Montrose Environmental Group Inc

NYSE:MEG

Earnings Call Analysis

Montrose Reports Record Revenues and Confirms Strong Outlook

Montrose Environmental Group achieved record revenues of $173.3 million in Q2 2024, an 8.9% increase from last year, driven by organic growth and acquisitions. Adjusted EBITDA reached $23.3 million. The company's Assessment, Permitting, and Response segment saw a $14.7 million decline in environmental emergency response revenues, yet other segments, particularly Remediation and Reuse with a 36.6% revenue increase, counterbalanced this drop. Montrose reaffirmed its 2024 revenue guidance of $690-$740 million and adjusted EBITDA of $95-$100 million. The firm remains optimistic due to regulatory tailwinds and ongoing strategic acquisitions, expecting a significant EBITDA portion in the latter half of the year.

Strong Financial Performance in Q2 2024

Montrose Environmental Group delivered its second quarter 2024 results with record revenues of $173.3 million, an 8.9% increase year-over-year. This contributed to first-half revenues reaching $328.7 million, growing 13.1% compared to the same period last year. The growth was primarily driven by solid organic performance across various segments, particularly in Assessment, Permitting, and Response (AP&R) and Measurement and Analysis, while revenue from environmental emergency response and water treatment segments saw declines due to prior-year comparatives and strategic shifts away from lower-margin activities.

Increasing Adjusted EBITDA Margins

The company's consolidated adjusted EBITDA for Q2 reached $23.3 million, reflecting 13.5% of revenue, climbing from $21.2 million or 13.3% in the previous year’s quarter. For the first half of 2024, adjusted EBITDA totaled $40.2 million, at 12.2% of revenue versus $37.8 million at 13% previously. Although margins decreased slightly due to the Matrix acquisition, the overall trajectory indicates effective cost management and operational efficiencies.

Segment Performance Highlights

Breaking down revenues by segment, the AP&R segment reported $53.4 million in Q2, down from $61.4 million the previous year, mainly attributed to reduced emergency response revenues. The Measurement and Analysis segment grew 9.5% to $54.8 million, supported by regulatory-driven demand and organic growth. Meanwhile, the Remediation and Reuse segment soared 36.6% to $65.1 million, bolstered by the Matrix acquisition and strategic shifts towards higher-margin services, positioning it for further growth in the coming years.

Adjusted Net Income Trends

For Q2, diluted adjusted net income per share was $0.20 compared to $0.29 a year earlier, and $0.37 for the first half of 2024, down from $0.47. The decline was driven by heightened interest and tax expenses, which overshadowed improved operational efficiencies and cost reductions.

Robust M&A Strategy and Growth Outlook

Montrose highlighted recent strategic acquisitions, including Paragon and Spirit Environmental, which enhance its footprint and service capabilities. The company reaffirms its full-year revenue guidance between $690 million and $740 million, with consolidated adjusted EBITDA expected in the range of $95 million to $100 million. This guidance considers organic growth rates of 10% to 12% for the year.

Focus on Long-Term Margin Expansion

Montrose continues to focus on improving profit margins. The long-term margin targets for the AP&R segment are expected to be between 20% and 25%, and 18% to 20% for the Measurement and Analysis segment. The acquisition of Matrix, which is expected to reach low double-digit EBITDA margins by year-end 2024, is pivotal in achieving these goals.

Navigating Regulatory Changes and Industry Tailwinds

Montrose remains optimistic about long-term demand driven by regulatory complexities, particularly concerning PFAS regulations and emissions. The company identifies a growing addressable market of approximately $200 billion for PFAS remediation. Recent regulatory developments are expected to increase compliance requirements, further amplifying demand for Montrose's services.

Future Expectations and Cash Flow Management

Despite a temporary increase in receivables impacting cash flow, Montrose anticipates a significant rebound in operating cash flow during the latter half of 2024. With $188.3 million in liquidity available post-acquisition activities, the company is well-positioned for continued investments in strategic growth opportunities. The management remains focused on maintaining a leverage ratio below 3.5x, currently standing at 2.4x.

