Q2 2022 Montrose Environmental Group Inc Earnings Call
[music].
Ladies and gentlemen, greetings and welcome to the Montrose Environmental Group, Inc. Second quarter 2022 earnings conference 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.
As a reminder, this conference is being recorded.
I will now turn the conference Volvo to your host Mr. Rodney <unk> Investor Relations.
Please go ahead Sir.
Thank you welcome to our second quarter 2022 earnings call. Joining me on the call are VJ, Matt <unk>, our President and Chief Executive Officer, and Alan <unk>, Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the investors section.
Our web site.
Our earnings release is also available on the website moving.
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.
Our recent SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2021, 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 Earth.
Presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors certain limitations abusing these measures and reconciliations thereof to their most directly comparable GAAP measure with that I would now like to turn the call over to B J beginning on slide four.
Thank you Rodney and welcome to all of you joining us today I.
I will provide a few business highlights then hand it over to Alan Thanks for our financial review, we will then open it up to Q&A.
I won't speak generally to pages four through eight of the presentation shared on our website.
Regarding the second quarter of 2022, I am proud of the stellar execution of all of our team members, who have helped us produce another solid quarter.
We successfully navigated the turbulent macroeconomic environment and.
And we successfully responded to a cyber attack in June that temporarily disrupted our operations for a few weeks.
Despite these challenges we produced strong broad based revenue growth and more than offset the previously communicated and expected normalization of C. T. H COVID-19 related revenues.
In addition to record second quarter revenue and continued organic revenue growth outperformance, excluding C. T H R.
Our solid year to date operating cash flow excluding contingent.
Payments was a stellar $16 6 million, which allows us to continue investing in our business.
The Montrose team's dedication to providing excellent service to our clients continues to drive our success and defined mantras is one of the leading environmental solutions providers.
To our team members joining us for the call. Thank you.
It is important to reiterate the demand for our environmental services does not follow fiscal quarter patterns and is best evaluated on an annual basis.
In the context of our continued business performance. There are several key themes I would like to highlight from the second quarter.
First there was outperformance in organic revenue growth in most of our service lines.
P fast water solutions, and our negative carbon intensity energy or biogas teams were a big contributor to this organic growth surged through the first half of the year.
Second the deceleration in C. T H as Covid related work continues as we have discussed over the past few quarters and is trending as expected.
As you can see in our results the decline in C. T. H is more than offset by growth in the rest of our business.
Third with costs, we have seen certain variable costs, such as travel expenses accelerate faster than anticipated, but we remain confident in our ability to respond with efficiencies and pricing adjustments to produce attractive margins.
2022 and long term margin expectations have not changed.
Fourth our cash flow continues to improve and remains very strong.
The strength of our cash flow as I mentioned earlier gives us financial flexibility and the ability to continue investing in environmental innovations.
Fifth we continued to execute on our plan to consolidate parts of our highly fragmented environmental industry.
Our acquisitions are often immediately accretive and add great talent and service capabilities to our team.
Consistent with that track record, we are pleased to welcome to triad team to Montrose as of last week.
Triad, our leading environmental consultants based out of Nashville, Tennessee.
In addition to providing mantras for specific clients industry access and geographic expansion. The triad team brings a great culture and history of mantras.
Complementary acquisitions, such as triad remains an important growth lever that underpin our long term growth and value creation strategy.
Finally, as you saw last night in our press release based on feedback from various stakeholders, including the S. E. T. We have removed the add back of startup investments from the definition of consolidated adjusted EBITDA.
This is nothing more than a methodology change.
Given the success, we are having with R&D and technology development. For example, we expect the startup investments to be less onetime in nature than they had been in the past.
This new methodology doesn't change our total guidance for the year it doesn't change our cash flows or any fundamental economics.
This new methodology also it doesn't alter our long term outlook on revenue or margins as previously communicated.
We are reiterating our outlook for the year given business momentum and Alan will address this further in his section.
Yeah.
Next let me take a few minutes to walk through some recent developments in some of the catalysts that we see for our business moving forward.
