Onterris, Inc. (ONT) Earnings Call Transcript

Okay. Good afternoon, everybody. Thanks for joining us this afternoon. As many of you know, the U.S. Supreme Court recently passed several rulings impacting federal agencies, including one in particular known as Loper Bright. And this has injected some uncertainty into the marketplace as investors are scrambling to discern the ultimate impact, or I guess, I should say the potential impact, of the earnings streams of the publicly traded companies. And one such company under our coverage list is Montrose Environmental, which offers environmental solutions across a variety of end markets and applications. So we're happy to have them here to discuss this whole dynamic in some detail. We're pleased to have with us today, CEO, Vijay Manthripragada; CFO, Allan Dicks; and the Chief Commercialization Officer, Todd Grosshandler. Gentlemen, welcome and thank you for joining us.

Thanks so much for having us, Tim.

Thanks, Tim.

You bet. So I'd like to start off with just a general question and then we can get into some of the details. But just to start out, my question is, do you think the Supreme Court's recent overturning of the Chevron Doctrine will impact your business?

That's a loaded question, Tim. [Audio Gap] quite a bit of. No, but it's a great one. Because of the scope of Loper, we believe most U.S. businesses are likely impacted. But the bottom line for Montrose, which I want to make sure we convey, is really kind of twofold. One, our short and long-term business outlook is unchanged and we're staying the course. And 2, and this may seem a little counterintuitive, there are likely additional future opportunities for us because of the regulatory complexity this is likely going to introduce. And just to give you a little bit more color around why I'm making those 2 statements, Tim, what I understand the ruling actually does is ensure courts have final say over whether agencies are doing what Congress intended, right? And they have to respect the agencies on the sides, but not defer to them. And as we think about the court-agency dynamic, that's been happening for a long time with the EPA. So, we here at Montrose are totally accustomed to this. This is kind of, in many ways, normal course for us as we think about Waters of the United States or the clean power plant, for example, how that unfolded and how we navigated that. You guys have seen, and that this, to us, feels like it's more akin to that. The other dynamic with the shift from Chevron to Skidmore is that we expect there's going to be more power given to the state environmental agencies. And as that dynamic shifts to the states, Tim, that benefits Montrose. The other point I want to make sure I convey to you is because we're mostly private sector oriented, we talked to about a dozen or so of our major clients. And what we heard from them is that they're also staying the course for all the reasons I just shared. And so given our clients are staying the course, given that they aren't necessarily shifting, and we're not seeing a shift in demand from them, and we expect there's potential upside in terms of more consulting demand for our business, we're remaining quite optimistic and positive about our outlook. And, Todd, I don't know if you want to share additional color with Tim on [Audio Gap].

Yes. No, thanks, each. As Vijay said, we reached out to a number of our key clients in a variety of the market segments, ranging from transportation and manufacturing to some of the chemical and some of the largest oil and gas producers in the world. And I think from the conversations I took away, there were like 3 key takeaways. The first was the sentiments that they were really sharing with me was, it's business as usual and nothing is changing today or tomorrow or for the foreseeable future. And those are really their words. I think they conveyed that the planning and compliance strategies that they're implementing at these larger companies are -- the federal oversight is really a backstop and really not the key driver for their immediate compliance for enforcement activities. And then just really, given the multiple stakeholders they have, from the public sentiment to the overall sustainability commitments to the states and their investors, that they continue to really see strong drivers for them in this market. They did convey that they saw the transformative element of this regulation was really around helping ensure clarity in environmental regulation and really to minimize the whipsaw that they see occurring from one administration change to the next, and to also minimize novel interpretations of some of these environmental regulations. So really, in short, the feedback that we got was they're really not slowing down any of the services in these markets where we play.

Thank you both. That is very clear what you just said. Nothing changing today or tomorrow or for the foreseeable future. Business as usual. I think that's the big takeaway there and appreciate all the detail. And I have this whole list of questions, but we want to hold 5 minutes up before I need to now [ go on with it.]

You wouldn't be Tim if you didn't.

Exactly. So let's -- I'd like to follow up on just a couple of those things. Number one is, Vijay, you said it could potentially give more power to states. I was wondering if we could double-click on that, because I've spent the last 2 weeks reading about this, and I don't -- I'm not exactly clear on what that means. And I have a feeling that you could maybe elaborate a little bit more on that if you could, if not, no worries. And then, Todd, after that, I was wondering if you could -- my impression of getting rid of Chevron was it was going to increase the whipsaw, because now there's this uncertainty going to courts. One judge says one thing, one says another. It's not deferring the regulators. So there's no federal one voice. It's like I thought it would increase uncertainty and the whipsaw effect. But in your mind, because everyone is going to have to bring more data to this effort, it might actually ensure clarity of the reg. I thought that was interesting. Just wanted to make sure I heard you correctly there. So I'll leave it to you guys to discuss those things.

