Q1 2023 Montrose Environmental Group Inc Earnings Call

Towards what we believe will be a very exciting trajectory for this segment over the coming quarters.

I will now discuss a few recent regulatory updates and industry trends that support our long term growth outlook.

The U S. EPA continues to focus on <unk> and recently issued an advanced notice of their intent to designate seven more <unk> chemicals to the list of hazardous substances.

Which triggers reporting and remediation needs, including potential Superfund cleanup status.

We expect this action will drive demand across the Montrose portfolio.

With regards to methane emissions the epa's pursuing high profile enforcement actions against some of the largest players in the energy industry to reduce releases and increased leak detection frequency.

We are working with our clients across our emissions measuring monitoring and assessment services.

Regarding demand for our environmental consulting services in April .

<unk> signed a new executive order to better protect certain communities from pollution and environmental firm.

The EPA has been stepping up enforcement of environmental Justice matters, and we anticipate this will drive increased demand for our advisory and testing services with the primary emphasis on air quality testing.

As evident in these recent actions and those we've discussed over the past several quarters momentum for environmental protection continues to grow.

The needs of our clients due to these announcements are very complementary to our existing service offerings and we believe mantra is exceptionally well positioned to assist our clients in navigating the rapidly evolving regulatory landscape.

So in summary.

I want to thank my colleagues around the world for all they've contributed to our business and for the exceptional work they do for our clients each and every day I remain incredibly grateful to all of you and thank you.

As a result of our Q1 2023 results and the momentum in our business into the second quarter.

We are increasing our full year 2023, EBITDA outlook, which Alan will expand upon shortly.

We remain as optimistic as ever in our ability to solve environmental challenges and problems and create value for our shareholders and all of our stakeholders with that let me hand, it over to Alan Thank you.

Thanks P J.

Our solid overall first quarter performance reflects the strength of our business model and ongoing demand for our environmental solutions as.

As BJ mentioned, we are especially pleased with our strong year over year margin performance at an operating segment level as a result of the favorable business mix in demand nature of our services and the early returns from our pricing actions. We also benefited from M&A, which we expect to be more meaningful this year given the resumption of our typical M&A.

<unk> as demonstrated by our recent acquisitions since the beginning of the year.

Moving to our first quarter performance on slide eight.

Total revenues for the first quarter was $131 4 million compared to $134 7 million in the prior year quarter, primarily due to lower demand for COVID-19 related services provided by <unk> lower revenues in a discontinued lab and the timing of projects in our remediation and reuse segment.

Excluding revenue from COVID-19 related services and discontinued businesses revenue was up 17, 2% year over year, given strong organic growth in our assessment permitting in response and measurement and analysis segments, an increase in GTH environmental response revenues and the contribution of acquisitions.

First quarter consolidated adjusted EBITDA was $16 6 million.

And represented 12, 6% of revenue.

Excluding discontinued businesses, and including startup losses, which we no longer amtech consolidated adjusted EBITDA of $16 6 million compared to $14 4 million in the prior year, an increase of 15, 2% and consolidated adjusted EBITDA margins improved from 11, 2% in Q1 2022.

To 12, 8% in the current year.

As we've highlighted on prior calls <unk> performance needs to be assessed annually.

This is how we evaluate the business due to the stronger predictability of the business on an annual basis.

This is consistent with how we highest off.

Allocate resources and manage the company.

Turning to our business segments on slides nine and 10.

We are primarily focused on meeting or exceeding our targets for adjusted EBITDA dollars and.

And cash flow conversion and we remain pleased with our results.

We also continue to drive margin improvement at the operating level and we were pleased to see operating segments. Adjusted EBITDA margin increased 190 basis points to 19, 7% compared to 17, 8% in the prior year quarter.

Mainly due to the transition of CCH away from COVID-19 services strong demand for our environmental testing services and the benefit of pricing.

Which more than offset the expected decline in remediation and we use revenue.

Excluding results from discontinued businesses and including startup losses in the prior year operating segments adjusted EBITDA margin increased 290 basis points year over year.

Beginning this year organic revenue growth for total revenue and for the assessment permitting in response segment excludes CCH to provide a better sense of underlying performance for that segment and our business without to GTH variability.