As it relates to regulatory and industry opportunities first.
First we continue to see tailwind from the private sector focused on better environmental stewardship and opportunities created by regulatory activity.
We have been able to capitalize on broad demand for P plus remediation greenhouse gas measurement and mitigation and renewable energy in particular.
Second we have recently been awarded large U S government projects, reflecting the growing importance of our environmental solutions across both the private and public sector.
On regulatory changes as it relates to methane emissions.
The inflation reduction act passed in the U S. Senate over the weekend is expected to impose a first time fee on excess emission of methane from select facilities.
Of note. This legislation also includes hundreds of millions of dollars in incentives for the oil and gas industry to monitor and clean up and reach to avoid future piece.
Improved leak detection repair and enhanced methane emissions quantification of verification.
Key areas of focus for mantras for years.
As the regulatory environment evolves in our favor.
For example, with a focus on improving equipment and processes to reduce emissions supporting innovation and permanently closing wells a nonfederal lands in particular, we expect our software capabilities, our methane testing and measurement advisory greenhouse gas detection and mitigation services and our program.
Digital capabilities to see increased tail winds.
The Bill also aims to invest over 60 billion to support communities that are disproportionately impacted by the negative environmental and public health effects of climate change.
We see additional direct overlap with Montrose capabilities. For example, the increase in demand for projects like our fence line and real time ambient air monitoring for Suncor energy and Commerce City in North Denver, Colorado, where the community industry and regulators are working together to reduce emissions impacts.
The bill is new and needs to be flushed out. So we will continue to update you as we learn more but in aggregate. We are really encouraged by what it represents for mantras.
And as it relates to Pee Foss and in April the E. P. A announced three clean water actions as part of its P fast strategic roadmap.
First our proposal for the clean water Act aquatic life criteria for P thoughts to permit authorities to reduce discharges of P plus at the source.
And measure for absorbable organic flooring and water samples.
This increase as demand for our low ebb and remediation services.
In may the EPA issued five regional screening levels for P. Phosphorus determined whether response and remediation activities are needed for cleanups.
While these screenings are not enforceable standards, they do serve as guidance for states.
Companies rely on Montrose interpret these guidelines and helped them develop remediation plans that will meet federal state and local requirements.
And in June the EPA released for drinking water health advisories for P. Pos and.
In conjunction with this announcement the E. P. S also invited states and territories to apply for 1 billion and bipartisan infrastructure law Grant funding to address P fast and other emerging contaminants in drinking water, specifically and smaller in disadvantaged communities.
The needs of our clients due to these announcements are very complementary to our existing service offerings, we expect that demand for our capabilities. We will continue to gain momentum in both the public and private sector.
It is for all these reasons that we believe as we have for a while that Montrose is exceptionally well positioned to help our clients navigate the rapidly evolving regulatory landscape as environmental remediation of protection become more and more central to corporate and government policies.
I would next like to discuss our second quarter business performance by segment.
Within our assessment permitting in response segment.
Spike the deceleration of C. Th revenues most of the revenue in this segment continues to be driven by C. T H, which remains at elevated levels relative to their normalized run rate.
The C. T. H team continues to do an exceptional job for our clients with business continuity services.
Excluding C. T. H, we are pleased to see positive contributions from our acquisitions over the past 12 months, which were mostly added to this segment.
Our acquisitions supporting West Coast utilities, managing fire risk for example are performing well along with attractive growth in select areas such as our greenhouse gas advisory services.
The shift in mix is the primary reason for our increase in margins relative to last year.
Within our measurement and analysis segment demand for our services remains very strong and drove solid organic growth during the second court.
Given the regulatory momentum around greenhouse gas emissions and P. Foss as I just discussed we remain optimistic about the future growth of the segment.
Margins in this segment were impacted by mix and the temporary impact of the cyber security attack in June , which primarily impacted our empathy lab network.
We expect to recoup the impact of the disruption over the subsequent quarters.
Putting quarterly variance aside as fiscal quarters aren't the best way to assess our business. We continue to have conviction that margins will remain an industry, leading high teens to 20% annually as previously discussed.
