Q2 2024 Montrose Environmental Group Inc Earnings Call

Speaker Change: Good day and welcome to the Montrose Environmental Group Inc. 2nd Quarter 2024 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Operator: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that this event is being recorded. I now would like to turn the conference over to Adrienne Griffin, Senior Vice President and Treasurer of Relations and Treasury. Please go ahead.

Speaker Change: After today's presentation, there will be an opportunity to ask questions.

Speaker Change: To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded.

Adrienne Griffin: Thank you, Operator. Welcome to our second quarter 2024 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer, and Allan Dicks, our Chief Financial Officer. During our prepared remarks today, we will refer to our earnings presentation, which is available in the Investor section of our website. Our earnings release is also available on the website. Moving to slide two, I would like to remind everyone that on today's call, we will include forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Adrienne Griffin: Actual results may differ materially due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook. We refer you to our recent SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31st, 2023, which identify the principal risks and uncertainties that could affect any forward-looking statements, as well as future performance. We assume no obligation to update any forward-looking statements.

Speaker Change: 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 Change: We refer you to our recent SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2023, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as future performance.

Speaker Change: We assume no obligation to update any forward-looking statements.

Adrienne Griffin: On today's call, we will discuss or provide certain non-GAAP financial measures, including consolidated adjusted EBITDA, adjusted net income, and adjusted net income per share. We provide these non-GAAP results for informational purposes only, and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation, or our earnings release, for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and a reconciliation to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay, beginning on slide four.

Speaker Change: On today's call, we will discuss or provide certain non-GAAP financial measures, including consolidated adjusted EBITDA, adjusted net income, and adjusted net income per share.

Vijay Manthripragada: Thank you and welcome to all of you joining us today. I wanted to start by introducing Adrian Griffin, who is our new Head of Investor Relations. She brings stellar depth of IR experience to Montrose. And as we continue to increase our stakeholder engagement, we look forward to introducing her to all of you in the very near future. Thank you.

Speaker Change: Thank you and welcome to all of you joining us today. I wanted to start by introducing Adrian Griffin, who is our new Head of Investor Relations.

Vijay Manthripragada: I will open my remarks with an update on our business, operations, and strategy. Allan will then provide the financial highlights. And following our prepared remarks, we will then hold a Q&A session.

Speaker Change: Allan will then provide the financial highlights.

Speaker Change: And following our prepared remarks, we will then hold a Q&A session.

Vijay Manthripragada: While today's call will highlight second quarter and year-to-date performance, it's important to reiterate that our business is best assessed on an annual basis. Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations using an annual perspective.

Speaker Change: While today's call will highlight second quarter and year-to-date performance, it's important to reiterate that our business is best assessed on an annual basis.

Speaker Change: Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations using annual perspectives.

Vijay Manthripragada: We are pleased to report our second quarter and first half results, which included our highest ever revenue and adjusted EBIT dot. Our solid operational performance and ability to capitalize on demand momentum across our business continues to be driven by our dedicated colleagues around the world, and I would like to thank them for their substantial contributions to our collective success.

Speaker Change: We are pleased to report our second quarter and first half results, which included our highest ever revenue and adjusted EBITDA.

Vijay Manthripragada: Our stellar quarterly results included 9% revenue growth and 10% adjusted EBITDA growth. Our organic growth trajectory continues to be positively impacted by further IP development and cross-selling success. Our focus on strengthening and optimizing margins was evident in our quarterly results as we reported a 20 basis point increase in consolidated adjusted EBITDA margins compared to the prior year period. As our customers react to anticipated regulatory complexity following recent U.S. Supreme Court decisions and as our customers work to comply with state and local regulatory requirements and respond to stakeholder encouragement, I will now discuss our second quarter performance by segment, the details of which are found on slides 13 through 15.

Speaker Change: Our stellar quarterly results included 9% revenue growth and 10% adjusted EBITDA growth.

Speaker Change: Organic revenue growth across most of our businesses contributed to our record performance.