Conclusion: Strategic Growth Amidst Regulatory Landscape

In conclusion, Montrose’s strong quarterly performance underlines its strategic initiatives in organic growth and M&A, backed by favorable regulatory conditions. The leadership's focus on margin improvement and expansion into higher-margin service lines places the company in a robust position to capitalize on emerging opportunities, reinforcing confidence in achieving its guided financial outlook for 2024.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Montrose Environmental Group, Inc. Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded.

And now, I'd like to turn the conference over to Adrianne Griffin, Senior Vice President, Investor Relations and Treasury. Please go ahead.

[Adrianne Griffin, executive]

Thank you, operator. Welcome to our second quarter 2024 earnings call. Joining me on the call are Vijay Manthripragada, our President and Chief Executive Officer; and Allan Dicks, our Chief Financial Officer. During our prepared remarks today, we will refer 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. I would like to remind everyone that on today's call, we 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 recent 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.

On today's call, we will discuss or provide certain non-GAAP financial measures, 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 a reconciliation to their most directly comparable GAAP measure.

With that, I would now like to turn the call over to Vijay, beginning on Slide 4.

[Vijay Manthripragada, executive]

Thank you, and welcome to all of you joining us today. I wanted to start by introducing Adrianne Griffin, who is our new Head of Investor Relations. She brings stellar depth of IR experience to Montrose. And as we continue to increase our stakeholder engagement, we look forward to introducing her to all of you in the very near future. Welcome, Adrianne, and thank you.

I will open my remarks with an update on our business, operations and strategy. Allan will then provide the financial highlights. And following our prepared remarks, we will then hold a Q&A session.

While today's call will highlight second quarter and year-to-date performance, it's important to reiterate that our business is best assessed on an annual basis. Demand for environmental solutions does not consistently follow quarterly patterns, and we manage our operations using annual perspectives.

We are pleased to report our second quarter and first half results, which included our highest ever revenue and adjusted EBITDA. Our solid operational performance and ability to capitalize on demand momentum across our business continues to be driven by our dedicated colleagues around the world, and I would like to thank them for their substantial contributions to our collective success.

Our stellar quarterly results included 9% revenue growth and 10% adjusted EBITDA growth. Organic revenue growth across most of our businesses contributed to our record performance. Our organic growth trajectory continues to be positively impacted by further IP development and cross-selling success. We expect continued strong organic growth in the back half of the year, and we reaffirm our full year 2024 organic growth expectation of 10% to 12%.

Our focus on strengthening and optimizing margins was evident in our quarterly results, as we reported a 20-basis-point increase in consolidated adjusted EBITDA margins compared to the prior year period. Cross-selling success contributed to margin expansion in all 3 segments, and this is despite the impact of Matrix. And Matrix remains a bright spot and is now realizing low double-digit adjusted EBITDA margins in the quarter. While we are pleased with the significant profitability improvement our team has achieved since acquiring Matrix in June of last year, we remain focused on further optimization.

Turning now to Slide 7. Since our prior update in May and following our equity capital raise, we have maintained our cadence of highly strategic M&A. In June of this year, we acquired Paragon, an exceptional addition to our Canadian footprint and an expansion of our environmental consulting and engineering services in Canada.

In July, we acquired Spirit Environmental, a leader in air permitting and modeling, which also enables geographic expansion across the U.S. Mountain and Gulf states. Though both transactions are relatively small, they are very strategically additive to Montrose, and we are thrilled to welcome these new colleagues to Montrose. Our M&A pipeline remains robust and includes numerous opportunities for the coming 12 to 18 months.

