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Montrose Environmental Group, Inc. (MEG)·Q1 2024 Earnings Summary

Executive Summary

  • Record Q1 revenue of $155.3M (+18.2% YoY) and record first-quarter consolidated adjusted EBITDA of $16.9M; normalized diluted adjusted EPS was $0.16 while GAAP EPS was a loss of $0.53, driven by mix and Matrix seasonality .
  • Management reiterated the recently raised FY2024 guidance to revenue of $690–$740M and consolidated adjusted EBITDA of $95–$100M, citing strong organic growth, cross-selling, R&D traction, and regulatory tailwinds (PFAS MCLs/CERCLA; methane; HAPs) .
  • Working capital build (Matrix and CTEH receivables, bonus timing) made Q1 operating cash flow negative (-$22.0M), with conversion expected to exceed 50% of adjusted EBITDA for the year; pro forma liquidity rose to $218.8M after April equity raise and leverage is 2.1x .
  • Catalysts: accelerating PFAS testing/treatment demand, methane regulations, continued margin expansion in Remediation & Reuse (Matrix ramp to double-digit EBITDA by YE24), and higher M&A cadence funded by the follow-on equity offering .

What Went Well and What Went Wrong

  • What Went Well

    • “Record first quarter revenues and consolidated adjusted EBITDA” with strong organic growth across AP&R and Measurement & Analysis; lab services strength in PFAS and air testing .
    • Segment strength and margin quality: AP&R EBITDA margin up to 27.8%; M&A margins reiterated at 18–20% annually despite slight Q1 mix impact .
    • Capital and strategy execution: completed three accretive acquisitions (Epic, Two Dot, ETA), raised ~$122.4M follow-on equity, pro forma liquidity $218.8M to support higher M&A cadence .

  • What Went Wrong

    • Emergency response revenue declined YoY ($15.7M vs $23.2M) due to tough comp (2023 derailment), pressuring AP&R mix though underlying advisory growth remained solid .
    • Lower Q1 consolidated EBITDA margin (10.9%) vs prior-year quarter and Q4, reflecting Matrix’s seasonally low margins in Canadian winter and a non-recurrence of a large high-margin response project .
    • Q1 operating cash flow was -$22.0M due to temporary working capital investment (receivables at Matrix/CTEH; bonus payments), expected to normalize through the year .

Financial Results

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$167.9 $165.742 $155.325
GAAP EPS ($)—$(0.18) $(0.53)
Diluted Adjusted EPS ($)—$0.27 $0.16
Consolidated Adjusted EBITDA ($USD Millions)$23.3 $17.479 $16.922
Consolidated Adjusted EBITDA Margin (%)13.9% 10.5% 10.9%
Operating Cash Flow ($USD Millions)——$(22.021)

Segment breakdown (Revenue and Adjusted EBITDA):

SegmentQ4 2023 Revenue ($M)Q4 2023 Adj. EBITDA ($M)Q1 2024 Revenue ($M)Q1 2024 Adj. EBITDA ($M)
Assessment, Permitting & Response$50.093 $9.171 $58.580 $16.280
Measurement & Analysis$54.045 $9.689 $45.494 $6.504
Remediation & Reuse$61.604 $8.320 $51.251 $5.012
Corporate & Other—$(9.701) —$(10.873)
Total$165.742 $17.479 $155.325 $16.922

KPIs:

KPIQ1 2024Commentary
Operating Cash Flow ($M)$(22.0) Working capital build at Matrix/CTEH; bonus timing
Liquidity ($M, pro forma)$218.8 Cash $43.8; undrawn revolver ~$175.0
Net Debt / EBITDA (Leverage ratio)2.1x (pro forma) Below LT target <3.5x
Preferred Redemption ($M)$60.0 (Jan) Annual dividend savings ~$5.4M
Credit FacilityUpsized to $400M; Term +$50M, Revolver +$50M Available revolver ~$175M
Emergency Response Revenue ($M)$15.7 in Q1 FY24 outlook $50–$70

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)FY 2024$675–$725 $690–$740 Raised
Consolidated Adjusted EBITDA ($USD Millions)FY 2024$90–$95 $95–$100 Raised
Emergency Response Revenue ($USD Millions)FY 2024$50–$70 $50–$70 Maintained
Segment Margin OutlookFY 2024AP&R mid-20s; M&A 18–20%; R&R improving AP&R ~mid-20s; M&A 18–20%; R&R to double-digit by YE24 Maintained/Refined
PhasingFY 2024Q1 margin down YoY; back-half weighted Q1 low point; ~60% of EBITDA back half Clarified