Speaker Change: While we are pleased with the significant profitability improvement our team has achieved since acquiring Matrix in June of last year, we remain focused on further optimization.

Speaker Change: Though both transactions are relatively small.

Speaker Change: Our M&A pipeline remains robust and includes numerous opportunities for the coming 12 to 18 months.

Speaker Change: Demand for Montrose's suite of innovative environmental services, technology, and solutions grows in tandem.

Speaker Change: I will now discuss our second quarter performance by segment, the details of which are found on slides 13 through 15.

Speaker Change: Within our assessment permitting and response segment, during the second quarter, we saw robust demand for our advisory services as well as growing cross-selling success across multiple business lines.

Vijay Manthripragada: Within the measurement and analysis segment, we are seeing the benefits of continued state, local, and federal regulation. Margins during the quarter were higher year over year, mainly due to revenue growth and operating leverage, validating our integrated strategy and further substantiating the acquisition component of our method of creating value for our shareholders.

Speaker Change: Margins during the quarter were higher year over year, mainly due to revenue growth and operating leverage.

Speaker Change: and strong organic revenue growth in our soil and groundwater remediation business, which more than offset an expected decline in our water treatment and renewable services, which we expect will be back on a solid growth trajectory later this year and into 2025 and beyond.

Speaker Change: Margins during the quarter increased versus prior year given strong operational improvement in matrix, acquisitions and organic revenue growth in our soil and groundwater remediation business.

Speaker Change: We are thrilled to see increasing revenues and margins from Matrix.

Speaker Change: validating our integrated strategy and further substantiating the acquisition component of our method of creating value for our shareholders.

Vijay Manthripragada: As we discussed in a recent webcast available on our website, the U.S. Supreme Court recently issued several sweeping opinions. In fact, we anticipate incremental opportunity. Uncertainty and complexity tend to drive demand for our advisory and consulting services. This shift benefits Montrose given our strong capabilities to serve our clients across multiple state and local jurisdictions. And they do not foresee any immediate changes in demand for Montrose's services. Our business remains anchored on stable, long-standing regulations that we believe are unlikely to change as a result of this shift in legal doctrine.

Speaker Change: This may open the door to litigation by potentially affected parties who seek to challenge prior interpretations of agency rules within a six-year statute of limitations.

Speaker Change: These rulings have introduced quite a bit of uncertainty into our marketplace.

Speaker Change: Long term, we believe uncertainty will be lower because shifts in political parties overseeing the EPA will have less of an impact on the statutorily authorized activities of the U.S. EPA.

Speaker Change: For Montrose, our short-term and long-term business outlook remains unchanged.

Speaker Change: In fact, we anticipate incremental opportunities arising from the increased regulatory complexity these rulings are likely to introduce.

Speaker Change: Uncertainty and complexity tend to drive demand for our advisory and consulting services.

Speaker Change: This shift benefits Montrose given our strong capabilities to serve our clients across multiple state and local jurisdictions.

Speaker Change: In terms of client sentiment, major clients across a diverse cross-section of our end markets, with whom we spoke, have indicated they are staying the course in terms of their existing environmental compliance programs and corporate sustainability goals.

Speaker Change: While the regulatory landscape is evolving, Montrose is well positioned to navigate these changes and capitalize on the opportunities presented.

Speaker Change: As it relates to other regulatory updates, we've seen continued momentum from the US EPA with regards to PFAS.

Vijay Manthripragada: Building on the EPA's final National Primary Drinking Water Regulation for six PFOS compounds issued in April, the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA, Hazardous Substance Designation for PFOA and PFOS, triggers the requirement for immediate reporting of releases.

Speaker Change: Building on the EPA's final National Primary Drinking Water Regulation for six PFOS compounds issued in April , the Comprehensive Environmental Response Compensation and Liability Act, also known as CERCLA, hazardous substance designation for PFOA and PFOS.

Speaker Change: was finalized in May and became effective on July 8, 2024.