Within our remediation and reuse segment, our organic growth outperformance in the second quarter. It was once again driven by demand for our P fast water treatment and renewable energy services.
As noted on prior calls margins remain below what we consider and expect as normalized levels given our ongoing investments.
We are investing in our teams our geographic footprint and our technology to harness the increased client demand and regulatory golfing landscape in this space.
In summary, I'm incredibly grateful to the entire mantras team for all they do for our business each other and our clients.
It was through their hard work and execution that we were able to overcome the challenges we faced and continue delivering for our clients and our communities.
Our second quarter results reflect the continued momentum in our business and as a result, we are reiterating full year guidance.
I remain incredibly excited about our future.
At Montrose, we look forward to helping solve our collective environmental challenges and to creating value for our shareholders. We also look forward to sharing more with you in the upcoming quarters and are grateful for all of your continued support.
With that let me hand, it over to Alan.
<unk>.
Thank you Vijay.
We are pleased to have delivered solid second quarter results, which reflect the resiliency of our business and the in demand nature of our environmental solutions.
Since our IPO two years ago, the need for environmental remediation and monitoring.
<unk> has gained significant momentum across the globe.
We believe that our core business remains strong and continues to grow benefiting from our expanding relationships with notable customers.
Continued success with our cross selling initiatives and successful execution of accretive M&A.
Moving to our revenue performance on slide nine.
We continue to drive strong organic growth in our business.
Second quarter revenues increased 2.7% to $139 9 million.
Compared to the prior year quarter.
Year to date revenues were up one 7% versus the prior year period.
$274 6 million.
The primary driver of revenue growth in both periods was organic growth in our measurement and analysis and remediation and we use segments.
As well as the positive contributions from acquisitions.
It was partially offset by significantly lower COVID-19 related services provided by C. T H.
And our planned exit from legacy O&M contracts.
Looking at our consolidated adjusted EBITDA performance on Slide 10.
As BJ mentioned, we are no longer adding back startup losses to consolidated adjusted EBITDA.
The significant opportunities ahead to grow our business through innovation will make startup initiatives are more recurring expense in our business. So we believe this change to our methodology is appropriate.
With that said second quarter consolidated adjusted EBITDA was $15 6 million or 11, 2% of revenue inclusive.
Inclusive of 0.9 million of startup losses in the second quarter of 'twenty to 'twenty two.
This compares to consolidated adjusted EBITDA of $19 8 million or 14, 6% of revenue.
Lucid, a $1 1 million of startup losses in the prior year quarter.
Year to date.
<unk> adjusted EBITDA was $31 3 million or 11, 4% of revenue inclusive of $1 7 million of startup losses in the first six months of 2022.
This compares to consolidated adjusted EBITDA of $35 7 million or 13, 2% of revenue inclusive of $2 1 million of startup losses in the prior year period.
The year over year change in consolidated adjusted EBITDA dollars and as a percentage of revenue for both periods was driven by business mix.
February attack in June 'twenty, 'twenty, two and.
And higher variable costs impacting travel field and lab supplies and other direct costs.
Year to date in 2022 we have seen great traction with our pricing initiatives. However.
The magnitude and duration of the increase in variable cost has been more severe than we initially anticipated.
In addition, the labor shortages, we were experiencing in certain of our businesses has increased the need to move that workforce to different geographies with more frequency than usual to meet our high demand.
That said the traction we've seen so far with our recent pricing initiatives, we remain confident.
And our ability to offset costs through pricing in the coming quarters.
I'll reemphasize that Montrose performance needs to be assessed annually.
This is consistent with how we evaluate the business due to the stronger predictability of our performance on an annual basis.
This is consistent with how we highest stop allocate resources and manage the company.
Turning to our business segments on slide 11.
In our assessment permitting in response segment.
Revenue and operating segment, adjusted EBITDA decreased to $50 million and $10 8 million respectively.
A year over year decreases in both revenue and adjusted EBITDA in this segment.
