All right, I think we're going to get it kicked off here. It's 4:00. Good afternoon, everyone, and welcome. My name is Tim Mulrooney. I'm the research analyst here that covers Montrose. I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. Montrose is a provider of integrated environmental solutions across three segments: consulting, testing, and remediation. I'm really excited to be hosting the company today because I think it's an interesting time. There's been a lot of noise in the marketplace, which can be difficult sometimes to separate the noise from all the signals. There's also been a lot of change at the company near term, a pause on M&A, focusing on cash flow, focusing on organic growth.
If you take a step back and you look at it, core organic growth was high single digits last year, looks to be high single digits this year. So I'm really excited to get CEO Vijay Manthripragada and CFO Allan Dicks here so we can dig into all of this with them. This format is a formal presentation followed by a breakout session, which will be held in the Adler room. We'll probably do this a little bit differently, maybe take 10 minutes on an overview of the company and then do more of a fireside chat Q&A. With that, we'll get started. Welcome, Vijay and Allan.
Thanks, Tim. It's wonderful to see all of you. Thank you so much for joining us kind of right before drinks. We really do appreciate you being here and listening to us. I thought, in the interest of just providing a quick overview of who we are and what we do, we'd give you a quick synopsis. Then, as Tim said, open it up to Q&A. We've had some incredible conversations with some of you already. A few of you know us quite well, and other faces look new. Just bear with me if some of this is redundant for those of you that know the Montrose story. I thought I'd break it up into kind of four key questions. What is Montrose? Which, for folks that are new to the story, we get that a lot.
How do we drive economic value, especially in this day and age and given a lot of the questions we got earlier today? How do we do through political and economic cycles? Why do we have conviction? What does our outlook look like for this year and into the next couple of years, given what we're seeing out in the marketplace? I'll start with what is Montrose. I would just kind of give you three themes to kind of keep in mind. One is that we are a pure-play environmental science and technology company. What I mean by that is that our revenue and our earnings come from helping our clients address environmental challenges primarily related to air quality, water quality, and soil quality.
We've over the last couple of months, we have repeatedly been told that we bring a practical environmentalism that folks are pretty excited about as we look to see how environmental stewardship and value creation and economic development go hand in hand, right? For planet, for progress. The other theme that I think is important that I want to make sure you hear loud and clear is that we are a unique integrator of services in the environmental space, specifically consulting services, testing services, and treatment services. That combination of services does not really exist in the marketplace today. It is something our clients are repeatedly saying they are looking for. And that is unique in what is a very large addressable market. That combination of services matters, as you'll see in subsequent slides, because our clients say they want it, right?
When we surveyed prospective clients, 85% of them said they are looking for this kind of integration of services. Interestingly for us, 75% said they have no idea where to find it. Our brand is not well known, but the opportunity set and the opportunity in front of us because of our business model is real and it's there. The other dynamic I think that's important to share with you is that we are primarily private sector oriented, which is relatively unique in the industry. Our client base is, call it the Fortune 500 type of companies. It's diversified, and we'll talk more about that in a second. The last theme that I think is worth noting is that we are pretty heavily invested in and have accrued the benefits of investments in IP and software.
On the intellectual property side, we have 24 patents, a slew of them still pending, which we're excited about. On the software side, we are starting to see the early benefits of a move we made several years ago using the combination of sensors, software, and machine learning to predict air quality and water quality issues that our clients may face. That is kind of Montrose in a nutshell. As you think about what drives our value, I kind of give you a couple of highlights. The first is that we've been growing on average since our IPO in 2020, approximately 25% a year, which we are excited about. As we look forward, we continue to see some real opportunities. Our organic growth of that 25% is about 13%, so it's about half per year. Our EBITDA has been growing even faster than that organically.
That organic growth is driven by strong customer retention. We publish this data every year. The numbers have been kind of increasing steadily since we have been public. We are about 96% of the revenue from our clients from the prior year repeats in the next year. It is not necessarily customer loss that makes up the last 4%, but the nature of some of the projects that we do. Our customer retention rates tend to be very strong unless we have a quality lapse or a safety lapse. We can talk more about that if it is of interest. That organic growth is also driven by some of the success we have been seeing on the cross-selling side.
Because of that unique combo of consulting, testing, and treatment, we've been able to service our customers kind of individually per service or per segment in the beginning, and then to transform that into a broader opportunity set. So said otherwise, our organic growth is largely coming from our existing customer base. We have about 6,000 customers. And this is a question we get often. No one customer is ever the same top customer year in and year out. If you kind of go back to 2020 when we started disclosing this information publicly, the top customer every year since then has been different, which we find encouraging because it suggests that the diverse business model and our end market diversity is really starting to accrue to our benefit.
