Q4 2019 Earnings Call
Good morning, and welcome to the local water technologies fourth quarter and full year 2019 earnings conference call.
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Thank you I would now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.
Thank you Erica and good morning, everyone. Thank you for joining us for a bulk water technologies conference call to review, our fourth quarter 2019 financial results.
Joining me on today's call. It one Keating President and Chief Executive Officer, Ben Stats, Executive Vice President and Chief Financial Officer.
After our prepared remarks, we will open the call for questions. We ask that you. Please keep to one question on a follow up to accommodate as many questions as possible.
This conference call includes forward looking statements, including our expectations for fiscal year 2020 is walnuts expected cost and benefits associated with her to segment realignment and our execution ever digital strategy.
Actual results may differ materially from expectations for additional information on a go cool please refer to the Companys FCC filings, including the risk factors described herein.
This conference call will also have a discussion of certain non-GAAP financial measures information required by regulation G.. If the exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained by a bulk whats investor relations website.
All historical non-GAAP financial results have been reconciled and included in the appendix section of the presentation slides.
Unless otherwise specified Watson to something that's called for your measures for two a year refer to our fiscal year, which ends on September 30.
I mean, so access this conference call via webcast, where does close in the press release, which was posted on our public website.
Replays of this conference call will be archived and available for the next southern days with that I would now like to turn the call over to <unk>.
Thank you Dan we're very pleased to report revenue and adjusted EBITDA results that were at the high end of our full year 2019 guidance. The business generated strong organic order growth strong sales growth record earnings record free cash flow and significant leverage improvement.
Our outlook continues to be positive as customers demand for our broad portfolio of sustainable solutions remains healthy as evidenced by our robust pipeline of opportunities and double digit order growth for the fourth quarter and for the full year.
Over the past year, we've taken steps to reposition the company for long term profitable growth in an attractive and expanding watermark.
Our organization has responded well to the two segment realignment and customers are benefiting from a more effective and coordinated sales effort.
Our digital strategy has advanced over the past year, and our expectations for both customer water manage opportunities and evoke <unk> outsourced water benefits are increasing.
Customers increasingly look to about what to solve their more most complex water treatment challenges and as a partner to outsource their water treatment needs to advance our leadership position, we have invested approximately $140 million and growth capital over the past four years, while also making 13 acquisitions at a recent.
Majority investment in frontier water systems to fill targeted technology and market gaps.
We continue to not only manage our investments into the business, but are also shaping our portfolio around the most attractive and customer line portions of our offerings.
Following the strategy, we recently announced the divestiture of our member product launch into a strategic partner, which will further strengthen our balance sheet, while providing ongoing access to these world class advanced filtration technologies, we will continue to take actions to drive our strategic plan and position the organization organic and inorganic revenue growth.
As the world moves to a more circular and sustainable economy, we believe we're well positioned to assist customers with recycle and reuse needs at our recent company leadership meeting, we added sustainable as our fourth corporate value joining integrity customers and performance.
We are actively engaged in helping our customers meet their sustainability goals. Additionally, we're taking actions to improve our portfolio of sustainable solutions and drop company goals, including the expansion of our sustainability programs in 2020.
Please turn to slide three.
We're very pleased with our overall results for the core in the quarter, we generated revenue growth of nearly 13% driven primarily by organic growth of approximately 12% for our fiscal year 19 revenues were up almost 8% with more than half of that coming from organic growth.
Order growth was up double digits on a four year basis for both segments.
Hey, BT had outstanding revenue growth of approximately 21% for the quarter with four out of the five divisions growing double digits, and we're particularly pleased to see our quarter to product line posted strong performance for the year.
I assess also reported solid revenue growth of approximately 8% in the quarter driven by both services and capital.
We have completed the first year of the two segment realignment, we made significant progress and streamlining our go to market structure, we expect to see additional customer benefits materialize in 2020, while we well the new structure continues to deliver efficiency.
We delivered free cash flow generation of $111 billion and a conversion rate of well over 200% of adjusted net income for the year.
We successfully finance growth capital investments during the quarter, including a large outsource water assets, which increases our overall cash returns and enhances free cash flow.
We announced the signing of our agreement to divest them EMCORE product line and our acquisition of 60% stake in frontier water in early October we expect to apply most of the net proceeds from the meant court midcore divestiture to further reduce our leverage below the current 3.8 times.
At the end of the fourth quarter. If we include the expected net proceeds from them EMCORE divestiture, our pro forma leverage is approximately 3.5 times, please turn to slide four.