Driven by lower revenue from COVID-19 related services provided by C. T H.
Partially offset by revenue from companies acquired subsequent to the second quarter of 2021.
The normalization of about Dth revenues was expected given the waning of COVID-19 related demand for testing and prevention services in the U S. S pandemic restrictions lifted.
Operating segment adjusted EBITDA as a percentage of revenue was 21, 6%.
Actually higher than the prior year quarter. Despite the decrease in lower margin Covid revenues, primarily due to the acquisitions of environmental intelligence horizon, and environmental standards, which typically operate at lower margins than our other businesses in this segment.
And our measurement and analysis segment.
Revenue increased seven 9% to $42 2 million, primarily attributable to organic growth as.
As well as the acquisitions of Vista and D C I.
Measurement and analysis adjusted EBITDA as a percentage of revenue decreased to 16, 7% as a result of unfavorable business mix.
Variable cost increases in excess of pricing taken earlier in the year.
The timing of projects and some of that specialty labs, and the impact of the cyber attack, which temporarily disrupted some of our labs ability to operate.
And finally in our remediation and we use segment.
Revenues increased 18, 5% year over year to 47.6 million, reflecting a significant increase in demand for P. First water treatment services and organic growth and a biogas business.
The decrease in remediation and we use adjusted EBITDA as a percent of revenue.
The 14, 8% was the result of lower margins in our P. Faas water treatment business as a result of project timing lowest.
The lowest soil remediation margins, where we have experienced significant increases in direct labor travel and subcontractor cost in excess of responsive pricing increases implemented earlier in the year.
Back to the discontinued O&M contracts and our continued investments in the operating infrastructure and a biogas and water treatment technology businesses, which temporarily impact margins.
Moving to our capital structure on slide 12.
Year to date cash flow used in operating activities was $2 9 million.
Which improved compared to cash used in operating activities of $17 million in the prior year period.
Cash used in operations includes the payment of acquisition related contingent consideration of $19 5 million in the current year and $15 5 million in the prior year, respectively, primarily related to the payment of a C T H earn outs.
Excluding acquisition related payments.
Cash from operating activities was $16 6 million in the first six months of 2022.
Compared to cash used in operating activities of $1 5 million in the first six months of 2021 an increase of $18 1 million.
This increase was driven primarily by lower lower increase in working capital in the current year period.
$10 2 million compared to an increase in working capital in the prior year period of $30 9 million.
These strong 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, 2022 which includes the impact of acquisition related contingent earn out obligations payable in cash was at one one times.
Down from three one times at the end of the prior year quarter.
Our series a two preferred stock has no maturity date, and we have the option, but not the obligation to redeem the preferred shares at any time for cash subject to a make whole payment if prepaid prior to April 2023.
We view this preferred equity instrument is favorable to the value creation potential in the business given its flexible dynamics.
If you include the 182 million balance of the series a two equity in our market cap.
Equity capitalization stands at approximately $1 4 billion.
Looking at a review of our base business trajectory on slide 14.
As we've discussed over the past few quarters, we anticipate an annual revenue run rate of 75 to 95 million for S. E T H business.
Although C T H revenue continues to normalize.
Dth revenues remained elevated compared to our expected revenue run rate for this business.
Therefore.
We maintain our view that the revenue bump from Covid services is not expected to reoccur at the same level in the coming years as the impact of COVID-19 related demand continues to wait.
When excluding the above trend revenue from C. T. H the remainder of that revenue is what we refer to as our base business, which includes the normalized revenues, we would expect to see from C. T. H. In addition to all of our other business lines.
Our base business continues to grow at a solid trajectory, reflecting the organic tailwind as we've discussed on this call.
Moving to our full year outlook on slide 15.
Based on our resilient performance in the first half of 2022.
We reiterate our outlook for the full year 2022 revenue to be in the range of $520 million to 517 plan.
Our outlook for consolidated adjusted EBITDA under the revised methodology is expected to be in the range of 68 million.
Then to $73 million for the full year 2022.
Inclusive of $5 million of startup losses.
In conclusion.