Speaker Change: This circular regulation triggers the requirement for immediate reporting of releases.

Speaker Change: Additionally, CERCLA liability for both chemicals is now in effect.

Speaker Change: As we mentioned last quarter, we expect this regulatory update to enhance our access to the approximately $200 billion addressable market for Montrose based on the number of impacted facilities we could engage.

Vijay Manthripragada: While still in its early stages, we anticipate demand for PFAS. Regarding methane emissions, in June, the EPA opened applications for $850 million in federal funding for projects that will help monitor, measure, quantify, and reduce methane emissions from the oil and gas sector. The Supreme Court and Congress in the United States have already weighed in on methane emissions regulations, so we don't expect a change to our growth thesis in energy and markets.

Speaker Change: While still in its early stages, we anticipate demand for PFAS will ramp up over time.

Speaker Change: Importantly, we do not anticipate the recent Supreme Court rulings to impact this major milestone in PFAS remediation.

Speaker Change: Regarding methane emissions, in June , the EPA opened applications for $850 million in federal funding for projects that will help monitor, measure, quantify, and reduce methane emissions from the oil and gas sector.

Speaker Change: This funding is designed to help mitigate legacy air pollution, create energy jobs in disadvantaged communities, reduce waste and inefficiencies, and realize near-term emissions reductions.

Speaker Change: This presents longer-term tailwinds for our emissions-measuring, monitoring, and assessment solutions as clients evaluate their environmental impacts.

Vijay Manthripragada: With regard to the political landscape and the upcoming U.S. presidential election, we remain confident in Montrose's ability to perform well regardless of the outcome. On slide eight, our strong performance existed during the Biden, Trump, and Obama administrations. In summary, I'm extremely proud of our team's performance this quarter to close out a strong first half of 2024. The continued organic growth in our business reflects the resilience of our business model and ramping demand for our environmental solutions as our customers increasingly choose Montrose's portfolio of differentiated solutions to work through complex environmental situations.

Speaker Change: As we've demonstrated on slide 8, our strong performance existed during the Biden, Trump, and Obama administrations.

Speaker Change: Our business model was designed to be resilient and largely insulated from the political swings at the federal level, which we've demonstrated repeatedly.

Speaker Change: While our business mix may shift from period to period, we remain as well positioned as ever to benefit from the evolving landscape.

Speaker Change: I'm extremely proud of our team's performance this quarter to close out a strong first half of 2024.

Speaker Change: The continued organic growth in our business reflects the resilience of our business model and ramping demand for our environmental solutions as our customers increasingly choose Montrose's portfolio of differentiated solutions to work through complex environmental situations.

Speaker Change: Looking to the remainder of the year, we are as confident as ever given the evolving regulatory landscape and the growing environmental concerns in our end markets.

Speaker Change: We are reiterating our full-year revenue guidance of $690 million to $740 million and consolidated adjusted EBITDA guidance of $95 million to $100 million.

Speaker Change: We expect to see significant opportunities for both organic growth and further strategic acquisitions in the coming quarters.

Speaker Change: With that, I'll hand it over to Allan. Thank you.

Allan: Thanks, Vijay. We delivered another quarter of strong financial performance as we continue to execute according to plan. Organic growth remained robust, given increased traction with our cross-selling initiatives and continued pricing success.

Vijay Manthripragada: Organic growth remained robust, given increased traction with our cross-selling initiatives and continued pricing success. Our strategic investments better position us to capitalize on demand, and our growth drivers remain intact.

Allan: We were also pleased to derive positive contributions from our recently acquired businesses.

Allan: Our strategic investments better position us to capitalize on demand and our growth drivers remain intact.

Allan Dicks: Our second quarter revenues increased to a record $173.3 million, or an 8.9% increase compared to the prior year quarter. For the first half of this year, we reported diluted adjusted net income per share of $0.37 compared to $0.47 in the prior year period. The change in both periods was mainly driven by an increase in interest and tax expenses, lower dividends on our Series A2 preferred stock, and a higher weighted average outstanding share count.