Regarding secular tailwinds, we remain as confident as ever in Montrose's ability to capitalize on the broad catalysts impacting our end markets. As our customers react to anticipated regulatory complexity following recent U.S. Supreme Court decisions, and as our customers work to comply with state and local regulatory requirements and respond to stakeholder encouragement, demand for Montrose's suite of innovative environmental services technology and solutions grows in tandem. We remain very positive on the long-term upside from regulatory drivers and complexity, which I will discuss in detail shortly.

I will now discuss our second quarter performance by segment, the details of which are found on Slides 13 through 15. Within our Assessment, Permitting and Response segment, during the second quarter, we saw robust demand for our advisory services, as well as growing cross-selling success across multiple business lines. The increase in segment margin was primarily driven by solid organic growth. This segment also includes our environmental emergency response business, and revenue associated with these emergency events does not follow a regular pattern, and emergency response revenue was down substantially in the second quarter because of a response that occurred last year and did not recur this year.

Within the Measurement and Analysis segment, we are seeing the benefits of continued state, local and federal regulations. Our comparative market outperformance has been primarily organic, driven by our lab services, PFAS, and air testing services. Continued project wins, such as our support of the Department of Defense, are driving success in this segment. Margins during the quarter were higher year-over-year, mainly due to revenue growth and operating leverage.

Within our Remediation and Reuse segment, revenue growth benefited from acquisitions in the prior year period, including Matrix, and strong organic revenue growth in our soil and groundwater remediation business, which more than offset an expected decline in our water treatment and renewable services, which we expect will be back on a solid growth trajectory later this year and into 2025 and beyond.

Margins during the quarter increased versus prior year, given strong operational improvement in Matrix, acquisitions and organic revenue growth in our soil and groundwater remediation business. We are thrilled to see increasing revenues and margins from Matrix, validating our integrated strategy and further substantiating the acquisition component of our method of creating value for our shareholders.

Next, I will discuss a few recent regulatory developments and the foundation for our long-term growth outlook. As we discussed on a recent webcast available on our website, the U.S. Supreme Court recently issued several sweeping opinions. In aggregate, they appear to limit the authority of federal agencies, including the U.S. EPA, to interpret ambiguous federal statutory provisions. This may open the door to litigation by potentially affected parties who seek to challenge prior interpretations of agency rules within a 6-year statute of limitations. These rulings have introduced quite a bit of uncertainty into our marketplace. Long-term, we believe uncertainty will be lower because shifts in political parties overseeing the EPA will have less of an impact on the statutorily authorized activities of the U.S. EPA.

For Montrose, our short-term and long-term business outlook remains unchanged. In fact, we anticipate incremental opportunities arising from the increased regulatory complexity these rulings are likely to introduce. Uncertainty and complexity tend to drive demand for our advisory and consulting services. As a result of these rulings, we also expect state and local regulatory bodies who retain significant enforcement authority to continue and potentially increase their efforts to enforce existing regulations. This shift benefits Montrose, given our strong capabilities to serve our clients across multiple state and local jurisdictions. State-level regulations often require more localized expertise, which is a strength of ours and a key differentiator in our business model.

In terms of client sentiment, major clients across a diverse cross-section of our end markets, with whom we spoke, have indicated they are staying the course in terms of their existing environmental compliance programs and corporate sustainability goals, and they do not foresee any immediate changes in demand for Montrose's services. This sentiment reinforces our confidence in our reiterated business outlook.

While the regulatory landscape is evolving, Montrose is well positioned to navigate these changes and capitalize on the opportunities presented. Our business remains anchored on stable longstanding regulations that we believe are unlikely to change as a result of this shift in legal doctrine.

As it relates to other regulatory updates, we've seen continued momentum from the U.S. EPA with regards to PFAS. Building on the EPA's final National Primary Drinking Water Regulation for 6 PFAS compounds issued in April, the Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA, hazardous substance designation for PFOA and PFOS, was finalized in May and became effective on July 8, 2024. This CERCLA regulation triggers the requirement for immediate reporting of releases of 1 pound or more of either substance. Additionally, CERCLA liability for both chemicals is now in effect.

