Q4 2022 Montrose Environmental Group Inc Earnings Call
Speaker 1: The C? C plan.
Speaker 2: Greetings and welcome to the Monro's Environmental Growth and Fourth Quarter 2022 earnings call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation.
Speaker 3: It is now my pleasure to introduce your host, Rodney Nastia, investor relations. Thank you, Mr. Nastia, you may begin. Thank you. Welcome to our fourth quarter and full year 2022 earnings call. Joining me on the call are Vijay Manthri Phragata, Mr. Nastia Phragata, and Mr. Nastia Phragata.
Speaker 3: 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 2.
Speaker 3: 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.
Speaker 3: We refer you to our recent SEC filings, including our latest annual report on Form 10-K , which identified 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.
Speaker 3: 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.
Speaker 3: and the reconciliation thereof to their most directly comparable gap measure.
Speaker 3: With that, I would now like to turn the call over to Vijay, beginning on slide 4. Thank you, Rodney, and welcome to all of you joining us today. I will provide you with business highlights and then hand it over to Alan for our financial review before we open it up to question and answer session.
Speaker 3: I will speak generally to the updated earnings presentation shared on our website, but before I begin, I would like to take a moment to acknowledge the plane crash in Little Rock, Arkansas, which took the lives of five of our colleagues last week. We're on their way to helping our clients, and this is one of those unthinkable events.
Speaker 3: for which there are no words. Our prayers and thoughts go out to the families that lost their loved ones and to our CTH colleagues who are mourning a deep, deep loss. I am proud of how the collective team has come together.
Speaker 3: I am also amazed at the poise and grace with which our CTH team is handling the sudden and unexpected shock. To all of our CTH leaders and colleagues, thank you for joining us today.
Speaker 4: Thank you for your unwavering fortitude and to our clients and partners who jumped in to help and are joining us to remember those we lost.
Speaker 4: for your unwavering fortitude, and to our clients and partners who jumped in to help and are joining us to remember those we lost. Thank you. you
Speaker 4: I also remain grateful for the efforts of our colleagues around the world from Australia to North America to Europe . Their results and efforts.
Speaker 4: I've resulted in another incredible year for Montrose, and I am really pleased with the execution across all levels of our business. As we have noted before, our business is best assessed on an annual basis given demand for environmental services is not driven by specific or predictable quarterly patterns. This is how we manage our business and how we recommend you view our results as well.
Speaker 4: Let me now go to our financial results.
Speaker 4: We were pleased to report another exceptional year in 2022. I'll highlight a few key things.
Speaker 4: First, we achieved record organic revenue growth of 26% in our core business, representing approximately two-thirds of the growth in the blue bars on page 5 of the presentation. As a result, our average organic growth over the past three years has been approximately 18% compared to the 7-9%.
Speaker 4: at the time of our IPO in mid 2020. Historically, acquisitions represented more than half of our annual revenue growth, but recently, organic revenue growth has been a greater contributor to our overall growth trajectory. Second, our organic revenue growth at performance and core services has been a greater contributor to our overall growth trajectory.
Speaker 4: helped mitigate the impact of the anticipated $125 million decline in CTEH COVID-19-related revenues from 2021 to 2022. Given the incredible surge in CTEH revenue in 2021, we expect it to be down in 2022. But revenues help steady on the back of strong organic-
Speaker 4: and mitigation.
Speaker 4: and renewable energy services. Fourth, we were also thrilled to see customer revenue retention and cross-selling revenues increase to record levels.
Speaker 4: Customer revenue retention increased to 96% in 2022. As a reminder, the 4% isn't necessarily lost revenue but more a function of project Our customer relationships remain as strong as ever.
Speaker 4: In addition, cross-failing revenues, which are defined as revenues from clients using more than one Montrose service,
Speaker 4: nearly doubled to 35% of total revenues. In essence, our organic growth outperformance is less about customer acquisition.
Speaker 4: and more about deepening existing customer relationships. Growth in these metrics reflects the success of our business development efforts.