Allan: Our second quarter revenues increased to a record $173.3 million, or an 8.9% increase compared to the prior year quarter.

Allan: The primary drivers of growth in both periods were strong organic revenue growth in our AP&R and M&A segments and the contributions of acquisitions.

Allan: Partially offset by lower environmental emergency response and water treatment revenues, and the shift away from lower margin revenue in our renewable services business completed in the latter part of last year.

Allan: Looking at our consolidated adjusted EBITDA performance on slide 11.

Allan: In the second quarter, we reported a record $23.3 million, or 13.5% of revenue. This compares favorably to consolidated adjusted EBITDA of $21.2 million, or 13.3% of revenue, in the prior year quarter.

Allan: First half 2024 consolidated adjusted EBITDA was $40.2 million, or 12.2% of revenue, compared to consolidated adjusted EBITDA of $37.8 million, or 13% of revenue.

Allan: The increase in consolidated adjusted EBITDA was primarily due to higher revenues driven by organic growth and acquisitions.

Allan: Consolidated adjusted EBITDA as a percentage of revenues decreased due to matrix, which despite continued improvement in EBITDA margins since acquisition, has not yet achieved our mid-teens EBITDA margin target.

Allan: For the first half of this year, we reported diluted adjusted net income per share of $0.37 compared to $0.47 in the prior year period.

Allan: As a reminder, during the third quarter of 2023, we changed our tax methodology for Adjusted Net Income, as reflected in the Adjusted Net Income Reconciliation Table in the appendix for the current and prior periods.

Allan: Please note our adjusted net income per diluted share attributable to common stockholders is calculated using adjusted net income attributable to stockholders divided by fully diluted shares.

Allan: We believe this net income methodology is the most helpful net income metric to Montrose and to common equity investors.

Allan: Turning to our business segments, beginning on slide 13.

Allan Dicks: In our assessment, permitting, and response segment, second quarter revenue was $53.4 million compared to $61.4 million in the prior year quarter. M&A adjusted EBITDA increased 14.6% to $12.4 million, or 22.5% of revenue, a 90 basis point margin improvement over the prior year quarter due to revenue growth and operating leverage, partially offset by the shift in our renewable service business to focus on higher margin revenue projects. Lower cash flow from operations was driven primarily by an increase in receivables related to the integration of Matrix earlier this year and several large new projects.

Allan: In our assessment, permitting and response segment, second quarter revenue was $53.4 million compared to $61.4 million in the prior year quarter.

Allan: AP&R's segment adjusted EBITDA with $12.6 million or 23.6% of revenue, up from 22.5% in the prior year, reflecting favorable business mix.

Allan: Long-term margins in this segment are expected to be 20 to 25 percent.

Allan: We reiterate our expectation for long-term annual margins in this segment to be between 18 and 20 percent.

Allan: In our remediation and reuse segment, second quarter revenues increased 36.6% to $65.1 million, primarily due to the acquisition of Matrix.

Allan: partially offset by the shift in our renewable service business to focus on higher margin revenue projects as well as expected lower water treatment revenues.

Allan: The lower cash flow from operations was driven primarily by an increase in receivables related to the integration of Matrix earlier this year and several large new projects.

Allan Dicks: Cash flow from operating activities is expected to improve over the balance of the year as the non-seasonal increase in accounts receivable is temporary. We have already deployed $27 million of this to work via the acquisitions of Paragon and Spirit. At the end of the quarter, we had $188.3 million of liquidity, including $16.9 million of cash on hand and $171.4 million of availability on our credit facility.

Allan: At the end of the quarter, we had $188.3 million of liquidity, including $16.9 million of cash on hand and $171.4 million of availability on our credit facility.