Yes. Todd, do you want me to start and then -- and then you can jump in. So, Tim, let me share --and I'll talk about this in the context of the state question as well, and this is jumping into what Todd was articulating. If you think about some of the concerns that folks have related to Chevron versus Skidmore, the idea is to follow the statutory guidelines prescribed by Congress, right? And what, the reason our clients are kind of sharing their view that this should increase certainty, right, is that non-enforcement or rollbacks of environmental regulations, which is one of the things we talked about with you when we kind of -- when we were going public in the Trump administration, right, that dynamic is also counter to the statutory guidelines. Does that make sense? So statutes are pretty clear. You shall do X. And so it doesn't really give you a lot of choice as to what that means, right? Either you're going to go more than that, in which case the courts are going to say no, or you're going to try to go less than that, in which case, the courts are going to say, no. And it's that in-between path that increases the certainty for an operating entity like our clients. That's really what that means. And I think it's important -- let me just step back. I think it's important to remember that the EPA's reason for existence, right, in a grossly simplistic way, is to worry about and regulate hazards in air, water and soil. And writ large, we expect the impact of Chevron will be where regulatory programs are premised on residual clauses within statutes or where agencies are deriving authority outside of their customary statutory wheelhouse. And so -- and I'll give you 2 examples of that, Tim. If you think about -- and we're not drawing any judgment on whether these rules are good or bad, just as examples of where they may be outside of something that is normal course, or what was intended by the statutes, the Pipeline Safety Administration or the [ SC ] ruling on climate, as 2 examples, right? We expect those are the types of rules that are going to get challenged more. But where the agency is exerting authority in its traditional wheelhouse, the challenges will occur like they have for decades and stuff we've seen before, it's nothing new. But we expect the regulatory ARC will remain. And so what I was alluding to is that not only do I think the areas in which Montrose is focused will largely be similar. They may be modified on the margin because they get challenged on the APA, not Chevron. But more importantly, even if some of the rules related to specific compounds or molecules are under pressure at the federal level, there are still states that have substantive regulations, right? So with PFAS, for example, 21 of our 50 states in the United States have rules, or in the process of implementing rules, some of which are more stringent than what's at the federal level. So if I'm an operating business, if I'm a private client like Montrose's clients, I have to address the state requirements anyway. And that's what I meant when I said the states. And if I -- now if I'm operating in multiple states, I have to likely deal with the lowest common denominator. And so state authority is going to increase, that benefits us. Complexity is going to increase, that benefits us. And more importantly, I don't think the long-term regulatory ARC on these specific compounds or molecules really changes for us all that much.

Okay, great. Thank you. Todd, did you have any thoughts or did Vijay kind of address it?

Yes. No, I think he covered it really well. I think the only thing I would add is the time it's going to take for these challenges to get through the court system is going to take a long time. And so I think the clients that I talk to as they're sort of thinking about their immediate and sort of near-term efforts, I think it's their long-term outlook. Like, long term, the outlook is going to be --there's going to be real clarity. You're not going to interpret the regulation differently just because it's a Democratic or Republican administration. It's going to be really, really clear. And so I think long term is where they will see the reduction in that whipsaw.

Okay. That's helpful. Thanks -- thank you. I'm wondering now, okay, so given everything that you just said, my next question is how are you positioning the business to address heightened uncertainty around environmental regulations. It sounds to me like it's business as usual, but I'm going to ask the question anyway. Is there anything different that you have to do now in thinking about the Chevron deference gone as you -- as we think about how you position your business?

I mean, Tim, uncertainty tends to benefit our business model, right? We've talked about this with you before, where complexity and uncertainty tends to drive our advisory and testing segments in particular. And so as we think about positioning, we may prioritize more of our advisory services in terms of where we allocate our attention or capital from an M&A perspective, and perhaps in select states where we see more opportunity as we see the power shift from federal to the state governments. But our thesis is the same. And I just want to make sure I'm very clear. We are not changing our path or our strategy. And our thesis is consistent for all the reasons we just talked about. I think the other point that's important here as it relates to uncertainty is that our business is almost entirely anchored on regulations that have been around for decades, Tim. And these are regulations that have been challenged in courts over and over and over again. And so even though this is a big shift in the legal doctrine, we don't expect it to move much of what Montrose is based on. So for all those reasons, we're not shifting kind of our outlook or our strategy. But in terms of where we emphasize parts of our segments or service lines versus others, that may shift over time as we see how this unfolds in the courts and how our clients react to that. Does that answer your question?