Not only is our customer retention strong, but part of the reason we're excited, and this is perhaps more of an opportunity than is something to talk about as a strength of ours, our customers do not know that we exist. So, when we think about this combination of lack of brand awareness and the fact that when we look at our 6,000 customers, only 2% of them use more than two of our services, and we have over a dozen technical service offerings that we could provide to them, we're sitting on a pretty large addressable opportunity that is really ours to tap into and a function of how well we execute against that. So w e do not really need new customers, and Tim alluded to this in his 7%-9%.
Part of our optimism, which we'll get into in a few minutes, we don't really need new customers to continue to grow at this pace into the foreseeable future. New customers are all upside optionality for us. Our 7%-9% is predicated largely on getting deeper into our existing incumbent customer base. From a value creation perspective, we've talked about this historically. It is less of a dynamic for us this year, but we've been consolidating a very fragmented industry. We've been acquiring small companies. We tend to buy them at mid- to high-single-digit EBITDA multiples and in our hands grow revenue and EBITDA quite attractively. We're pausing acquisitions this year, but they have historically been quite accretive to our story, both financially and strategically.
So those are kind of the strong organic growth for all the reasons I talked about, both top line and EBITDA, but also from a consolidation and acquisition perspective. So that's our value engine. The last two themes that I'll touch on before we head to Q&A, and Allan will certainly jump in, is we get a lot of questions around the Trump administration and what the current economic dynamics and political dynamics look like. I think this slide is important just to put some of that history in context. We grew solidly through Trump 1.0. In fact, we went public at the end of the first Trump administration. We do expect solid organic growth this year. I said this publicly, and some folks laughed when I said it. It is certainly starting to prove out.
We expected and we are seeing more tailwinds than headwinds from some of the administration's actions, which for our industry has surprised many of our followers. We are quite optimistic, and we do see the current set of policies continuing to create tailwinds for our business. Not only at the federal level are we seeing more tailwinds than headwinds, but state regulations are taking on a more prominent role. They are staying quite steady. If you kind of combine the opportunities from the federal side with the steadiness and the increased importance of the state side, you can see why in the United States in particular, we are quite upbeat about what the next couple of years looks like for us.
That has been further validated, as we've talked about in our public comments through our conversations with many, many customers who have almost to a customer said they are largely staying the course. No major shifts in their strategy, their approach. They are obviously paying a lot of close attention to what's happening from a regulatory perspective and in the marketplace, but we're not really seeing from them, nor are they saying to us that they're shifting their cadence or outlook at this point, which for us is very encouraging. Something that came up quite a bit today, and I jotted this down in my notes, despite all of the political rhetoric, the regulations that underpin most of our work are not really in the political crosshairs. There is kind of broad bipartisan support around the importance of a lot of this.
Not only are the regulations continuing apace, but the adherence to the regulations by our client base is continuing apace. Kind of certainly a different dynamic than many folks expected, right? Kind of as we approached the election last year and as we looked out at the beginning of this year, but we're starting to see a lot of that manifest. We did get a fair number of questions around the Supreme Court Chevron decision on the overturn last June. That is actually proving to be, as we said it would, a fantastic governor of some of that political whipsawing. It has created more certainty as to exactly how the courts are going to rule on some of these matters. It is going on as expected, and it is actually serving as a governor against some of the whipsawing from the Biden to the Trump administration.
It is a large part of why the regs haven't really changed because they have to be statutorily adjusted and why, therefore, our clients are not really changing behavior. Last but not least, sorry, we did get some questions around what a lot of the onshoring and the industrial activity pickup means for us, and it means tailwinds. We didn't anticipate some of that. When we gave guidance, we're starting to see some of the benefits of that as this year unfolds. So that' s kind of what the administration currently means for us here in the United States. Our ex-U.S. business, which represents around 20% of Montrose, is growing really nicely in Canada, Europe, and Australia.
There is certainly a little bit of an anti-American sentiment we're seeing in some of our markets, which we're trying to navigate through, but all of that's already baked into our assumptions. Because of our highly local presence, we're largely insulated from a lot of that, which I can talk through if it's of interest. Which leads me to our outlook. We'll kind of, Allan, you should share a couple of thoughts so we can open up to Q&A, which is, look, I talked about us growing about 13% organically. Our public commentary speaks to 7%-9% organic revenue growth and organic EBITDA that's going to grow in excess of that 7%-9% organic revenue. We will and expect to deliver margin accretion this year. Our cash flow, both operating and free cash, should be a nice step up, 24 and 25.
