Montrose Environmental Group, Inc.

Good day and welcome to Montrose Environmental Group fourth quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal and 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 touch tone phone. To withdraw your question, please press star, then 2. Please note that this event is being recorded. I would now like to turn the conference over to Rodney Nasir from Investor Relations. Please go ahead.

Thank you, Operator. Welcome to our fourth quarter and full year 23 earnings call. Joining me on the call are Vijay Manpuri-Pragada, 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. We 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 SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31st, 2023, 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 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 the reconciliation thereof to their most directly comparable GAAP measure. With that, I will now turn the call 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 updated earnings presentation shared on our website. Before I begin, I would like to take a moment to thank our over 3,100 dedicated colleagues around the globe. Their efforts drove another year of record revenue, adjusted EBITDA, and cash flow by implementing best-in-class environmental solutions. I would also like to re-emphasize that our business is best assessed on an annual basis, given demand for environmental solutions is typically not driven by quarterly patterns. We manage our business on an annual basis, and that is how we recommend you view our results as well. In terms of our financial results and business highlights, 2023 was another stellar year for Montrose. Our performance was driven by the key themes we touched on last year. We were thrilled to produce record full-year revenue and consolidated adjusted EBITDA. Total revenue grew by 15%, and adjusted EBITDA grew by 19%. Adjusted EBITDA margins increased as planned, and our cash flow was also at record levels. Second, our revenue predictability and consistency continued to increase. Our 95% revenue retention rate with customers in 2023 continues from last year. We also saw a consistent increase in cross-sells, with over 50% of our 2023 revenues coming from clients utilizing two or more Montrose services, which was up substantially from last year. Our integrated business model and our IP portfolio enable cross-selling, which further enhances our model. In effect, our flywheel is starting to spin really nicely. A large portion of the organic growth that we've seen over the last few years has been from cross-selling our services. So this level of integrated activity within our business gives us confidence to continue growing organically in 2024 and beyond. Third, we saw 24% organic revenue growth in our AP&R segment and 17% organic revenue growth in our M&A segment. Our strong organic growth in these segments was primarily due to higher demand for our advisory services and the positive performance in our lab and field services, particularly methane emissions and PFAS testing. Fourth, double-digit organic growth in our AP&R and M&A segments was partially offset by the expected revenue decline in our R&R segments. This is due to our shift away from lower margin work within our biogas services Growth was also impacted by a shift in project timeline as our clients navigate proposed U.S. EPA PFAS regulations that the EPA originally proposed for Q4 2023 and now expects to finalize any day. With all that considered, for the full year, we produced total organic growth of 2%. I want to reiterate that our organic growth thesis has not changed despite the strategic shift in our R&R segment that caused a temporary slowdown in 2023. To put a finer point on our organic growth thesis, we have averaged 15% organic revenue growth per year for the last three years, and our 2024 outlook assumes low double-digit organic revenue growth. Our focus on higher-margin work in 2023 manifested itself in our adjusted EBITDA results. Our consolidated adjusted EBITDA margins increased 40 basis points despite the acquisition of Matrix. Matrix had full year revenue of approximately 70 million at a 4.6% adjusted EBITDA margin prior to joining Montrose. We expect a continuation of adjusted EBITDA margin improvement in 2024. So we not only expect to outperform our historical 79% organic growth cadence this year, but we expect to do it with higher margins. witnessing growing activity in our end markets driven by new and anticipated regulations, as well as our clients' voluntary focus on environmental stewardship. From new regulations affecting PFAS disposal and tightened methane leak detection protocols, depending rules on climate disclosures and changes in air emission standards, we are experiencing significant regulatory tailwinds across all aspects of our business. Sixth, Acquisitions remain core to our strategy. Our investments in M&A have been very additive to our ability to service customers through new technologies and geographic expansion. In addition to strategic synergy, we're unlocking tremendous value from pricing and cross-selling opportunities. With larger deals in particular, we are now starting to see cost synergies because we run on one platform and have robust support functions. With Matrix, which had margins of 4.6%, margins have already almost doubled in our hand on a run rate basis, and we expect continued margin accretion. Furthermore, through our larger scale and cross-selling capabilities, we believe we have grown the serviceable, addressable market for Matrix materially.