Allan Dicks: Our leverage ratio as of June 30, 2024 was 2.4 times and well within our long-term operating leverage target of below 3.5 times. Moving to our reiterated full year outlook on slide 18. Based on the performance in the first half and our conviction in the second half, we reiterate our outlook for full-year 2024 revenues to be in the range of $690 to $740 million. Our 2024 outlook remains anchored on our expectation for low double-digit organic revenue growth and margin expansion over the prior year and includes an expectation for full-year emergency response revenues to be in the $50 to $70 million range. 3rd and 4th quarter 2024 at Yasd Adibadah is expected to be similar.

Allan: Our leverage ratio as of June 30, 2024 was 2.4 times, and well within our long-term operating leverage target of below 3.5 times.

Allan: As we highlighted last quarter, we expect to generate roughly 60% of our full year 2024 adjusted EBITDA in the back half of the year, primarily due to the timing of recent acquisitions, matrix seasonality, and project timing.

Allan: As compared to the prior year period, we expect Q3 2024 revenue growth of approximately 10%, along with adjusted EBITDA margin improvement of approximately 100 bps.

Allan: Third and fourth quarter 2024 adjusted EBITDA is expected to be similar.

Allan: Our second quarter results reflect strong execution at all levels of our business and the successes we are seeing with our cross-selling and margin-enhancing initiatives.

Allan: With the recent additions to our service portfolio from our acquisitions, Montrose is well positioned to meet the growing needs for our differentiated environmental solutions.

Vijay Manthripragada: Thank you all for joining us today and for your continued interest in Montrose. 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 for questions.

Speaker Change: Thank you all for joining us today and for your continued interest in Montrose. We look forward to the opportunities we see ahead and updating you on our progress next quarter.

Speaker Change: Operator, we are ready to open the lines to questions.

Operator: If you are using a speaker phone, please pick up your handset before pressing the

Speaker Change: If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time we will pause momentarily to assemble our roster.

Speaker Change: And today's first question comes from Timothy Mulrooney with William Blair.

Allan: Allan, Vijay, good morning.

Allan: Hey Tim, how are you? Doing well, thank you. Just to start out level set here, you guys highlighted robust organic growth in the second quarter several times in your prepared remarks. I just, I don't think I caught what that was.

Unnamed Analyst: Okay, well, that's helpful. I mean, it must have been strong then, so that's a helpful color.

Timothy Mulrooney: Okay, well that's helpful. I mean it must have been strong then, so that's helpful color it. Shifting gears, Vijay, I know that water treatment business was lower in the second quarter. Is that...

Unnamed Analyst: Shifting gears, Vijay, I know that the water treatment business was lower in the second quarter. Is that...? I don't know, is that something we should expect for the back half of 2024 as well? I'm just curious, based on what you see in your backlog today or with customer conversations, like, when you might expect that to begin to grow again on a year-over-year basis.

Vijay: has picked up materially.

Vijay: through the latter part of this year and into the next several years.

Vijay: in that business through the back half of this year. And that's in the guidance numbers that we've provided to you. And then as we think about our broader.

Speaker Change: Yeah, Vijay, if I could just sneak one more in. Sorry, but on that point, you know, as more and more water systems begin implementing PFAS testing programs over the next few years,

Unnamed Analyst: I'm just curious if you've already seen a step up in demand there yet in your labs business, or if it's just too early to say that there's been an impact there from the we have.

Speaker Change: I'm just curious if you've already seen a step up in demand there yet in your labs' business, or if it's just too early to say that there's been an impact there from the... No, we haven't.

Vijay Manthripragada: We have. If you look at our testing segment, Tim, that growth is all organic. We haven't, I don't believe, completed any acquisitions in that segment, and PFAS is a big part of that.

Speaker Change: We have. We have. If you look at our testing segment, Tim, that growth is all organic. We haven't, I don't believe, completed any acquisitions in that segment, and PFAS is a big part of that.

Unnamed Analyst: Okay, great. Thanks for taking the time.

Tim O'Rooney: Okay, great, thanks for taking my questions.

Tim O'Rooney: Thank you, and the next question comes from Jim Ricciuti with Needham & Company.

Unnamed Analyst: Thank you. Good morning.

Jim Ricciuti: Thank you. Good morning.