You'll see a clean balance sheet given some of the feedback we have gotten from many of you, and we're excited about how that's going to progress. We've already announced some of the changes we made at the beginning of Q2. You'll see more in Q3 and Q4. If you kind of put all that together, right, solid top line growth organically, strong performance on the margin side, cash flow, and clean balance sheet. That's with the acquisition pause. We've had a fantastic opportunity to look inward and really continue to tweak our operations internally to kind of show what this engine can create. We're pretty excited to share that with you as the quarters progress. That's kind of Montrose in a nutshell. Allan, is there anything else you think we should touch on?
Yeah, I can just talk about capital allocation and kind of the longer-term outlook. We've publicly said we're going to pause acquisitions this year. That's allowing us to really focus on the core business, how we operate, the organization structure, a lot of the margin and revenue opportunities. Simplify the balance sheet, Vijay mentioned, fully repaying the pref. We will have repaid all of the $182 million of pref in the last two years without delivering above three times. We should exit 2025 in a very strong balance sheet position, which will then allow us to get back to acquisitions if they make strategic sense, growth, CapEx, or if neither of those opportunities are there and there continues to be a dislocation in the stock price, we have a stock repurchase program that's been authorized. We should continue to grow at 7%-9% over the foreseeable future.
That excludes what could be a sizable PFAS opportunity over that timeframe. We expect cash flow conversion to be above 50% of adjusted EBITDA. We expect free cash flows, as a percentage of operating cash flow, to continue to improve year- on- year over that five-year period. Margins, which have improved over the last few years, will be better this year than last year. We'll continue to improve over the five-year period, benefiting from both operating leverage. Our corporate infrastructure is largely fixed. The operating process optimization I will improve our operating margins. Our remediation and reuse segment, or our treatment segment, runs at subscale margins, runs mid-teens, should run north of 20% margins, and should be by far the largest growth engine over a five-year period. We will benefit from both margin improvement and revenue mix.
Those four levers should enable us to get margins up substantively from where they are today.
Tim, that's a great overview of it, isn't there?
I mean, you front-run all my questions. Sorry, it's forgotten. No, that was really helpful. Thanks, guys. That was a great overview. I guess, Vijay, one of the things I want to double-click on is the comment that you made several times, that the recent policies that are being proposed and passed are creating more tailwinds than headwinds. I do agree. When people hear that, I think they scratch their head a little bit. I understand it a little bit because we've had some time to talk about it, but I think it is there. Could you maybe give some examples of where those tailwinds are emerging that may not be so obvious?
Yeah. I mean, one of the topics, Tim, that we got a lot of questions around, so I presume it's of interest to most folks here during kind of our one-on-ones or two-on-ones, three-on-ones today, was around PFAS, right, as an example. Just looking back at the history, and you're obviously intimately familiar with this, from, call it, mid-2023 to today, there's been this relatively large question mark as to what the federal government's going to do. It was expected that the EPA would promulgate regulations in that Q3 2023 timeframe. They didn't. It came out April of 2024. Two months later, the Chevron decision got overturned. Four months later, right, we have a new president. There's this huge deregulatory push, and there was just lots of what is going to happen type of dynamic.
Our clients, as a result, many of them are in wait-and-see mode, doing more assessment and testing, but not really jumping to start making decisions. With Administrator Zeldin, the administrator of the U.S. EPA, with his recent press release around PFAS, a couple of dynamics came out. One is they are going to keep the four parts per trillion level for PFAS and PFOA. They're removing the HAZ index, but they are likely going to continue regulating it under the circular regulations. What that's effectively signaled is that, and we were surprised that they kept it at four. We thought that it was likely going to get lifted. There seems to be kind of bipartisan consensus that this is an issue. The fact that they're keeping it at very stringent levels was surprising to us, but surprising to the upside.
As a result of that, the train's effectively now clearly left the station, right? Folks feel comfortable starting to make decisions around what that treatment process looks like. We are upstream of those drinking water regulations, so we're dealing with everyone kind of leading up to that. Now they know, right? The treatment thresholds are going to be pretty stringent. You're going to need some scalability and the ability to dial up, the ability to treat. State regs are much more pronounced now with some states like Illinois at two parts per trillion. All of that kind of benefits our technology.
When we say tailwinds, that clarity, right, or relative clarity has created tailwinds for our business, which we're seeing not only in the growth we expect year- on- year on the treatment side, which we've talked about publicly, but we're also seeing a much larger activity set at the top of our funnel. The client inbounds and types of conversations, requests for information, requests for pilots has really started to pick up noticeably.
