Greetings. Welcome to the Montrose Environmental Group Incorporated first-quarter 2021 earnings call. I will now turn the conference over to your host, Rodney Nacier, investor relations. Thank you. You may begin..

Thank you, Hilary. Welcome to our first-quarter 2021 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, Chief Financial Officer. During our discussion today, we will be referring to our earnings presentation, which is available on the Investor section of our website..

Thanks, Rodney and welcome to all of you joining us today. I'm going to begin by providing a few business highlights, I'll then hand them over to Allan Dicks, Our CFO for our financial review after which we'll both open it up to Q&A. For those of you following the presentation, I'm going to speak generally to Slide 4 through Slide 8.

And I'm glad to start this update to you by saying, we started 2021 on a strong footing following a fantastic 2020. I'm proud of our team for their continued excellence, teamwork, and service to our clients. Our revenue and adjusted EBITDA more than doubled compared to the prior-year quarter.

Although Q1 reflects a continuation of tailwinds we have seen over the past few quarters, I would like to take a moment to reiterate the theme we've highlighted before that our environmental services don't map neatly to fiscal quarters, so Montrose is best assessed and managed on an annual basis.

That said, given the strength of Q1, we remain very confident in continued performance through 2021 and our long-term expectation for annual revenue growth in excess of 20% is intact with adjusted EBITDA growing faster than revenue as it has historically..

Allan Dicks:.

Thank you. Our first question is from Jim Ricchiuti of Needham and Company. Please state your question..

So the first question I have is for you Allan. Just -- if I look at the SG&A line it scaled up a bit from Q4 but it's still below those the mid-year levels that we saw back in 2020, the June, September quarter. The question I have is to what extent have you really layered in some of those temporary cost savings.

Did that hit in Q1? Should we assume further scaling of those temporary savings looking at Q2 and Q3? Or is that the bulk of it now have has been realized in Q1..

Jim, the cost that you're referring to -- and as we indicated was put back in the first quarter-was largely operational related to. So those were the temporary labor costs that we bear mobilized early in the second quarter of 2020. So those were put back at the beginning of the year or in the fourth quarter of Q1.

And so largely impacted our operating margins and not so much the corporate or SG&A..

So we will pick up and travel and whatnot are still -- that wasn't a big factor I guess.

Is what you're saying?.

Not -- a Q1 is outside of SG&A. It is typically a slower travel quarter. Certainly, as the business picks up and we started to see that already in the second quarter you will see an uptick in travel to more normalized levels.

And then there are additional -- the balance of the costs that we took out in 2020 has been put back early in the second quarter. So, you'll see the full impact when we report the second-quarter results. But in the first half of the year, all of those costs will have been put back..

Ok. Thank you for that. And then my follow-up question is just as it relates to the Remediation and Reuse business segment and then the Measurement and Analysis segment business. Clearly, some projects were timing-related issues in those businesses.

So it doesn't sound like you're overly concerned with the decline in the EBITDA margins that we're seeing -- that we've seen in those businesses. But I guess, what I'm wondering is to what extent are you gonna be able to respond to the pickup that you're anticipating in some of the client work picks up again.

Are you able to move quickly enough to begin to address that stronger demand?.

Hi, Jim. This is Vijay. Let me start and let me let Allan jump in as well. On the back half of your question, are we going to be able to respond to the pickup? The answer is, yes. We've talked about this before. The business is not linearly linked to needing to add headcount as demand picks upright. We are confident in how we've built a scalable model.

And so as demand starts to accelerate, our teams are well-positioned to take advantage of that. On the margin point, I would characterize it quite a bit differently. I think of this as kind of a two-pronged answer.

As we look out for 2021, we are quite optimistic about our ability to generate strong organic growth across our segments specifically in the Remediation Reuse, which is where our PFAS waterworks, our renewable energy work, and our remediation business is. And then, within measurement analysis where our testing footprint sets.

And then, we shared this with you last year Jim, that service in line specifically around measurement and analysis was running way ahead of expectations or what we would consider normal. Right? So that business on a run-rate basis should do kind of high teens EBITDA margins, and we were in the mid-20s. And so this normalization is exactly what it is.

It's not -- it's not a point of concern candidly, we're excited as our teams get going that the business starts to look more like it did before the pandemic hit. So the -- we will keep anchoring you on. Don't look at it quarter on quarter, you gotta look at this annually.

But I think it's important to really kind of hear us on the annual trends where we have quite a bit of optimism across the segments. That makes sense..

It does, Vijay, and thanks for clarifying that and pointing it out. I think it's useful. Thank you..