As we mentioned last quarter, we expect this regulatory update to enhance our access to the approximately $200 billion addressable market for Montrose based on the number of impacted facilities we could engage. While still in its early stages, we anticipate demand for PFAS will ramp up over time. Importantly, we do not anticipate the recent Supreme Court rulings to impact this major milestone in PFAS remediation.

Regarding methane emissions, in June, the EPA opened applications for $850 million in federal funding for projects that will help monitor, measure, quantify, and reduce methane emissions from the oil and gas sector. This funding is designed to help mitigate legacy air pollution, create energy jobs in disadvantaged communities, reduce waste and inefficiencies, and realize near-term emissions reductions. This presents longer-term tailwinds for our emissions measuring, monitoring, and assessment solutions as clients evaluate their environmental impacts. The Supreme Court and Congress in the United States have already weighed in on methane emissions regulations, so we don't expect a change to our growth thesis in energy end markets.

With regards to the political landscape and the upcoming U.S. presidential election, we remain confident in Montrose's ability to perform well regardless of the outcome. As we've demonstrated on Slide 8, our strong performance existed during the Biden, Trump, and Obama administrations. This was by design. Our business model was designed to be resilient and largely insulated from the political swings at the federal level, which we've demonstrated repeatedly. We expect this trend to hold true going forward, given our limited exposure to any 1 end market and the higher relative influence of state and local environmental regulations on our customer activity. While our business mix may shift from period to period, we remain as well positioned as ever to benefit from the evolving landscape.

In summary, I'm extremely proud of our team's performance this quarter to close out a strong first half of 2024. The continued organic growth in our business reflects the resilience of our business model and ramping demand for our environmental solutions as our customers increasingly choose Montrose's portfolio of differentiated solutions to work through complex environmental situations.

Looking to the remainder of the year, we are as confident as ever, given the evolving regulatory landscape and the growing environmental concerns in our end markets. We are reiterating our full-year revenue guidance of $690 million to $740 million, and consolidated adjusted EBITDA guidance of $95 million to $100 million. We expect to see significant opportunities for both organic growth and further strategic acquisitions in the coming quarters.

With that, I'll hand it over to Allan. Thank you.

[Allan Dicks, executive]

Thanks, Vijay. We delivered another quarter of strong financial performance as we continue to execute according to plan. Organic growth remained robust, given increased traction with our cross-selling initiatives and continued pricing success. We were also pleased to drive positive contributions from our recently acquired businesses. Our strategic investments better position us to capitalize on demand and our growth drivers remain intact.

Moving to our revenue performance on Slide 10. Our second quarter revenues increased to a record $173.3 million, or an 8.9% increase compared to the prior year quarter. First half revenues of $328.7 million increased 13.1% versus the prior year period. The primary drivers of growth in both periods were strong organic revenue growth in our AP&R and the M&A segments and the contribution of acquisitions, partially offset by lower environmental emergency response and water treatment revenues, and the shift away from lower margin revenue in our renewable services business completed in the latter part of last year.

Looking at our consolidated adjusted EBITDA performance on Slide 11. In the second quarter, we reported a record $23.3 million, or 13.5% of revenue. This compares favorably to consolidated adjusted EBITDA of $21.2 million, or 13.3% of revenue in the prior year quarter. First half 2024 consolidated adjusted EBITDA was $40.2 million, or 12.2% of revenue, compared to consolidated adjusted EBITDA of $37.8 million, or 13% of revenue. The increase in consolidated adjusted EBITDA was primarily due to higher revenues, driven by organic growth and acquisitions. Consolidated adjusted EBITDA as a percentage of revenues decreased due to Matrix, which despite continued improvement in EBITDA margins since acquisition, has not yet achieved our mid-teens EBITDA margin target.