Does. I actually was reading an article that said the Supreme Court hasn't relied on Chevron deference for an EPA ruling since 2014. So it sounds like this isn't -- like you said, your business isn't anchored on the regs that are maybe up for debate here. Like, a lot of the regs are probably the ones that have been around for decades and aren't going to be challenged on that basis. So definitely understood. I think it's interesting that you highlighted this advisory and testing opportunity for folks that don't know the business as well. Why would heightened uncertainty potentially help that business? I mean, I think I have an idea, but for folks that don't know the business as well, I could imagine there being more uncertainty in the courts, hey, these 10 regs are being challenged. We need help navigating the business. Is that -- we need help understanding where the risk is in our business. You guys could help out with that? Or is it something else? Why might advisory and testing benefit from heightened uncertainty?

I'll give you -- I'll give you kind of 3 historical examples, Tim, right. When we saw what happened with Waters of the United States and how the courts kind of processed that over time, when we saw the NEPA regulations when we shifted from the Obama administration to the Trump administration, when we saw kind of the changes to the initial proposition related to the Clean Power Plan and the courts negating that, all of that resulted in significant uncertainty for our clients. And our advisory business deals, exactly as you said, Tim, with those questions, what does this mean? Where are my risks? What should I do now? What should I plan for in the future? Does this impact my future planning process? How do I think about my existing permits? How do I think about future permitting requirements? So we see substantive tailwinds on the advisory side as a result of that complexity and uncertainty. And oftentimes, that results in tailwinds for our testing business, because now, do I need to measure things differently? Do I need to report things differently? And then how does that flow into my permitting and assessment and risk management process, and those 2 are usually intertwined. And so we see a fair amount of that. We've seen it before, and we certainly expect that to happen here. We're already seeing inbounds related to that. The other part of this is, I think you know this, Tim, we support many of our clients with litigation related to environmental regulations and environmental impacts. And that part of our business is seeing a nice demand uptick as well.

Great. Very clear. Thanks. We've seen -- we've kind of already discussed this, but we've seen many articles highlighting expected challenges to things like PFAS, MCLs, or GHG emission caps for power plants, or the renewable fuel standard, just to name a few. What areas of your business do you think are more dependent upon specific regulations that may be challenged relative to other areas of your business?

Look, as I noted earlier, Tim, the vast majority of our business is anchored on regulatory frameworks that have been validated over decades by the courts. So just as a quick reminder, our growth algorithm of 20% to 25% top line growth, right, about high single digits, 7% to 9% organic, and 10% to 15% plus M&A driven, Tim, is what we talked about at IPO. That's the same it's always been. That's unchanged. And so our outlook and our growth algorithm are the same as they've always been. We've been growing closer to 30% to 35% a year over the last couple of years, right, faster than our historical thesis. And that's because of the opportunities we've seen around methane and PFAS, which are a big part of that incremental and that accelerated growth that we've seen. And so it's not that our business is dependent on specific regs, but that accelerated growth driven by PFAS and methane. We think PFAS is an APA debate, not a Chevron deference debate. And so it's really around the administrative procedures by which the agencies make rules. And as I said earlier, that's par for the course for us. We see that all the time. This is something that's been happening for decades. It's happened in the last couple of years where the courts weigh in on whether the agency overstepped or didn't step properly on specific regulations. That was expected as it relates to both PFAS and methane and that's progressing as per plan. And on methane, the Supreme Court and Congress have already weighed in, and so we don't really expect, and our clients don't expect much to change there. There may be tweaks on the margin around specific thresholds. I mean, should it be 4 PPT or should it be 3 or should it be 6. But that doesn't really impact our outlook or our thesis. And so if you -- again, just reiterating what I was saying earlier, Tim, we've talked to our clients. They aren't changing our outlook. We're not changing our outlook either. And our business isn't dependent and our growth algorithm and our positioning is not dependent on any specific regulation.

Yes. I'm not sure that demand would change that much if it went up to 20 PPT, to be honest. The point is, folks are still going to have to plan for it. I want to touch on methane real quick. What's your take on the specific air regulations, particularly those targeting methane? Your thoughts on the HON MACT regulation, which requires chemical producers to perform ongoing fence line monitoring to measure hazardous air pollutants?

[indiscernible].