Overall demand for our services remains resilient and our reaffirmed outlook for 2022 reflects our confidence in our ability to deliver shareholder value through our differentiated approach to provide best in class environmental solutions.
VJ and I would like to both.
Think of tremendous team members again for their hard work in helping mantras produce another quarter of solid results.
Thank you all for joining us today and for your continued interest in mantras, we look forward to updating you on our progress next quarter.
Operator, we are ready to open the lines to questions.
Thank you so.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.
One moment, please while we poll for questions.
Our first question comes from the line of Tim Mulrooney from William Blair. Please go ahead.
Yeah, Vijay Alan good morning.
Hey, Tim how are you.
Doing well. Thank you I'm, so sorry, I joined a little late so I apologize if you already discussed this vijay but I was hoping you could just briefly comment on how the I R. A bite.
My impact your Oh, Gee I business. It sounds like the proposed legislation will include the hefty penalty for excess.
Sure.
Yeah, Tim we did we talked about it briefly.
But let me, let me shed a little bit more light, we think it's actually quite beneficial Tim and it's beyond just our <unk> business as we think about the support for better measurement for the replacement of equipment.
For the quantification of what's coming out because there's going to be penalties it looks like above a 25000 metric tonne threshold.
We anticipate significant opportunities for our advisory business.
Leak detection and repair business Oh Gee is part of that Tim as you know, it's kind of a next generation a mechanism to measure and quantify them and then there's also some program management work that we think we can benefit from because there's a verbiage in there to support the closure of old wells that are on.
Non federal land, so as we kind of look across the overall assessment permitting.
Measurement analysis and remediation reuse service lines for US Tim We think all three are likely to see tailwind as a result of the of the act.
Alright, Thats really helpful. Thanks, Vijay one more for me pivoting to margins.
Specifically, you're R&R business, you know EBITDA margins, there if I'm reading the slides correctly. It looks like they were down about 150 basis points year over year and al and I heard you gave quite a few reasons for why that is including.
Lower margins in your P Foss treatment business as.
Pizza hut continues to grow as a percentage of the mix how do you expect that to impact the overall profitability of that segment over the next couple of years.
Hey, Jim why don't you take a macro look at it and then Alan do you want to address the specific question then.
The main theme is this is why the quarters are really choppy a lot of it has to do with how these projects starts and ends ebb and flow and how some of these timelines shift so as we kind of look out at 2021 versus 2022 outlook, you'll see us put.
For some really attractive margin accretion in that macro segment over the course of this year quarter end quarter out there's going to be a little bit of noise.
That's just a function of how these projects have been slow. So I just want you to keep that in mind, when you're comparing specific quarters. They may look like there is a trend that's going to be extrapolated over the course of the year I really don't think that's the case here, but why don't I, let al expand on that further.
Yeah, Yeah, you're exactly right. These are these large projects that span.
Several quarters, Tim a don't have a don't necessarily have a consistent margin it depends on the underlying deliverables is pretty complex revenue recognition.
Associated with them. So over the course of the full project, we are generating very healthy margins and continue to believe that.
Our business in that segment.
We'll deliver low 20% margins at scale.
It would be just like quarter to quarter.
The timing and the nature of the project.
In that quarter can have an impact on margins.
That segment also includes our soil remediation business.
Those projects can also.
Typically span a couple of quarters and there are we've seen some headwind from variable cost. So the pricing that we have been able to take earlier than the euro.
Has somewhat been eroded by the rapid increase in travel.
And the tight labor market, which is also forcing more travel on us.
And because of the nature and the length of those projects. It takes a couple of quarters to react to those cost increases so you'll see us start to offset those higher costs in the next quarter or two.
Okay. So it sounds like 14, 8% that's not the.
The steady state or go forward expectation, it's just timing you know lumpiness, it's not something you guys have.
Given in the past.
Yeah. If you look at the first half of the year Tim.
As a contrast to that our margins are up 300 basis points right. So it's kind of a we we struggled with this because we tried to say it every time you got to look at the year you can't look at any individual quarter, because theres a lot of noise in the numbers flow out.
