Montrose Environmental Group Inc
NYSE:MEG
Earnings Call Analysis
Q4-2023 Analysis
Montrose Environmental Group Inc
Montrose experienced an impressive year in 2023, marked by record revenues and consolidated adjusted EBITDA. Revenue increased by 15%, with EBITDA growing by 19%, reflecting an emphasis on higher-margin work and robust organic growth in key segments. The company saw a small total organic growth of 2%, attributed to cross-selling and demand in advisory services. While the R&R segment faced a strategic shift, moving away from lower-margin work, which temporarily slowed growth, Montrose's other sectors, particularly AP&R and M&A, exhibited 24% and 17% organic growth respectively.
Consolidating the organic growth thesis, Montrose anticipates low double-digit organic revenue growth, aiming to surpass their historical 7% to 9% organic growth cadence. The acquisition of Matrix brought revenue but lower initial margins; however, the company projects margin improvements in 2024. Montrose remains dedicated to strategic acquisitions, with five completed in 2023, two already in 2024, and a robust pipeline yet to unfold. These acquisitions are essential to their service expansion and cross-selling strategy, positioning them for sustainable and profitable growth.
Montrose's advisory services are set for strong organic revenue growth, riding on the successful performance of environmental emergency response and other high-demand services. In the long run, the company foresees these segments achieving 20% to 25% EBITDA margins, which is representative of their confident outlook and strategic direction towards higher profitability.
An upbeat assessment for 2024 suggests revenue growth and EBITDA margin expansion, underpinned by innovative business models and technologies. The final quarter of 2023 already posted a remarkable 18.8% increase in revenue to $165.7 million, leading to an annual revenue of $624.2 million, which is up by 14.7%. The full year's consolidated adjusted EBITDA stood at $78.6 million or 12.6% of revenue. Adjusted EPS also saw an uptick, climbing 24% to $1.07 per share. These financial indicators provide a solid foundation for Montrose's strong trajectory going into the next fiscal year.
Montrose is strategically positioned to benefit from evolving environmental regulations, such as the new U.S. EPA rules on PFAS and methane emissions. The focus on environmental justice and increased scrutiny on waste facilities and corrective actions creates new opportunities that Montrose is ready to capture with its expanding capabilities in emissions measurement and advisory services.
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Good day, and welcome to Montrose Environmental Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Rodny Nacier from Investor Relations. Please go ahead.
Thank you, operator. Welcome to our fourth quarter and full year '23 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, Chief Financial Officer.During our discussion today, we will be referring to our earnings presentation, which is available on the Investors section of our website. Our earnings release is also available on the website.Moving to Slide 2. We would like to remind everyone that today's call will include forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ in a material way due to known and unknown risks and uncertainties that should be considered in evaluating our operating performance and financial outlook.We refer you to our SEC filings, including our annual report on Form 10-K for the fiscal year ended December 31, 2023, which identify the principal risks and uncertainties that could affect any forward-looking statements as well as future performance. We assume no obligation to update any forward-looking statements.In addition, we will be discussing or providing certain non-GAAP financial measures today, including consolidated adjusted EBITDA, adjusted net income and adjusted net income per share. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. Please see the appendix to the earnings presentation or our earnings release for a discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures and the reconciliation thereof to their most directly comparable GAAP measure.With that, I will now turn the call to Vijay, beginning on Slide 4.
