Q3 2022 Montrose Environmental Group Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to the Montrose environmental groups third quarter, our 2022 earnings call.
At this time, all participants are in listen only mode.
Christian and authorization.
A presentation.
If anyone should require operator assistance during the country's talking Darren I need kind of a key pad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Rodney not yet okay.
I think that's the strength of elections.
Thank you welcome to our third quarter 2022 earnings call. Joining me are VJ men Threep Regatta, our president and Chief Executive Officer, and Alan <unk>, Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation.
<unk>, 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 known risks and uncertainties that should be considered in evaluating our.
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 31 2021.
To 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 on 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 a few business highlights then hand, it over to Allen <unk> for our financial review and we will then open it up to Q&A.
I will speak generally to pages four through eight of the presentation shared on our website.
And before I begin I would like to reiterate two themes that we've highlighted before.
The first is that demand for our environmental services does not follow fiscal quarter patterns and is best evaluated on an annual basis.
The second theme is that these results belongs to our colleagues around the world who have managed through a pandemic macroeconomic shocks and geopolitical turbulence I am proud of all of our team members, whose dedication helped us produce another quarter of great results.
With that let me now take a moment to recap several key themes that are relevant to our third quarter 2022 results.
First as it has all year, our business continues to benefit from growing demand across most of our service lines and in particular in the areas of P fast water treatment greenhouse gas measurement and mitigation and renewable energy.
The quarter also saw strong performance across our air and lab services and recent acquisitions, which are recurring and are driven primarily by regulations.
Our third quarter performance continues to validate the demand tailwind and regulatory themes, we've outlined since our IPO over two years ago.
Our stellar organic growth excluding C. T. H reflects the continued demand for our integrated service model and differentiated solutions.
Second in addition to strong organic revenue growth excluding C. T. H, we are pleased with our overall sequential margin improvement.
As noted last quarter, we were able to respond with pricing and other initiatives given some of the unexpected inflationary pressures we saw on select costs such as travel.
The impact of those efforts along with business mix and other factors allowed us to get back on track with EBITDA margins.
Third and finally, we are also happy with the strength of our balance sheet and strong cash generation.
Our acquisitions to date have been funded through cash flow from operations and our balance sheet provides us with ample flexibility to continue consolidating our industry and investing in cutting edge environmental innovation.
As it relates to acquisitions, our strategy and outlook remain unchanged.
We continue to consolidate our highly fragmented industry completing four deals this year.
Our acquisitions are usually immediately accretive and they add great talent and service capabilities to our Montrose team.
This year given the rate of increase in our organic growth excluding C. T. H, we temper our pace of acquisitions as we focused on supporting the surge in organic revenue growth for example, helping with hiring training and quality management programs across multiple geographies.
The number of potential acquisitions and average multiples havent moved so our pipeline and opportunity to create value remains as strong as ever.
Despite our choice to move at a relatively slower cadence of acquisitions in 2022, we were thrilled to welcome the triad and air kinetics teams to Montrose during the third quarter.
The addition of triad's consulting team and focus in the South Eastern United States and the addition of air Kinetics Air testing team and capabilities in the southwestern United States are all very strategically additive to mantras.
We expect our 2023 cadence of acquisitions will accelerate back to where we have historically trended.
Next let me take a few minutes to walk through some recent developments and catalysts that we see for our business moving forward.
As it relates to regulatory industry opportunities.
We see tell wins across our business lines as corporate ESG initiatives, environmental regulation and enforcement and better environmental stewardship remain at the forefront of private sector and government policies.
We believe Montrose is exceptionally well positioned to capitalize on these tailwind.
And that fundamental belief underpins the favorable long term outlook for our business.
In terms of selecting specific regulatory developments that will have or continue to have the potential to impact Montrose in September 2022, the EPA proposed to designate before and T force as hazardous substances under the comprehensive environmental response compensation and liability or search.
<unk> Act.
This action will cause before and defaults to be eligible for clean up under the recently refunded Superfund program.
This designation also triggers a requirement for companies to report any spills to the environment like when putting out a fire that could trigger additional contamination investigations as well as remedial actions.
Furthermore, the EPA recently announced the addition of certain P fast chemicals to the toxic release inventory, which likely impacts current and future demand for consulting and advisory services in particular.
Outside of direct actions by the E. P. A we also saw additional momentum with P. Fast regulations at the state level in the United States and in October a formal request for continued monitoring of <unk> from 49 members of Congress.