Yeah tell me a few more times I might I might eventually get to.
Thanks Alan.
Thanks, Tim.
Okay.
Thank you.
Our next question comes from the line of Andrew Oldman from Bank of America. Please go ahead.
Hey, good morning, Sabrina Abrams on for Andrew I'll then.
As Sabrina how are you.
Good so back on the EBITDA margins can you talk about sort of the initiatives, you're taking to sort of.
To mitigate the higher variable cost and labor shortages and sort of I understand like you talked about how it's how ebitdas lumpy and kind of has to do with the full project and what is booked one but can you talk more about how youre thinking about the margin ramp in the second half.
Yeah, Yeah, So why don't I take a swing at that Sabrina Alan Please jump in I think in Q2, Sabrina Theres a couple of themes to keep in mind, one is that or does the cyber attack that we faced in June impacted our quarter.
Q2, primarily June the most there's a little bit of spillover into July .
And it primarily impacted our empathy lab network and so.
We expect and certainly anticipate that we're going to recoup that over the course of the next couple of quarters, but there's some noise in the system, it's about $1 million of impact in Q2, and so that's one variable to keep in mind as.
As you kind of look at the macro trends profile quarter on quarter.
And then from a pricing perspective, there's two there's two dynamics at play we as you know have thousands upon thousands of projects that are short term in nature for those projects.
We're able to react very quickly on pricing, it's the longer term multi quarter projects that primarily are more remediation water treatment by I guess oriented where it takes us a little bit more time to respond we have a lot of conviction that we can respond and pricing and customers have been very receptive to it they are facing the same environment we're facing.
And the team candidly at the beginning of the beginning of the year did a really nice job, taking our prices we talked about.
Our labor costs have gone up and our prices are commensurately gone up to offset those which is why our margin expectations remain unchanged. We were a little bit caught off guard with the escalation of costs like travel.
And so we're just responding to those and we'll we'll get those right sized over the next couple of quarters does that does that makes sense.
Yes. Thank you that makes perfect sense and just a follow up thinking about geographic expansion can you talk a little bit about what your priorities here are and what are the potential for a macro slowdown and Europe impacts your near term priorities.
Yes in terms of geographic expansion is primarily North America. So we are continuing.
Continuing to as you saw with the triad acquisition, adding select capabilities and attractive geographies.
Where we're effectively building scale and an ability to execute across the broader landscape. Both here in the U S and in Canada, Our European efforts Sabrina are a function of our technology and our intellectual property getting pulled across the Atlantic and so there because we have unique ways to remove people.
That's from water, which are really compelling and are increasingly proving out.
That's why we're there we're going to be very careful with how we expand there, but we're really bullish on the long term opportunity with what we see and whether that's in the form of partnerships.
Or our execution on the ground that is still to be determined but that's not something we set out to do its something that we were opportunistic with it that makes sense.
Yep. Thank you I'll pass it along.
Thanks for bringing up.
Thank you.
Ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone keypad.
Okay.
Our next question is from the line of Jim.
The U T.
From Needham <unk> Company. Please go ahead.
Thank you good morning.
Look I get the Oh are you P. J I'm looking at the growth and the remediation and reuse segment and I'm wondering if there's any way you could help us understand.
The cash contribution.
Contribution that you're seeing to that growth rate from from P. Fashion and biogas is there a way to give us a little bit more color on the extent to which there they're driving the growth in that area.
Yeah, Jim Let me, let me I was chuckling at the way they pronounce your last name by the way. It is how I usually get to see that it's always an adventure.
[laughter] Trust me I was like in third grade.
We are.
It's most of it Jim So if you kind of look at the year the quarter on quarter numbers that we posted almost all of it is a function of the success, we're having on the water on the biogas side just to put a little bit more again, if you look at the quarterly organic or even the first half year organic it.
Credibly strong and Ah and this goes back to my narrative around you know please don't look at this just on a quarterly basis look over the course of the year. We certainly do anticipate that organic growth. This year will be well in excess of 20% year on year and that is being driven primarily by.