Thank you, Rodney, and welcome to all of you joining us today. I will provide you with business highlights. Allan will provide you with financial highlights, and we will then open it up to Q&A. I will speak generally to the updated earnings presentation shared on our website.Before I begin, I would like to take a moment to thank our over 3,100 dedicated colleagues around the globe. Their efforts drove another year of record revenue, adjusted EBITDA and cash flow by implementing best-in-class environmental solutions. I would also like to reemphasize that our business is best assessed on an annual basis, given demand for environmental solutions is typically not driven by quarterly patterns. We manage our business on an annual basis, and that is how we recommend you view our results as well.In terms of our financial results and business highlights, 2023 was another stellar year for Montrose. Our performance was driven by the key themes we touched on last year. First, we were thrilled to produce record full year revenue and consolidated adjusted EBITDA. Total revenue grew by 15% and adjusted EBITDA grew by 19%. Adjusted EBITDA margins increased as planned, and our cash flow was also at record levels.Second, our revenue predictability and consistency continue to increase. Our 95% revenue retention rate with customers in 2023 continues from last year. We also saw a consistent increase in cross-selling with over 50% of our 2023 revenues coming from clients utilizing 2 or more Montrose services, which was up substantially from last year. Our integrated business model and our IP portfolio enable cross-selling, which further enhances our model. In effect, our flywheel is starting to spin really nicely.A large portion of the organic growth that we've seen over the last few years has been from cross-selling our services. So this level of integrated activity within our business gives us confidence to continue growing organically in 2024 and beyond.Third, we saw 24% organic revenue growth in our AP&R segment and 17% organic revenue growth in our M&A segment. Our strong organic growth in these segments was primarily due to higher demand for our advisory services and the positive performance in our lab and field services, particularly methane emissions and PFAS testing.Fourth, double-digit organic growth in our AP&R and M&A segments was partially offset by the expected revenue decline in our R&R segment. This is due to our shift away from lower-margin work within our biogas services. Growth was also impacted by a shift in project time lines as our clients navigate proposed U.S. EPA PFAS regulation that the EPA originally proposed for Q4 2023 and now expects to finalize any day. With all that considered, for the full year, we produced total organic growth of 2%.I want to reiterate that our organic growth thesis has not changed despite the strategic shift in our R&R segment that caused a temporary slowdown in 2023. To put a finer point on our organic growth thesis, we have averaged 15% organic revenue growth per year for the last 3 years, and our 2024 outlook assumes low double-digit organic revenue growth.Our focus on higher margin work in 2023 manifested itself in our adjusted EBITDA results. Our consolidated adjusted EBITDA margin increased 40 basis points despite the acquisition of Matrix. Matrix had full year revenue of approximately $70 million at a 4.6% adjusted EBITDA margin prior to joining Montrose. We expect a continuation of adjusted EBITDA margin improvement in 2024. So we not only expect to outperform our historical 7% to 9% organic growth cadence this year, but we expect to do it with higher margins.Fifth, we are witnessing growing activity in our end markets driven by new and anticipated regulations as well as our clients' voluntary focus on environmental stewardship. From new regulations affecting PFAS disposal and tightened methane leak detection protocols, depending rules on climate disclosures and changes in air emission standards, we are experiencing significant regulatory tailwinds across all aspects of our business.Sixth, acquisitions remain core to our strategy. Our investments in M&A have been very additive to our ability to service customers through new technologies and geographic expansion. In addition to the strategic synergy, we're unlocking tremendous value from pricing and cross-selling opportunities. With larger deals, in particular, we are now starting to see cost synergies because we run on one platform and have robust support functions. With Matrix, which had margins of 4.6%, margins have already almost doubled in our hands on a run rate basis, and we expect continued margin accretion.Furthermore, through our larger scale and cross-selling capabilities, we believe we have grown the serviceable addressable market for Matrix materially. We closed 5 acquisitions in 2023. And so far this year, we closed 2. And our acquisition pipeline is more robust than we've seen in a while.I would also like to highlight that we are particularly proud of the success of our R&D efforts, which aims to solve major environmental challenges and create new opportunities for our business. We submitted 9 new and unique patent applications in 2023, which we believe will continue to differentiate our services and create value. For example, we expanded our PFAS treatment solutions to include unique home fractionation and unique bioreactors to address the needs of our clients with wastewater and landfill leachate challenges.We've also expanded our ability to more effectively remove metals from water, like selenium at the request of our mining and industrial clients. Furthermore, we're helping many of our clients and communities with their quality monitoring and greenhouse gas measurements using next-generation sensors and proprietary software. The EPA's focus