Onterris, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Business Update: Q3 2024 revenue reached a record $178.7 million, and consolidated adjusted EBITDA was $28.3 million with a 15.8% EBITDA margin, a 190 basis point improvement over the prior year quarter. Driven by robust organic growth across most business lines and positive impacts from recent acquisitions. Matrix in Canada is on track to achieve mid-teen EBITDA margin, an improvement from its prior margin.
• Regulatory and Market Trends: Little impact from the US Supreme Court's Loper Bright decision on Montrose, but increased demand for advisory and consulting services due to complexity from the decision. The business is resilient to political swings at the federal level due to diversified end markets, and ~20% of business in Canada, Australia, and Europe performs well.
• Near-Term Priorities: Priority is redeeming Series A-2 preferred stock via cash flow generation and incremental borrowing under the current credit facility, temporarily deemphasizing acquisitions though pipeline remains robust. Annual target of converting 50+% of consolidated adjusted EBIT to operating cash flow.
• Cash Flow and Capital Structure: Operating cash flow conversion improved to 40% of consolidated adjusted EBITDA in Q3, expected to increase in Q4. Liquidity at the end of the quarter was $139.8 million. Leverage ratio was 2.6 times, well within the preferred level.

Segment Performance

• Assessment, Permitting and Response: Third quarter revenue was $52 million, down from $57 million in the prior year quarter. Adjusted EBITA was $11.2 million, 21.5% of revenue compared to 26.1% in the prior year. This reflects a $12.8 million reduction in high-margin environmental emergency response revenue, partially offset by strong organic growth in the rest of the segment and the positive impact of the Spirit acquisition.
• Measurement and Analysis: Revenues for the quarter increased 16.1% to $58.6 million. The segment's adjusted EBITDA increased 29.2% to $13.4 million, 22.8% of revenue, a 230 basis point improvement over the prior year quarter due to revenue growth and operating leverage. This segment benefited from the acquisition of Origins.
• Remediation and Reuse: Third quarter revenue increased 12.6% to $68.1 million, benefiting from acquisitions and solid organic growth in remediation services, which more than offset the decline in treatment technology revenue due to temporary customer project delays. The segment's adjusted EBITA margin improved 480 basis points to 17.1% in the quarter.

Guidance

• Reiterated full year 2024 guidance: Revenue expected to be $690 million to $740 million, and consolidated adjusted EBITDA expected to be $95 million to $100 million. Q4 revenue expected to increase 10%-15%, and consolidated adjusted EBITDA margin expected to increase 350-400 basis points. Environmental emergency response revenue expected in the range of $50 million to $70 million for the fiscal year.

Risks

• Regulatory uncertainties, including the impact of the Loper Bright decision and potential changes in political landscapes. However, the business is resilient to federal political swings due to diversified end markets.

Q: Question on how Montrose's businesses performed under Trump's prior administration and which would continue to thrive.

A: Vijay stated the business grew during prior Trump admin, consulting and treatment sides did well, and ~20% of revenue ex-US (Canada, Australia, Europe) performs well and is expected to continue.

Q: Question on COO Joshua LeMaire leaving.

A: Josh is stepping down from COO but staying, transitioning with focus on hiring a new leader with industry experience.

Q: Question on recent acquisitions (Origins and Spirit).

A: Origins (lab in Colorado/Mountain States) performing well with cross-selling, Spirit (air permitting powerhouse) additive to consulting/testing footprint, integrations going well.

Q: Question on pause in acquisitions.

A: Focus on redeeming Series A-2 preferred stock via cash flow and credit facility, near-term deemphasis on acquisitions but core strategy unchanged, leverage metrics in mind.

Q: Question on risk of lost M&A opportunities.

A: No risk of losing desired opportunities, staying close to core targets.

Q: Question on Q4 outlook and matrix margins.

A: Q4 driven by organic growth and acquisitions, matrix on track for mid-teens margins, solid Q3 performance with strong organic growth within matrix