There are significant water challenges emerging in the market provides attractive growth opportunities for decades to come.
Emerging contaminant removals of mission critical competency of the vocal and there is no one size fits all technology that can be used in treating challenging contaminants. Our service network combined with our extensive mobile fleet and comprehensive treatment portfolio favorably positioned to vote to help solve the most challenging water problems for our.
Customers.
PFS, which was has received significant publicity recently as a complex and growing threat to the safety of our water supply.
The treatment adoption rate, while still early is highly variable and driven impart by public perception.
Regulatory and legislative enforcement requirements are still evolving and differ between federal state and local authorities.
While still early stage, we have more than 30 us based PFS treatment installations and that number has the potential to grow quickly over the coming years. These installations include municipal drinking water military bases industrial sites and testing and landfills, we have multiple technologies to remove PFS Pf payoffs from was.
After including fixed and mobile assets and we're investing in expanding that portfolio.
In addition to providing treatment solutions were also actively investing in new technology trials aimed at developing and expanding pfcs destruction technologies and capabilities.
We expect the scope and specifics of federal state and local regulations to plays a key factor in determining the PFS market size and growth right, but we are showing that vocal is equipped to address the need.
Please turn to slide five.
As a cornerstone of our strategy, we remain focused on growing our highly recurring and digitally enabled revenues as a result of many macro trends water treatment complexities are increasing and we are investing to address these challenges through recent efforts. We are beginning to incorporate biotech technologies into our vast.
Product portfolio to boost efficiency and able predictive maintenance protect assets and provide predictable total ownership cost to our customers.
Lets connect to strategy also often leads to customers choosing outsource water lock our water one program after seeing the significant benefits of our connected management systems.
The focus digital strategy has made significant progress during the year, we launched our water one program nationally one year ago, and we're on track to meet or exceed our three year goal of digitally enabling $90 million to $100 million of existing sales.
More than 1000 basis points of margin improvement across that portfolio.
Please turn to slide six.
Overall, the business continues to benefit from stable in recurring revenue growth. This graph presents our revenue and adjusted EBITDA on a rolling 12 month basis from quarter to quarter since 2016.
Our overall revenues have grown at a rate of almost 9% with adjusted EBITDA growth of approximately 20% during this time.
We continue to see strong growth of product revenues of 11% pulling through an accelerating service revenue growth, which is now over 5% compounded annually since 2016.
As we previously discussed the nature, our business is subject to quarterly variability. However, we have high visibility into our revenues from products and services on an annualized basis.
Please turn to slide seven.
Acquisitions will continue to be an important part of our long term strategy the supplements our organic growth.
Over the past four years, we've acquired 13 companies nine of which added to our product and technology portfolios and for that extended our geographic or vertical market Ridge.
We're very pleased with our most recent acquisition of a majority stake in frontier water marketing our 14th transaction.
Frontier as a great technology investment, providing cutting edge biological treatment solutions for the removal of select and other heavy metals from flue gas Desulfurization systems coal ash ponds and mining applications. We're very pleased to welcome the frontier team to above.
In early October we also announced our agreement to divest of our men for product line to depart we've enjoyed a decade long relationship with Dupont as we have delivered integrated membrane based systems and solutions into the marketplace.
This transaction allows us to focus on growing our businesses that are digitally enabled with highly recurring revenues, while maintaining access to world class filtration technologies, our existing and trusted partner.
Ill now turn the presentation over to Bend to review, our financial results and our 2020 outlook.
Thank you Ron.
Please turn to slide eight.
For the fourth quarter revenues grew 46 million or approximately 13% over the prior year to 412 million.
Organic revenues grew nearly 12%.
Integrated solutions and services revenue grew approximately 8% and and applied product technologies revenue increased 21% over the prior year.
Foreign exchange negatively impacted overall revenues by approximately 1%.
Adjusted EBITDA was 79 million up approximately 30% versus the prior year for an overall margin of 19.2% fourth quarter profitability and margins benefited primarily from volume leverage favorable price cost and two segment realignment benefits, but was partly offset by an.
Change and strong capital revenue growth.
Please turn to slide nine.
For the full year revenues increased approximately 8% to 1.44 billion versus the prior year.
Service revenues grew over 10% with products growing by 6% organic revenues were approximately 5% with both segments delivering double digit order growth for the year.
Foreign exchange negatively impacted revenues by almost $14 million or 1%.
Adjusted EBITDA increased 8% to 235 million versus the prior year to a 16.3% margin.