Speaker 4: as importantly our integrated service offerings. Finally and fifth, we are also happy with the strength of our balance sheet and continued strong cash generation. Our acquisitions were and continue to be funded through our operating cash flows.
Speaker 4: Our balance sheet remains effectively hedged against rising interest rates and it provides us with ample flexibility to continue consolidating our industry and investing in environmental innovation. Our balance sheet remains effectively hedged against rising interest rates and it provides
Speaker 4: As it relates to acquisitions which remain a core part of our strategy, we believe our slower pace during 2022 was prudent as we focused on executing against our accelerating organic growth opportunities.
Speaker 4: So far in 2023, we have increased our cadence of M&A activity, and those small, we believe they are very additive to Montrose, and we are very pleased to have added the teams from Frontier Labs.
Speaker 4: PUCO Consulting, and Environmental Alliance to our family. We expect more announcements in the near future, and as you can see to the quick start this year, we expect 2023 to be back to our historical cadence of strategic acquisitions. As Alan shares more about our 2023 outlook,
Speaker 4: and environmental alliance to our family. We expect more announcements in the near future, and as you can see to the quick start this year, we expect 2023 to be back to our historical cadence of strategic acquisitions. As Alan shares more about our 2023 outlook, I think it is important to highlight where we came from.
Speaker 4: of our emerging growth status more quickly than anticipated.
Speaker 4: Regarding 2022 expectations, our revenues came in consistent with expectations primarily due to organic growth outperformance as discussed earlier. But our operating segment EBITDA was a little lower than expectations for 3 primary reasons.
Speaker 4: Regarding 2022 expectations, our revenues came in consistent with expectations primarily due to organic growth outperformance as discussed earlier. But our operating segment EBITDA was a little lower than expectations for three primary reasons. First,
Speaker 4: As our water treatment and biogas services scale, their margin profile, though very attractive at run rate levels, is immature at this time as we invest to capture organic growth opportunities. Although I am oversimplifying, the revenue that replaced the CTEH COVID-19 revenues from 2021 was lower margin in the short term.
Speaker 4: However, it grew faster than we expected, and importantly, it represents more consistency and higher margin opportunity in the long term. Second, our recent acquisitions in our consulting and engineering service lines have been lower, mid-teens margins, but very strategically additive.
Speaker 4: In addition, we purchased a few small testing businesses that were also lower margins. We expect margins for these businesses will increase as part of Montrose over the coming years.
Speaker 4: These acquisitions have also been very financially accretive. And finally, when we last spoke in November ,
Speaker 4: CTEH had a near record October of 2022, so we expected fourth quarter 2022 out performance.
Speaker 4: However, the fourth quarter ended lower than we expected. The CTH business is challenging to predict over months or quarters as we have noted before.
Speaker 4: The TEH remains core to the mantra strategy and had a spectacular overall year as you can see on flood 5 and 6.
Speaker 4: PEH remains core to the mantra strategy and had a spectacular overall year as you can see on Fleds 5 and 6. So this is more of a short term phenomenon.
Speaker 4: Given all these factors, our 2023 outlook on pages 5 and 6 reflects our bullishness, particularly with our core services. We expect double-digit organic revenue growth in 2023 for our core business, which will offset the continued wind-down of the CTH COVID-19 services. Those services remain meaningful, particularly in early 2022. We also expect strong double-digit operating segment adjusted EBITDA growth for our core services.
Speaker 4: which will offset a slight decline in CTEH. Finally, we expect to be back to a regular M&A cadence, and Alan will expand further on these trends. Overall, our long-term strategy remains unchanged. We are confident in our ability to create shareholder value, as we have been doing, given our ability to innovate, and capitalize on strong demand for our environmental solutions. Next, I will discuss broader regulatory and industry trends.
Speaker 4: We continue to see market drivers as government policy initiatives are catching up with public and private sector demand for better environmental stewardship. We remain well positioned to capitalize on these tailings. Specifically, and first, on PFAS, the US EPA continues to be focused on the issue of PFAS and added several more PFAS...