Moving to a review of adjusted net income on Slide 12. We reported diluted adjusted net income per share of $0.20 in the second quarter of 2024 compared to $0.29 in the prior year quarter. For the first half of this year, we reported diluted adjusted net income per share of $0.37 compared to $0.47 in the prior year period. The change in both periods was mainly driven by an increase in interest and tax expenses, partially offset by improved results from operations, lower dividends on our Series A-2 preferred stock, and a higher weighted average outstanding share count.

As a reminder, during the third quarter of 2023, we changed our tax methodology for adjusted net income, as reflected in the adjusted net income reconciliation table in the appendix, for the current and prior periods. Please note our adjusted net income per diluted share attributable to common stockholders is calculated using adjusted net income attributable to stockholders divided by fully diluted shares. We believe this net income methodology is the most helpful net income metric to Montrose and to common equity investors.

Turning to our business segments beginning on Slide 13. I'll focus my comments on the second quarter. In our Assessment, Permitting and Response segment, second quarter revenue was $53.4 million, compared to $61.4 million in the prior year quarter, as solid organic growth in our advisory business line was more than offset by a $14.7 million decline in environmental emergency response revenues. AP&R segment adjusted EBITDA was $12.6 million, or 23.6% of revenue, up from 22.5% in the prior year, reflecting favorable business mix. Long-term margins in the segment are expected to be 20% to 25%.

In our Measurement and Analysis segment, revenue for the quarter increased 9.5% to $54.8 million, primarily attributable to organic growth. M&A adjusted EBITDA increased 14.6% to $12.4 million, or 22.5% of revenue, a 90 basis point margin improvement over the prior year quarter due to revenue growth and operating leverage. We reiterate our expectation for long-term annual margins in the segment to be between 18% and 20%.

In our Remediation and Reuse segment, second quarter revenues increased 36.6% to $65.1 million, primarily due to the acquisition of Matrix, partially offset by the shift in our renewable service business to focus on higher margin revenue projects as well as expected lower water treatment revenues. Segment adjusted EBITDA margin improved due to acquisitions and improved Matrix margins. The improvement in Matrix is a result of our margin optimization efforts, and this business remains on track to achieve a mid-teen adjusted EBITDA margin by the end of 2024 on an annualized run rate basis. We continue to expect organic growth and margin expansion in this segment for the full year.

Moving to a review of our cash flow and capital structure on Slide 16. Year-to-date cash flow used in operating activities was $21.1 million compared to cash generated of $24.5 million in the prior year. Lower cash flow from operations was driven primarily by an increase in receivables related to the integration of Matrix earlier this year and several large new projects. Cash flow from operating activities is expected to improve over the balance of the year as the nonseasonal increase in accounts receivable is temporary. There are no collection issues or credit problems with these large, well-established customers. Operating cash flow in the back half of the current year is expected to be up significantly versus the second half of 2023.

In April, we completed a follow-on equity offering, raising net proceeds of approximately $121.8 million, providing further flexibility to continue M&A and organic investments. We have already deployed $27 million of this to work via the acquisitions of Paragon and Spirit. At the end of the quarter, we had $188.3 million of liquidity, including $16.9 million of cash on hand, and $171.4 million of availability on our credit facility. Our leverage ratio as of June 30, 2024 was 2.4x and well within our long-term operating leverage target of below 3.5x.

Moving to our reiterated full year outlook on Slide 18. Based on the performance in the first half and our conviction in the second half, we reiterate our outlook for full year 2024 revenues to be in the range of $690 million to $740 million, and consolidated adjusted EBITDA to be in the range of $95 million to $100 million.

Our 2024 outlook remains anchored on our expectation for low double-digit organic revenue growth and margin expansion over the prior year, and includes an expectation for full year emergency response revenues to be in the $50 million to $70 million range. As we highlighted last quarter, we expect to generate roughly 60% of our full year 2024 adjusted EBITDA in the back half of the year, primarily due to the timing of recent acquisitions, Matrix seasonality and project timing. As compared to the prior year period, we expect third quarter 2024 revenue growth of approximately 10%, along with adjusted EBITDA margin improvement of approximately 100 bps. Third and fourth quarter 2024 adjusted EBITDA is expected to be similar.