The combination of multiple factors drove the increase including volume leverage realignment benefits price cost, while being partly offset by mix and foreign exchange.
Please turn to slide 10.
For the fourth quarter integrated solutions and service revenues were approximately 8%.
To 248 million capital revenues were up approximately 12% while service revenues were up approximately 8% we saw solid growth from customers in the microelectronics and chemical process industries during the quarter.
Panic revenues grew over 6% in the quarter two acquisitions contributed approximately 2% to growth.
Order growth was up double digits in the fourth quarter, driven largely by capital and outsource water projects.
Fourth quarter, adjusted EBITDA increased approximately 14% to 61 million versus the prior year, primarily due to higher volumes improved pricing and acquisitions growth adjusted EBITDA margin was 24.7% up 130 basis points over the prior year.
Benefit of volume leverage favorable price cost and restructuring were partly offset by mix from strong capital sales.
Please turn to slide 11.
For the fourth quarter applied product technology segment revenues increased approximately 21% to 165 million.
For the five product lines growing at double digit rates foreign exchange negatively impacted revenues by approximately $3 million for 2%.
We're pleased to report that are highly profitable Fox product line reported double digit revenue and adjusted EBITDA growth for both the fourth quarter and the full year.
For the fourth quarter adjusted EBITDA grew 56% to 37 million for a margin of 22.7% improvement was driven by volume leverage to segment realignment benefits and favorable mix, partly driven by stronger products product line sales growth.
Please turn to slide 12.
Capital expenditures in the fourth quarter were approximately 25 million slightly down from last year, while full year Capex increased 8 million over the prior year outsource water projects and mobile fleet expansion drove most of the growth investments during the quarter, we financed $22 million of growth Capex investments in.
Including a large outsource water project and the websites.
On a year to date basis capital expenditures were 89 million or approximately 51 million net of growth Capex financing.
Net working capital increased 14 million in the fourth quarter over the prior year.
Which includes approximately 2 million from acquisitions.
The increase in working capitals.
Is primarily driven by sales volume growth working capital improved 20 basis points over the prior year and 130 basis points sequentially from the third quarter.
Please turn to slide 13.
Free cash flow for the quarter was 81 million full year free cash flow was 111 million exceeding 200% of adjusted net income.
Leverage improved sequentially from 4.2 times to 3.8 times in the quarter driven by both adjusted EBITDA growth and strong cash generation.
Additionally, we expect debt pay down from the net proceeds of the men for divestiture will further improve our balance sheet flexibility at the ended the fourth quarter considering the net proceeds from the men for divestiture pro forma leverage is expected to be approximately 3.5 times. Our current weighted average cost of debt is approximately 5.4%.
Please turn to slide 14.
We're pleased with the momentum we have built as we enter the new fiscal year, but we're also monitoring uncertainties that could unfold throughout the year Tailwinds going into 2020 include a strong close to the fiscal year with solid order book growth notable sales execution benefits from the two segment realignment a strong.
Pipeline of opportunities and favorable macro water trends.
The global economy is growing but there are concerns that the growth rates may be slowing.
Order book continues to be strong delivering.
Partly driven partly by outsourced water service contracts, which tend to convert over longer period of time, we continue to invest in commercial talent in a tight labor market to execute on our strong pipeline of opportunities geopolitical risk also create potential for currency fluctuations.
Please turn to slide 15.
Our key assumptions for 2020 include default.
We're taking a balanced approach factoring in order conversion timing and the potential for slower growth macro environment.
Price cost is expect to be neutral to slightly positive.
We expect to see approximately four to 6 million of annualized restructuring cost benefits. We also have the potential for higher employment costs associated with a tight labor market investments in front end capabilities to execute on our robust opportunity pipeline.
We are targeting 2020 free cash flow conversion to be higher than 100%. We expect 2020 tax expenses to be between 10, and 20 million, which includes the mentor transaction, we expect diluted shares count to be approximately 120 million shares.
And we have factored in the impact of the men for divestiture into our sales and adjusted EBITDA outlook.
Please turn to slide 16.
We have good visibility into our business over a rolling 12 month basis as we discussed earlier. This chart highlights our historic quarterly and seasonal variability over the past four years. However over the course of a rolling 12 month period. This variability tends to normalize as reflected on this chart we.
We expect to see our 2020 quarterly adjusted EBIDTA pattern to be similar to fiscal 2019.
Please turn to slide 17.
Our full year revenues outlook is in the range of 1.4 billion to 1.46 billion and adjusted EBITDA in the range $230 million to $240 million.