on GHG emissions and separately, the impact of air quality on disadvantaged communities have bolstered demand for our real-time quality assured and data-driven solutions.Our historical R&D investments are more than conceptual. They are already generating EBITDA and cash flow, and they are already helping us continue to generate strong shareholder value.Finally, our strong balance sheet and record cash flow generation for the year has enabled our investments in M&A and R&D. 2023 cash flow from operations of $56 million, which is more than double compared to the prior year, provided us ample flexibility to continue investing in attractive opportunities for Montrose.Before I discuss our performance by segment, I would also like to discuss organic performance. When we purchased CTEH, it was almost exclusively a response business, making it more difficult to forecast quarter-to-quarter. What we saw in 2023 and what we are already seeing in 2024 is a really nice collaboration between the operating leaders of CTEH and the rest of Montrose, which is manifesting in the form of increased cross-sell.We are also seeing a nice increase in the consultative part of the CTEH business. And this means CTEH revenue is now proportionately less response and more typical of traditional environmental solutions. We exclude the emergency response related revenues from our organic calculation and have separately disclosed revenues from emergency response as requested by many of you, our shareholders.I will now discuss our full year performance by segment. Within our Assessment, Permitting and Response segment, we were pleased to see strong organic revenue growth in our advisory services for the full year. We also saw positive contributions from our acquisitions. Our environmental emergency response business continued to perform above historical run rate levels given several high-profile response projects that continued from earlier in 2023. The increase in margins for this segment were driven by strong organic revenue growth and the increase in environmental emergency response revenue. We remain bullish on the outlook for our advisory services in 2024 and beyond. And in the long run, we expect this segment to continue to run at 20% to 25% EBITDA margins.Within our Measurement and Analysis segment, we also continued to experience strong organic revenue growth. We are especially pleased with the positive performance across our lab and field services, with particular strength in our air quality testing and greenhouse gas testing services. We continue to add to our geographic footprint with new locations to facilitate faster turnaround times for our clients.In addition, our software coupled with our sensor networks, are creating new and differentiated opportunities for our business. In total, we remain upbeat about our prospects for continued performance in Measurement and Analysis for 2024. Annual margins in this segment were at and remained in our long-term 18% to 22% expectation range.Finally, within our Remediation and Reuse segment, revenue growth was primarily driven by our acquisition of Matrix that was offset by reduced revenues from our ECT2 water and biogas [ projects ]. Margins during the year were lower primarily given the impact of the Matrix acquisition, which was a 4.6% margin business prior to acquisition. Margins were also impacted by lower ECT2 revenues, which were due to delays in PFAS projects given delays in the U.S. EPA's PFAS regulations and a planned shift in our biogas business towards higher-margin services.The shift in ECT2's biogas services and the improvements we are already making with Matrix are expected to enhance our margin profile in this segment in 2024. This segment should also be back to steady organic growth in 2024. R&R segment is our least mature segment, and we expect margins to run operationally at 20% to 25% over the long term.Next, I will discuss recent regulatory updates and industry trends that support our long-term growth outlook. The U.S. EPA remains focused on PFAS and recently added 9 PFAS, the list of hazardous constituents under the Resource Conservation and Recovery Act. This rule will give the EPA the authority to regulate for emerging contaminants such as PFAS at permitted waste facilities and pursue corrective actions in a wide variety of industries, creating substantive opportunities from Montrose.With regards to methane emissions, the EPA's new methane rule was finalized in December of 2023. This regulation aims to significantly reduce methane releases from flares, vents and leaks along with requiring increased leak detection, all of which support incremental demand for our emissions measurement, monitoring and assessment solutions. Our early investments in optical imaging technologies and our early investments in software and sensor networks continue to create strong tailwinds for our business given these regulations.Regarding demand for our environmental consulting services, the EPA continues to prioritize environmental justice in its rule making, permitting and enforcement activities. We anticipate this campaign will drive increased demand for our advisory and for our testing services.In summary, before I turn it over to Allan, I would like to again acknowledge the entire Montrose team for their hard work and dedication. I remain incredibly grateful for the immense value they bring to our clients, which is reflected in these record 2023 results. Our upbeat outlook in terms of revenue growth and EBITDA margin expansion for 2024 is a function of the strength of our business and the differentiated nature of our business model, technologies and services. Allan will touch on our 2024 guidance shortly, and we look forward to updating you on our progress throughout the year.With that, I will hand it over to Allan. Thank you.