We expect all of these developments will continue to create tell wins across our three segments.
With regards to methane emissions.
Late last year, the EPA proposed performance standards for new sources of methane emissions.
The proposal expands and strengthens emission reduction requirements and would require states to reduce methane emissions from hundreds of thousands of existing sources nationwide for the first time.
We are also aware.
The EPA is seeking information about community monitoring opportunities in technologies to support community monitoring programs.
Should these regulations will be adopted we would expect to see increased demand for our emissions measuring monitoring and assessment services, primarily impacting our measurement and analysis.
Regarding our environmental consulting services in April the E. P. A made further changes to the NIPA N E P a process.
Regulators will now have to account for how government actions may increase greenhouse gas emissions.
They fragment wildlife habitats and may impose new burdens on communities, particularly disadvantaged neighborhoods.
Notably the EPA has also created a new division to oversee the implementation and delivery of the $3 billion of climate and environmental Justice Block Grant program created by the 2022 inflation reduction act. While this is a new development that has yet to be fully implemented we believe that in aggregate. This is a positive.
For Montrose, given our expertise with environmental advisory testing and remediation services.
This is all to say that the momentum for environmental protection continues to grow.
We believe mantras is exceptionally well positioned to help our clients navigate rapidly evolving priorities and mandates regarding environmental stewardship as it continues to become more and more central to <unk>.
And governmental policies.
I would next like to discuss our third quarter business performance by segment.
Within our assessment permitting in response segment.
Despite the anticipated deceleration in C. T. H COVID-19 revenues are C. T. H team continues to perform above run rate ROE levels and is doing an exceptional job for our clients with business continuity services.
Support following environmental incidents caused by fires and Hurricanes in particular, I've picked up compared to last year.
Excluding C. T. H, we were pleased to see positive contributions from our acquisitions.
Our acquisitions that 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.
Margins in this segment were primarily impacted by the shift in C th margins and the lower margins of our recent acquisitions.
Within our measurement and analysis segment.
For our testing services remains very strong and drove solid organic growth during the third quarter.
Given the regulatory momentum I just discussed we expect further opportunities in this segment given our position as a market leader.
Our margins in this segment continues to normalize in the high teens to 20% range as we've previously discussed.
And finally within our remediation and reuse segment, our organic growth outperformance in the third quarter was once again driven by demand for our <unk> water treatment and renewable biogas services.
As we've reiterated on prior calls.
<unk> remained below what we would consider normalized levels given our ongoing investments into this business.
For example, the establishment of our European infrastructure investments that we believe will enable us to capitalize on the outsized growth opportunity over the next three to five years.
That said, we did see sequential margin improvement in this segment, which is in line with our expectations.
In summary, and before I turn it over to Alan I would like to thank all of our team members around the world for their tremendous efforts so far this year.
For those of you that are listening.
Thank you for all the hard work you've put in through these uncertain times I am incredibly grateful for you.
To our investors. Thank you for your continued support and for giving us the opportunity to continue creating value, while leaving the world a better place.
Our third quarter results reflect positive momentum in our business and based on our current trajectory our outlook for 2022 remains firm.
Alan is going to expand upon that in a moment.
We look forward to closing out a strong 2022 and to a great 2023. Thank you Alan.
Thank you Vijay.
The strong growth in our coal business continued in the third quarter, reflecting our expanding customer relationships and ongoing cross selling success.
We also continue to execute our M&A strategy with the recent closing of our fourth acquisition in 2022.
Moving to our revenue performance on slide 10.
We saw organic growth across most of our business lines.
Third quarter revenues were $130 3 million compared to $132 6 million in the prior year quarter.
This decrease in revenues was driven by significantly lower COVID-19 revenue from C. T. H. This COVID-19 revenue dropped by $31 1 million.
And the exiting of certain wastewater treatment and biogas O&M contracts.
The revenue decrease was partially offset by organic growth and our measurement and analysis and remediation and reuse segments as well as the positive contributions from acquisitions, which added $7 5 million to the point now.
Year to date revenues were up 0.6% versus the prior year period to $404 9 million.
Primary driver of revenue growth in the year to date period was organic growth in our measurement and analysis and remediation and reuse segments as well as the positive contributions from acquisitions, which added $19 9 million year to date revenue.