The growth rates on this chart, our adjusted for the pending mentor divestiture on a pro forma basis for comparative purposes.
We expect to see the first half adjusted EBITDA to be in the range of 40% of the 2020 mid point, which is in line with the typical year as commented on slide 16, we expect to see our 2040 2020.
Quarterly adjusted EBITDA pattern to be similar to 2019.
Please turn to slide 18.
We remain committed to these long term targets over the next three to five years.
Our go to market strategy is increasingly focused on digitally enabled recurring revenue growth and more comprehensive solutions to drive additional customer benefits.
I would now like to turn to call back over to Ron for closing remarks.
Thanks, Ben Please turn to slide 19 through the tremendous work of our industry leading team. We delivered strong results for the year and are looking forward to another solid year in 2020.
Our two segment realignment is resulting a customer benefits, yielding strong order growth and we're continuing to invest heavily in our team and talent development.
Water, one and our overall digital strategy is on track and we're working to leverage our connected assets to more efficiently manage multiple outsource water opportunities.
As a company, we're well positioned to benefit from macro water trends and the increasing challenges from emerging contaminants.
We saw favorable year over year pricing benefits in 2019, and we will continue to be diligent in our pricing initiatives in 2020.
Free cash flow strong providing increased balance sheet flexibility.
We expect growth Capex spending to continue as we invest to meet customer demands and the service are very strong order growth.
Additionally, we will continue our acquisition strategy of manageable attractively priced tuck ins to supplement our organic growth and fill identified gaps, allowing us to better serve our customers.
We go into 2020 with momentum and we're confident that our market position is strong and improving through the actions of our dedicated team members.
We will now open the call to your questions.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound.
Any interest to time, we do ask you to limit yourself to one question and one follow up so that everyone has a chance to ask your question.
Our first question comes from Deane Dray with RBC capital markets.
Thank you. Thank you good morning, everyone. Good morning, Dave Good morning.
Hey, maybe we can say first of all congratulations on.
A strong rebound year, and especially at fourth quarter on cash flow. So congrats to the team.
Maybe we could start with where and how.
The growth the growth rate, where you may be having some slowing that Ben mentioned there might be some slowing.
Where might you be seeing that.
Yes, so indeed, we watch across many vertical markets as you know we play.
We have we've had fantastic order book growth as we've talked about we highlighted again on this call a lot of the orders that we have our longer term order. So we have a.
Long term service.
Contract that will sign an eye assets that will go over multiple years. So it's really good for us as we look out into the future years on the visibility and recurring nature of our revenue, which we continue to highlight where we're seeing a little bit of slowdown.
It's been talked about even on the slide with some of the macroeconomic trends is in the pipeline that we're looking at and we're seeing not the cancellation and not a stop but a pause and those would be in the power markets, a little bit and chemical hydrocarbon processing around larger.
Jacks that customers have considered and they've asked us to give them prelim quotes on day would be in the pipeline and then they seem to be hesitating or just making decisions to pull the trigger a little slower than than we've seen in some of the historical Uri.
Okay.
It's helpful. And then just a quick question on the member core divestiture five years ago. It might have been considered very surprising to see an ex that but this is very much a standalone business.
Not a lot and the way service around that so what was the factors that.
Consideration that.
This was not a business that was core to evolve.
Hi, Thank you you actually get it in your question and it's more project basis less service and aftermarket based it's a longer aftermarket tail. We're very focused on making sure that we're investing in businesses that are highly repeatable highly recurring we see a service tail on the back side, we can digitally connect them.
So that we can drive the business more effectively and efficiently with.
Good predictability the other thing about men or it was the only business. We had that made membranes. We have partnered with membrane manufacturers for many years and certainly Dupont, we were selling it to for many decades and we are a design source and assemble against best in class products on the membrane side.
So it makes sense for MIM core you'd be aligned with Dupont, where we still have great access to those tremendous products that they manufacture.
Thank you.
Our next question comes from Nathan Jones with Stifel.
Good morning, everyone.
Good morning, good morning Nathan.
I'd like to square a little bit some of the commentary on auto rates versus what looks to be about zero organic growth in the guidance.
For 2020, I mean, you've talked about having double digit order growth across both segments for the full year I think you've given us a little bit of an idea that some of these things might be.
A few years out in realizing.
Some of the revenue for dies or can you talk about.
The goal for you to see.
Dave the board as be that long dated.
Rather than converting to revenue in 2020, what kind of growth that might baking as we get added to 21 and 22 and has has the.
The duration of the backlog increased as you.
Shifted the portfolio more into the digital areas.