Thanks, Vijay. We are pleased with our strong performance in 2023, driven by strong execution, our track record of highly additive M&A activity and our expanding customer relationships, which drove another year of solid revenue retention and cross-selling success.Moving to our revenue performance on Slide 11. We were happy to see continued strong organic growth across most of our service lines during the fourth quarter and full year 2023. Our fourth quarter revenues increased 18.8% to $165.7 million compared to the prior year quarter. Full year revenues were up 14.7% versus the prior year to $624.2 million. The primary driver of revenue growth in both periods was the positive contributions from acquisitions, including Matrix, strong double-digit organic growth in our AP&R and M&A segments and an increase in environmental emergency response revenues.This was partially offset by our R&R segment, where we experienced delays in project time lines as clients await clarity on PFAS regulations. We also executed a strategic shift in our biogas business to focus on higher margin, lower revenue services, as Vijay discussed. Excluding revenue from discontinued businesses, revenue was up 20.2% to $162.8 million in the fourth quarter and was up 17.5% to $615.4 million for the full year.Looking at our consolidated adjusted EBITDA performance on Slide 12. Fourth quarter consolidated adjusted EBITDA was $17.5 million or 10.5% of revenue. This compares to consolidated adjusted EBITDA of $17.8 million or 12.7% of revenue in the prior year. Prior year Q4 EBITDA includes $2.2 million related to the discontinued specialty lab, which included a business interruption insurance gain following the cyberattack that impacted that lab earlier in 2022.Excluding the discontinued specialty lab, Q4 2023 consolidated adjusted EBITDA increased 12.2%, driven by higher revenues. Roughly half of the lower Q4 consolidated adjusted EBITDA margin was due to the removal of the discontinued specialty lab, with the remainder primarily driven by seasonally low margins from Matrix acquired in June 2023 as well as unfavorable mix and significantly lower incentive comp expense in the prior year.Full year consolidated adjusted EBITDA was $78.6 million or 12.6% of revenue, an improvement compared to consolidated adjusted EBITDA of $66.2 million or 12.2% of revenue in the prior year. Prior year adjusted EBITDA included $2.1 million from the discontinued specialty lab.Moving to a review of diluted adjusted net income per share on Slide 13. Adjusted EPS increased for the quarter and full year. For the year, we reported diluted adjusted net income per share of $1.07, an increase of 24% compared to diluted adjusted net income per share of $0.86 in 2022. The increase was mainly driven by higher revenues and stronger adjusted EBITDA dollars. Please note, our diluted adjusted net income per share is calculated using adjusted net income attributable to stockholders divided by fully diluted shares. We believe diluted adjusted net income per share is the most helpful net income metric to Montrose and to common equity investors.Turning to our business segments on Slide 14. I'll focus my comments on the most recent quarter. In our Assessment, Permitting and Response segment, fourth quarter revenue increased 10.9% year-over-year to $50.1 million. The year-over-year increase was driven primarily by organic growth, growth in revenues from environmental emergency responses and, to a lesser extent, the positive contributions from acquisitions.AP&R segment adjusted EBITDA increased 27.3% year-over-year to $9.2 million or 18.3% of revenue, up from 15.9% in the prior year, reflecting the benefits of organic growth, favorable revenue mix and higher aggregate margins across our other businesses within this segment.In our Measurement and Analysis segment, revenue for the quarter increased 15.7% to $54 million, primarily attributable to double-digit organic growth and, to a lesser extent, the benefits from acquisitions, partially offset by lower revenues from the discontinued specialty lab. M&A segment adjusted EBITDA was flat year-over-year. Excluding the discontinued specialty lab, however, M&A segment adjusted EBITDA was $9.7 million or 18.9% of revenue in the current year compared to $7.5 million or 17.6% in the prior year. The increase in adjusted EBITDA and adjusted EBITDA margin, excluding the discontinued specialty lab, was driven by organic revenue growth.In our Remediation and Reuse segment, fourth quarter revenues increased 29.3% to $61.6 million, primarily due to the acquisition of Matrix, partially offset by the anticipated decline in revenues from certain large water treatment projects and the recent pivot in our biogas business to focus on higher margin, lower revenue projects. The decrease in R&R segment adjusted EBITDA margin was due to lower water treatment revenues and the dilutive impact of Metrix. Our margin optimization efforts are well on track at Matrix to achieve a double-digit adjusted EBITDA margin in that business by the end of 2024.Moving to a review of our cash flow and capital structure on Slide 17. Full year cash flow from operating