In our assessment permitting in response segment revenue increased 14, 5% year over year to $52 2 million.

Year over year increase was driven primarily by organic growth and to a lesser extent the positive contributions from acquisitions.

Within GTH, a significant increase in environmental response revenues fully offset the anticipated steep decline in COVID-19 related services.

<unk> segment, adjusted EBITDA increased 48, 2% year over year to $14 3 million or 27, 3% of revenue up from 21, 1% in the prior year quarter.

Reflecting the benefits of organic growth and a favorable <unk> revenue mix, given environmental response revenues generate higher margins and COVID-19 related revenues.

And higher aggregate margins across our other businesses within this segment.

And our measurement and analysis segment revenue increased 7% to $42 $5 million, primarily attributable to strong organic growth.

While M&A segment adjusted EBITDA increased slightly the decline as a percent of revenue was mainly due to a decrease in revenues and adjusted EBITDA from a discontinued lab.

Excluding the impact of the discontinued lab.

And including startup losses in the prior year segment adjusted EBITDA margin increased to 15, 6% from 13, 7% in the prior year, reflecting strong demand for our testing services and the benefits from our pricing actions.

And our remediation and reuse segment revenues were $36 7 million compared to $49 3 million in the prior year quarter as a result of the winding down certain high dollar value projects.

The decrease was partially offset by revenues from acquisitions.

The decrease in R&R segments, adjusted EBITDA as a percentage of revenue was a result of lower revenues.

Moving to our capital structure on slide 11.

First quarter cash flow from operating activities was $3 million compared to cash used in operations of $18 3 million in the prior year quarter.

Cash used in operations in the prior year includes payment of acquisition related consideration of $19 5 million.

Excluding this acquisition related payments cash provided by operating activities increased by $1 8 million year over year compared to adjusted cash from operating activities of $1 2 million in the prior year quarter.

This year over year increase was primarily due to an increase in working capital in the current period of $9 7 million versus an increase in working capital in the prior year period of $12 5 million, partially offset by lower earnings before noncash items of <unk> 9 million.

These strong operating cash flows reflects 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 March 31, 2023, which includes the impact of recent acquisitions and the acquisition related contingent earn out obligations payable in cash was at one four times. The cash we have on the balance sheet and the interest rate swap we put in place in January 2022 have resulted in almost <unk>.

Our exposure to rising interest rates at current borrowing levels.

Our series H preferred stock has no maturity date.

We have the option, but not an obligation to redeem the preferred shares at any time for cash.

Prepayment penalty expired in April of this year.

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 at <unk>.

It'll equity capitalization stands at approximately $1 3 billion.

Moving to our improved full year outlook on slide 13.

We've had a strong start to the year.

Based on EBITDA performance in the first quarter and momentum in our overall business. We are raising our full year growth outlook for consolidated adjusted EBITDA to be in the range of $70 million to $76 million.

<unk> to the prior range of $68 million to $74 million.

Our higher consolidated adjusted EBITDA outlook represents low double digit growth and margin expansion over the prior year.

Our expectation for revenue is unchanged in the range of $550 million to $600 million, representing mid to high single digit growth for the full year.

Our revenue and consolidated adjusted EBITDA outlook does not include any benefit from future acquisitions that have not been completed.

In conclusion.

Our improved 2023 outlook reflects our confidence in our ability to execute against our growth strategy.

On demand nature of our unique environmental solutions expanded customer relationships solid customer retention and cross selling success, all position us well to expand our market share as a leader in the environmental services space.

Over the longer term our investments in R&D are expected to generate significant returns as we look to capture and market and regulatory tailwind and the greenhouse gas measurement and mitigation paphos remediation renewable energy and carbon capture spaces.

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.

Yes. Thank you at this time, we will begin the question and answer session.

I'll ask a question you May press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

Your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Tim Mulrooney with William Blair.

Hey, This is Sam platform offered them B J Allen of you guys are both doing well.

Hey, how are you.

Doing good doing good.

I guess I'll focus my question more on the matrix solutions acquisition I guess to start can you give us a sense of the size of this acquisition, we noticed matrix that.

570 employees in GTH hundreds on the acquired new first acquired it. So it seems like this might be a pretty sizable acquisition.