Yes, so Nathan the duration of the backlog has increased and we it is difficult to see longer.
Orders that are.
Cover multiple years and you have to look at both businesses ISS has a fair amount of that in the service.
The service orders that we'll get that are longer standing contract that has extended into into longer years and longer cycles. So we're very pleased with add it gives us very good visibility in what into what the outlook, Yes, I would say that on the topline in the bottom line as we looked at next year, we took a very balanced approach.
In the guidance were given BTT is a little faster book to Bill and you saw that in a lot of the results we had and represented in the fourth quarter. We expect to see continued good growth going into next year, but we want to make sure that were very balanced around the back ended the year with some of the the macro economic.
Trends that that are potentially on the Russia.
No, but I do think that.
We've got fantastic product portfolio. The demand is there the long term demand is there we just realize that as we look at quite 20, we've got to be very balanced and make sure that were.
Continuing to give the right outlook and the right tone and tenor.
In the track record that we've established over up on I think.
No one has to be a little cautious on the outlook.
Is it fair to say that you had a strong first half of the built into the guidance and weaker second half of the built into the guidance based on potential uncertainty.
Out in the second half of the.
Yes snake the net.
That's correct. When you look at page 16, we expect to see like 20 to be very similar deployed 19, Neely that chart and you see 60% in the second half the 34% of the EBITDA coming in the fourth quarter, we have the least visibility to that at this point time, so as we look to the uncertain.
Macro situation industrial production is has been under stress.
And we're saying all right what's going to happen in the book to Bill business, particularly within APTP and that latter part of the year. It. We just don't have that good visibility at this point time, so we're maintaining conservatism.
Even though we're not seeing that right now on our current order rates and our pipeline activity is healthy but.
We think it's prudent we don't want to have to get into point in time, where we're looking at second half year things change and have to adjust guidance.
All right I think that that helps a lot can frame prime that I'll pass it on thanks very much. Thank you.
Our next question comes from Andrew Capital with Citi.
This is John but find there on for Andy Good morning.
Good morning, good morning, ending.
Adjusted EBITDA margin for the year extended 10 basis points to 16.3, and the midpoint of your guidance implies another 10 basis points improvement.
18.4.
Two segment realignment benefit that Telair in further could you talk about the potential for margin expansion in 2020.
Yes, we do feel like there.
Good opportunity for margin expansion as we do go into 2020 again.
To the commentary I gave on the prior when we took a very balanced approach in the year what are the things that we're looking at and we've gotten much better at being able to do a backlog growth. While we're looking at our pipeline, we realized where we need to make investments to ensure that we are expanding our product portfolio and into the re.
Soccer reuse much more the wastewater treatment side in the industrial space in a closed loop system and a lot of these things what we'll do is we'll do you know our first article.
Development and creation, which will go in at lower margins and then the follow on projects coming outside of that are much higher margins because we've done the engineering upfront. So we've got a little bit of that balanced into.
What I call a balanced outlook into next year around topline and bottom line that.
If these moved faster and as they go through more quickly we see repeat there could be some nice margin pickup as we get to the latter half assuming the macro economic trends they stay bullish.
That's helpful and this quarter at double digit organic growth and try to the five product lines and HBP and Threeq. You also had growth in four out of the five businesses could could you talk a little bit about the different pieces of growth in the segment.
Yes, again, we saw it as we said 405 businesses some of the businesses. We saw the real benefit in his businesses that we've had some struggles were before so specifically mentioned the aquatic business that we're very pleased to see performing quite well.
Thats on the heels of.
18, where we had challenges in the products business, we were able to roll our systems in across that business, we have great visibility against that we realigned the manufacturing and in fact, we just announced that we're going to be moving into new innovation Center.
In Coventry, Rhode Island, which is where the headquarters of that business is so we can bring customers and they can see touch and feel the product. So we're seeing that really very broadly across the segment again for five did extremely well and and we anticipate that will continues as we enter into point 20.
Thank you very much on patent alone.
Our next question comes from Brian Lee with Goldman Sachs.
Hey, guys. Thanks for thanks for taking the questions and good morning.
Good morning.
I guess, maybe just followed on on the last question Incrementals.
Margins were pretty strong in both ISS and they PT. This quarter can you maybe speak to some of the drivers there and.
Near term trend should hold.
In you maintain these kind of incrementals.
Into 2020.
Im a little confused as to why that doesn't seem to be.
Reflected in the dropped to based on the guidance for revenue and EBITDA growth being sort of in line with each other.