activities was $56 million. This represented a conversion of adjusted EBITDA to operating cash flow of 71% for the year. Cash flow from operations, which increased roughly $35 million over the prior year, included the payment of acquisition-related contingent consideration of $0.6 million in the current year and $19.5 million in the prior year, accounting for $18.9 million of the year-over-year increase in operating cash flow, with the remainder of the increase driven by a lower working capital build and higher earnings before noncash items.For the year, we produced free cash flow, i.e., operating cash flow less cash paid for CapEx net of proceeds from asset sales, of $27.4 million, representing approximately 70% of adjusted net income. In 2023, our cash capital expenditures of $29.6 million included $12.2 million to replace the plane we lost in a tragic accident earlier in the year. Ongoing maintenance CapEx is expected to continue to run at around 1% of revenues.Our net leverage ratio includes the impact of acquisition-related contingent earn-out obligations payable in cash. We ended the year at a healthy ratio of 1.9x and a strong available liquidity position of approximately $150 million. In January 2024, we voluntarily redeemed $60 million of the outstanding preferred stock. The associated dividend savings are an estimated $5.4 million annually and represent a proactive step towards simplifying our capital structure. Following this redemption, the principal balance of the preferred stock outstanding was reduced to $122.2 million.As a reminder, our convertible and redeemable Series A2 preferred stock has no cash maturity date, but we have the option to redeem the preferred shares at any time for cash. In February, we upsized our credit facility to $400 million, adding $100 million to our available liquidity on the same terms as our pre-existing facility. $50 million of the increase was added to our term loan and the other $50 million increased our revolver capacity to $175 million.Overall, we believe our solid balance sheet, ample liquidity position and expectation of continued robust operating and free cash flow generation puts us in a good position to continue to drive additional value creation in our business in 2024 and beyond.Moving to our full year outlook on Slide 20. Based on the positive momentum in our business, we are introducing our outlook for full year 2024 revenues to be in the range of $675 million to $725 million. We expect consolidated adjusted EBITDA to be in the range of $90 million to $95 million. Our revenue and consolidated adjusted EBITDA outlook for the full year represents double-digit revenue growth and margin expansion over the prior year.We anticipate strong organic growth in the low double digits, given our current visibility into end market demand and cross-selling momentum. Our outlook also includes an expectation for environmental emergency response revenues to be in the range of $50 million to $70 million compared to $91 million in 2023. Additionally, we anticipate the conversion of consolidated adjusted EBITDA into cash flow from operating activities will remain in excess of 50%, consistent with our long-term annual target.As we think about the distribution of revenue and adjusted EBITDA in 2024, the addition of Matrix for the full year and the timing of environmental responses in the prior year will change the growth patterns of our revenue and margins as we move through the year. So we wanted to provide a bit more color on the topic as follows.We expect revenues to be up year-over-year in each quarter of 2024. We expect margins will be down in the first quarter and up in the second, third and fourth quarters, resulting in higher margins for the full year. For the first quarter, we anticipate revenues to be up mid-teens compared to Q1 2023. While first quarter total revenues are up year-over-year, there will be a notable difference in revenue mix, mostly occurring within our AP&R and R&R segments.In our AP&R segment, we had a high-margin emergency response mega project in the prior year period, which is not expected to recur in Q1 2024. In our R&R segment, the primary factor is seasonally low margins from Matrix, which was not in the comparable prior year period. Therefore, we expect first quarter consolidated adjusted EBITDA margin to be down year-over-year but up 50 to 100 basis points sequentially compared to Q4 2023.In terms of seasonality, we anticipate revenue in the second, third and fourth quarters to follow similar seasonality as the prior year, along with margins up year-over-year in all 3 quarters.In summary, 2023 was another milestone year for Montrose. With the strong momentum in demand, substantive regulatory tailwinds and strong cash flow generation, we believe we are well positioned to realize another year of record performance in revenue, adjusted EBITDA, cash flow and diluted adjusted net income per share.Thank you all for joining us today and for your continued interest in Montrose. We look forward to the opportunities we see ahead and updating you on our progress next quarter.Operator, we are ready to open the lines to questions.