Overall, we remain as optimistic as ever in the strength of our business and our ability to capitalize on the many growth avenues we see before us. Our second quarter results reflect strong execution at all levels of our business and the successes we are seeing with our cross-selling and margin-enhancing initiatives. With the recent additions to our service portfolio from our acquisitions, Montrose is well positioned to meet the growing needs for our differentiated environmental solutions.

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]

[Operator Instructions] And today's first question comes from Tim Mulrooney with William Blair.

[Timothy Mulrooney, analyst]

Just to start out, level set here, you guys highlighted robust organic growth in the second quarter several times in your prepared remarks. I don't think I caught what that was.

[Vijay Manthripragada, executive]

Yes, Tim, we don't break out our quarterly organic, as you know, but we wanted to indicate that we are well on our way to achieving our annual organic guidance of 10% to 12%. We're feeling like we're in a very good spot, given the cadence of the business both in the first and second quarters and what we can see for Q3 and Q4.

[Timothy Mulrooney, analyst]

Okay. Well, that's helpful. I mean, it must have been strong then. So that's helpful color. Shifting gears, Vijay, I know that water treatment business was lower in the second quarter. Is that something we should expect for the back half of 2024 as well? Just curious, based on what you see in your backlog today or with customer conversations, like when you might expect that to begin to grow again on a year-over-year basis?

[Vijay Manthripragada, executive]

Yes. Let me step back and give you some of the themes, Tim. And then I'll talk specifically about first half, second half, and year-over-year. So, our -- and this is something we alluded to in earlier conversations. The cadence of our discussions related to treatment has picked up materially. And as we think about the adoption curve extending through the latter part of this year and into the next several years, that curve certainly has lengthened, but the opportunity set seems much bigger than it was for Montrose. And so we're pretty excited about what the long-term outlook looks like for us.

PFAS water treatment, specifically for us, is up in the second half of the year versus the first half of this year. So we're already expecting some growth in that business through the back half of this year. And that's in the guidance numbers that we've provided to you. And then, as we think about our broader treatment technology business, of which the water treatment is a part, Tim, the water treatment and renewables part, that business is up nicely year-on-year as well. And so, we're kind of looking at a nice set of secular tailwinds in that business, but the timing of that is not really quarterly for us. We're thinking about that more in the medium to long-term, if that makes sense. And then, just to reiterate, PFAS for us is not just water treatment. It's in our advisory and our testing business. And a lot of the strong organic growth you're seeing in those 2 segments is driven in significant part because of our prominence in the PFAS advisory and testing markets.

[Timothy Mulrooney, analyst]

Yes, Vijay, if I could just sneak 1 more in. Sorry. But on that point, as more and more water systems begin implementing PFAS testing programs over the next few years, I'm just curious if you've already seen a step up in demand there yet in your labs business, or if it's just too early to say that there's been an impact there from the...

[Vijay Manthripragada, executive]

No, we have. If you look at our testing segment, Tim, that growth is all organic. We haven't, I don't believe, completed any acquisitions in that segment, and PFAS is a big part of that.

[Operator]

And the next question comes from Jim Ricchiuti with Needham & Company.

[James Ricchiuti, analyst]

2 questions. First, and I know it's still very early in light of the Supreme Court ruling, but what I'm wondering is, as you think about '25 and possibly even '26, and think about M&A in a post-Chevron world, are you thinking about it any differently? And maybe even before we talk about the M&A point, are you considering any changes in the way you allocate resources across the business lines in light of the ruling?