Brian This is Ben yes, so when you think about looking to the outlook. We first of all we've got about $2 million part of upside to our two segment realignment benefits Nate and APTP earlier than expected. So Q4 was bolstered by that and that helped.
In addition price cost.
Was a benefit but as we look to the future. We also see the potential for tight labor market pressure on some wages that we want to make sure we factor in and as Ron mentioned.
Making sure that we have one these longer term projects that.
The initial engineering is more expensive it puts a little weight on margins early on but then the repeat engineering on these wastewater projects becomes much more profitable. So as we look at at pipeline, we factored in additional cost associated with being able to execute on these orders for these initial wastewater projects, but.
Those are the main drivers as we think about the outlook.
And then as I also previously mentioned, we have the lease visibility to the second half of the year on particularly the fourth quarter and we've we wanted to make sure that we didn't get not over our skis in terms of our guidance okay.
And Brian I think just to add to Ben's comment again, we took a very balanced approach as we look forward. The other thing that is as we discussed and he discussed the mix a little bit once leesburg recycle reuse a lot of the larger wastewater projects go in and around industrial customers. The follow on after that because that.
Engineering has done and then the service that comes from it as well will be higher margin, but those are in the out years once they've been installed and theyre actually executed.
Okay, Great now that that's helpful color.
And then just second question and.
On the cash for obviously very good this year and then you're targeting over 100% again in 2020, so kind of turning around that part of the part of the story, which I think had been.
Concern for some investors. So now with them then of course sale, you'll get net leverage down to three and half turns you will much above the long term target. So maybe maybe flipping the question a little bed, where this seems to be a concern is this something where you could be a bit more offensive how do you think about.
Further de levering from here getting to that targeted range of leverage ahead of the three to five your timeline. Thanks.
Our goal is certainly to continue to create balance sheet flexibility and generate strong free cash flow.
We are going to stick to our priority uses of cash we have a lot of great investment opportunities, but as this service.
Orders continue to grow in the base of service revenues continue to growth, particularly with the outsourced water.
It helps our cash flow conversion cycle. In addition, the exit amend core menu or it was a long cash.
Hello conversion cycle that will also help.
And take less takes pressure off the after free cash flow, but we still have a lot of nice tuck ins in the pipeline, we have a lot of opportunities and best both organically and inorganically to execute on this strong order book and we're going to continue to do that one other item. We're going to also focus on this people and making sure that we have.
The proper technologies investments in place.
To address the continued trend in emerging contaminants, okay, but yes, we should be able to continue to see leverage reduction as we head through 2020.
Thanks, guys.
Thanks, Bob.
Our next question comes from Andrew Best value with Berenberg.
Hey, guys.
On that on the divestment of men core.
The best in for not something I was quite expecting.
The stage are there.
Can you quantify or maybe talk to how many more divestments you think.
And your portfolio or are not where.
This is that you deem.
Probably the long term strategy.
You know Andy we're really pleased with the wouldn't the portfolio that we have in fact, what weve.
What we've been investing on is making sure that we're driving more product technologies that are deployed through other integrated solutions and other integrator solutions like we do we identify technologies through our ISS business, where we go out and design source and assemble and we either aligned with the order were purchased those.
Now, let's use to bring in our portfolio I think that we're very comfortable with the balance of what we have and we're very comfortable that the products that we have fit our manufacturing portfolio and the capability. So I would say that.
We're comfortable with the portfolio, we have with the exception of some gaps that we still want to go after on acquisitions.
EMCORE was just one that was a heavy manufacturing space create again.
Producing membranes is something that is not in our core competency nor has it been and so it just made the most sense to align that with the membrane and a materials company that we could have access to the products on the go forward.
Okay, all right Thats helpful.
Then you had some interesting commentary on water, one kind of where you said with that exiting 2019.
You had some goals are some expectations you might set for us.
As it pertains to water line and how that.
Something we can we can look to to track.
Progress there.
Yes, so the quantification of water one stays with what we what we've articulated before we said, we would convert $90 million to $100 million of our service beyond position business over to water one platform over the next three years were one year ended that cycle and we are well on track for what that looks like we also said it would deliver.
1000 basis points of margin improvement across the that portfolio of businesses and that is holding very true. The thing that we talked about in this you know today is taking the digitally enabled to a higher level and deploying it across more of our product portfolio I would anticipate as we go forward.
It's not going to be the fall through that we would see an a water one of 1000 basis points, but it's going to be a predictability and a sticky miss on our revenue and our after market because we can see and we can predict at what point, we're going to need a service or we're going to need to.