These year to date benefits to revenue helped us to more than overcome the significantly lower COVID-19 related services provided by C. T H.
COVID-19 revenues were down $103 4 million year over year as well as our planned exit from legacy O&M contract.
Looking at our consolidated adjusted EBITDA performance on Slide 11.
Third quarter consolidated adjusted EBITDA was $17 1 million or 13, 1% of revenue compared to consolidated adjusted EBITDA of $20 3 million or 15, 3% of revenue in the prior year quarter.
Year to date consolidated adjusted EBITDA was $48 4 million or 12% of revenue compared to a consolidated adjusted EBITDA of $56 million or 13, 9% of revenue 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. The cyber attack in June which temporarily disrupted certain of our lab the ability to operate in both June and July are continued investments and operating infrastructure and a biogas.
<unk> and water businesses and higher variable costs impacting travel field and lab supplies and other direct costs.
Year to date in 2022, we have seen strong traction with our pricing initiatives and have been pleased to see the resulting sequential improvement in quarterly margins, which we expect will continue into the fourth quarter.
I'll reemphasize that mantra 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 off.
Allocate resources and manage the company.
Turning to our business segments on slide 12.
And our assessment permitting in response segment revenue and operating segment adjusted EBITDA decreased to $46 4 million and $9 8 million respectively.
Your over year decreases in both revenue and adjusted EBITDA. In this segment was driven by significantly lower revenue from COVID-19 related services provided by C. Th.
Partially offset by revenue from companies acquired subsequent to the end of the third quarter of 2021.
As we've reiterated on recent calls the normalization of S. E. T. H revenues was expected as the demand for a pandemic related services. His Wayne Halloween the reduction of COVID-19 testing and prevention of requirements in the U S.
Operating segment adjusted EBITDA as a percentage of revenue was 21, 2%, which was lower than the prior year quarter. As a result of the acquisitions of environmental standards earlier this year, an environmental intelligence and horizon in 2021.
All of which run at lower margins than our other businesses in this segment.
And our measurement and analysis segment revenue increased 12, 9% to $43 8 million, primarily attributable to organic growth as well as acquisitions completed in and after the end of the third quarter of 2021.
Measurement and analysis adjusted EBITDA as a percentage of revenue.
Decreased to 19, 4% as a result of business mix.
<unk> of projects and some of our specialty labs.
And to a lesser degree the impact of the cyber attack, which temporarily disrupted some of our labs ability to operate.
And finally in our remediation and reuse segment.
Revenues increased 32% year over year to $40 1 million.
Collecting a significant increase in demand for our P. Foss water treatment services and organic growth and a biogas business.
Partially offset by the exiting of discontinued O&M contracts.
The slight decrease.
And remediation and reuse adjusted EBITA as a percentage of revenue to 17, 5% was primarily a result of business mix and our continued investments in the operating infrastructure about biogas and water treatment technology businesses, which temporarily impacted margins.
Moving to our capital structure on slide 13.
Year to date cash flow from operating activities was $8 2 million compared to cash flow from operating activities of $13 7 million in the prior year period.
Cash from operations includes the payment of acquisition related consideration of $19 5 million in the current year and $15 5 million in the prior year respectively.
Excluding acquisition related payments cash from operating activities was 27 7 million in the first nine months of 2022 compared to cash from operating activities of $29 2 million in the first nine months of 2021.
This change was primarily due to lower earnings before noncash items of $6 million.
Partially offset by an increase in working capital of $13 4 million in the current year period compared to an increase in working capital of $17 6 million in the prior year period.
Cash from operating activities before acquisition related payments as a percentage of adjusted EBITDA improved to 57% in the current year from 52% in the prior year.
Our 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.
Given our performance year to date, we expect to report another strong year of operating cash flow in 2022, excluding acquisition related payments.
Our liquidity position remains strong with cash on hand as of September 32022 of $93 6 million and an additional $125 million of availability on our revolving credit facility.
We have almost no exposure to rising interest rates as a result of the interest rate swap we put in place in January of this year.
And the cash we have on the balance sheet.
In addition, effective September <unk> 2022, the company received an interest rate reduction of five basis points under the 2021 credit facility based on the Companys achievement of certain sustainability and environmental social and governments related objectives as provided for in the 2021 credit facility.
Our leverage ratios as of September 32022, which includes the impact of acquisition related contingent obligations payable in cash was at one two times.