Speaker 4: In addition, the USEPA plans to publish final drinking water limits for PFAS by the fall of 2023. Their recent memo also includes recommendations for least quarterly testing of wastewater and technology-based treatment, both of which are expected to continue driving demand for Montrose's testing and treatment capabilities.
Speaker 4: With regards to methane emissions late last year, the EPA released a supplemental proposal for the oil and natural gas sector to reduce methane emissions from facilities among other emission reduction requirements.
Speaker 4: The proposal expands the scope of requirements and requires states to reduce methane emissions from hundreds of thousands of existing sources nationwide for the first time.
Speaker 4: In addition, the U.S. Bureau of Land Management published a proposal that requires operators of federal and tribal oil and gas leases take steps to avoid the waste of methane. If adopted, we expect to see increased demand for our emissions measurement, monitoring, and assessment services. For more information, visit www.fema.gov
Speaker 4: Third, and finally, regarding demand for our Environmental Consulting Services, in January , the US EPA announced availability of $100 million, which builds on previous investments from the America Rescue Plan to support projects that address various aspects of pollution, emissions and climate matters.
Speaker 4: in disadvantaged communities. In addition to the demand we have started to see from the American Rescue Plan, we have also seen increased demand from industrial clients partnering with communities as a result of these new efforts.
Speaker 4: advantage communities. In addition to the demand we have started to see from the American Rescue Plan, we have also seen increased demand from industrial clients partnering with communities as a result of these new efforts to monitor air quality in particular.
Speaker 4: This creates tailwinds for our consulting and testing services. Also in January , the U.S. EPA released a document on how to ensure cumulative environmental impacts are considered with permitting, remediation, waste management, environmental emergency response, and other decisions. If implemented, we expect this proposal will help increase demand across our services.
Speaker 4: So, in essence with regulations, while many of these actions are in the early rulemaking phase, the macro-demand drivers for environmental services.
Organic growth in the remainder of the segment plus acquisitions provided a partial offset.
Operating segments adjusted EBITDA as a percentage of revenue was 20%, which was lower than the prior year as a result of business mix and the acquisitions of environmental standards, Environmental intelligence and horizon, all of which operate at lower margins than our other businesses in this segment.
And our measurement and analysis segment.
Revenue increased 12, 5% to $172 $4 million.
Primarily attributable to strong organic growth.
As well as acquisitions.
Measurement and analysis adjusted EBITDA as a percentage of revenue decreased to 18, 3% as a result of business mix and the impact of the cyber attack in June which temporarily disrupted some of our labs ability to operate.
In our remediation and we use segment revenues increased.
Increased 47% year over year to $184 8 million, reflecting strong organic growth related to the increase in demand for our <unk> water treatment technology, and biogas services as well as revenues from acquisitions.
The increase in segment adjusted EBITDA as a percentage of revenue was a result of significantly higher revenues and business mix.
Moving to our capital structure on slide 15.
All year cash flow from operating activities was $20 6 million compared to cash flow from operating activities of $37 6 million in the prior year cash.
Cash from operations includes the payment of acquisition related contingent consideration of $19 $5 million in the current year and.
$15 6 million in the prior year, respectively.
Excluding these acquisition related payments adjusted cash from operating activities was $40 1 million for the full year 2022, compared to $53 2 million for full year 2021.
This year over year change was primarily due to lower earnings before noncash items of $9 million and an increase in working capital of $16 5 million in the current year compared to an increase in working capital of $10 1 million in the prior year.
These strong operational cash flows reflect our ongoing focus on balancing the generation of cash with investments in technology, R&D thought up initiatives and corporate infrastructure to ensure continued scalability.
Our liquidity position also remains strong.
With cash on hand as of December 31, 2022 of $89 8 million.
And an additional $125 million of availability on our revolving credit facility.
As we've highlighted over the past few quarters the interest rate swap we put in place in January 2022, and the solid cash position. We have on the balance sheet have resulted in almost no exposure to rising interest rates at current borrowing levels.