Hey, Dan this is Vijay.

That acquisition is in the process of shareholder votes for Canadian law.

<unk> is expected to close kind of in the back half of the second quarter, So I'm not going to say too much about it.

But.

The.

Right.

The aggregate size of that business will not materially move our overall profile into ACTH did.

It has a lot of people, but it is not it is not as impactful from an EBITDA perspective.

Got you, Okay, well, maybe maybe more of a broad question.

Your last two acquisitions.

They're both headquartered in Canada may.

Maybe you could just share your thoughts I guess on the market opportunity in Canada, and how you characterize that relative to the United States.

Yes, it's a great question, we are we.

We are still heavily oriented towards North America, and a lot of our clients are had a substantive presence in the Canadian market.

And for all the reasons, we've talked about before as it relates to environmental policy.

Methane measurement mitigation both the.

The provincial governments in Alberta in particular in the broader Canadian Federal government are.

Very forward leaning and so where we've been bullish on that market in aggregate for a long time now and this is just an extension of the same policy and so we think theres going to be a lot of.

Client based opportunity across both geographies.

And we're also really excited about what the Canadian market unto itself presents once these teams join us.

Okay. That's good to hear maybe one last one for me it relates more to the guidance I guess.

Can you maybe share what do you expect green path to generate revenue for remainder of 2023, and it's approximate EBITDA margin I guess, we're trying to figure out how much of the EBITDA guidance raise today, but it was attributable to that acquisition.

Yes, I'd say its about.

I would think of that business is kind of around $1 million in terms of the contribution this year, so little under about a half a little under half of the guidance ranges due to the <unk> acquisition and the rest is due to the organic performance of the business.

Got you thanks, guys.

Thank you and the next question comes from Jim Ricchiuti with Needham.

Hi, Good morning, This is Chris Greg on for Jim.

Hey, Chris.

Okay.

You had mentioned that the assessment and permitting segment segment margin benefit benefited from mix and pricing.

How are you thinking about that margin level improvement on a go forward basis, and how should we be thinking about the durability of that margin.

That segment comprises both of our kind of classic consulting business, Chris as well as our CCH business.

Th business.

Alan noted in his comments.

Shifted away from COVID-19 towards the more traditional environmental response.

So that margin.

Run rate and durable as we've highlighted for you highlighted for you before kind of as you think about that business that would continue to think about that is it 75% to $95 million top line.

25 ish percent EBITDA margins.

And then the other part of that business as our more traditional environment with consulting practices.

And they have just been benefiting from incredibly strong organic growth and pricing efforts that we've undertaken over the course of the last couple of quarters, and so I would say in aggregate.

That margin profile is quite durable.

Great.

And.

Could you could you perhaps expand on what end markets, you're seeing the most activity from it sounded like.

Oil and gases.

We're seeing a lot of activity are there any other areas that are like that.

Are worth highlighting.

Activity levels.

I would say, yes, it's a good question the activity level is not just oil and gas that comprises fluctuates year in year out of around 10% to 15% of our revenue and as you can see our broader profiling portfolio across our services has just been a fantastic cadence.

And so we're seeing broad demand cycles.

Our testing business, so thats, our field testing in our lab business, we're seeing.

Really nice demand cycle across our advisory services, which span all the different industries.

Both of which span all the different industries.

And then as you know we're incredibly excited about our long term water gas water and biogas technology practice as well so we're.

Not to say that this is anchored on one industry really is broad based not only in terms of our end markets, but also in terms of our own internal segment definitions.

Great. Thanks, very much does that make sense for us.

Yes. Thank you.

Great.

Thank you.

Thank you.

And the next question comes from Andrew <unk> with Bank of America Merrill Lynch.

Hi, This is David Ridley Lane on for Andrew.

Hey, Dave.

Morning.

I understand the project timing and remediation reuse Ken.

Can lead to kind of quarter to quarter volatility but.

Based on the project pipelines and current.

Project timelines.

Should we expect growth in the remediation reuse revenue for the full year to be kind of in line with.

The aggregate.

Revenue guidance for 2023.

Yes, it's a great question, Dave I wouldn't read too much into the quarters are.