Our series H 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 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 all the series H to equity and our market cap our total equity capitalization stands at approximately $1 five.
$5 billion.
Looking at a review of our business trajectory on slide 15.
As we've discussed over the past few quarters, we anticipate an average annual revenue run rate of $75 million to $95 million for Dth business.
Although C. Th revenue continues to normalize C. T. H revenues remained elevated compared to our expected average revenue run rate for this business.
As a result of continued demand for COVID-19 related services, which are expected to be transitory in nature.
When excluding the above trend revenue from C. T. H the remainder of our revenue is what we refer to as our base business, which includes the normalized revenues, we would expect to see from PTH. 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 16.
Just on our updated visibility through year end and a resilient performance. Thus far in 2022, we now expect full year 2022 revenue to be in the range of 535 million to $555 million.
This revenue range is narrowed from our prior full year guidance of $520 million and $570 million in revenue.
On this growth, we reiterate our expectation for consolidated adjusted EBITDA to be in the range of 68 million to $73 million for the full year 2022.
Our full year outlook remains anchored on our expectations for double digit organic growth, excluding Cta edge plus the contribution of completed acquisitions.
As always the timing of sales and the mix of business may influence adjusted EBITDA in any quarter.
This is due to the timing of large projects and the emergency response nature of Dth business.
Earlier in the year, there was time to make up for quarter to quarter variability, but we are mindful of some projects towards the end of year getting pulled up or pushed back between 2022 and 2023.
In summary, our third quarter and year to date results reflect the resiliency of our business model and focused execution across all levels of our operations. We are also very proud of our ability to more than replace the year over year reduction in C. T. H COVID-19 revenues of over $100 million year to date.
We remain optimistic about the momentum in our business I would like to thank our dedicated team of game, where they focused efforts and helping us produce another quarter of robust results.
Thank you all for joining us today and for your continued interest in mantras.
Look forward to updating you on our progress next quarter.
Operator, we are ready to open the lines to questions.
Thank you Sir ladies.
Ladies and gentlemen, we will now be conducting a question al decision.
If you talk also a question. Please press Star then one on these kind of unclear pad.
A confirmation tone will indicate that you're not an easy question Karen.
You May please talk to leave the question Kim.
Property, and making use of specie equipment. It may be needed really to pick up your handset before pressing just talk to us.
Our first question comes from Tim Mulrooney William plane.
Hi.
D J Allen good morning.
How are you.
Pretty good.
Some quick questions just two quick ones for me numbers related questions. So the revenue of $130 million for the third quarter that came in below consensus expectations, but you guys don't guide to quarters, you guys have for years and you maintained your guidance or Meredith for the full year keeping the metal coins. So my question is.
Oh, It was third quarter revenue in line with your internal expectations.
Or did some stuff get pushed out into the fourth quarter.
Hey, Ken I'll take that conceptually our outlook is exactly the same and the reason we don't guide to quarters as there is by virtue of some of the projects that we do on the testing side on our water side on the renewable energy side for example.
They will ebb and flow.
And so by virtue of us not changing or.
Annual outlook at the midpoint as you alluded to you can see that we have a lot of conviction what the trajectory looks like through the through the back half of Q3.
Alright, your back half of Q4 and into next year.
Yeah.
So yes, it was very much in line with expectations and our annual expectations, we have a lot of cars.
As well.
Got it so consensus got too aggressive, but no change in business.
As far as you're concerned.
Yeah.
Quite a bit.
Implicit in that is that consensus.
Q3.
The annual doesn't change it's too aggressive than consensus for Q4 may not be aggressive in all right. If you were just to take those two quarters in isolation. So we don't guide quarters precisely.
Yep Yep sounds cool okay.
On the on the EBITDA margins for the fourth quarter.
The midpoint of your guidance P. J I mean, it implies pretty strong EBITDA margin expansion in the fourth quarter.
Following several quarters, where EBITDA margins have declined year over year. So can you just kind of walk us through the puts and takes on why you.
You know why you expect that margins wouldn't slack into such a positive expansion territory in the fourth quarter. Thank you.
Okay.
So I'll take that conceptually, we don't look at the business on a quarterly basis and so again, it's influenced by revenue mix and various initiatives that we would implement over the course of the year. This year part of the reason for this sequential improvement was because of the cyber attack that we talked about in Q2.
As an example of kind of anomalous impacts that we had earlier in the year.
