Okay, good afternoon. Welcome, I'm Durgesh Chopra. I'm the lead power and utilities analyst at Evercore ISI, also covering E&C companies, and this is the last presentation of the day. We're delighted to have Montrose Environmental Group joining us for this presentation. From the Montrose team, we have presenting Vijay Manthripragada, President and CEO, and Allan Dicks, Chief Financial Officer. So with no further ado, Vijay, I'm going to turn it over to you.
That sounds great, Durgesh. Thank you so much. It's wonderful to see all of you, and I know it's late today, so really appreciate you guys being here. Before we kind of go into the presentation, I thought it'd be helpful for Allan and I to share a little bit of our mindset and our approach, so you have the narrative behind the Montrose story. Our purpose at Montrose, or our goal, is really to support economic development and human development and growth, while simultaneously helping steward the environment and having a positive impact on the environment. So what that means practically, and as you go through the presentation, hopefully, you'll see this, is that all of our activities ultimately have to meet two criteria.
The first is that it has to have we have to help or have a positive impact on environmental stewardship, and the second is that it's got to be commercially viable and scalable, meaning the services we provide our clients need to want to have to pay for it. And so as we present our story, as we present our narrative around revenue and earnings and cash flow, please know that all of it is anchored on our efforts around environmental stewardship. Because at core, Montrose is a mission-driven business. It's why our employees join us and stay with us. It's why most of our acquisition introductions, which are all word-of-mouth and warm introductions, are anchored on the environmental mission.
It's why many of our clients want to know what we're doing in this space before they kind of agree to partner up with us. And so we're really thrilled about that. That's core to kind of how we think, but we wanted to make sure we shared that with you. So with that, why don't I jump into the presentation, and we can just kind of...
Is there a clicker? Would you mind just going forward one?
We'll kind of just give you a couple of highlights. And before you, I'm not going to read through the slide in detail, but just wanted to give you a little bit of a history as to where the firm came from. We were incorporated in 2012, and we got off the ground in 2013.
So we're about a little over a 10-year-old business. In 2015, to give you a sense of our trajectory, we were doing around a little under $100 million of revenue in 30 locations in the United States. In 2020, we went public. We were doing around, you know, $250 million of revenue, 60 locations in a couple of countries. And today, four years later, we're a $700+ million revenue business in 120 locations in Europe, North America, and Australia. And we have clear line of sight to well north of $1 billion, which is really exciting, so it's been a fantastic ride for us. And as Allan reminds me, we're often luckier than we are smart.
A lot of that has to do with the fact that we're in a large and growing addressable market. So as you think about water issues and water stewardship, getting water treated and back to communities, the impact of pollution on climate, greenhouse gases, measuring and mitigating them, dealing with waste, converting it into either energy or other resources, these are all themes that are very applicable to our business. And what we're learning over time is the demand is there, demand is growing, and because of the unique way we approach it, we're able to meet that demand cycle or innovate to capture more of it. So in terms of some of these highlights, today we're around 3,000 employees in the U.S., Australia, the Nordic countries, and Canada.
On the far right there, you can see that number is actually now 18. We are a technology-driven business. Research and development is core to how we operate. We have 18 patents and nine more pending, all in the environmental arena and various topics that I'll talk about in a second. The business has been growing since IPO, around 30%-35% annualized, about half of which is organic on average. And that is in large part driven by the fact that our revenue is very sticky, it's recurring, and we're able to drive growth by penetrating into our existing customer base more because we have a very low wallet share today relative to what we think we could have.
We guided this year to just shy of $100 million in EBITDA, and the reason we anchor on that is it's ultimately about cash flow for us. It's a very cash-generative business. Last year, we converted about 70% of that to operating cash flow, and then it's a capital-light business. Only about 1%-1.5% of revenue is maintenance CapEx, and so the rest of it is our investment in growth. And so this is not only a mission-driven business, but it's a very cash-generative business, which we're really excited about. Do you want to take the next?
Yep. All right.
Do you want me to touch a little bit on the analogy element?