Jim Ricciuti: How are you guys? Two questions. First, and I know it's still very early in light of the

Jim Ricciuti: As you think about 25, and possibly even 26, and think about MMA in a post-Chevron world, are you thinking about...

Jim Ricciuti: it any differently? And maybe even before we talk about the M&A point, are you considering any changes in the way you allocate resources across the business lines in light of the ruling?

Vijay Manthripragada: In light of Chevron, Jim, no, and the reason is... For us, the bottom line is we think there's actually going to be more opportunity than risk as a result of Chevron. The regulations that impact Montrose seem pretty clearly within the statutory authority of the EPA, and as we think about the regulations across our segments, most of them have been decades old, and even as we look at the recent regulations around PFAS and methane, a lot of that has been written in via Congressional Act, and so we are not – we don't expect, and we don't anticipate much flux in the business due to Chevron.

Jim Ricciuti: In the light of Chevron, Jim, no. And the reason is...

Jim: For us, the bottom line is we think there's actually going to be more opportunity than risk as a result of Chevron.

Speaker Change: The regulations that impact Montrose seem pretty clearly within the statutory authority of the EPA, and as we think about

Speaker Change: The regs across our segments, most of them have been decades old, and even as we look at the recent regs around PFAS and methane, a lot of that has been written in via congressional act, and so we are not, we don't expect, and we don't anticipate much flux.

Vijay Manthripragada: There may be challenges for other reasons, as there have been in the past, and we've seen this for many, many years around the technicalities of specific regulations, but that's par for the course for us, and so, no, our actions there are unlikely to change. The other dynamic, Jim, that we always have been looking at and perhaps would look at a little bit more is that Chevron likely shifts a little bit more influence to state and local regulators, and that's where we tend to shine because of our ability to service the local markets and with local expertise, and so we will continue to and anticipate more activity in select markets where we see a lot of opportunity to continue to provide services for our clients.

Speaker Change: in the business due to Chevron. There may be challenges for other reasons, as there always has been in the past, and we've seen this for many, many years, around the technicalities of specific regulations, but that's par for the course for us. And so, no, our actions there are unlikely to change. The other dynamic.

Speaker Change: shift a little bit more influence to state and local regulators, and that's where we tend to shine because of our ability to service the local markets and with local expertise.

Speaker Change: And so we will continue to and anticipate more activity in select markets where we see a lot of opportunity to continue to provide services for our clients.

Vijay Manthripragada: And then the last part of this, Jim, and I think you've known this, I mean, for several years now, we've expanded our footprint largely at the behest of our clients internationally, and we have about 20 percent of Montrose's revenue is now ex-U.S., which is not really impacted by Chevron at all, so as you kind of look at the diversity of our business, which has been in play now for years, our path is largely unchanged, and in many ways, we think long-term Chevron actually introduces more certainty because if there's major changes in the executive branch in terms of political philosophy from one to the other, there's not going to be as much change because if it's under statutory mandate, the agencies can't just decide what they're going to do. So for all those reasons, we're staying the course, and we're feeling as good as ever.

Speaker Change: And then the last part of this, Jim, and I think you've known this, I mean, for several years now, we've expanded our footprint largely at the behest of our clients.

Speaker Change: And we have about 20% of Montrose's revenue is now ex-U.S., which is not really impacted by Chevron at all.

Jim: So, as you kind of look at the diversity of our business...

Speaker Change: which has been in play now for years, our path is largely unchanged. And in many ways, we think long-term, Chevron actually introduces more certainty, because if there's major changes in the executive branch in terms of political philosophy from one to the other, there's not going to be as much change, because if it's under statutory mandate, the agencies can't just decide what they're going to do.

Vijay Manthripragada: Thank you. A follow-up question, just actually a separate topic. I wanted to ask about gross margins, which I know you don't guide to, but the fact is, you know, these are the highest gross margins that I can recall. And so I wonder if you could talk perhaps about the improvement in the quarter and, you know, any color and perhaps how we should be thinking about gross margins going forward.