And then because of the inflationary pressures in Q2 that we that has tried to redeem over the course of three and four and we've had a lot of success doing that.
We've seen really positive momentum on the margin side and so we're expecting sequential margin improvement as a function of those efforts.
But again as you look over the course of the year, Tim our outlook is very consistent with where it was even at the beginning.
Got it thank you.
Okay.
Thank you. The next question comes from Andrew <unk>.
Maybe I can.
I ask good morning.
Hey, Andrew.
Hey, how are you guys. Just a question just more of a sort of bigger picture question is as you're getting bigger.
What are the sort of system challenges have you run into and sort of trying to manage the company.
And you know what have been any actions you have taken to sort of change your approach to how you manage to systems. How you manage complexity as you continue to make acquisitions or does the current setup continues to work.
Yeah, let me try that.
As you know are totally off the IPO in late 2020, we replaced our ERP precisely in anticipation.
The continued growth, we were expecting and it particularly at some of the business mix that we were seeing that was more project oriented and needed a system that can handle more complex projects.
So that system has now been in place.
Yes that is operating really well.
The training.
The S O P. The kpis around those systems are now well implemented.
<unk> plans have been built around those.
At the same time, we implemented a new CRM as we've talked about so between those two systems we are operating.
Well as we've ever been and operating through that those single systems right.
Multiple systems.
And also as we've discussed when we acquire companies.
We integrate those companies systems and our systems are pretty quickly. So we feel really well set from a system perspective, yeah, and Andrew I would say I totally agree with Alan.
Perhaps highlight a couple of other consideration so youre right we are.
More than double the size, we were at IPO, but we have stronger organic growth higher margins better cash flow generation and lower leverage and so hopefully by virtue of our results you can see that even though we are a larger more complex business.
Any objective measure.
Much stronger business.
The the variables, we're considering now as we enter this new phase of our growth are more related to some of the externalities that we face all of which you guys. Obviously are very close to them, we have gotten a lot more disciplined with pricing.
Jim alluded to we're seeing youre already seeing the benefits of those efforts right with our sequential margin expansion.
We've gotten a lot more disciplined system wise and infrastructure wise with our cash management.
And our sales and marketing efforts, which were nonexistent.
The coordinated sets right.
Which we talked about them in a formal way have resulted in us seeing materially higher cross sell activity rates over 18% of the revenue.
Last year, and increasing I'm, just coming from clients purchasing multiple services and sort of largely harvesting our clients and working more closely with them as supposed to trying to acquire new clients and so those are all examples of us operating in a more complex environment, but with a series of new capabilities.
Which are largely a function of the infrastructure and systems, we put in place some of which Alan alluded to.
And so as we think about getting from you know.
$5 million to $600 million of revenue to 1 billion.
A lot of what we talked about in terms of the corporate investments. We made this year right, which were a function of our accelerated growth, we think will position us well in a similar way over the next couple of years.
Got you and just a follow up.
Can you just provide more color.
On price cost on specifics, where you go how does the equation sort of labor availability of labor skill and wage inflation work against your ability to go to your customers and are continuing to raise price and the fact, what appeared to be a tight labor market and maybe not.
You know if you could provide color there I think you know it's a it's a very tight labor market I mean, we.
We are very sensitive to it it's something we spent a lot of time on.
Through our ESG report you see us disclose all of our attention right now.
And I think we said this on earlier calls Andrew we feel really good about the efforts, we've made and the quality and strength of our team.
Particularly at the senior levels of the bonds are interacting with our clients regularly.
Our retention is strong.
They're heavily at the times and continues to be heavily engaged with the management team, where we are more sensitive.
You need to do a better job candidly is that the more junior levels, They actually love and stop the averaged out.
And we need to continue focusing there we have a series of efforts initiatives through our human resources team and all of our operating leaders to engage more be more flexible with the work environment and think about creative ways to compensate them and incentivize them. So that's that's a huge focus last year was that preamble are labor costs, which arent just.
Including benefits went up 5% as opposed to our historical cadence of around 3%.
So our pricing this year reflected that.
And then we have to take pricing up against Q3 because of some of the variable costs, we alluded to earlier.
But because it's primarily a services business as long as we are really disciplined with translating that labor cost increase to our pricing algorithms.
We will be able to offset that increase but it's a it is a very this is something that we are spending a ton of time on.
So as we work for about six years ago.
Gotcha.