Our next question is from Andrew Obin of Bank of America. Please state your question..

Just a question on assessment permitting and response subject to the impact of COVID. You guys clearly have warned us that we will see quarters like this, but just the scope of the beat is quite impressive.

So, how familiar are you now with this business? What are the chances of seeing a similar beat next quarter? And what are the chances of this being a pure pull forward from the other quarters? And I appreciate sort of that the business model is very uncertain quarter to quarter, given what happened.

But based on what I'm hearing, what you've described it's not necessarily a pull forward, is just one-time events that will not necessarily repeat. So sort of pull forward versus just business normalizing? That's I guess question No. 1..

Hey, Andrew, this is Vijay. Let me take that. So I -- in terms of our familiarity with the business, which is where you started we spent a lot of time with the CTEH team and have a ton of respect for the leadership team there, and just are thrilled with not only how they're operating but how they're fitting into Montrose.

So I would characterize our familiarity as very high, and rapidly continuing to increase. Just an exceptional fit into Montrose. The reason I say that to you is I can say with full conviction that the concept of pull forward does not exist at CTEH, right? So it is a responsible business, right? By and large.

And so, the way to think about that business is a run rate of $60 million to $80 million per year business that has spikes off of that. And just as you have spiked up, you'll have some spikes down as you kind of roll quarter on quarter.

But over the course of the year, on a normalized basis, we think that they are the beneficiaries of long-term secular drivers like climate change-related events, and aging infrastructure. So in the context of the beat in Q1, the way I would characterize that is yes, it is substantial.

So if you kind of think about the 60 to 80 run rate on an annualized basis, you would think they would do $15 million to $20 million per quarter. And they were kind of well in excess of three times that level in Q1. And the COVID-related response work that drove that beat primarily drove that beat in Q1.

We expect to continue as we told you a couple of weeks ago through the first half of this year. But we think the business short of another environmental emergency. A response need begins to kind of look more normal in the Q3, Q4 timeframe..

Got it. And I guess, question No.2, I mean you just sort of went over very positive trends for your business. I assume that others in the industry are seeing similar trends.

So how does this change the M&A environment and conversations that you're having with potential targets? I'm wondering if you have to pull back away from some conversations as you know maybe targets are getting more and more optimistic. So how do you price in this optimism as you talk to put on larger acquisitions? Thank you..

So we -- in the context of larger acquisitions, we certainly are seeing what the broader market expectations are, so they tend to be fraught there. But that's really not what we do. Andrew, as you know, the vast majority candidly outside of CTEH, every transaction Montrose is really consummated.

It is much more of a smaller business that's very strategic and more of a bolt-on type strategy. And in that market, which is where we tend to play, we have not seen multiple accretions.

The sellers tend to be motivated by mission by a desire to grow their business to stay and integrate into the Montrose engine and that's where we built our reputation and where we see a ton of opportunity and given how fragmented the market is. That's where we hope to continue playing.

We think it's right for us where we are today in terms of strategy as well. So in the space where we want to be in the 10 plus million that we've signaled to you in the street, we don't anticipate shifting off of our legacy discipline around acquisition multiples.

But certainly for the larger deals and we've seen a fair amount of that come through valuation, expectations are very frothy and as a result, we probably will not play..

Our next question is from Tim Mulrooney of William Blair. Please state your question..

Two quick ones for you. On the leak detection business, I saw an article the other day where the Senate voted to restore some regulations around stricter monitoring on oil and gas emissions.

Does this have any near-term impact on that business? Do you think or is this just another regulatory change and kind of a long line of slow evolution toward better leak detection standards? And maybe this would be just a good opportunity to talk about how that business is faring year to date..

Yeah, let me take that Tim. So there's been a fair amount of activity around methane emissions, specifically in some of the restrictions that both Congress and the EPA are putting around various flaring rules, on methane leaks and methane mitigation.

And so, there's been a couple of bills I don't know exactly which one you referring to but in aggregate they are all very additive to our business. We've seen a lot of client engagement around this topic.

Some of the voluntary emissions reduction narratives that were in my opening remarks speak specifically to some of the demand driven by the types of initiatives you just cited. And as we look at 2019 versus '20 growth in that business in North America, and in the United States, and Canada.

And as we project forward into 2021, we remain quite bullish about what that business will do. And we think that that trend will continue into the foreseeable future. It is a simple example if you think about the recent press around the European shut down of American natural gas purchase.

Because of a lack of clarity around methane emissions reduction that type of effort obviously, resonates in the market or that type of action sorry, obviously, resonates in the market and it's something our customers here in the United States pay a lot of attention to.