Yeah
Before we talk about segments
So, if you flip over to the next slide, on slide five, in terms of our business model, the consultants that have studied us and our approach have described us as a vertically integrated business. And what that means from a practical perspective is that we're kind of answering three questions that our clients ask. The first question is, you know, "What is my environmental risk or opportunity?" And so that's our advisory segment. "If you have a risk or opportunity in the environmental space, can you help me measure it? Where am I today, where do I need to go, and how can I validate or verify that I indeed achieved it?" That's our testing business.
If you have a risk or opportunity, and you can measure it, can you help me fix it?" That's our treatment business. This is an important point that I just want to make sure I convey clearly. Having advisory expertise with consultants and toxicologists and regulatory experts partnered or coupled with physical labs and field teams that can actually measure contaminants accurately in a regulatorily accepted way, also partnered with an IP portfolio, technology and software portfolio, is a powerful combination that doesn't really exist in the market. The reason we did it when we built the business is because we felt like we needed channel control to optimize outcomes and to optimize quality.
The analogy we always like to use, it's a little bit like human healthcare, where your primary care physician are like the advisory experts, the labs are like the X-rays and the phlebotomists, and the treatment solutions are like the surgeons and those prescribing medicines. You want that coordinated to optimize your health outcome. The environment, similarly, if you think of it as an interconnected organism, the outcomes are optimized. We're able to coordinate that care. So that's why we've organized the business the way we have: advisory, testing, treatment. And I'll let Allan talk a little bit more about what that how that manifests in terms of our public reporting.
Great. So in terms of the assessment, permitting, and response or advisory segment, we're doing high-end consulting work, dealing with very high levels of client relationships, which helps the recurring nature of the business. It's rare in the industry for relationships to change, absent a quality lapse or a safety lapse. We're also doing environmental audits and permitting, and we also have a very large environmental emergency response business within this segment. So there are some key statistics. We respond to over 200 environmental emergencies a year, some of which are small, might go on for a week. Others, like the Norfolk Southern derailment in East Palestine, can go on for 12 months plus.
In terms of our measurement and analysis segment, or our testing segment, here we have field-based teams, measuring things like, methane emissions. We have physical labs that'll test air, soil, water, for various, contaminants. And we have our, EDP business or real-time, monitoring business using proprietary software, and tools. Within that business, we have nine physical labs, and, or have only two of 28, DOD PFAS-accredited labs in the country. And then finally, our remediation and reuse segment, is, around water treatment, particularly for PFAS and other emerging contaminants, and we also have, an environmental, engineering and consulting business. That's the largest addressable market, and where we expect to see the most growth, over the next three to five years.
The 17 or now 18 patents that we have are all within this particular segment, and we expect that patent portfolio to continue to grow. Our revenue breaks down approximately a third across those segments today. Again, within our assessment, permitting, and response segment, we are helping solve very complex environmental challenges and helping clients navigate the changing environmental regulations. The segment margins run at scale at 20%-25%. We ran at 24% in 2023, so that's a very healthy business, has seen a ton of growth over the last four or five years.
The emergency response business, you'll see in that bottom, left-hand chart, is the gray bar, has certainly added some revenue volatility to that segment, but it has proven to be highly synergistic, in their ability to cross-sell the broad suite of Montrose environmental services into these large responses has been very additive. That emergency response business is expected to be less than 10% of consolidated revenue in 2024, so it's certainly shrinking as a percentage, but it's still highly additive. In terms of our measurement and analysis segment, this is the most mature of our three segments. It's where the business started. Those margins are mature. They should run 18%-20%. They ran at 19%. That margin compares very favorably with the very large European TICC companies, has seen good growth.
That business grew at 17%, organic rates, in 2023 and will grow in the low teens in 2024. So despite being mature, we're still seeing some really nice growth from some of the niche service lines we have within that business. Just going back to the assessment, permitting, and response, that business grew at 24% organically in 2023 and is expected to grow in the mid-teens organically in 2024. And then finally, remediation and reuse, the least mature of the three segments, as I mentioned, by far the largest addressable market. The margins there are certainly immature. They ran at 13% in 2023. That margin was exacerbated by an acquisition we did called Matrix, which we'll talk about in a few slides, that was running at 4% margins.