Sure, sure. I think as Vijay mentioned, Tim, that the -- given the 2007 ruling, the Massachusetts versus EPA, it really confirmed the EPA's authority to regulate greenhouse gas -- gases, including methane, under the Clean Air Act. And so we really see that this ruling is just not affecting those regulations. Additionally, the methane reduction funding, as well as the measurement, quantification and taxing is written into the Inflation Reduction Act. And so since they're part of the statute, they just don't see that they can be clawed back. I think with the HON MACT, it's similar. This is well-trotted ground. These niche apps are well established regulatorily and have withstood scrutiny for decades and decades. And so we see no impact to the HON MACT either.

Got it. And you already said this, Vijay, but I got the question a lot from investors over the last couple of days. So I'm just going to ask it again just so -- just to be super clear. How should investors think about the impact from this Loper Bright ruling on your long-term financial targets? And can you remind us what those are?

So we are not changing our long-term financial targets, Tim. We are feeling as good and in some ways, we're kind of excited for some of the opportunities this brings for us, as I talked about. So just to reiterate what I said earlier, our -- we expect to grow 20% to 25% top line a year, and we expect to continue seeing margin accretion over time. And we believe organic will represent around 7% to 9% of that and then the remaining 10% to 15% of that will be M&A driven. That thesis remains unchanged and we're feeling as good as we were before this happened on what that outlook looks like for us.

Okay. Thank you. Just wanted to reiterate that. We'll pivot here a little bit. I know PFAS is only one piece of a much broader sustainability services story at Montrose. But given the passage of those recent regs, this topic, in particular, represents a lot of the inbound investor questions. So I think we should spend a little time here. I also think digging into one issue might help investors build a framework for how to approach other environmental statutes that may be challenged in court. So with that in mind, I'm recalling back to an expert call we did not that long ago with former Deputy Assistant Director at the EPA, who said, one way or another, this PFAS issue is going to have to be dealt with. Is that also your view?

Yes. Right. And we've gotten this question from many folks, Tim. So I'm not surprised you're fielding it as well. Look, the future is always very tough to predict. But I'll share -- let me share a little bit more detail as to why our outlook is unchanged and why, as we kind of apply the framework internally to this situation, or PFAS in particular, why we feel pretty good about where it stands. So I'll give you a couple of data points. One is regulating contaminants, or potential contaminants is what statutes ask the EPA to do. So the courts may not like how the statutes were interpreted, but regulating them is not really in question. So this is -- we believe this to be fully within the EPA's wheelhouse. The other data point that I think is relevant here, which is important to note, is that this is a bipartisan issue, and it's been for a while. So whether it's red states or blue states, they have been both been focused on it. And there's example after example that we've talked about with you in the past, Tim, and even recently with what's currently in front of the committee with the Clean Water Standards for PFAS Act, right, bipartisan. This is both a Republican and a Democratic issue. And as a result, we think that this is likely going to stick. Todd alluded to this. The third variable that's really critical here is that this is not just about regulations, right? This is also about litigation, legal risks that many potential clients may face, or existing clients do face shareholder concerns. And for companies operating again in states that have substantive regulations, which there are many and/or international jurisdictions where there's many PFAS regulations, the regulatory landscape is complex, and it's not entirely predicated on the EPA. And so for all of those reasons, though, the limits and the methodology the EPA used around PFAS will get challenged and likely will get challenged for a while, we expected that before the Chevron deference ruling. We are seeing that now, but it doesn't reduce the opportunity for us, Tim. And so I know I sound like a broken record. But as you think about what this means for Montrose, a lot of this is par for the course as these new regulations get -- as they get promulgated and as they get implemented and we expected a lot of this. Our clients did as well. And we've seen this before. But this was --this is -- it doesn't change kind of the opportunity set for us or where we believe what the broader industry outlook is going to be. And as a result, our outlook just stays the same. We're not changing.

Yes. And you don't sound like a broken record. I'm asking you the same question in 10 different ways. So many ways to answer it, right? So I think -- I think it's really important to be very clear with investors how you're looking about it and I appreciate that. And to that point about expecting challenges, I mean, we saw the AMWA and the AWWA recently filed a challenge on these recently passed PFAS MCLs. So I'm wondering what you think about that challenge if it has basis and if a judge were to vacate that standard, how you think about that target that you've talked about of doubling or tripling your PFAS revenue stream over the next several years?