[Operator Instructions] The first question comes from Jim Ricchiuti from Needham & Company.
I wanted to go to the cross-selling metrics that you guys are providing. And this may be a tougher question to answer, but is there any way of gauging the impact of some of the success you're having on cross-selling with respect to adjusted EBITDA? And the other follow-up, and it's related to this cross-selling is, are you seeing any early cross-selling in Canada with the Matrix business? Or is that more of a 2024 story?
If you -- the short answer is, it is absolutely having a material impact on our organic, on our EBITDA margins and on our predictability. What's beautiful about this story for us is that if you kind of go back to our IPO, we were under 10% of clients purchasing more than one service. And that metric, as you can see in the investor presentation, has been consistently ticking up.We targeted getting to 50% over the next few years, and the teams have done an exceptional job. We've kind of hit that metric now ahead of plan. That's having kind of multiple impacts on our business. If you look at our kind of historical cadence of organic growth and how it's kind of lifted from that 7% to 9% to now the teens, that is in large part because of the cross-selling efforts.The margin lift that we saw last year and the margin lift we're kind of anticipating in 2024 is in large part because of these cross-selling efforts. And then the other part that we're really happy about is that the recurring nature of that revenue, which impacts our overall predictability and consistency, has now gone up materially as well. And so it's -- this is kind of one of those narratives for us that we're really, really excited about.And I think the other point, Jim, that's worth noting is that, that 51% is clients buying more than one service. And we're now -- we are still a fraction of the overall environmental spend of our existing clients. And so there's still a material opportunity for us to continue penetrating the wallet share or the market share within our existing customer base. And so we think this trend will continue for us for a while.
Jim, let me just add. This is Allan. It's manifesting itself primarily in our AP&R and M&A segments where the majority of our clients are. If you look at, organic growth was 24% in AP&R and 17% in M&A. So well above industry growth rates. And if you look at margins, margins are up nicely in both of those segments. So it's absolutely manifesting itself in the numbers.
And then just with respect to Matrix. First, how is the integration going? Clearly, have some plans to expand margins there. And has cross-selling begun to take place there? Or is that something we should assume this year?
It is -- the integration is going well, Jim. We -- on a run rate basis, margins have almost doubled in our hands from the point of acquisition. So we are really happy with the way that's progressing. And so we are ahead of plan a little bit and certainly expect to get to our mid-teens by the end of this year.And yes, cross-selling is a big focus. That's kind of the main focus of our commercial organization, and it has been -- it has already started, and we certainly expect it to manifest more fully this year in '24.
And then last question, I'll jump back in the queue. Just from an R&D standpoint, are there any key milestones that we should be looking out for in 2024?
We need to spend some more time with you, Jim, walking through what I would consider some incredible successes on that front. We filed for 9 unique patents in 2023, both expanding our existing footprint for the treatment of multiple contaminants like PFAS, other emerging contaminants, but also opening up some new market opportunities. Each of these is sizable and could be material, obviously, because it's moved into development and the early phase of commercialization, we're not calling for anything specific this year.But as we think about the drivers of our organic now based on investments we made 4, 5 years ago, for example, with PFAS or with methane emissions and monitoring, right, we've talked about all this in the past, Jim. We believe some of these opportunities that we're starting to get success with on the R&D side will provide a similarly sized growth engine for Montrose 3 to 5 years out.
The next question comes from Tim Mulrooney from William Blair.
Just a clarification question to start off here. When you say low double-digit organic growth guidance for this year, my question is, is that in spite of the headwind from the lower expected disaster response revenues? Or when you say organic, are you excluding both the impact from acquisitions and changes in disaster response revenue?
