Thank you for standing by. This is the conference operator. Welcome to the Montrose Environmental Group, Inc. Third Quarter 2021 Earnings Call. As a reminder, the conference is being recorded. . I would now like to turn the conference over to Rodny Nacier, Investor Relations. Please go ahead.

Thank you, operator. Welcome to our third 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 Investors section of the Montrose Environmental website. Our earnings release is also available on the website. Moving to Slide 2. I would like to remind everyone that today's call will include forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ in a material way due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook. We refer you to our recent SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2020, 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. In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA and adjusted EBITDA margins. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix of 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 thereof to their most directly comparable GAAP measure. With that, I would now like to turn the call over to Vijay beginning on Slide 4.

Thank you, Rodny, and welcome to all of you who are joining us today. I'm going to provide you with a few business highlights and then hand it over to Allan Dicks for our financial review, and then we'll both open it up to Q&A. I will speak generally the Pages 4 through 8 of the presentation that all of you have and that we've shared publicly. And let me start by saying the positive momentum in our business continued with our solid third quarter results. These results are due to the efforts of our team members who are working tirelessly to serve our clients. And without their efforts and unwavering support of each other, we would not have been able to meet our clients' growing demand for our environmental solutions and achieved another quarter of record results. To all of you from Montrose listening, these results belong to you. Thank you very, very much. As we've discussed on previous calls, I would like to highlight our perspective on quarterly results and how we view our business. Since our environmental services don't map neatly to fiscal quarters and as we have already demonstrated during our short tenure as a public company, Montrose is best assessed and managed on an annual basis. We manage our business on annual trends and annual expectations, and we urge you to do the same. Given our strong results in the first 9 months of 2021, we have already exceeded our previously noted full year 2021 objective of over 20% annual base business revenue growth and in addition, despite substantial investments to support our continued scaling and the unwinding of COVID-related defensiveness that we implemented in 2020, as we shared on earlier updates to you, EBITDA in the first 9 months of 2021 is already 10%…

Thank you, Vijay. Our strong performance in the third quarter and year-to-date reflects the regulatory themes we've discussed since our IPO come into fruition as the need for environmental remediation and monitoring, particularly for PFAS, gains momentum across the globe. Our resilient core business continues to grow, and we continue to execute on our M&A strategy with the recent closing of our sixth acquisition in 2021. In addition, we further strengthened our capacity for growth through the successful completion of our follow-on equity offering in October. Moving to our revenue performance on Slide 10. We continue to drive strong growth across our business. Our third quarter revenue increased 57% to $132.6 million compared to the prior year quarter. Year-to-date, revenues were up 83% versus the prior year period to $402.6 million. The primary driver of revenue growth in the quarter was organic growth in our CTEH emergency response business and our remediation and Reuse segment, largely offset by an expected decrease in revenues in our Measurement and Analysis segment. Revenue growth also benefited from the acquisitions of MSE in January 2021, Vista in June 2021 and Environmental Intelligence in July 2021. The business drivers were similar for the year-to-date period, and it also included the benefit of a full period of results or CTEH, which was acquired in April 2020. As mentioned on prior calls, we completed the process of discontinuing service lines early in the second quarter of 2020, which partially offset our year-to-date comparisons. Excluding this continued service lines, revenues would have increased 87% year-to-date. I would also like to reiterate that we generally don't focus on organic growth on a quarterly basis as year-over-year quarterly comparisons can be misleading. That being said, we are seeing strong organic growth in 2021, excluding contributions of CTEH and on the…

. The first question is from Andrew Obin from Bank of America.

This is Emily Shu on for Andrew Obin. So yes, my first question is just if you could provide any detail and color on CTEH's performance next -- in 4Q and next year, given expected normalization of color-related work, that would be great. So should CTEH covered related work in 4Q would be similar to 3Q? Or do you expect a bit of a step down? And then also how much of that normalized run rate do you expect to be COVID work next year?