And our capabilities around fence line monitoring, ambient monitoring, leak detection, quantification right this is where our integrated model really plays nicely. So if you're hearing optimism from us that's exactly what it is.

We think that these secular trends in that broader space are quite attractive that it's not just leaked detection for us, it's kind of our broader Air Quality Management business..

Right. Got it. And then if I could pivot, I was hoping to get a little bit more detail. Vijay, on your recent investments in I.T. and commercialization. I know you talked about this before, but I know it's an important area of focus for you right now.

Can you maybe walk through some of the more significant investments? And although it's early -- if you're seeing any initial benefits or what type of benefits you'd hope to see from these investments. I'm kind of thinking about addressing pricing and efficiencies or cross-selling for example. But, thank you..

Yeah. So let me -- look let me give you a very tangible example, Tim. And you know look at pricing, we've said this before the salesforce -- the CRM implementation will give us much more visibility and data to share with you over time, but it's going to take us a couple of quarters given we've just implemented at January 1 of this year.

It's going to the couple -- it's going to take a couple of quarters for the debt data to saturate and in a way that we can kind of quantify and reflect back to you. But one area where that investment in a CRM and in a system where our various experts can see what others are doing across our 5,000 customers.

Customers have resulted in a notable uptick in cross-selling across our segments. And so, we've been really encouraged by how the teams are starting to see collaboration opportunities and cross-selling opportunities.

And as a simple example, the recent acquisition of MSE by virtue of both the system and the way that business was integrated has resulted in just a flurry of activity across Remediation, testing measurement, permitting compliance, so on, and so forth.

And so as just a simple tangible example, there are at least a half dozen cross-sell opportunities that we talked about over the last couple of months that arose because of the way our teams were able to collaborate. Because of the investments, we made in the infrastructure and systems over a year ago.

We've added as we said to you kind of a little over a dozen business development personnel to supplement our cellar door model, and that's also starting to pay some attractive dividends for us.

It's just -- it's core to our system if you're really focused on one specific area to your point like leak detection and you're dealing with methane issues and the client's broader concern are the upcoming regulations shifting where the Congress is focused or the EPAs focused.

And you have to mitigate, it makes a kind of sense that our teams collaborate across our various service lines and that's what that teams meant to do. So we're seeing kind of again, a validation of our strategy and our model. The more and more we get visibility into where our folks are touching our clients across our business lines..

A great example of your integrated approach. Thank you, Vijay. Appreciate it..

Thanks, Tim..

Our next question is from Noelle Dilts of Stifel. Please state your question..

Hey. So my question is somewhat related to your conversation with Tim, but I'm curious how you're thinking about the market for sort of benchmarking, monitoring, and measuring greenhouse gas emissions.

I'm thinking about this from extending outside of utilities and heavy manufacturing and oil and gas into other industries given public policy and how society is pushing for a greener economy. Any thoughts on how that overall market could develop..

Gosh, that's a great question, Noelle. This is probably an answer that's going to warrant a much, much lengthier conversation. The -- that brought your broader question sets of an intersection of a couple of different and very related demand drivers within our client base right? There's the broader ESG push.

There's the carbon measurement mitigation, the race to net zero, and then the impact that renewables can have on that. And these are all different ways that a business can either reduce measure or mitigate their ongoing impact from carbon or climate perspective.

So as we look at where Montrose sits today, there's a host of opportunities within our advisory segment. Our assessment permitting response segment where we have -- where we are and this is where a lot of our recruiting energy has been in terms of bringing experts and expertise in-house.

And these are folks helping boards and sea suites figure out how to think about some of these issues where to set the bench eventually the baseline or the benchmark right? So what is point zero? How do I compare it to where others are and then where do I want to be given some of the commitments that have been made publicly? And then that feeds beautifully into our testing business like some of what we talked with Tim, Noel? And that can come in many different forms, right? The historical regulatory-driven differentiation between source emissions and leaks, and fence line monitoring, and ambient air monitoring start to blend as folks begin to assess comprehensively across their facility or production cycle where their carbon footprint is coming from.

And then, on the remediation side, some of the work in the renewable energy space can serve as an offset. And then, there are various other technologies that can be used to capture. For example, some of the emissions so we are kind of sitting beautifully across all three.

But we -- but I want to be careful to state that we have yet to formalize a product that specifically helps address a singular need in a climate have.