Okay. Yeah. You are starting to see more activity now that there's that certainty, more certainty in place.
Yeah. As another example, when I say the administration's policies are creating more tailwinds, industrial activity, and that word doesn't just mean more CapEx. It could also mean shifts in activity, right? Foreign ex-U.S. companies either pulling back or investing more in, depending on the industry, or American companies stepping up production.
All of that activity drives demand for our services, and we're seeing that in ways we didn't forecast because we didn't know, right, pre-President Trump getting inaugurated and having policies getting implemented. We're seeing really nice tailwinds and projects start that weren't really in our crosshairs nine months ago. That is incremental to what we expected when we came out with our guidance. Those are two examples of more tailwinds than headwinds. When I say headwinds, when we saw the first Trump administration in 2017- 2020 timeframe, we saw a lot of the regulatory pullback resulted in the testing part of our business slowing down relative to historical growth rates. We thought we would see something similar this year. We have not seen any indications of that really happening.
You saw kind of our, and I do think it'll take some time to truly manifest, but that segment is as hot as it's ever been.
That's growing, what, mid-teens, double digits?
Yes. Those are kind of quantitative and illustrative examples of what I'm talking about.
Okay. That's helpful.
Is that fair? Yeah. Anything else you had?
Absolutely.
Yeah. Another, I think, misconception is this idea that, because I think you get grouped together with the comps, some of the other players in the space that have significant exposure to federal revenue. Can you talk a little bit about what your mix is for federal revenue? Because sometimes you see these headlines about cuts to federal and your stock will react to that. I think it's probably worthwhile to take a moment to talk about what is your exposure to federal revenue? Maybe what is your exposure to some of the other end markets, like energy, for example? If we do go through this unleashing America's energy independence, what would that look like for you?
It's a great question. When we think of federal, just to be specific, I guess you're asking the U.S. federal.
U.S. federal.
For us, we kind of bucket it all into a category of public sector, which includes the Australians, the Canadians, the Europeans, and state governments, local governments, because we don't do a lot of public sector work. The U.S. government, in all of the publicly disclosed data, I think is low single-digit percentage revenue, so 2.5%, 3%. De minimis impact, we don't really whipsaw one way or the other depending on what the federal government does. On top of that, our work is largely non-discretionary.
If water quality on an air force base is contaminated and our servicemen and women are drinking contaminated water, that does not really get impacted by kind of the spending cuts that folks are proposing. That is, we have not seen any pullback in any of that activity. In fact, we have actually seen awards come out and requests for work to continue. That is not in any of our numbers, Tim. We have gotten some of these recent wins, which we have disclosed publicly. We are one of a group of folks that have gotten them, so it is not just us. If those come through, that is great and that is upside. If they do not, it is not in any of our forecasts and our numbers to begin with.
What we are excited about is that as we mature, as our technology and our capabilities become more recognized, we're winning these as kind of prime providers, whereas historically we were always a sub to someone else.
Interesting. Okay. That's helpful. Maybe we could also, while we're talking about this, dig into the cross-sell. You talked about a lot of the growth can come from cross-selling to your 6,000 customers. One example I think about is the fact that now all the drinking water systems, all, what, 60,000 drinking water systems in the United States, they all need to have some sort of insight into what their PFAS exposure is because it looks like the four parts per trillion is here to stay.
Yeah
I know you do not do a lot of treatment with those folks, but I imagine you are going to help support some of them with their testing and the consulting, maybe. I do not know. You could talk about that. Would that lead into cross-selling some of your treatment later on? Or maybe you could give some other examples of where you think the low-hanging fruit is on the cross-selling for your business more broadly, even outside of PFAS?
Yeah, no, it is a great question. On PFAS, that is right. We have seen a fair amount of activity. In fact, a lot of the organic growth you referenced in our testing segment, a good chunk of it was a function of this uptick in drinking water-related measurements that our labs were doing, even though we do not treat that water by design. That is not a focus.
We are seeing a fair amount of activity from it. We have talked about this. We have seen kind of five consecutive quarters of growth in our PFAS as a market, right, market and performance. We certainly expect all three of those, consulting, testing, and treatment, to grow year- on- year for all the reasons we talked about. And yes, we are already seeing the benefits of us having helped measure or assess the risks or contamination levels. Now the question is natural, which is, can you guys help us clean it up, which includes, in select instances, some of the larger municipalities or public drinking water systems that have either higher concentrations or an appetite to think about kind of long-term lifecycle cost of something as opposed to just the upfront. It has been really encouraging to see that dynamic.