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023, Q4 2023)Current Period (Q1 2024)Trend
PFAS regulations (MCLs/CERCLA)Anticipation and client caution; broad tailwinds across AP&R and M&A EPA finalized PFAS drinking water MCLs; PFOS/PFOA hazardous under CERCLA; ~$200B TAM; testing momentum now, treatment ramp expected through 2H24–2025 Accelerating demand
Methane emissions rulesFinalized EPA methane rule (Dec 2023) supports measurement/monitoring demand Clean Air Act methane rules published; standards for new sources, guidelines for existing; long-term tailwinds Strengthening
Matrix integration/marginsSeasonal margin drag; margin accretion underway toward mid-teens by YE24 Seasonal Q1 headwind; on track to double-digit EBITDA by YE24; improved ROI without revenue loss Improving margins
Biogas pivotShift to higher-margin, lower-revenue services; tail expected into early 2024 Pivot complete; lower YoY revenue vs Q1’23 but back-half ramp and margin accretion expected Margin up, revenue ramps later
Cross-selling/organic cadenceCross-selling now >50% of revenue; elevated organic growth vs historical 7–9% Strong organic growth drives record Q1; FY24 organic implied 10–12% Sustained

Management Commentary

  • “We are seeing secular tailwinds and strong performance across our segments… resulting in record first quarter revenues and consolidated adjusted EBITDA” .
  • “The U.S. EPA finalized its first-ever national drinking water standards for PFAS… and designated PFOA and PFOS as hazardous substances under CERCLA… we expect… an approximately $200 billion addressable market” .
  • “Our margin optimization efforts are well underway… Matrix… on track to achieve a double-digit adjusted EBITDA margin by the end of 2024” .
  • “We reiterate our expectation for annual margins in [Measurement & Analysis]… around 18% to 20%” .
  • “We expect… roughly 60% of our full year 2024 adjusted EBITDA in the back half of the year” .

Q&A Highlights

  • PFAS timing and portfolio: testing has a 3-year window and treatment a 5-year window; momentum already visible in assessment/testing, with treatment ramp expected in back half of 2024 and 2025; suite includes regenerable resins and foam fractionation, with life-cycle cost advantages and upstream contamination sources addressed .
  • Guidance increase drivers: regulatory landscape shifts materially; Matrix’s back-half weight; acquisitions cadence and response mix normalization; transparency to reduce surprises .
  • M&A cadence/resources: higher cadence with smaller, accretive deals (handful per year) funded by stronger balance sheet; no need for added resources; focus on geographic expansion and service complementarity (Epic, Two Dot, ETA) .
  • Segment specifics: R&R ex-Matrix margins down slightly due to biogas pivot; back-half ramp to drive aggregate margin expansion at company level (~100bps at guidance midpoint) .
  • Organic growth outlook: elevated vs historical 7–9%; implied 10–12% organic in FY24; AP&R and M&A double-digit; R&R mid to mid-high single digits contingent on regulatory clarity .

Estimates Context

  • S&P Global consensus data for Q1 2024 EPS and revenue was unavailable due to SPGI request limits at the time of analysis; as a result, we cannot quantify beats/misses vs consensus here. Values would normally be retrieved from S&P Global.

Key Takeaways for Investors

  • Q1 delivered record revenue and adjusted EBITDA with strong organic growth, but margins reflected Matrix seasonality and response mix; sequential margin and revenue improvement expected from Q2 onward with ~60% of EBITDA in 2H24 .
  • Regulatory catalysts (PFAS MCLs/CERCLA, methane, HAPs) materially expand addressable markets across testing, advisory, and treatment; PFAS testing demand is visible now, with treatment revenue ramp into 2H24/2025 .
  • AP&R and M&A segments show resilient growth and attractive margin profiles (AP&R high-20s; M&A 18–20%); R&R margin trajectory improving with Matrix and biogas pivot execution, targeting double-digit by YE24 .
  • Balance sheet strengthened with April equity raise; pro forma liquidity $218.8M and leverage 2.1x support higher M&A cadence without over-levering .
  • Guidance raised on April 2 and reiterated post-Q1; consider positioning for back-half weighted earnings delivery and potential estimate revisions tied to PFAS/treatment timing .
  • Watch working capital normalization and cash conversion (>50% of adjusted EBITDA expected) as operating cash flows improve through the year .
  • Near-term stock narrative likely driven by regulatory tailwinds translating to orders, Matrix margin execution, and continued accretive M&A closes; monitor emergency response mix relative to $50–$70M FY outlook .