But ultimately ultimately you know the pricing pressure is still there on labor, but you feel comfortable being able to keep up and stay ahead of it.
We feel comfortable being able to keep up with that yes.
Thanks, so much.
Okay.
Question comes from D. J P. Morgan.
Hi, good morning.
Hey, Stephanie.
And I wanted to ask I I appreciate that you highlighted a lot of the business is tied to regulations and.
Even kind of in this environment of uncertainty still see very robust growth.
Well at this point the business.
Have you seen any projects or customers kind of pulling back I'm just yes, maybe in timing just any color in terms of maybe some had you can see in terms of client demand because of the environment.
We havent Stephanie you know.
We talked about the only time, we really saw that in 2020 when.
The government is effectively shut down the ability to move within the states cities or between states.
And then.
Some of those projects got pushed as we've talked about with you and others.
Two other quarters, but know this year, we haven't really seen much of that I mean, there is a natural scheduling variances that occur all the time, which is why we talk about our quarterly business a project.
That may be scheduled for late Q2 may move into early Q3 or something like that happens all the time, but in aggregate, we haven't really seen much movement of projects.
Okay, Okay, that's awesome.
In terms of the comment about some of the acquisitions being lower margin that the company's fitness impacting kind of the assessment segment.
I guess over time do you expect some of these acquisitions the margins to come up to the company level as you integrate them as you drives more synergies for them or.
It.
Is it they're structurally I guess Martin on the company, but the acquisitions are accretive from a strategic standpoint.
Yeah, It's a great question so we.
What we were alluding to that perhaps we weren't clear Stephanie. So my apologies is are some of the recent acquisitions we've done in the.
Consulting advisory space haven't been at that 35, plus percent margin cadence that we've historically talked about.
And so those.
So in the commentary we were alluding to the fact that that.
Some impact on the quarterly variance quarter in quarter out for that segment.
There are some smaller acquisitions, we may do for example testing side that are similarly, lower margin than they would be on a run rate basis.
In select instances, we certainly expect margins to rise as they get integrated into our systems.
But as you know are really inorganic revenue play right. This is not a cost synergy play.
But as we continue to cross sell services.
The revenue trajectory increases the natural organic and operating leverage in the business World class margins to accrete. So.
The recent acquisitions for example, environmental standards Triad Air kinetics.
Those relative to our existing segment margins.
Certainly margin accretive which is what we've got.
Sure that makes any sense, but yes over time, we have no change in our expectations around margins.
Okay understood.
And does that conclude your questions.
Yes. Thank you that was helpful.
Thank you.
Ladies pension. So can you just remind us exactly the question Youre welcome to Bristow and then wanting to place its all kind of question Kim.
The next question comes from that adults Osterholm.
Hi, guys.
So we're taking that.
Hey.
So I was wondering if you were to take out adjust for C. T. H and if you were to kind of look at that.
Well, what I would characterize it as the legacy businesses versus you know the higher growth that youre seeing and G fast and biogas and a C. O. Two could you give us a sense of kind of how to think about the growth trajectory of each of those groups in 2022, and how you're thinking about them.
Should we be thinking about sort of the mix of growth for 2023.
Yeah. It's a good question Noelle, we highlight a few parts.
Biogas and greenhouses measures and litigation because those are at elevated levels of organic growth as you know right as you can see from our numbers.
But that doesn't mean that the rest of our core environmental services are also growing very attractively.
We just don't highlight them as much by virtue of the math.
But as we look at our core testing business for example, the organic growth trajectory in that business is amongst the best it's ever been on the back of some of the regulations that have already been implemented and some that are expected to be important that our clients are heavily engaged with us across our testing business our field services our labs, we're seeing.
Some really nice trajectory.
Cros are engineering remediation and consulting businesses were.
Seeing some really nice growth opportunities.
As we look at our recent acquisitions for example on the West Coast. The work, we're doing utilities, our fire mitigation.
I alluded to our team.
Sylvania environmental standards.
Those two as an example are seeing exceptional organic growth opportunities ahead of them and they are indicative of kind of our broader sentiment in that group.
And so as we look forward, we're really really.
Feeling great about what the three to five year outlook looks like and then obviously, we've talked a lot about the pizza hut's water treatment the biogas renewable energy and greenhouse gas mitigation is the reason for that is those addressable markets have been increasing in size.
And the velocity and client demand in those business lines.