We expect that given our intellectual property, differentiation in that segment, that margins will grow at scale to 20%-25%.
I think the one other point that's worth noting is that in each of the segments, even though in some were mature, as Allan noted, right on the advisory and on the testing and our margin profile is mature, we're still a rounding error, in terms of the overall market opportunity.
In each, we have thousands of firms that are our primary competition, but also our M&A pipeline. Even though the treatment part of our business is the largest TAM. We have plenty of room, both organically and inorganically, to grow into each of these and continue to grow into each of these, and so we're pretty excited about that. The other point that's worth noting, if you flip to the next slide, is that, we're not just integrating, because we want channel control and because we can optimize outcomes, but arguably more importantly, because our clients are telling us they really need it. This was a survey conducted by a third party of over 500 companies, most of whom were not Montrose's clients, and there's two takeaways here.
One is 73% were extremely interested in an integrated solution, which makes sense because they're dealing with dozens upon dozens of vendors and sub-vendors by virtue of how regulations have evolved over time, which is frustrating for a lot of these firms, especially now that they're reporting on these environmental metrics publicly for a host of reasons. The other stat that we didn't love, but was eye-opening for us, is that 81% were unaware of where to find one. And so what that tells us is that all of this growth that we've talked about is despite the fact that we're still largely unknown in the market. The market doesn't know we exist.
Clients are saying they need our solution set, but we've done a poor job of really increasing brand awareness, and so this, again, creates some really nice white space for us, as we think about future opportunities and opportunities to grow. We're in the right place at the right time. We're just not known as well as we should be, and that's on us to improve. One way that manifests itself is because of our integrated model and because of our ability to deploy research and development to solve problems that our clients are telling us they need us to help solve. This is an example of how that manifested itself. So this is a large multinational, and they were removing PFAS, the forever chemicals from water, by virtue of liability and public pressure that they were facing.
And what they basically said to us is, "It's not working. We're under fire. The government is really upset, and we're not able to get the PFAS out in a sustainable way. And the public is seeing the waste being generated, they're seeing the amount of money being spent, and they're seeing that the PFAS is not coming out. So no one's happy. Can you help us figure it out?" So our team, this was the initiation of some of our early IP development. We developed regenerable ion exchange resins, and you can see on the chart on the far left, you don't want that number anywhere above zero, right? Because it's called a breakthrough curve.
So what it basically means is you've got water with PFAS coming through it, and how much do you detect on the other end once it goes through the system? You can see they were using activated carbon prior to us, and it was breaking through early. It's that second line with the little stub at the bottom there. Then the one that says zero is a system that we developed. So efficacy was an issue that our team solved. The life cycle cost of the solution was much lower. This mattered a lot.
Then that bottom left was a critical component, which is the public was very upset about the amount of waste being generated and getting carted offsite, and we were able to treat billions of gallons or liters of water, and we have yet to take any waste offsite, to give you a sense for how rapidly we concentrate the effluent. Then because the system is much smaller and easier to operate, there's a safety benefit as well, which really mattered to the client. So this is an example of how we're able to deploy the science in a practical way to address a client need, and this is partially because of our integrated model. Our labs could help measure and test in real time, and then our engineers could apply the IP to a practical, real world, real-world solution.
We got this question a lot today, so I'll touch on kinda why we are so bullish or optimistic, I should say, on our near-term and long-term outlook, and it's really because our business is anchored on five key themes. The first, on the far left, is that our existing clients and our revenue base is really sticky, right? So it's a sticky client base, which is wonderful for us. It's an honor, and we also have a very diverse client base, which de-risks the business quite materially, and I'll talk about that in a second. On top of that, because of our integrated model, our solution set increases our stickiness, which allows us to provide more services, which allows us to accelerate our integration.
It's a fantastic flywheel that has become a reality for us, and that's manifested as, as I talked about earlier, with the percentage of our revenue that's coming from clients buying more than one service, and that's really the core reason why our organic growth has remained accelerated relative to both the market and what our historical rates are. The third reason is because we're in a large and growing market, and that's independent of us. As you think about all the factors we talked about earlier, there's a really nice tailwind now in this industry that we're able to participate in.