Yes. Emily, this is Vijay. It's really -- and we've said this to you before, it's really hard to predict what the pandemic related or response-related work will be. Let me reframe kind of how we think about our CTEH set of opportunities. For all the reasons we've shared with you before, a bigger market share, more incidents, more services and kind of an expanded team. We think they're really well positioned to continue performing at or above kind of our $75 million to $95 million per year revenue run rate. We currently anticipate at least through the winter that the COVID-related work will continue. We -- it's really hard to predict exactly when that's going to ebb and flow. And part of the reason it's difficult to predict is because there's ongoing fluctuation in regulations. You saw what the Biden administration did with vaccines and testing. OSHA rules came out some of the court stayed some of that. So our clients, including Montrose, struggle a little bit with exactly how to implement all of that. And the CTEH team, of course, with their experience and expertise is really well positioned to advise folks through that. And for all those reasons, it's really hard to predict exactly when it's going to start and stop. But I think what I can share with you and the confidence, Allan and I have leading into the back half of this year or actually to the end of this year, the first half of next, is that we do anticipate they'll remain elevated, just the magnitude of which is going to be very hard to predict at this stage. Does that answer your question?

Yes, that's great. And then just a follow-up question on Measurement and Analysis. Just curious what drove the postponement in projects in the third quarter. Is that just customers delaying projects because of uncertainty around inflation and labor availability? Or is there something else to it?

No, there's really nothing else to it. It's just the nature of the work. I think I've said this to you. When you do these tests and you do them once a year, for example, whether you do it in June or July is meaningless to the client. And to Montrose, but it means a lot to folks that measure us on fiscal quarters. So if you move from September to October or something that pushed from Q3 to Q4, there is no material impact from our clients' perspective or from Montrose's perspective, which is why we keep saying quarterly does not make sense to measure Montrose. So there's nothing untoward in the business. We remain very bullish on it.

. The next question is from Tim Mulrooney from William Blair.

Two questions for me. The first is on your guide. Your full year guide implies fourth quarter adjusted EBITDA of about $18 million at the midpoint which is about flat with last year. Is that primarily because of the difficult comparison with CTEH last year? Or are there other factors that we might want to take into account as well?

There's certainly -- Tim, this is Alan. CTEH did $45 million of revenue in the back -- in the quarter of 2020. So we're certainly elevated, you're right, so the comparisons in terms of what we forecast are about flat for CTEH. And then we've bought the public company costs that are higher this year. You've got the unwinding of some of the cost mitigation efforts that were in place for all of last year. So yes, that's a big part of it. But the organic growth on the revenue side, as we mentioned in our prepared remarks, are accelerating. And so we expect on the revenue side to be a very favorable comparison year-over-year.

You know what, Allan, I forgot about the cost mitigation efforts and those costs coming back in. So that makes a lot of sense. And then I wanted to ask about CTEH revenue. If the step-up in CTEH revenue in the third quarter was primarily pandemic response-related revenue or if there was any -- Was there any step-up in disaster response related revenue from Hurricane Ida down in Louisiana. I heard that there was some petrochemical infrastructure that was taken out of commission for a while. So I didn't know if there was other things here, also adding to CTEH's revenue stream? Or I mean, it sounds like from your prepared remarks that it's a lot -- almost all of it sounds to be pandemic-related.

No. No. Tim, sorry. And perhaps we don't do it justice. The team does a fantastic job of having a pretty broad response portfolio. And so there's many, many incidents and clients and projects that contribute to their aggregate performance. And so yes, there is some hurricane response, there will be some oil spill response. And this goes to my earlier comments, they are -- because of their market-leading position, because there's more incidents or events that result in environmental emergencies because they have more market share because they have more services because they have more people, they're able to serve our clients across our broader portfolio. So all of the above applies. And the reason we talk about the pandemic so much is because -- If you think about the $75 million to $95 million in run rate, they've done 190 year-to-date, right, plus/minus. And so a lot of that excess in aggregate over time is due to the pandemic-related services. And that's why we talk about it, but please don't hear us say that that's all it is. There's a very robust team here across industrial hygiene, health and safety, toxicology, emergency response, disaster recovery, we are serving our clients across kind of a broad portfolio of services.

The next question is from Noelle Dilts from Stifel.

Congrats on the quarter.

Thanks.

So I was -- sorry, go ahead. So I was hoping that you could comment on some of the more emerging markets you've talked about in the past, things like biogas and carbon capture. And if you could sort of frame how you're thinking about those opportunities into next year and if you're seeing any areas of particular acceleration as we look out over the next few years?