[Vijay Manthripragada, executive]

In light of Chevron, Jim, no. And the reason is for us, the bottom line is we think there's actually going to be more opportunity than risk as a result of Chevron. The regulations that impact Montrose seem pretty clearly within the statutory authority of the EPA. And as we think about the regs across our segments, most of them have been decades old. And even as we look at the recent regs around PFAS and methane, a lot of that has been written in via Congressional Act. And so, we are not -- we don't expect and we don't anticipate much flux in the business due to Chevron.

There may be challenges for other reasons, as there always has been in the past, and we've seen this for many, many years, around the technicalities of specific regulations, but that's par for the course for us. And so, no, our actions there are unlikely to change. The other dynamic, Jim, that we are always have been looking at and perhaps would look at a little bit more, is that Chevron likely shifts a little bit more influence to state and local regulators. And that's where we tend to shine because of our ability to service the local markets and with local expertise. And so, we will continue to and anticipate more activity in select markets where we see a lot of opportunity to continue to provide services for our clients.

And then, the last part of this, Jim, and I think you've known this; I mean, for several years now, we've expanded our footprint largely at the behest of our clients internationally. And we have about 20% of Montrose's revenues now ex-U.S., which is not really impacted by Chevron at all. So as you kind of look at the diversity of our business, which has been in play now for years, our path is largely unchanged. And in many ways, we think long-term, Chevron actually introduces more certainty. Because if there's major changes in the Executive branch in terms of political philosophy from 1 to the other, there's not going to be as much change because if it's under statutory mandate, the agencies can't just decide what they're going to do. So, for all those reasons, we're staying the course and we're feeling as good as ever.

[James Ricchiuti, analyst]

Follow-up question, actually separate topic. I wanted to ask about gross margins, which I know you don't guide to. But the fact is, these are the highest gross margins that I can recall. And so, I wonder if you could talk perhaps to the improvement in the quarter and, yes, any color in perhaps how we should be thinking about gross margins going forward.

[Allan Dicks, executive]

Yes. Gross margins, Jim, are closely tied to our operating EBITDA margin, right? So the drivers of operating EBITDA margin, which you've seen increase year-over-year, and if you do the math, the back half margins will be even stronger of an increase year-over-year. Some of that is business mix, but it also reflects the impact of some of the pricing success that we've had. It reflects the operating leverage that we're seeing in some of our businesses, like our labs.

And then, as we've built scalable support functions, we're increasingly able to relieve our operating teams of a lot of the back office support that they were providing. So if you look at our SG&A, you strip out acquisitions, SG&A within operations is flat in dollar terms. And so, we're getting the benefit of operating leverage in [indiscernible] as well. So all of those drivers are increasing gross margins, and they should continue to improve over time similar to our EBITDA margins.

[Operator]

And the next question comes from [indiscernible] with Stifel.

[Unknown Analyst]

Congratulations on a good quarter. So just going back to sort of your guidance, you reaffirmed it, but just looking back, you've spent $27 million on Paragon and Spirit since you actually raised guidance back in April, and you mentioned they were accretive. Maybe you could just provide some color on like how much -- I know you don't disclose this, but maybe what you sort of expect to get them in the guidance and what is offsetting that contribution. I mean, if it's -- maybe it's nothing that large, so that's why a guidance raise is not warranted, but if you could provide some color?

[Vijay Manthripragada, executive]

It's a great question. It's a great question. Those were small acquisitions. And so, for those 2 in particular, our aggregate average multiple hasn't moved. But for those 2 acquisitions in particular, they were a little bit higher than our historical cadence of mid to high single-digit. And as a result, when you look at kind of the annual contribution and you take just the back half of this year, it's a de minimis amount of contribution and not enough to move our annual guidance.

When we started 2024, just to kind of reset where we were, we were at $90 million to $95 million, and we took it up to $95 million to $100 million on the back of very strong organic performance and the impact of -- the strong impact of acquisitions that had already been completed. And so, we feel like a lot of the expectation for this year was baked into that guidance, and these 2 transactions were too small for us to kind of increase it further. Though, as the year progresses, there may be opportunity to relook at that as we get through Q3.

