularly in the first half when we had COVID. That was a more prominent service stream. I mean, these numbers are in the queue, Jim, but if you think about kind of their typical cadence at an 85 midpoint of kind of low $20-ish million of revenue a quarter, they were closer to $38 million. for the quarter, right? So they're substantially elevated. And those margins are much more similar to the normalized 25% margin levels that we would expect for them.

And we do expect them to return back to that normal cadence of kind of 20 to 25 a quarter in the back half of the year, Jim.

Okay. Okay. Thank you.

Thanks, Jim. Thanks.

This concludes our question and answer session. I would now like to turn the conference back over to Mr. Vijay Manthari-Pragada for any closing remarks.

Thank you. Thank you all for the time and for the interest in Montrose, and we're really excited about the rest of the year, and we're looking forward to our next conversation with you. Thank you again.

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