Speaker Change: Thank you for that. A follow-up question, just actually a separate topic.

Speaker Change: I wanted to ask about gross margins, which I know you don't guide to, but the fact is these are the highest gross margins that I can recall, and so I wonder if you could talk perhaps to the improvement in the quarter and any color and perhaps how we should be thinking about gross margins going forward.

Vijay Manthripragada: Yeah, gross margins, Jim, are closely tied to our operating EBITDA margin, right? So the drivers of operating EBITDA margin, which you've seen increase year over year, and if you do the math, the back-off margins will be an even stronger increase year over year. Some of that is business mix, but it also reflects the impact of some of the pricing success that we've had. It reflects the operating leverage that we're seeing in some of our businesses, like our labs.

Speaker Change: Yeah, gross margins, Jim, are closely tied to our operating EBITDA margin, right, so the drivers of...

Speaker Change: margins will be even stronger of an increase year-over-year.

Speaker Change: some of the pricing success that we've had. It reflects the operating levers that we're seeing in some of our businesses like our labs.

Vijay Manthripragada: And then as we've built scalable support functions, we're increasingly able to relieve our operating teams of a lot of the back-office support that they were providing. So if you look at our SG&A, you strip out acquisitions. SG&A within operations is flat yearly in dollar terms, and so we're getting the benefit of operating leverage in that regard as well. So all of those drivers are increasing gross margins, and they should continue to improve over time, similar to our EBITDA margins.

Dan O'Sweefe: And then a sweep.

Dan O'Sweefe: We've built scalable support functions.

Dan O'Sweefe: were increasingly able to relieve

Dan O'Sweefe: And so we're getting the benefit of operating leverage in that regard as well. So all of those drivers are increasing gross margins and they should continue to improve over time as similar to our EBITDA margins.

Unnamed Analyst: Thank you. I'll jump back in. Thanks. Thanks, Chip.

Chip: Thanks. Thanks, Chip.

Unnamed Analyst: Hi, good morning. Thank you for taking my question. Thank you. How are you?

Unnamed Analyst: Good, good. Thanks. So just going back to sort of your guidance, you reaffirmed it. But just looking back, you spent $27 million on Paragon Spirits since you actually raised guidance back in April, and you mentioned that you were creative. Maybe you could just provide some color on how much, or if, I know you don't disclose this, but maybe what you sort of expect to get from the guidance, what is offsetting that contribution? I mean, if it's, you know, maybe it's nothing that large, so that's why a guidance raise is not warranted, but it's a great question.

Chip: Thank you. How are you?

Speaker Change: So, just going back to sort of your guidance, your reaffirmed it.

Chip: But just looking back, you spent $27 million on Paragon Spirits since you actually raised guidance back in April .

Speaker Change: And you mentioned they were creative. Maybe you could just provide some color, like how much... I know you don't disclose this, but maybe what you sort of expect to get from the guidance, and what is offsetting that contribution?

Speaker Change: you know maybe it's nothing that large so that's why a guidance raise is not warranted but yeah it's a great question

Allan Dicks: It's a great question. It's a great question.

Allan Dicks: Those were small acquisitions, and so for those two in particular, our aggregate average multiple hasn't moved, but for those two acquisitions, in particular, it was a little bit higher than our historical cadence of mid to high single digits. And as a result, when you look at kind of the annual contribution, and you take just the back half of this year, it's a de minimis amount of contribution, not enough to move our annual guidance.

Speaker Change: of mid to high single digit, and as a result, when you look at kind of the annual contribution, and you take just the back half of this year, it's a de minimis amount of contribution and not enough to move our annual guidance.

Allan Dicks: When we started 2024, just to kind of reset where we were, we were at 90 to 95, and we took it up to 95 to 100 on the back of very strong organic performance and the impact of the strong impact of acquisitions that had already been completed. And so we feel like a lot of the expectation for this year was baked into that guidance, and these two transactions were too small for us to kind of increase it further. Though, as the year progresses, there may be an opportunity to relook at that as we get through Q3.