Do and I do an aftermarket trade on on some type of installation that our customers will use. So that's what we're trying to drive is that digital connection across more of our portfolio So thinking about.
Billion for in revenue, the it's going to be somewhere around 30% to 40% over the next five years that we would expect to see.
Got it thanks.
Our next question comes from several.
Non of with Raymond James.
Thanks for taking the question.
I was fascinated by the disclosure of the EBITDA multiple on EMCORE 13 guidance.
EBIT died as you said not a lot of recurring revenue in that segment.
That that kind of that the going rate.
Market valuation these days.
For pure hardware.
Applier.
Is that indicative of the rest of of water Tac and I'm, particularly asking this from a.
From the perspective have you guys being buyers right as everything that expense.
That's a good question it is not overly indicative of water tech when we're more when we are a buyer and the reason is not indicative of water check when we're on buyers because what we're identifying or smaller technologies, new investments new products that can get tomorrow.
Market without the right channel. So what we're able to do is go in and align and acquire at much better multiples because what we have on the back side is the ability to be able to take these these companies and take these products to market much more effectively.
You are going adding Europe .
Subscale company trying to sell two very large conglomerate.
Don't have the confidence and giving that solution to a subscale company and putting their operation at risk someone lucky vocal with the channel. We have we have 90 service branches were going to within a two hour radius of 95% of the US population, we cover the math around being able to.
Service industrial customers, we're able to buy at the right levels to pull these through and sought of our product portfolio around designs horizontal.
Okay. That's helpful. One more question on on M&A.
When you did the deal with a friend Peter are you took a controlling stake by stopping short of.
Buying it out right I think historically, you've generally done M&A at kind of 100% level.
Yes.
Okay.
Oh, sorry, you broke up.
On me there little bit, but I think you're asking why we did not by 100% and the reason as we wanted to partner with the team at from tier the two founders of the business are very.
Visionary entrepreneurs around water treatment and emerging contaminants, we wanted to make sure that we all state in this engaged very effectively together, we had access and and really the a lot of the availability to sell the portfolio of products as well as develop some new products for emerging contaminants with the frontier team.
So we really like what we found there we were confident that they had a good operating model they needed or the ability to scale up and operational execution around larger projects to be able to go after just as I mentioned and so that was the reason that we bought a controlling stake versus by 100%.
Got it appreciate it.
Our next question comes from Joe Giordano with Cowen.
Hey, guys good morning.
Hey, so I do I want to get back to margins a little bit again.
Ron I get I appreciate your your points you've made about putting in the engineering upfront and then you get this out in the service tail and at that higher margin that comes due in the Bakken that makes a lot sense, but and the same time to be fair. We're looking at like third straight year of the same margin level and all three down from 17, and when I think about that gap from where were whereas.
Were looking at exiting 22 to three to five and to the longer term guidance of 20% margin that assumes if you're one is kind of zero growth there and we're talking over 130 Bips a year for the next couple. So what gives you confidence that in that magnitude of step up post 2020.
So Joe.
As Ron mentioned earlier, you're not going to necessarily see the improvement every year as you convert the business to more of a subscription based business, particularly in these areas where we are.
First article engineering, but the service revenue in the into profitable service revenue pull through is going to occur when that order book starts to convert into revenue, which has a longer period of time. So we do expect if you did you say how do we going to 20%, we expect to be able to get 80 basis points on average per year to be able to do.
Do that but it's not going to necessarily happen each and every year.
All right and.
In addition to that.
As we mentioned earlier, we're cautious with the second half because we have the least amount of visibility in particularly with APTP, which is some of the high margin businesses have the potential we don't have the visibility there in the second half the year and we can get hit with mix.
And Joe I think I think Thats. The key is what what Ben talked about as some of the mix components that we're dealing with some of the projects just like we've highlighted earlier, but what would you are going to see is where the volume that comes through that's where we're going to continue to be able to ramp this up and grow into the 20% getting more too.
And again more of our boss volume more of our business more of our mix that is going to recurring am repeatable revenue as we deploy our digital solutions across we're getting the margin improvement I mean, we're still very early days one year in as you guys know, we did not predict a lot of.
Volume or or profit from the digital connected world. What we're saying is that play out and the deployments that we have so if we continue to carry that across that's where you'll really see the margin fall through so it's ramping over time.
Okay and then just on my follow up one I just wanted one quick clarification did you say you thought the digital put part of your business can be 30% five years from now I just want to make sure I heard that correct and then yes, we thought the connected part of our business could be can be 30% to 40% of our revenue that comes through and that's because we're driving.