And what's exciting for us is, because of our 18 patents and nine pending and our software capabilities, because of this technology focus, we're able to capture more wallet share and create more value, which is accelerating that growth in an already large and growing market. And we're able to use acquisitions. We tend to buy companies, it's mostly bolt-ons, at mid to high single-digit EBITDA multiples, which is very accretive financially. But they're also very accretive to our strategy and our business, as you can see from our historical organic growth cadence, which is accelerated by the fact that we can bolt these acquisitions on that are very additive.
And so if you put these five levers together, we have the opportunity to moderate where we focus and where we don't, but continue to take advantage of this fantastic market opportunity ahead of us. So let me touch on some of these quickly, and then we can-
Yeah
. hop to the financials. Do you wanna-
Do you wanna take this?
Yeah.
Yeah. So in terms of the diversification of our revenue base, almost 90% of our revenue in 2023 was from the private sector, and the remaining 10% was from municipal, State, Federal and Foreign governments. In terms of the private sector, we don't really have any large end market concentration or risk. We don't have any individual customer risks over 6,000 customers.
And again, a lot of that revenue comes back year in, year out, as evidenced by the right-hand side of this chart, which is 96% of revenue from clients in the prior year coming back the following year. And we don't lose that other 4%. That's largely the long tail of clients that might need a phase I permit done one year and not need it the next year. As we look across our top 200 customers, that statistic is 99.5% came back in 2023, so very, very high retention rate.
In terms of resilience to both political and economic cycles, the company was started during the Obama administration. During both that administration, that timeframe, and the Trump timeframe through IPO, which was in the middle of 2020, we had grown 7% organically in a market growing 2%-3%. In 2020, where the economy largely shut down, the EPA pulled back on a lot of the enforcement of regulations. We grew 4%. The industry shrank that year, and subsequent to 2020, our organic growth rate has been 15%. Again, well in excess of industry growth rates, and we're calling for a 10%-12% organic growth rate in 2024.
Part of that was impacted by the fact that, again, as I mentioned, we're kind of a young business. We didn't have a CRM or a commercial department. And so we built that out over the course of 2020 and 2021, and we're kind of harvesting the benefits of that investment now. The concept of flywheel effect, which I talked about earlier, which is on this slide, is very real for us. At IPO, less than a couple of single-digit % of our customers were purchasing more than one of our services. And so our commercial focus has been on deepening, as I said earlier, our wallet share with our existing customer base. And today, that percent a nd our goal at IPO is to get that number up to 50% over a five-seven-year horizon.
We're a little bit ahead of plan. We've already achieved it as of last year. So 51% of our customers are buying more than one Montrose service. What's really exciting for us about that metric is that's more than one service. So if now they purchase two or three or four or five, the percentage doesn't move, but our cross-selling revenue obviously continues to accelerate. That this dynamic and the fact that our integration fuels the cross-selling, which allows us to see more problems, which allows us to integrate further, it reduces our cost of customer acquisition and drives our organic growth. And as we look forward, a couple of years, without acquiring any new customers, we have a lot of conviction in our ability to continue to drive the growth profile that we're seeing today.
The next slide kind of illustrates this as a great example. This is a Fortune 100 client in the energy space. If you look over on the right-hand side, it started off as an air testing client of ours, and the timeframe goes kind of beyond what's on this chart, which is why the color is a little different. But we then migrated to providing them more physical lab services, and then methane emissions and leak detection, and then moved on to ambient air measurement. They are now also working with us on next-generation sensor networks and software to understand what emissions profiles look like in real time. As that relationship deepened, they asked us to help them with certain responses that occurred, given their global footprint.
As we participated in that, we were able to see where certain risks of theirs on the environmental side weren't mitigated as well as they perhaps could have been, so our advisory teams got involved. This is purely a function of a focus on understanding the issues, the flywheel concept, and continuing to get deeper with the client. You can see what that revenue profile looks like on the left-hand side of this page. If we do this for the 250 customers that Allan talked about, we can be multiples more than we are today without any new customer acquisition, which is why we have so much conviction in our organic opportunity.