Our leverage ratio as of December 31, 2022.
Which includes the impact of acquisition related contingent earn out obligations payable in cash with.
It was at one three times.
Our series a preferred stock has no maturity date, and we have the option, but not an 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 and the fixed nature of the dividend in a rising interest rate environment.
If you include the 182 million balance of the series a to equity and our market cap. Our total equity capitalization stands at approximately $1 7 billion.
Moving to our full year outlook on slide 17.
Based on the solid traction in our core business through 2022 and into 2023, we are initiating a full year growth outlook for revenue to be in the range of $550 million to $600 million.
And for consolidated adjusted EBITDA to be in the range of $68 million to $74 million.
Our revenue forecast reflects our expectation for continued double digit organic growth in 2023, we.
We expect <unk> to be within its estimated $75 million to $95 million run rate.
Which is approximately $20 million to $40 million lower year on year, primarily due to the expected cessation of COVID-19 related services in 2023.
Within our consolidated adjusted EBITDA outlook, we expect to see margin expansion and mid teens EBITDA growth in our core business operating segments adjusted EBITDA.
At the midpoint.
<unk> million dollars year over year increase to 85 million is expected to more than offset a $4 million to $6 million reduction in adjusted EBITDA from Cte H as detailed on slide six of the presentation.
We expect corporate costs to remain at roughly 6% of revenue.
This percentage is expected to drop with the completion of acquisitions during the year.
Putting the pieces together results in higher expected consolidated adjusted EBITDA for the year.
Additionally, I'd like to highlight that our revenue and consolidated adjusted EBITDA outlook does not include any benefit from future acquisitions that have not been completed.
It's worth reflecting further upon the details of the moving pieces, we shared earlier on slides five and six of the presentation.
We acknowledge that the significant outperformance of CCH as a result of COVID-19 services.
This dynamic began in Q4 of 2020.
Surged in 2021, and then saw a significant decline in 2022.
Although still at elevated levels in 2022 and anticipated to six in 2023. It has created significant noise around business performance growth and margins.
Accordingly, we believe it is important to provide transparency around the performance of our core business excluding <unk>.
Since 2020, our core business revenue has grown organically at a compounded annual growth rate of 18%.
With an additional double digit percent organic growth expected in 2023.
Well above our pre IPO levels.
Inclusive of acquisitions, but excluding discontinued services, our core revenue is expected to be at a 29%.
Impounded annual growth rate from 2020 through 2023 again above our expectations at the time of our IPO for annual growth of 20% to 25%.
Core business operating segments adjusted EBITDA has grown at a 15% CAGR since 2020 with an additional mid teen percentage growth expected in 2023.
Although core business operating segments adjusted EBITDA margins declined from 2020 to 2022 as a result of investments and operating infrastructure, particularly in our water treatment and biogas businesses.
Business mix, driven by lower margin acquisitions, and higher investments in startup activities margins are expected to increase in 2023.
In conclusion, our 2022 results demonstrate the resiliency and non cyclicality of our core business along with the ongoing need for our unique environmental solutions are.
Our focused execution to capitalize on end market and regulatory tailwind drove another year of double digit organic revenue growth across most of our business.
We were pleased to execute accretive M&A transactions invest in talented team members and expand our innovative IP portfolio.
Looking to 2023, we remain optimistic in our ability to create substantial value for all of our stakeholders as we capitalize on demand for our leading environmental solutions globally.
Thank you all for joining us today and for your continued interest in mantras, 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 be conducting a question and answer session.
If you would like to ask a question.
Press one on your telephone keypad, a confirmation time indicated your line is in the question Kim.
Fred sorry tier if you would like to remove your question from the queue for participants using speaker equipment and are preparing to pick up your handset before pressing the sarkis one moment. Please while we poll for questions.
Our fist question comes down Jim Ricchiuti with Needham and company. Please go ahead.
Hi, Good morning, this is actually Chris <unk> on for Jim.
Hey, Chris how are you all right sorry for sorry for your loss.