It's both, Tim. Yes. So it's, call it, 10% to 12%, excluding the response, which is consistent with what we've always been doing and excluding acquisitions.
Got it. So really organic growth, you say core -- your core business organic growth you expect to be up double digit. Understood. And so -- okay, so that's still obviously looking very healthy. Could you provide a little more detail on what your expectations are, specifically for that Remediation and Reuse segment this year on an organic basis?The reason I ask, Vijay, is I know we have a lot of moving pieces here. We've got this biogas business, which maybe has another quarter or 2 of a headwind before that turns into a tailwind. You've got PFAS, which is still waiting on these regs. You got Matrix and Epic on the inorganic side. So just any other color you can give us on what's predicated in your guide for that core organic?
Yes, it's a great question, Tim. So we do expect the Remediation and Reuse segment to get back to kind of a healthy organic growth this year. If you kind of break down our low double-digit expectation for the core business, as Allan alluded to earlier, our AP&R segment has been on fire, right, 24% organic last year. We certainly expect elevated organic for them again this year. Same with the M&A segment at 17% last year. We think they'll be healthy double digits this year. And then we think the Remediation and Reuse segment in our estimates, we're assuming kind of [ mid- to mid-high ] single-digit organic, so back to a nice cadence.Some of that, Tim, is going to be predicated on kind of how this regulatory environment evolves. Obviously, if it comes in more favorable, there's going to be more upside opportunity and long-term upside opportunity. If it gets delayed, that could swing that a couple of points. But we've baked that into our assumptions this year. Does that answer your question?
Yes, it completely answers my question. I guess, when you say kind of dependent upon regulatory, are you speaking specifically about MCLs and CERCLA and that kind of thing? And if so, could you...
Yes, ECT2, it's a big part of it, Tim, right? So if you look at '22 versus '23 that water and biogas part of our business, coming off of, obviously, triple-digit organic in '22 was down about 20%-ish. And we think they're back to a nice, healthy organic growth cadence this year. We do expect to kind of see some of that kind of at the end of Q2, Q3, Q4 because a lot of that, especially on the PFAS side is going to be predicated on some of the regulatory clarity.
The next question comes from Andrew Obin from Bank of America.
Just -- this is David Ridley-Lane on for Andrew Obin. Just a follow-up on that last question. I understand clients are sort of waiting to see the final regs on PFAS. Any color, though, on sort of the funnel or the breadth of client discussions that you're having?
Yes. David, I mean, as we are -- the funnel has expanded materially. I think the expectation that the treatment limits are as low as they are expected to be and the number of molecules that are being covered is substantive. And now that the test methods and the rules on how to measure this has been promulgated, there is a lot of attention now on how best to treat. We are, as you know, working on some of the largest we've already built and are building some of the largest PFAS treatment facilities in the world.We're seeing that even outside of the industrial space. We're working on some of the largest PFAS treatment facilities on the waste and landfill leachate side. And that's a function of anticipatory activity by a lot of our clients related to these PFAS regulations. And so across the globe, we've seen a real uptick in activity in Europe. We've seen a real uptick in activity here. The challenge for us is predicting exactly when the wave crests and breaks.
And then can we get a little bit more color on the 2 acquisitions so far this year, Epic and Two Dot? How do they fit with your strategy and I guess relative scale?
Yes. These -- so Epic is an incredible team. They are kind of environmental experts with an incredible brand and presence within the Australian market. We love it for 2 reasons. One, the credibility that team brings in terms of their overall knowledge of and access to the broader Australian market is very complementary to our treatment technology efforts. And that team's expertise also gives us a lot of visibility into how potential regulations and opportunities are evolving as we think about other ways for Montrose to offer services in Australia. So that's been -- it's going to be, I believe, an exceptional addition to our team this year.And then Two Dot is an environmental consultancy in the Rocky Mountain region. They've got expertise in the energy and renewable energy space in the Rocky Mountain area. And that's, for us, an area we need to continue doing more in, David. It's -- as you look at kind of the Montrose footprint, that's a geography in which we are underrepresented given the market opportunity there. So that's always been a focus. You'll see us continue to build that out and also an incredible and exceptional team. So we're really excited about both of these.