Our water and our biogas practices and then to a lesser extent some of the benefits we're seeing on the greenhouse gas side.
This is all the information we provided kind of in a public context, Jim So I'll just repeat it to help put some more framework around this as we look at <unk>. It sits across all three segments. It it's across our advisory our testing and our remediation practices and it represented less than 10%.
<unk> of Montrose as revenue last year, obviously growing materially from 2020.
This year, we think it starts to approach 20%. So that gives you a sense of order of magnitude for how much of an influence its having.
So if we think about the contribution first half or even in Q2. The P. Fast P pass through was a bigger contributor to that growth rate, although you're seeing pretty good growth it sounds like.
From from a biogas practice as well.
Yes in order of impact it's the P fast water treatment than biogas, then the greenhouse gas work.
Got it and did you you alluded to some larger U S government projects and I Wonder if you could talk a little bit more about that because we normally think of of mattresses businesses very much commercial commercial focus the bulk of the revenues coming from their end.
So is there anything that's changed in it that's potentially you can add some incremental growth that's coming from that area.
But it as Jim and it's certainly in our favor it's the U S Department of defense just to be a little bit more explicit about what that is if.
If you go back to where our technology tends to have relative advantages both cost and efficacy Jim we've talked about this before it's why industry leans in our favor. It's when you have more complex water and you have a more contamination. So there's concerns around.
As you know, it's a family of molecules the short chain and the long chain.
Fair degree of uncertainty around.
How to remove it let alone how to measure it the D O D because of the drilled they run right. The Air Force for example, an army and Air Force.
Other basis Navy bases.
Often had similar highly complex issues with contamination within the groundwater surface water or even some instances potable water and so as a result, we're seeing our technology increasingly get.
Adopted by government agencies for the same reasons, we see our technology getting adopted by the private sector.
Actually very similar Jim to what happened in Australia, and in Northern Europe , where you had a really tough water treatment situation. The government pulled us in and the private sector noticed and adopted it which is a little different here at home, where it really started with the private sector in the now it seems to be adopted by the government does that makes sense.
So we're not yet where again.
We're gonna stay we are short of a real opportunistic set of circumstances, we don't really play as much in the municipal space.
But certainly where you have complex problems.
First the U S Department of Defense, our technology as expected is resonating and we're starting to see some nice multi year awards, a potential multi year awards come our way.
Got it and last question just relates to.
Some of the the cost pressures and pricing actions, which appear that you're you're going to see more of a benefit of the pricing over the next couple of quarters, but I'm kind of curious just in terms of of outright labor shortages, where are you seeing it in your business lines are more acute.
How much of a concern is that.
Okay.
We're seeing it primarily in our hourly and entry level staff.
And what we would consider our measurement analysis segment services, Jim So a lot of our field teams that go on site to collect samples conduct tests.
Our entry level biologists and chemists.
The E. So it is a concern and that's why we're seeing it primarily we are obviously focused first and foremost on making sure we serve our clients and with that our team is doing really well.
But offsetting a select departures or material increases in costs, either with pricing or efficiency is kind of where our next focus is.
So it's something we're acutely aware of it's candidly something we anticipated.
And so on the labor side, our team has done a really nice job responding to that.
What we didn't anticipate is the magnitude of the increase in non labor related costs like travel.
Those are our direct costs that we face as these projects rollout.
Which is why we have conviction that we can.
Get those incorporated into our broader pricing scheme over the next couple of quarters.
Got it thank you.
Yes.
Thank you ladies and gentlemen, we have reached the end of the question and answer session.
I would now like to turn the conference over to Mr. Vijay monthly regatta for closing comments.
Thank you all again for the time, if there's any further questions. We're happy to address them. One on one we really appreciate all of your support and wish you all the best and take care and we'll talk to you next quarter.
Thank you Phil.
Conference of Montrose Environmental Group, Inc. Has now concluded. Thank you for your participation you may now disconnect your lines.
Mhm.
[music].
Yes.
[music].
Uh huh.