Congrats on the quarter.
Just perhaps.
Could you could you provide a bit more color on what youre seeing in terms of.
The greenhouse gas monitoring and renewables looking for looking forward into 2023.
In terms of.
How those how those two are going to contribute to growth.
I have one follow up thank you.
Yes, Chris why don't I take that and then Allen please jump in.
The the majority of our work on the greenhouse gas measurement.
It is around our measurement analysis segment and our assessment permitting response segment, our advisory work Chris.
We are seeing a material uptick in demand.
Both of those services with clients asking us to help them think about how to frame the measurements for broader reporting purposes and ESG reporting.
Also for compliance purposes, so as we think about our outlook for the measurement analysis segment.
Some of our attractive margin growth opportunities and our disproportionate high margin growth opportunities will be coming from that sector and we certainly expect that to sustain over the next several years, you'll see us accelerate organically.
Double digits as we have over the last couple of years and.
There are also acquisition opportunities in that space that we will continue to expand upon once those occur.
Does that answer your question Chris.
Yes, thank you very much.
And.
With cross selling now at 35% of revenues were.
I guess, where do you see that going longer term.
Yeah.
<unk>.
What's the potential to continue to increase that thank you.
Yes.
Where most of our attention is on the business development side Chris.
Yes.
Have you historically talked about focusing on deepening our relationships with customers.
And that can come in several forms that can be additional services to our clients at a client site. It can be the same service across multiple client sites and one of the challenges with the metric we're presenting it's the cleanest one to allow for consistent measurement overtime is that it's more than one service and so if we add.
A second or a third service Chris it doesn't count in that metric. So we think over time.
Organic growth opportunities.
Sustained by continuing to capture more wallet share across our existing customers, it's less about customer acquisition for us and more about deepening relationships.
That measuring.
Alan has mentioned before should easily go north of 50%.
And there's no reason over the long term horizon, why all of our customers shouldnt be using more than one module serves.
Great very helpful. Thank you very much.
All right.
Thanks, Chris.
Ronnie.
Blair. Please go ahead.
Good morning, VJ and Allen.
Hey.
Doing okay. Thank you.
So D.
EBITDA.
Margin guide.
It kind of implies flattish margin expansion year over year.
And we were expecting some margin expansion in 'twenty three as you get leverage on some of those fixed corporate costs you layered in last year and maybe is the remediation business scales up.
So can you talk about some of those things that are holding margin expansion back in 2023 to that.
Flattish type range.
And.
And maybe you could elaborate a little bit on.
If your long term margin target of 20% or.
Your timeframe around that target has changed at all that that's my only question. Thank you.
Sure.
Hey, Alan do you want me to start with that and then you can jump in.
Yes.
Yes.
Tim Thanks for the question, it's a great question, Tim and let me, let me perhaps start with.
Now let me take your question in pieces and let me know if this addresses this forgive me, it's going to be a little bit of a lengthy answer.
Our long term outlook around 20% it has not changed and its driven as we've talked about by two factors one is operating EBITDA.
And the second is corporate expenses as a percentage of revenue and so to get to 20% operating EBITDA margins would need to be in the 22% to 25% range incorporate would need to come down to 3% to 4% of revenue.
Corporate will absolutely get there and youll see that tick down this year.
So bear with us as we prove that out, but that's very tightly managed and we have visibility to that.
On our operating EBITDA margin run rate.
That will also get to a range. If we think about our measurement analysis segment being at 18% to 20% we've demonstrated over the years that that is and will continue.
Our water biogas business at maturity getting to the mid twenties Dth you can see their margin has increased to getting to the mid <unk> by getting back to the mid twenties post Covid and then the advisory and remediation practices being in the teens to 20% so from a macro perspective, our outlook Hasnt changed.
And if you think about the slides five and six Tim the Blue bars, you can see that we are expecting some operating leverage in 2023.
But youre exactly right.
The pace of that has been challenging for us to predict and the and the reason for that Tim is twofold.