And one last quick one. Since you mentioned it, as you develop client relationships that are deeper and spanning multiple service lines, are you also starting to have kind of higher relationships at more senior levels of management, right, that would enable you to take that more holistic basis and access greater wallet share for the total company? In other words, is that -- it's great that you're winning and winning and winning more, but are you taking that next step to perhaps have a kind of firm-wide basis?
Yes. Yes. I mean, look, a large part of our effort to expand and part of our thesis around really expanding within the advisory services space, which was an area we were -- if you go back to our inception or even to our IPO was a relatively underrepresented part of our business. That has been growing really nicely. And our focus on that, David, is precisely for this point, these top-tier highly credentialed and deeply experienced experts in the environmental space are advising General Counsels, CEOs, CFOs and heads of environmental. And that obviously gives us a bird's eye view as to different ways that we can help solve our clients' challenges.This is what I was kind of alluding to, David, on the flywheel concept, which is if we can have the relationship at the local level and at the executive level, then we can understand what the needs are, and we are uniquely positioned to address those needs because we're integrated across the portfolio. So that's exactly why we are expanding in the advisory side. And yes, we are seeing really nice success there.
[Operator Instructions] The next question comes from Brian Butler from Stifel.
I guess I'll start just on the M&A path as well. Can we talk about maybe what does the capacity look like with the expanded revolver and taking out the preferred? What's left, I guess, on the capacity side? And then just maybe some color on the market in what areas are attractive at this point?
Yes, let me take that. So we -- at the end of '23, our revolver, which was $125 million at the time was unused. So we've added $50 million to that and then the additional $50 million term loan gave us $225 million of capacity, of which $60 million is going to pay down the first tranche of the preferred and the rest is fully available for us to continue to acquire and invest.
Okay. And when you talked about, I guess, on the cash flow side and the conversion, can you give -- can you just remind me where we're expecting cash flow conversion in 2024?
Yes. What we've historically said is expect us to convert 50% to 60% of our adjusted EBITDA into operating cash flow. The last couple of years, we've been north of 70%. And I'm particularly proud of the team's ability to manage working capital. We don't talk a lot about this, but our DSOs dropped 3 days in the core business this year, that was certainly a contributor towards that strong organic cash flow generation. And that's expected.So we think that 50% to 60% target, we're likely to be on the higher end of that range. So very healthy conversion and certainly above where we had expected to be a few years ago. Yes. And our maintenance CapEx, as you know, is always harbors around 1% to 1.5% of revenues. The business is still a very capital-light business. And so our ability to continue investing given how strong cash flow has been, is as good as it's ever been.
Okay. And then just maybe one last one. Can you maybe just kind of wrap it up? I know we've touched on a bunch of different ones. But when you think about the quarters in 2024, are there any really tough comparisons kind of by segment that everyone should be aware of and just kind of make sure that we don't miss anything in -- like the headwind in R&R? Is there anything else that we should be focused on?
Yes. As we think -- it's a great question. As we think about the profile of the year, we gave additional color in the prepared remarks on Q1. So revenue is going to be up over every quarter in the year. Q1 has the toughest comparables on an EBITDA basis, mainly because of the large emergency response in the prior year. The rest of the year, so Q2, 3, 4 will follow a similar seasonal pattern, although Q2 will have 2 more months of Matrix that was acquired June 1 of '23. But you'll see a similar across the year in those quarters, similar profile.And then margins are typically significantly higher in Q2 and Q3. And you'll see that if you look across 2023, we expect that to continue. And again, Q4 will follow similar margin seasonality as the prior year. So in every quarter, we will be up on revenue and margins will be up, the seasonal profile to be fairly similar year-on-year.
Congratulations on a good quarter.
This concludes our question-and-answer session. I would like to turn the conference back over to the CEO, Vijay Manthripragada, for any closing remarks.
Thank you, and thank you to all of you for joining us this morning. We're really excited about the year, and we're looking forward to continued dialogue with you as the year unfolds. Talk soon and take care.
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