And then on the theme around the large addressable market, you know, you can see on the left-hand side in which, how the segments touch it. You know, these are all material tailwinds unto themselves that impact all of our segments or almost all of our segments. Pollution and climate change impact is very real. It's driven a lot of activity on our client side, and it's created substantive opportunity. Emerging contaminants like PFAS, and as you think about other contaminants in water, whether it's the pharmaceutical byproducts or microplastics or metals, as industrial activity picks up or mining activity picks up. A lot of the regulatory thrust recently, with the government spend accelerating in Europe, in the United States, and in Australia, has created tailwinds for our business.
For example, with the IRA, a lot of the focus on methane emissions and methane mitigation has created substantive opportunities for us. And then down at the bottom, we are not general-purpose renewable energy, just to make that abundantly clear. We take largely ag and industrial waste, and we make either biogas or hydrogen out of it. And this is largely at the request of our industrial client base. That business is now seeing increased tailwinds, and it's created some really nice opportunities for us. And so as we kinda look across where the market's going, the macro trends around better environmental stewardship, around decarbonization, around the management of waste and conversion into either energy or resources, we're the beneficiaries of a lot of that secular opportunity.
And then, you know, the PFAS or the forever chemicals have gotten a ton of press recently, so I won't beat that horse to death. But we are unique, again, going back to our integrated model and the solution set that we offer, whether it's being able to test, as Allan mentioned, we're one of few labs that can do it at part per trillion levels, or whether it's being able to treat the family of compounds that look like they're gonna get regulated at very low levels in unique ways, and then coupling that with the full portfolio of services.
As our clients struggle with what their liability is, and how to manage this, and how to deal with the public pressure and the public health impacts and treat, the fact that we're able to offer this full suite, has really, enabled us to punch above our weight class. But even though regulations haven't yet fully, manifested, this already represents, as a contaminant, 20% of our revenue and growing. And so we certainly believe if, if the regulations come to be, that we're gonna see some incremental secular tailwinds in our favor in what is a new and large, and growing market. And then another example is with greenhouse gases.
You can see on the bottom right, how our software and technology advantages have made client adoption much quicker, and they've increased our addressable market. So, what you see on the top right there is that, just our top 20-25 clients that are working actively on how to manage their emissions footprint, the number of services they're requesting and the opportunity set for our next generation technologies has increased our serviceable addressable market for them. And though we were kind of in early stages of deployment in 2021 and 2022, it's really taken off over the last couple of years, and we expect that's gonna continue to grow, as a piece of our overall pie over the coming years, and we're excited to share more about that with you.
If you wanna take the next one then, or is it R&D?
Oh. All right, and then one more theme, the fourth theme, which is research and development. This is critical, and in the interest of time, I'll go through this quickly. But we have a dedicated research and development group, whose purpose is to kind of address these problems that our clients bring to us. And this isn't just a concept for us. Their innovations and their technologies get rapidly commercialized. And so 20% of our revenue today is already a function of the work that they've done and the technologies they've brought to bear that have helped solve some of our clients' problems. And the focus areas you can see on this slide are not just PFAS. We're able to remove other contaminants from water. We're able to measure contaminants in real time.
We're able to extract metals. We've increased the scope of opportunity with PFAS. And then recently, at the request of a food and beverage client, we've demonstrated with high efficacy and low cost, the removal of CO2 from their industrial production process, which is then getting converted into soda ash, which they use as part of their bottling process. It's a full closed-loop system. That is in development phase, not yet ready for commercialization. And so we're excited about some of the opportunity sets coming through the R&D group and what that represents for us four to five years from now. And then this is an example of our how our software is being used in the city of Denver.
For example, our air sensor network is feeding into a real-time software application, which is proprietary, quality controlled. The city put the sensors all around, and the data is now being fed to schools, so the kids and administrators can see, depending on where they are in the city, what the quality of the air is, which impacts kind of recess time. That same application on the industrial side is being used by an industrial client, that is working with the community in a disadvantaged area and trying to manage, in a transparent way, what the emissions footprint looks like, so both the community can react and the company can react.