It's hard for us to predict the acquisition profiles and I'll explain what I mean by that in a second.
And we've also been surprised by the success of our R&D efforts.
And then I'll expand on that as well so on acquisitions, Tim I'll give you three examples.
Of the assets that throw us off in the short term, but are very accretive in the long term. So we purchased a company called air kinetics towards the back half of last year and are testing business.
It's very strategically additive excellent customers and it plugs right into our infrastructure, but at the time of purchase it was effectively zero EBITDA, we obviously don't need their corporate infrastructure and the variable contribution on those customers is 70 plus percent. So very financially accretive its going to take us a couple of quarters to kind of harp.
What's that.
That throws us off in the short term as another example, environmental intelligence. This is the business in the western United States that.
As a rock star asset they help utilities manage fire risk as an example that business runs in the mid teens, it's a large part of our organic growth surge in that segment.
Excluding Cta H are very strategic to the broader mantras portfolio, but because it runs up mid teens it throws off the short term margin profile.
And Theres additional assets in the pipeline Tim that we're seeing come to market very strong brands excellent client base is very synergistic to Montrose, but these businesses have historically struggled with cost management, so labor price increases and pricing in an inflationary environment. They just haven't done it well.
If we bring them into the Montrose fold not only do we continue to capture share and harvest the synergies on the top line side.
But we think we can lift their margins really nicely as well, but that again will take us several quarters to harvest and so as we think about all of that.
That's part of the reason why we're having a hard time articulating exactly what the cadence of that margin accretion will be.
And then on the R&D side, Tim as our patents.
Come to fruition and as clients ask us to capture some of these themes like PFS destruction and carbon capture as we invest in that that obviously also temporarily dipped.
Depresses margins, but like with ECT too in the water treatment technologies over several years, we think that's going to be very very additive.
Does that does that answer your question Tim.
Yes.
Vijay.
Yes, let me just add.
Yes, let me just add Tim.
We're seeing lots of growth opportunities more sorry, then.
Two three years ago, many of those require some upfront investment.
Like our European expansion for example, and because we no longer add back startup losses that obviously has a short term impact on margins.
We're also growing at elevated levels above what we had anticipated.
And in a tight labor market and an inflationary environment and a desire to maintain quality, it's really tough to grow double digit organically and expand margins at the same time.
When revenue slows as it did in 2020, we demonstrated an ability to expand margins quickly.
But we don't think it's prudent in the short term to focus on margin expansion given.
The wave of organic opportunities that we're seeing.
Okay. So if that Alan just following that point then if you are planning to continue to grow double digit organically.
Is it unlikely that we will see margin expansion in the coming years in that 20% EBITDA margin target is indeed farther away than what we were thinking.
It depends on a number of factors right again if.
If you look at our guidance for 'twenty three.
What youre going to do.
Page six if you look at our core business, so pulling out GTH FRC.
And focusing on operating segment margins.
There's about 100 basis point improvement.
In 23 versus <unk> 22, so youre seeing some margin expansion.
But we're also calling at the mid point for double digit organic growth.
Which is above what we had expected certainly at IPO time so.
Getting to the high teens to 20% margin is still absolutely achievable.
As we just said the mix of acquisitions can throw that off temporarily and outsized organic growth can throw that off temporarily.
But the Angola doesn't doesn't China is absolutely achievable and we look at the mix of business, we have and the margin profile of the businesses, we have and the underlying market sizes. So we have a sense of where our portfolio should settle out.
That 20% is absolutely achievable.
Corporate costs as VJ mentioned will come down with acquisitions, you'll see that come down in 'twenty three.
A little slow out of the gate than we had anticipated but again the growth is also faster than we had anticipated.
NGO is still we believe achievable.
Is it three years is it five years is it seven years, its just really hard to say because we're going to continue to be very opportunistic.
<unk>.
And driving revenue growth and prioritizing revenue quality revenue growth.
Okay.
Hey, Tim.
Just stepping back.
Because I think you're alluding to.