We're very cautious about whether we want to really dive into that, but those conversations are also opening up. A lot of what we talked about historically with 3M and building the largest treatment facilities in the world for PFAS, those are examples of cross-sell, right? Those opportunities came to us through cross-selling efforts.
Okay. What about a question I get a lot is around all these proposed cuts, Lee Zeldin's list of 31 or 35 priorities. I noticed that basically only one or two are on water. Most of them are around air. You guys have a large air practice. We've talked about some of the opportunities. Let's talk about some of the risks, the likelihood of these things passing. I think, I don't know, maybe you have some insight on that, but how do you think about that potentially impacting your business or not? Because I know that some of these are kind of baseline regs where the state regs are higher, but I think that's another common misconception we could talk about.
Yeah. Yeah. If you kind of think about the underpinnings of the Clean Air Act or the underpinnings of some of the hazardous air pollutants, most of those have been around a long, long time. That's most of what makes up our revenue. A lot of the attention we get and the discussions we have is usually around greenhouse gases because that's clearly in President Trump's and Administrator Zeldin's crosshairs.
Some of the recent rules that target specific industries, whether it is the coal industry or selected parts of the energy industry, we have not seen any material pullback in any of our key air testing workstreams. Areas where we have seen some movement, or it was an interesting word choice by one of our conversations earlier today, air pockets, as an example, Tim, would be the ethylene oxide regulations, right? The implementation of which were pushed out. Those are examples of when Administrator Zeldin says reconsider, right? It has to be reconsidered because it has to be changed if it is statutorily defined. That is not up to the administration. But t he administration can dictate for newer regs what the compliance deadlines are, and they have in some instances done that.
So in those instances, we may see some pullback in terms of how quickly folks adopt technology to measure or address emissions. But that is overwhelmingly overshadowed by the tailwinds, which is just a continuation of, and then all the demand cycles we talked about now. Everything we talk about is net of those types of potential pressure points. It is not that it is not there. There are just more tailwinds than headwinds, if that makes sense.
Yep. That makes sense.
Interestingly, with greenhouse gases, our energy clients who have certainly stepped up activity have not pulled back at all, neither in Canada nor in the United States with their greenhouse gas emissions measurements. Whether it is source emissions testing, leak detection and testing, sensor-based monitoring, none of that has really slowed down.
Our labs, which do a lot of air quality work, have also started to see continued or continuing to see continued organic growth opportunities there. On the air side, we are a dominant player. For all the reasons I talked about earlier, the rules are the rules, and the state regulations continue to hold. Everyone's kind of, and every conversation with clients, including our major energy clients, just met a couple of weeks ago with the general counsel of one of the largest ones. It was like, "Look, until we're told not to, we got to plan over a longer lifecycle and timeframe, and we're just to stay the course." We've already invested the capital, right? We're already doing the work. We're not stopping until someone tells us we have to stop.
Makes sense. Okay. In the short time we have left, is there anything out in the crowd? Any question before we head to the breakout? Go ahead, Joachim. Yeah. Sorry. Short slide when you bring the revenue and let it die by 25%. The stock price is flat here in the five years. We definitely change that. It needs to happen.
Yeah. It's a great question. We took a pummeling. There's a couple of dynamics. We went public in the middle of 2020 at 15, and from 2020 to the end of 2021, the price ran north of 75 on the back of our response business really surging and taking advantage of a pretty unique market opportunity that we were very clear about would not repeat.
Once that finished, even though we said it would not repeat, there was certainly some disappointment that it did not repeat, which was natural, and we certainly dealt with that. As we kind of approached June of last year, right, the price was starting to come back up on the back of raised guidance, and we were around $48-$50 a share. When the Supreme Court decision came out, June 28th, 29th, from that point to the end of July, we lost 70% of our market cap, and we had no business news that came out on the back of it. We got hit with a short attack shortly thereafter, right? We got downgraded as a result of the Trump election before our results came out. We effectively, to your point, you're exactly right.
We saw a fair amount of pressure and pain kind of from June to, call it, right, the early part of this year. We announced results in February. There seemed to have been a really solid reaction to that. There was some kind of negative news or perceived negative news related to a lot of what we talked about with Administrator Zeldin. We announced Q1. It feels like we are on the back end of a lot of that noise as we continue to deliver the quarters predictably and candidly beat and raise and beat and raise, right? I think some of that credibility and our ability to show all the things we are saying are actually manifesting and coming true. I think you guys.