The idea is faster decision-making and lower pollution thresholds by virtue of using the software and sensors, which we are a first mover in, and it's really exciting because it builds on our existing footprint.
Acquisitions are also a key part of our strategy. The environmental industry is dominated by tens of thousands of companies. We acquire to expand our geographic footprint, access IP and software, expand our customer base, and in a tight labor market, access talent. We're serious about integrating these deals. Of the 70 deals we had completed through the end of 2023, every single one of those was integrated, meaning into a single ERP, a single CRM, and in the U.S., a single bank account. So single payroll, single handbook. We will moderate the pace of acquisitions so that we can integrate. These deals are usually done via warm introductions from owners of companies we've acquired, and it results in us being able to acquire these companies at mid- to high single-digit multiples.
We are increasingly finding an ability to drive top-line growth through pricing and cross-selling activities, and then the ability with larger deals, to take, cost synergies out, which results in expanding margins. I mentioned, Matrix earlier. That was a deal we acquired, at a little over 14x, knowing that we could expand margins from the 4.7% that we're doing at the time. Those margins have doubled in the nine months that we've owned them, and they're expected to be at the 13%-15% run rate by the end of 2024, which will mean we'll have ultimately paid less than 5x for a premier blue-chip, environmentally focused business in Canada, a pretty rare asset for us.
And then just in terms of financials, again, really strong, both top line and organic growth, over the company's history, and margins that will continue to expand over time. In 2024, again, the organic is expected to be 10%-12%, with margins expanding about 60 basis points year-over-year. And then finally, we have a really robust balance sheet. We're about 1.9x levered at the end of 2023. Significant capacity on our borrowing facilities, and as Vijay mentioned, we're quite cash generative. So our ability to continue to invest in acquisitions, CapEx, R&D, is supported by this cash flow. I'll leave it there.
We're a minute over, Durgesh, sorry.
No, it's perfect.
Yeah.
Maybe I'll just, in the interest of time, one quick question, was obviously sizable PFAS opportunity, we see that across the water utility, so I'm not gonna beat the dead horse. But what is extremely topical is there's an active wildfire in Texas, as you guys have seen.
Yeah.
I noticed you have an emergency response business. It actually does services in California. Maybe just highlight, you know, what do you do there, and what does the opportunity set look like in that business quickly?
Yeah. So it's, you know, if you think about, kind of climate change-related events, forest fires, floods, hurricanes, or events, environmental events due to aging infrastructure, right? Spills or accidents, and any impact that where the environment's adversely affected, our team is one of the first calls. To give you a sense for how premier, the, the brand under which we operate there is called CTEH. To give you a sense for how premier that brand was or is, within minutes of the BP Deepwater Horizon spill, which occurred obviously years ago, they were the first call out of the U.K., right, for deployment, and obviously, you saw how that unfolded. Similarly, with the East Palestine derailment, within minutes of that occurring, right, the team was on the ground.
They work for Incident Command, meaning it's the EPA, FEMA, and the responders that make the decisions. But they are kind of a premier response brand. So in that example, in Texas or on the West Coast, there's two elements of this. One is the response, and so obviously, the fire is devastating, can have a tragic set of implications, but then you use firefighting foam to put that fire out. And guess what firefighting foam has in it? PFAS. So now you've likely contaminated a series of water tables, right? Now, you have to test for that, then you have to treat for that, and that's exactly why it's synergistic and why the flywheel kind of builds on itself for us. And that story is playing out over and over and over again.
In East Palestine, a lot of the air monitoring that had to occur well after the response was completed, was enabled by the fact that we have the largest air testing footprint in North America, and we were able to support that team. So it's an excellent team. It's a premier blue-chip team, and it's very complementary to our overall thesis.
Awesome. Thank you. We'll leave it there. Any final closing remarks from you guys?
No. I think it's time for a drink.
Time for a drink.
Yeah.
All right, we'll leave it there.
Next thing.
Thank you.
Yeah.