In digital or into the product side as well, where we're we're getting feedback loops on at what point, we need to.
No change go go into aftermarket, we're getting them, we have a lot more visibility around it also in in some more of our services business. That's not just service beyond the station.
Okay.
That's helpful and then if I could on PFS and just when I talk to people about this it just still feels a little bit like wild West where people don't know how big this opportunity is it's still kind of super early stage being scope down like how do you see this playing out where do you feel like regulation environment is in.
Right.
Does anyone have a good kind of grass button on where this market really is.
There is not an overall.
Strong grasp on where the market is right now what we've seen is about 100 PFS installations around treatments in those range from.
Mobile system, all the way up to a capital system, we want about a third of those that we've gone after and we're operating in those these systems can be anywhere from $200000 to a 1.8 million on what we've seen in the capital system to a temporary service system, we're treating somewhere between 200 gallons per minute to 22 and a gallon.
Per minute. So a lot of it is going to depend on where the government and the EPA sets the regulations up which they still have a period of time about another 18 months I believe before they are required this at what the regulations or what you're seeing is local municipalities local water districts.
Find a contaminant and they're very concerned about it I think the Deo de estimated somewhere around 2.2 billion for cleanup of the.
Military bases, you would think 12% to 15% of that would be around water treatment a lot of those will be around construction and ancillary services the going behind that.
That's helpful. Thanks, Ron.
Okay.
And as a reminder, navistar one if you would like to ask your question at this time.
Our next question is from Patrick Thalmann with Jpmorgan.
Hi, good morning, guys.
Congrats on a strong entity or thanks for taking my question.
On the guidance for next year I'm, sorry, if you answered this already I missed.
A lot of the call, but can you just walk walk me your year.
Adjusted EBITDA bridge from 2019 to 2020.
And I guess I'm, just curious because if you guys.
46 million of restructuring synergy savings and you, losing eight 8 million for men core.
It would seem like the base for 2019 should be somewhat similar to what you reported and I'm just curious with the revenue growth why you wouldn't see more drop through from that.
So as much as Ron mentioned earlier, we have some investments, we're making particularly in new waste water technologies PFS technologies, including destruction technologies engineering for first article installs. So part of that restructuring benefits are being offset.
By investments, we're making that would will pull through more profitable revenue later, but as we head into this first year and we want to convert this order book, we've budgeted for those.
Okay and magnitude dollar wise did you quantify that in terms of investments.
Yes, it's pretty pretty similar to the restructuring benefits and then we also have factored in the potential for that's a tight labor market right now in attracting good technical resources.
As is it's tight so we got to make sure that we factored in not only the ability to attract those resources, but retain our existing resources and we do expect to see some pressure potential pressure on wages the ship.
And that would fall into that price cost bucket or that's outside of that that's outside of price cost price cost us, particularly is our commodities.
Okay makes sense.
And then last one from me just.
In terms of the.
The.
Different seen GAAP and adjusted EBITDA for next year.
See that.
Difference converging a little bit next year.
How would you describe kind of what you're expecting for add backs.
Yes.
Restructuring or other items.
For 2020.
Yes, we should see convergence.
We will have some part about expense associated with.
With with metaphor that we'll talk about on our next earnings call. Once we complete.
The deal.
But it should converge and also share based compensation the IPO bonuses roll off so that's going to be reduced substantially probably above about half of what was in the prior year and.
The other types of FX, the noncash FX pieces on variable it all depends on what happens to exchange rates on intercompany loans, but thats noncash anyway, and the restructuring portion will be telling off as we talked about with the two segment structure winding down.
We should.
Okay, great. Thanks, a lot.
Okay.
Thank you.
Thank you that concludes our question and answer period I would now like to turn the call back over to Ron for his closing remarks.
So thank you very much core for joining us for the call. Today, we are awfully pleased with the close out of our fiscal year 19, we're looking forward to a strong fiscal year 20, and I know that as we discussed on the call. We took a very balanced approach to the way that we're looking at 20 in the way that we're estimating the 20 numbers I would say that we can.
When you see a great demand for the products that both we'll have to offer we continue to.
We'll see a tremendous opportunity as we become focus as well as our customers are on driving sustainability and sustainable solutions I would like to thank all of our team members across the local enterprise for the work that they do.
Thank our customers for trusting us to take care of their needs. Thank you again for joining US we'll look forward to speaking with you again next quarter.
Thank you that concludes today's of local water technologies fourth quarter 2019 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.