That's a great question, Noelle. And we often don't spend time with you on it, but it's a large part of why I'm really optimistic. So on the biogas space, as we think kind of more geopolitically and macro markets, any transition, which is clearly the signal we're getting from the political sphere, any transition in kind of energy markets is going to necessitate some degree of transition with natural gas being a big part of it. And that, coupled with the fact that biogas is negative carbon intensity energy we think, is driving continued demand from the client side. And so our clients certainly are asking for a lot more. We are seeing a lot more market opportunity. And the team is doing more. And as a result, that is a big part of the organic growth that you see in the Remediation and Reuse segment. It's why we're seeing organic growth acceleration. You can kind of back into the fact that we're now effectively projecting low double-digit organic with potential for upside into Q4 for the year. So we are seeing sustained demand there, and we think there's some macro factors that play on the biogas side. Carbon capture, we don't generate and don't anticipate generating any revenue in the immediate term. That is an area our research and development team is actively involved in. They're making some nice inroads but it's way too early, Noelle, to speak about the impact of that on our P&L. That is an area that we are implicitly and explicitly involved in. Water and the water infrastructure market, and especially now with the infrastructure bill, there's increased dollars at play around remediation and PFAS treatment in particular. And then obviously, allocations also have some of that. So we see a lot of…

That that's great. Super thorough. Really quick somewhat related follow-up question. With Horizon, you mentioned that they're helping you take a more proactive approach to the water markets. I guess I've always thought Montrose had a pretty proactive approach. So could you just expand on what you mean by that and just the strategic importance there?

Yes. They're on our advisory side, right? So they help folks think about the regulation, the various capital dollars at play, especially with something like the infrastructure bill, which has a fair amount of highly nuanced pockets are related to that, resiliency, treatment, infrastructure upgrades. And so our existing water treatment technology and portfolio, Noelle, is really around PFAS remediation primarily, right? So we are helping mostly industrial clients and DoD clients treat water contaminated with PFAS. Horizon is much broader in terms of how they think about ecological services and water. And so they will give us fantastic insights into other ways to cross-sell services, but also potentially penetrate new water markets given some of the advantages that we have. So that's what I meant by that.

The next question is from Chris Granda from Needham & Company.

This is Chris on for Jim. Congrats on the results.

Thank you.

It sounds like there's a pretty rich pipeline of M&A opportunities. And with the capital raise, should we expect a faster pace of M&A? And do you expect the profile of the types of deals that you're doing to change in terms of the size and the rationale? Or should we expect a continuation of the strategy?

Yes, Chris, this is Vijay. We are not changing our strategy. We think what we've been doing works, and we hope to continue doing more of the same. We are really well positioned to be opportunistic, and that's what the capital raise was intended to provide. Yes, the pipeline remains really rich and candidly, look, the market timely fragmented. So we've said this before. There's been no dirt of assets. There's certainly more of them now that have come to market. But the market valuation expectations also are really frothy. So we're going to remain disciplined you can see that we're still buying at the mid- to high single-digit multiples, Chris, and that discipline is important because we are thinking longer term. So for all those reasons, please don't expect us, and please don't hear us say we're changing our strategy. We think there's some really attractive opportunities for capital deployment here, not just M&A but also for organic growth, and we certainly anticipate deploying it proactively. You've seen us do it well so far. So I promise you, we intend to continue doing it well going forward.

Perfect. That's very helpful. And with the passage of the infrastructure bill, have you seen any changes yet or anything materialize with respect to clients that might try to be getting out in front of what's coming down the pike over the next couple of years? And you have a sense of when you could anticipate having greater insight into which areas of the business will be most affected by the bill?

Yes. I think it's a bit early. Look, candidly, I think the expectation was that this bill would pass exactly which pieces were always in the air a little bit given some of the activities in Congress. But we certainly, and I believe our clients mostly anticipated this would come through. And so there's been no real immediate change. It's going to take some time for some of that to flow its way through the system, Chris. The part of our business that we expect will be most impacted by this in a positive way, our Assessment and Permitting teams. And so as you kind of build infrastructure or even decommission or downgrade or change operations, you often need environmental assessments and permits and the like. And so we expect to see continued demand and increase in demand due to this within our AP&R segment. Testing needs often go up as a result. And then the infrastructure build also had remediation dollars in it. So I expect that our soil remediation practice will benefit from some of the activity, the super fun brown field and broader remediation markets are starting to pick up steam as well. So we're going to see, I expect across the board benefits from Montrose, but it's too early to call out at this point.

This concludes the question-and-answer session. I would like to turn the conference back over to Vijay Manthripragada for any closing remarks.

Thank you all very much for making the time. We really do appreciate it. We appreciate your continued support of Montrose. Take care, be well out there. Allan and I have been the beneficiaries a very gracious set of hosts here in Little Rock with our CTEH team, and we're really excited about the prospects going into next year. And in gratitude to the CTEH team, we'd just like to close by saying go Hogs . Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.