Our articulation of kind of our expectations at IPO over that five year horizon right. So when we when we went public in 2020, we were around $230 million of revenue.
And what we said is that you should expect us to grow at $20 to 25% a year, 7% to 9% organic right would that be a fair way to say, where we started.
Yes, that's exactly.
Yes, so if we.
So if you're going to just do the math on that and just forgive me I'm doing it on the fly right, let's just take the top end of that 25% growth over five years right. That's about a triple starting at $2 30, you should be at around $700 million to $725 million of revenue at 20% margins. It's about $140 million of EBITDA I think what we're trying to say is.
To achieve both milestones and hit our earnings and EBITDA targets. There's no question about that what we're what we're also saying is that we're actually outpacing our expectations on revenue.
So the margin profile may be different year in and year out, but it should be very additive to our shareholders and sets us up beyond that five year horizon. So it's not like our absolute earnings potential of our cash potential as any different.
That works.
Outpacing the topline expectations by virtue of some of the advantages we have built with our business model and with our technology.
Does that makes sense and so we're anchoring on margin.
But it's the absolute cash in absolute EBITDA that we're not all that hesitant about saying, we're very confident in the city.
Yeah, No I think that's a good way of framing it for investors.
And Greg on the dollars rather than maybe I'm, a little too focused on the margins here.
But regardless I appreciate all the color you both shared pear and I'll get back in line. Thank you.
Thanks, Tim.
Yeah.
I have a question. Please press star one on your telephone keypad.
Our next question comes from Andrea <unk> with.
Bank of America. Please go ahead.
Good morning. This is David Ridley Lane on for Andrew Ruben.
Hey, Jamie.
Good morning.
Looking at the.
2023 revenue guidance, excluding Cta itch.
What are the factors that would drive you towards that lower end of 10% for the.
The upper end of 17%.
Yeah.
What's driving some of the factors driving that variability.
Yeah, Let me, let me start with that and ounce certainly jump in so David there's a couple of variables. There one is these.
Phasing in and starting of our various water and biogas projects as we've said before we're seeing a lot of interest in both of those end markets and demand has been really attractive.
But exactly when the projects start and stop is a little tougher for us to predict so that's going to be one variable that dictates, where we fall on that macro.
The trajectory of B, the low double digits or high double digits.
The other variable that is going to be.
One that we're going to need to watch is the cadence at which our greenhouse gas measurement practice really picks up.
And that's another one.
And thats, partially a function of some of the regulatory flux that occurred at the very end of last year, where the technology the <unk>.
Imaging technology that we've been.
Practitioners up for years was recently deemed the best emissions reduction technology by the EPA. So how quickly clients adopt that will partially also dictate our ability to capture share in that part of the market to those those variables are the ones depending on the cadence that will dictate whether we're on the low end or high end of that but regardless.
Even the low end is elevated compared to our historical levels.
Does that makes sense.
Yeah.
Makes perfect sense, and then [laughter].
The last two quarters of C. T H have meaningful levels of Covid related.
Revenue I'm, just trying to understand the bridge you've been at about 100 million dollar run rate in the second half of 'twenty two.
So the $75 million to $95 million guidance.
Yes, <unk>, yes.
Look at island, you want to take that bet.
Sure Yes.
So it's still a.
Meaningful for them in terms of overall mantras.
Has shrunk significantly suddenly by by Q4, and we expect that to go away completely.
As we get into 'twenty three.
The sequential decline.
About a third of the revenue in Q4.
But those contracts are largely winding up so we don't expect to see much more of it.
In the new year.
And David one of the just to add onto that the team has done an exceptional job pivoting away from that part of the business to the traditional.
Uh huh.
Okay.
Environmental side.
And they had a.
Even with the $125 million drop you can see there overall reduction was less than that and that's because the core business for <unk> their core response.
And Tox business has really started to pick up nicely and certainly has done. So so far in 2023. The team has just been on a very nice cadence already so far this year independent of the Covid work.
Got it so the $75 million to $95 million does include growth in sort of core Cta Chen.
The.