Is that something you guys had I think a lot of attention to and we're naturally benefiting from that already so.
We're feeling great I think the and again you said, excluding Eth, obviously, that's a business.
A bit tougher for us to predict year on year out, but the fundamentals there are really strong as well. So you can see that I think in the investor presentation of Wow.
The blue bars, which we would call core environmental services, you can see that trajectory.
You know that case is incredibly strong and has been for the last couple of years and as we look out over the next three to five years for killing are bullish on it.
Is that right.
I'm sure. It does and then just on the pizza Astro mutation surfaces, but any way you could kind of talk about how many programs do you have at this point that are in phase you know beta testing and kind of how we should think about your historical hit rate in terms of moving those tests into into full scale deployment.
Yes.
Yeah.
We don't disclose the number of pilots.
We have ongoing.
Structural that point, then it would be helpful.
We.
As we think about.
P fought.
In aggregate representing.
Mantra is as a percentage of revenue from single digits to this year, we think it'll be closer to 20% as we look across the next three to five years, we think that has the possibility of increasing well beyond that.
The 20% of revenue mix and that's a function of.
The series a.
Pilots that are underway. The reason were not disclosing pilots, we're disclosing exactly when they will start with a little unpredictable for us. It's about an 18 to 24 month cycle from when the initial water testing is done a lot of which started at the end of last year to where the pilots get implemented those patents become full scale and some of.
That especially when dealing with departments of defense airports, which are public private partnerships is also predicated on public funding cycles.
And so over the three to five year horizon, feeling really really good about the growth trajectory.
We're not in a position today to disclose exactly how many pilots.
Nor how many of those will convert to full scale systems next year in 2023.
Got it thank you.
Yeah.
Thank you, ladies and gentlemen, as we have no further questions in the conference call lines.
Apologies, if it's got enough.
Christian coming from tenants.
Rooney of William Blair.
Hey, Thanks for sneaking me in I, just I just wanted to build the last conversation that you're having with with no well given that your P fast remediation technology.
P. J, you know and it is particularly well suited for certain applications.
I'm curious if there are certain markets, where there's a greater near term opportunity.
Near term I think like you know.
Three to five years, whether that'd be military bases or airports or large industrial sites or are there particular.
Set of customers and it's in specific end markets.
Where you're seeing outsized demand at the moment as you think about those pilot programs. Thank you.
Yeah, it's a great buy.
Yeah.
For us have already been adopting the technology and we expect will continue so that is probably our number one goal at this point Tim These tend to be more complex water stream sometime in industrial wastewater specifically more complex water streams with shortchange, our lunch N P parts.
That benefit from our technology and regeneration, we're demonstrating pretty consistently that if you have high concentration, but short chain.
That's the lifecycle costs are lower with our system and the efficacy is stronger with our system against the inkjet rallies and we've shared a lot of the technicalities with you and publicly too.
We're also seeing similarly, a lot of.
Both inquiries and demand from department of Defense sites, specifically Air Force bases, not surprisingly with training occurred with the spring a firefighting foam.
On Air Force bases as an example, and obviously maybe to a lesser extent Navy sites.
That the P pause from the secret to the water streams.
Now requires remediation piece airforce base as a simple example, which we took you to and others to Tim is an example that we're seeing a lot of demand.
Picking up from that sector and that's consistent.
Has it been consistent in Australia that is now increasingly consistent across Europe .
And so we are seeing just a consistent uptick from those two constituencies in particular.
And going back to Noah's question exactly when that starts a full scale at the velocity. Many expect is a little tougher to predict but it's already as you can see in our organic growth.
And our margin accretion to remediate shouldn't you said, it's already in our numbers it has been.
At the end of 'twenty over the course of 'twenty, one through this year as well.
And we certainly expect over the next three to five years that those two constituencies the industrial wastewater.
The Dod across the world will be our primary sources of engagements.
Right.
That's really helpful. Thanks, Vijay that's it for me.
Thank you ladies and gentlemen, this does not conclude our question and answer session. I will now turn the call over to Mr. Vijay monthly <unk> for closing remarks.
Wonderful. Thank you. Thank you all for the time again. This morning are Alan and I and the team are thrilled with the quarter and we're looking forward to speaking with you at the end of the year in 2023. So thank you again take care and be well.
Yeah.
Thank you ladies and gentlemen, you may now disconnect. Your lines. Thank you for your participation.
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