Yes. So those -- some of those challenges are related to the municipal drinking water market, Tim, which has not been a focus of ours. So to answer your question, specifically, our target of doubling over or more over the next 3 to 5 years, that is unchanged, right, for all the reasons we just talked about on this call. So we're feeling as good as we were before. And just as a quick reminder, PFAS for us is not just about treatment. There's advisory work, there's testing work. Those have been going on for years. Those are accelerating materially as a result of some of these questions that have come up. And of course, there's treatment, and we've talked about that as well, given some of our proprietary technology. In addition to that, as it relates specifically to municipal drinking water, to give you a discrete example of what I meant by folks, our clients are not changing course and their outlook is no different. We recently got it -- were contacted by a major municipal water utility. They reached out to us after Chevron, right, given that that's the topic of this call, and they were asking about our regeneration and our intellectual property around regeneration and concentration. And the reason was because of the amount of media they expect to use, right, whether it's 4 PPT, 6 PPT, 10, 15, 20, they know that they're going to have to treat and it's going to be some threshold or some level, and they're going to end up using a lot of media. And so therefore, they're interested in what the technology could provide for them, either from a cost savings perspective, reduced waste perspective, right, for a host of reasons that has implications for their sustainability goals and investor commitments in addition to cost savings. And so not only [ is that a marketing ] historically hadn't addressed, but I cite that as an example to show you that clients aren't necessarily changing and the potential upside for us because of some of the confusion this has created is real. So that type of challenge, again, just to kind of reiterate what I was saying before, was expected. We expect those will continue. There's going to be a fair amount of that. We expect that courts will have various interpretations of what the statute said, right. It'll make its way through the appellate process. That takes years. Operating businesses and clients that we deal with are going to have to manage through that. That's going to create tailwinds for our advisory and testing. But we haven't seen any pullback in demand for the treatment side either. And in this specific instance, this opens up a set of opportunities we hadn't even really contemplated before, which is the drinking water utility market.

Yes. So -- the MCLs are specific to public water utilities, but how much of that PFAS -- I think kind of think about Montrose as being more leveraged to the industrial sites, airports, military bases. How much of that PFAS revenue target that you have in your head? I mean, you said doubled or more, but I'm sure you've got a number, right? So how much of that is based upon growth from the public water utility end market in particular?

In terms of what we shared about our historical outlook, [ very little ], right? That's just not a market we were very focused on our labs and our consulting businesses. We're helping the utilities kind of on the testing side. But when we're talking about the opportunity ahead of us, the municipal drinking water piece of it was tiny. It was de minimis.

Yes, that's what I thought. So maybe we can talk about what is important on the PFAS side, which is these advisory testing remediation projects. As I think about the ones that you've won to date, how important were other factors, not regulatory, but like the technology, the resin regeneration, the super concentration, the on-site containment. How important were these factors in terms of helping you win those projects?

So our clients to date, before regulations were obligated, before the Chevron ruling came out, our clients were primarily focused on anticipated regulations. So that outlook from their perspective hasn't changed. They were focused on litigation and risks that they were facing from a legal perspective. And then they were -- they were very focused on public relations, right, communities in which they operate and their commitments to those communities and/or pressure from communities in which they operate. So those are the primary drivers. And going back to my earlier comment, like those haven't really changed, right? Now, you have the regulations on top of that. And as they were thinking about balancing those variables, and as they were thinking about the best solutions for their specific needs, specifically industrial clients or Department of Defense around the world, our technology, because it's more efficacious when you have multiple PFAS compounds, including short-chain PFAS compounds, because of our regeneration, which minimizes waste right, and therefore, minimizes cost and disposal risk, those variables weighed pretty heavily, and they continue to be a key part of what drives the dialog even after this ruling.

Got it. Okay.

If I could -- hey, Tim, if I could just add one other point I think is important in that decision making is it's really unique to Montrose is our integrated business model where we have the consulting capabilities, the remediation capabilities, but we also have the dedicated internal PFAS laboratories, and then some experience doing some incredible projects globally. I think those really set us apart from a lot of folks that play in that same space.

[ It's the ] comprehensive solution set and the technology that's helping you win rather than any specific set of regulations. Is that a fair statement, guys?

I think that's well said.

Okay. I mean, we've talked about the MCLs having potential upstream impacts to industrial sites or airports because the MCLs just tackle public water utilities. But upstream impacts, potentially downstream impacts on landfills and wastewater plants. Gosh, I feel like I'm asking the same question again and again, but I'm going to ask it. Do you think a judge vacating those MCLs would decrease demand for PFAS solutions from those folks upstream and downstream from the MCLs?

Again, the states have a significant amount of authority, Tim, and so if there's challenges at the federal level, the state rules still have to be honored. And for all the reasons we cited earlier, we believe it's highly unlikely that the rules get vacated at the federal level. More likely they get challenged because of administrative procedures. And so it's going to be more about limits as opposed to complete removal. But that belief aside, even if they did get vacated because of the state rules and because of other pressures, the clients dealing with, say, 2 parts per trillion, which is the Illinois standard, right, not to mention all the other states that have rules are going to have to deal with how to treat the water before it gets to that level.