Target numbers just right.
Actually they are not the expert.
Coverage related revenues is that the right way to think about it.
I think the right way to think about it is there their cadence of $75 to 95.
And it's.
It's a matter of they have a very talented team and an ability to flex up and down but it's a matter of the mix of the work and where they are deployed so as COVID-19 winds down they reallocate those resources to their more traditional work.
Thank you very much.
Thanks, David.
Our next question comes from Tony.
J P Morgan.
Got it.
Hi, good morning.
Thank you Stephanie.
And can you remind us.
Synergies between Montrose and Cte.
Its business outside of the Covid related work.
Okay.
Yeah. They they are.
A really critical part of our overall story Stephanie.
Just at a macro level as clients think about ways to deal with various environmental opportunities and challenges one of those is dealing with.
Various incidents that occurred due to changes in our climate or aging.
Aging infrastructure so.
The macro demand for their services, which is something our clients need us.
Independently very additive.
In addition to that.
Because they are the advisors working with incident command when something happens there is substantive testing work monitoring work advisory work.
<unk> toxicology and public health impact work and then downstream remediation work that occurs when something.
Unfortunate happens right, whether it's a hurricane or a flood or a fire or a derailment.
And so as they're helping these communities and helping incident command.
The mantra services that flow downstream of those.
That initial event.
To make it very synergistic.
So when we when we talked about maybe two years ago is definitely one of the early indications of how synergistic. It was we referenced the oil spill in California, and how five different Montrose teams deployed alongside GTH to support that client doing natural resource damage assessments.
Monitoring.
And in addition to the response.
And that is certainly the case as well with some of the recent.
Incidents that have occurred so far at the end of 'twenty two in early part of 'twenty three.
Okay. Okay.
And that makes sense I was just asking because I guess, we were hoping that we wouldn't be talking about the COVID-19 related grab me is tied to CPI in 2023, I know that was a lot to explain in 2022.
And that looks like Theres still a little bit of that rolling off in 2023. So I just wanted to be reminded of.
By coming together the two companies.
Uh huh.
T O.
Thank you for that.
Yes, and again due to the Covid.
Services.
Forgive us we're having a really hard time, we had a hard time predicting exactly when that was going to start to stop.
Going back to 'twenty, one we thought it would slow down and it didn't it continued into 'twenty two.
And it was certainly a substantive in the early part of 'twenty, two but its really behind US now it's definitely as we look at the 2023 guidance.
That's a that's a non factor.
With what we know so far.
Okay.
And just one other question can you talk about how maybe the economic environment.
It's ebb and flowing a little bit of uncertainty how that factors into your intention of increasing the pace of acquisitions in 2023 is that all.
It doesn't it doesn't impact what we were alluding to and kind of following on Tim's question, Stephanie what we're saying is that the macroeconomic challenges.
Had impacted our acquisition targets more than they've impacted us.
As Alan talked about in his comments, we've been fortunate with our pricing discipline to be able to take up prices.
That the cost pressures and fleet and the inflation related cost pressures I'm, not really had an impact on us.
And because of the diversification of our end markets were broadly insulated from any major economic shifts to the upside or downside to it is a very steady business.
But are some of the smaller companies that we're buying have certainly been battered we see that candidly as it really attractive opportunity.
Which throws off again in the short term profile.
But we think it will be very attractive long term. So we're not all that worried about it.
And.
Our balance sheet is hedged against those.
Increased rate environments.
It hasnt been for a while so for us it's really more a matter of making sure it's strategically additive and us being opportunistic.
Okay, great or anything else you would add.
Alright.
Okay, great. Thank you.
Thank you.
Okay.
Again, if you wish to ask a question. Please press star one on your salad.
Wow.
Please Howard.
There are no further questions at this time I would like to turn the floor back over to MS. <unk> for closing comments. Please go ahead.
Thank you and thank you all again for your time for your interest and for your support of Montrose.
We're thrilled and excited about 2023 and I'm sure we'll be talking soon take care.
Hmm.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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