For example, a need that says, I want to get to net-zero by 2035, can you help me do that? So the elements are certainly there, but we're in the process over the next year or two to formalize that in a way where it can be a little bit more of a turnkey solution, specifically targeting the questions coming from our customers.

But we are actively involved in many many projects, both at discussion stages and also fully an implementation where folks are either voluntarily saying, "look, I have to begin to measure my emissions and my carbon footprints", at least get a baseline and so that the boards and sea suites can then begin to achieve their targets.

And then others saying, help us formulate a plan to get us there. So it's kind of that ambiguity or you're sensing for my answer is a function of a rapidly evolving marketplace with no defined kind of end goal yet..

Right, okay.

Does that make sense, Noelle?.

Yes, it does. In terms of where you sit and where you might be looking to go with that. Great. But yeah, that's great. My second question is a little bit simpler. But I think we're getting starting to get a somewhat better sense of what an infrastructure bill could look like.

When you look at some of the proposals within the bill, maybe you could touch on where you think are the areas that could potentially have the most impact on Montrose. Perhaps around PFAS or any of the other energy initiatives? That would be great..

The two areas where we actually are seeing the most impact are not in our Remediation and Reuse segment though. Certainly, there are some of the Brownfield reclamation and some of the increase in spending around cleanup. We certainly anticipate that we're starting to see that.

But most of the opportunity for us that we've seen given what's already come down the pike is on the assessment side. So this was the comp -- these are the comments I made related to the NEPA and CEQA assessments that our teams do, and the eco-services work that our teams do, Noelle.

So more on the advisory what is the impact of some of these changes or if I'm building a new road or a bridge? How do I assess? What environmental impact is it? So we're seeing an impact within our EP and our segment. And then, the results and testing work that comes with that, we're seeing an impact there as well.

Let's at this point, on the remediation side that we certainly expect that as that ticks up and as the spend begins to increase and formally roll out. And this obviously, will take some time over the next couple of years, we expect to see some nice tailwinds within our remediation segment as well.

And then, look, it's not just that in from even the COVID relief bill for example had some elements there around industrial hygiene, wastewater treatment, right sanitation, and so there were elements of that that are again adjacent to the spaces in, which Montrose Place. It's very hard to predict exactly how governments spend will roll out.

But if there's one theme that's pretty consistent for us it's that there are clearly tailwinds that are going to get created as a result. But we have yet to really fully see that. That's not baked into our numbers nor is it baked into our projections just to be explicitly clear about that..

Our next question is from Stephanie Yee of JP Morgan. Please state your question..

I just had a question on -- It's just a clarification question really on the Remediation segment.

So, I wonder if you can give an idea of how much of the growth in the first quarter was due to the acquisition of MSE and whether it's the low margins that were seen in the first quarter it's really because you've been making investments upfront like in PFAS and with restricted travel to Europe and Australia still you're not able to get your people out there.

And so maybe the margin pickup, we would expect from that segment would be more back-half weighted as kind of the COVID situation gets more under control in Europe and Australia?.

Yeah. Let me take that Stephanie. Let me answer the second part of your question. First, you're exactly right. The inability to travel is certainly having an impact. Recall, we're still comparing a COVID impact to quarter with a non-COVID impact to quarter and the Remediation Reuse segment has been impacted more so than the other two segments.

And yes, we certainly have maintained the capacity and capability in that segment. Just given the expertise, we have in-house and the very strong belief. We have in the future growth in this particular segment. So those margins toward the back end of this year, you should start to see a tick up.

What we've said is on a long-term basis this particular segment should run on a low 20% to 25% margins. We want to get there this year, but in the back half of this year, you'll see us start to tick up closer to those levels. On your first question, MSE contributed $4 million to EBITDA in that particular segment. And then, the rest was organic..

Of revenue..

Of revenue sorry, of revenue and the balance was organic growth..

Ok. Perfect. And then also clarification on your CRM system and the salespeople. I know Vijay you just mentioned you've added a dozen or so business development people. I was wondering if you guys divide up -- how they're oriented.

Are they focused by industry or by the three segments of your business to kind of promote cross-selling? If you can comment on the structure and how -- yeah, just what their expertise is in order to kind of further penetrate the client base?.

So, it's kind of -- it's a two-prong strategy, Stephanie. And so we're not gonna be adding a ton of headcount for this. But the purpose of adding to that team.

Step 1, was to facilitate our cellar door model right?. The inherent risk or weakness in a cellar door business model is that when you're busy doing it, it's harder to sell.

And so we wanted to supplement existing teams where we saw a ton of tailwinds like some of the leak detection or methane mitigation work that we were talking about with Tim and Noelle.