[Unknown Analyst]

All right. Thanks. And just to follow up, it's not related, but with Matrix, the target mid-teens margins, what's left to get it there, and do we actually start seeing that in 3Q?

[Vijay Manthripragada, executive]

Yes. I mean, look, what you've seen -- again, just to kind of reset so that we know where we started. When we purchased Matrix, that business was around 4.5% to 5% EBITDA margins. And we knew, of course, that there was lots of opportunity for us to influence that. And that is now trending to low double-digits and is well on its way to achieving its mid-teens by the end of this year. And so, we're feeling really good about the trajectory of that business. And obviously, the returns to Montrose are exceptional.

All the things we've done to get from 5-ish-percent to the low double-digits are things like pricing, staffing optimization, the optimization of overhead costs. And those efforts have largely been put in place and have almost been completed. And the increase between now and the end of the year is just a continuation of what's already well in flight. There's just a timing issue, but the efforts are all in place.

[Operator]

[Operator Instructions] And the next question comes from Stephanie Yee with JPMorgan.

[Stephanie Yee, analyst]

Could you give us an update on the renewable service business, how that's progressing? I think you're going to lap the pivot that you started in the back half of last year as we enter into the third quarter this year.

[Vijay Manthripragada, executive]

Yes. That's progressing really well. So that business, similar to what I was describing earlier, last year to this year, should see nice growth. First half -- the second half of this year should see nice growth, and '24 to '25 should see nice growth. And so, we're back on offense in that business. It is part of our treatment technology portfolio, and it's the same team as we've talked about before. And the combination of our water treatment and renewables business, we think is on a really nice upward trajectory over the next couple of years.

[Stephanie Yee, analyst]

Okay, great. And I have a question on capital allocation. So, you've done 5 acquisitions year-to-date. I think, are you thinking maybe you might surpass your goal of acquiring $10 million in EBITDA in any given year? And then secondly, would you consider buying back your shares at the current stock level then to offset the dilution from more shares outstanding?

[Vijay Manthripragada, executive]

Let me take the first question, and Allan, you'll take the second one [indiscernible] as well. So yes, we have surpassed our goal this year of acquiring $10 million a year, and the opportunity set ahead of us remains quite significant, Stephanie. And we talked about this in the context of the capital raise. Our selection as a preferred acquirer by many of the companies that we're talking to remains as robust as ever. And the opportunity for us to continue adding value for our shareholders and for our business is as robust as ever.

So we expect to see continued activity through the back half of this year, and we'll stay close to you as that progresses. And then the outlook for next year remains quite strong as well.

[Allan Dicks, executive]

Yes. And on the potential buyback, it's something, honestly, we've discussed internally. But being a high-growth company, that doesn't seem to fit with the thesis. And while we agree this looks like a pretty attractive entry point, it's just not where our focus is, right? The investments in acquisitions have very strong ROIs, it fits with our strategy and thesis. And so, we're going to stick to running the business that way. But certainly something we've knocked around internally.

[Vijay Manthripragada, executive]

Yes. Stock price for us, Stephanie, as you know, is something we're -- we don't fully control. And it looked like the stock price reacted to the Supreme Court Chevron decision. So we're looking forward to getting back. We were in the midst of a quiet period, getting it back in front of investors to talk through it. And as we mentioned to you, look, we can buy businesses at mid to high single digits. The value that creates for all of our shareholders are contrasted with buying back Montrose stock at -- even at these depressed prices, mid to high teens multiples. It's ultimately our fiduciary responsibility to all of you, and we'll always make sure we execute on that. But we're feeling pretty good about the plan, and we do think the markets will be rational over the medium to long-term.

[Operator]

Thank you. And that does conclude the question-and-answer session. I would like to turn the conference over to Vijay Manthripragada, CEO, for any closing comments.

[Vijay Manthripragada, executive]

Thank you all again for your time, and we look forward to sharing more progress and have a fantastic day.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.