Speaker Change: the impact of, the strong impact of acquisitions that had already been completed.

Speaker Change: And so we feel like a lot of the expectation for this year was baked into that guidance, and these two transactions were too small for us to kind of increase it further, though as the year progresses, there may be opportunity to re-look at that as we get through Q3.

Unnamed Analyst: All right, thanks. And just to follow up, it's not related, but with the Matrix...

Unnamed Analyst: The target mid-teens margins, what's left to get it there, and do we actually start seeing that in 3-2?

Allan Dicks: Yeah, I mean, look, what you've seen, again, just to kind of reset so that we know where we started. When we purchased Matrix, that business was around 4.5 to 5% EBITDA margins, and we knew, of course, that there was lots of opportunity for us to influence that, and that is now trending to low double digits and is well on its way to achieving its mid-teens by the end of this And so we're feeling really good about the trajectory of that business, and obviously, the returns to Montrose are exceptional.

Speaker Change: Yeah, I mean, look, what you've seen...

Speaker Change: Again, just to kind of reset so that we know where we started, when we purchased Matrix, that business was around four and a half to five percent.

Allan Dicks: All the things we've done to get from 5-ish percent to the low double digits are things like pricing, staffing optimization, and the optimization of overhead costs, and those efforts have largely been put in place and have almost been completed. And the increase between now and the end of the year is just a continuation of what's already well in flight. So it's just a timing issue, but the efforts are all in place.

Speaker Change: to the low double digits are things like pricing, staffing optimization, the optimization of overhead costs.

Speaker Change: And those efforts have largely been put in place and have almost been completed. And the increase between now and the end of the year is just a continuation of what's already well in flight. So it's just a timing issue, but the efforts are all in place.

Unnamed Analyst: Thanks a lot for taking my questions.

Operator: Thank you. And once again, please press star then 1 if you would like to ask a question. And the next question comes from Stephanie Yee with J.P.

Stephanie Yee: Good morning. Could you give us an update on the Renewable Service business, how that's progressing? I think you're going to elapse the pivot that you started in the back half of last year as we enter into the third quarter this year.

Speaker Change: Good morning. Could you give us an update on the Renewable Service business, how that's progressing? I think you're going to elapse the pivot that you started in the back half of last year as we enter into the third quarter this year.

Vijay Manthripragada: Yeah. No, thanks, Stephanie.

Speaker Change: Yeah, no, thanks Stephanie. That's progressing really well. So that business...

Vijay Manthripragada: That's progressing really well. So that business is similar to what I was describing earlier. Last year to this year should see nice growth. First half to second half of this year should see nice growth. And 24 to 25 should see nice growth.

Vijay Manthripragada: And so we're back on offense in that business. It is part of our treatment technology portfolio. And it's the same team we've talked about before. And the combination of our water treatment and renewables business, we think, is on a really nice upward trajectory over the next couple of years.

Speaker Change: should see nice growth, and so we're back on offense in that business. It is part of our treatment technology portfolio.

Vijay Manthripragada: Let me take the first question, and do you want to take the second one?

Speaker Change: Let me take the first question, and Allan, you want to take the second one? So, yes, we have surpassed our goal this year of acquiring $10 million a year.

Allan: Our selection as a preferred acquirer by many of the companies that we are talking to remains as robust as ever, and the opportunity for us to continue adding value.

Vijay Manthripragada: Yeah, and on the other...

Allan: Yeah, and on the...

Allan: It's just not where our focus is, right? The investments and acquisitions...

Allan: have very strong ROIs. It fits with

Allan: Our strategy and thesis, so we're going to stick to running the business that way. But certainly something we've looked around internally.

Allan: Yes, stock price for us, Stephanie, as you know, is something where we don't fully control, and it looked like the stock price reacted to the Supreme Court Chevron decision.

Allan: Thank you all again for your time and we look forward to sharing more progress and have a fantastic day.