We wanted experts in that space to further penetrate in areas where we think some of our technology advantages that we've talked about with you before will play nicely. So these are folks targeted at that specific client base.

But the broader push is not only to supplement or support our cellar doors but as importantly, if not, more importantly, to collaborate across our service lines.

Right? When you're a deep technical expert at dealing with or solving a technical problem for a customer you tend to be an advanced scientist or an engineer, and you tend to be less comfortable speaking about technical areas where you may not have as much expertise.

And so the hope was, as we added some of these folks they could help facilitate those conversations and introduce the right experts into the mix as needed for customers so that our integrated offering seemed more of a turnkey solution.

And so that longer-term strategy is really what this is all about, and we are just in the early, early stages of putting that in place. So just to be explicit about answering your question, the vast majority of that dozen or so that we've added are right now allocated at the business line level.

But their managers have been specifically mandated to connect the dots so to speak across our service lines. One of the disadvantages of being kind of one of the first movers in this fragmented market is we're playing in the fragmented market right? So for us on fragmented, we have to shift the dialogue with the customer.

But we're seeing some really nice early indications of that. And I'm excited going back to the earlier questions around giving more data from the CRM this time next year. Sharing some explicit examples of that with you. We already have a few, just to a preliminary to really talk about it.

Does that make sense?.

Yeah. Yeah, that's super helpful. Thank you..

Our next question is from Jim Ricchiuti of Needham & Company. Please state your question..

Hi. The follow-up is related to what you're seeing from your clients in terms of how they're responding to some of the changing regulatory actions whether it's at the state or federal level. What I'm wondering is, if that's causing you to look at your M&A pipeline a little differently in terms of where you might be looking to put resources..

It's a great question, Jim. And the short answer is, yes. The -- It's a rapidly evolving and dynamic regulatory landscape. And obviously, there's always and we've said this to you before, just as a shift to the downside doesn't necessarily result in a lot of lost business.

The introduction of new regulations continues -- will likely get challenged, litigated, and modified. But it's a signal for our client and for us as to where the market's moving. And so as we begin to start to see some of these rules unfold on the more tactical level right, increased NAAQS standards or an unwind of a prior stay on a regulation.

Those are easy. Those are expected, and those don't really -- clients are already accustomed to those types of changes and that increases demand that we can respond to it.

But what some of these newer community monitoring mandates or voluntary reductions exactly how they're framed, how they're communicated, and how they're quantified is not fully fleshed out. And so that for example will change areas where we may look to acquire talent or technology capabilities or software capabilities for example.

So it is absolutely impacting where Jose and the strategy team are focused, both on the M&A side and also on the recruiting side.

And we're pretty -- I would say in the immediate term two areas of focus for us is the better capability on the testing side, given some of the new regulations, we're seeing from administrator Reagan and his priorities and bolstering our eco services capabilities.

Those are -- we anticipate areas that we just need to continue to bolster not only our internal ability but more broadly the offerings we provide to our clients. And so that's a little bit of a pivot from where we had historically looked. But we think again very consistent, very additive with our vertically integrated strategy..

That's helpful. And the last question I had is just as relates to what you've seen with CTEH in the last couple of quarters. And I realized some of that business is not necessarily going to lend itself to your other businesses. But I have to believe within that client base that's been utilizing CTEH more slowly.

There are increased cross-selling benefits from the experience. And some of these clients have had with them in the last couple of quarters..

That's right. That's right.

Some of the -- some of what we alluded to on the last earnings call, Jim that the -- our increased footprint in the technology media telecom industry for example is a function of some of the efforts and the success that our colleagues at the CTEH team have had, and that represents a host of new conversations that we can have as a collective combined team with those organizations.

And part of the challenge candidly is, they are doing such a great job that they are just all out right now, right? The bandwidth the capacity to take on new conversations and work is strained. It's limited and that team's been working really hard and clearly, from the results you can see over the last couple of quarters have had exceptional success.

But that comes at a cost to employee fatigue and morale. And so, we absolutely long term see excitement and opportunity in terms of being able to cross-sell. We just have to take it one step at a time.

Hopefully, give them a chance to catch their breath in the back half of this year, and then we can begin to update cadence on some of the dialogue with their leadership team and our business development team..

We have reached the end of the Q&A session. I will now turn the call back over to Vijay Manthripragada for closing remarks..

Thanks all. Thank you, again for joining us today. We really appreciate all of your support and look forward to sharing more continued progress and success over the coming quarters. Thank you for your time. Stay well. Be safe, and talk to you soon..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great rest of your day..