Let me just step back and give you kind of my broader perspective on this our water and biogas business grew triple digits organically last year. So as we've talked about with you and Andrew and others. We expected this year to be moderated. So we kind of planned for 2023 to be kind of flat to 2022.

Knowing that the 2023 to 2025 outlook remains incredibly strong for us.

And despite that right. Despite the way we thought about leading into this year. Our overall business will remain at elevated organic growth levels against speaks to the other.

You're lying strength of the broad portfolio that we just talked about with Chris.

So no I would not think of that segment's growth in the same way that I would think about the aggregate business.

Because of the incredible cadence and trajectory last year, but we want to make sure we reset anchor on quality and performance and make sure that team, which tripled in size.

It's feeling good as the new opportunities continue to build on a global level for us.

Does that answer your question.

Yes.

And then.

No Thats mantra and services are highly insulated from kind of broader economic trends.

But is there.

Any sensitivity around Capex projects, maybe M&A assessment and permitting.

Area.

Any sort of way you're thinking about.

The potential slowdown in construction activity and how that might influence your business.

No we don't have a lot of exposure to discretionary spend.

Dave.

And so we're always attuned to that and we're staying very close to our clients on this but as you can see in the way we've come out of the gate this year and in our outlook for the rest of the year.

Despite the broader macroeconomic uncertainty a lot of the work that we do.

It's fundamental.

In many ways necessary for our clients.

And so we're not as exposed to it nor are we as worried about it.

Understood. Thank you very much.

Dave.

Thank you and once again. Please press Star then one if you would like to ask a question.

And the next question comes from <unk> <unk> with capital one.

Good morning, everyone. Thank you for taking my questions.

Hi.

Great to see our results today I'm wondering if you could.

Expand a little bit on the greenhouse gas methane management.

Out of the house, obviously very deliberate moves here with three path and.

At last month's agreement with sensors can you just talk about how these businesses are sort of integrated logistics and where do you see this how big do you see this business for you all to <unk>.

Three five years.

Hey, Ross this is Vijay thank you for that.

This is a as we think about kind of our multiyear outlook way than we've highlighted this for you in the past.

The greenhouse gas measurement and mitigation as a key part of our thesis.

The.

The questions our clients are dealing with both from a regulatory perspective as well as the commitments related to net zero.

Our substantive and they span.

Across our industrial end market base.

Those questions often necessitate testing and our capabilities is one of the leading air testing firms in the world.

One of the biggest in North America puts us in a really unique position to enable testing across multiple sources. The fence line of an facility the source of emissions leaks.

Ross a portfolio.

So we're able to couple our testing capabilities with the broader advisory work that our teams are doing.

And as we will continue to share more as this progresses, but our technology team out of ETT too has developed some really compelling.

Patents and again this is early stage that may not work out, but they're entering pilot phase with our clients.

That actually remove the cotwo from the industrial production process and so like P thoughts.

As an example that we've talked about historically, we think that the broader greenhouse gas.

Measurement mitigation opportunities very substantive for us over the coming years.

Anchor you on the numbers in Q1, you saw the measurement analysis revenue growth kind of quarter on quarter.

Look very strong that's mostly organic and a substantive part of that organic surge was due to our greenhouse gas measurement business in particular, so we are.

Even with the moderation in our on the water side in the biogas side, which we again plan for them to give that team a little bit of a break.

We remain pretty excited about what the organic growth opportunity for mantra looks like in aggregate because of this and other factors.

Thank you.

To dovetail on one of them maybe prior questions on our.

<unk>.

Margins are obviously very strong in the quarter can you give us a sense for how this might play out.

The rest of the year any color you can give us.

More directly contributed to those margins would be very helpful. Thank you so much.

Yes, let me take that.

What we've said historically is that segment should run 25% to 30% margins.

Can we expect for the full year it should be right in that Zip code.

The strong Q1.

Something similar.

Sure.

Yes.

Great. Thank you.

Thanks Wade.

Thank you.

And this concludes our question and answer session I would like to turn the floor to visually monitor <unk> for any closing comments.

Thank you all for your time and thank you again for your interest in mantras, we look forward to engaging with you through the course of this year. Thank you and take care. Thank.

Thank you <unk>.

Has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.