Q4 2020 Evoqua Water Technologies Corp Earnings Call

<unk> fourth quarter and full year 2020, <unk> earnings conference call.

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I'd now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.

Thank you Maria and thanks, everyone for joining us for today's call to review, our fourth quarter and fiscal 2020 financial results participating on today's call are on Keating, President and Chief Executive Officer, and Ben Staffs, Executive Vice President and Chief Financial Officer.

After our prepared remarks, we will open the call to questions. This conference call includes forward looking statements, including our expectations for the first quarter and the full year of fiscal 2021, as well as expectations relating to the impact of the COVID-19 pandemic assets.

Execution of our digital strategy the market for treatment of emerging contaminants and other potential growth drivers actual results may differ materially from expectations for additional information on the bulk water. Please refer to the company's SEC filings, including income.

Floating the risk factors described therein.

On this conference call will also have a discussion of certain non-GAAP financial measures information required by regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained via provoke water vocal its investor relations.

Web site, all historical non-GAAP financial results have been reconciled and included in the appendix section of the presentation slides with respect to our guidance. We have not presented a quantitative reconciliation of the forward looking non-GAAP financial measure adjusted EBITDA.

Its most directly comparable GAAP financial measure because it is impractical to forecast certain items without unreasonable effort due to the uncertainty and the inherent difficulty of predicting the occurrence and financial impact all in the periods in which such items may be recognized less.

Otherwise specified references on this call to for your measures or two a year refer to our fiscal year, which ends on September thirtyth.

Means assets. This conference call via webcast were disclosed in the press release, which was posted to our corporate website replays of this conference call will be archived on available for the next seven days with that I would now like to turn the call over to Ron Ron.

Thank you Dan.

Starting on slide three.

As we finished up on 20 October 19 priorities remain cautious we continue to focus on the health and safety of our employees, ensuring business continuity on customer uptime, and improving our balance sheet and liquidity of the company on.

Working conditions have been dynamic would demand varying across a diverse set of end markets that we serve we expect second trend to continue for some time.

We're encouraged by the overall balance that come from our broad portfolio exposure.

We have responded by investing on our strategy of delivering connected solutions and outsourced water systems on technologies to treat increasingly complex water industry challenges growth.

Growth pandemic, we effectively managed our operations on our cost structure, and we exited an unprecedented fiscal year and I point 20, as a much stronger company.

Please turn to slide four.

I'm very proud of our team's performance, which resulted in year over year improvements across most of our key financial metrics adjusting for the men for divestiture.

Our order book grew double digits during the quarter and mid single digits for the four year with a book book to Bill ratio above 1.0, we.

We continue to see an increasing amount of outsourced water orders, which result in an asset that produces long term recurring and profitable revenues and place of more variable capital project revenues.

As we experience increased outsourced water order growth versus capital near term revenue growth may appear muted relative to our historical results and underlying bookings activities.

I'm pleased to report that during the quarter, we booked our largest outsourced water system from a waste water treatment facility and the CP on market and our pipeline remains strong.

Organic revenue growth for the quarter was down slightly, particularly given last years strong fourth quarter organic growth comparison, we're pleased to report on 1.5 per cent for your organic revenue growth and a challenged operational Europe COVID-19, which highlights the importance of our mission and dedication to our central workforce.

Adjusted EBITDA increased in the fourth quarter and full year compared to last year. After adjusting for the December 31st Mem core sales and acquisitions.

On corn cost control efforts favorable price cost management and operational execution efficiencies contributed to higher profitability.

Overall, the resiliency of the business was reinforces for your revenues of 1.43 billion achieved the midpoint of the original for your guidance and adjusted EBITDA of 240 million achieved the high end of our expected range, which we reported grew guidance in April due to uncertainty created by the time.

Right.

Our focus on cash generation produced adjusted free cash flow conversion of 184%, which tracked well above our 100 per se annual target driven by a variety of working capital initiatives and ongoing cost management.

Liquidity is now over 300 million, an all time high and net leverage has improved to three times adjusted EBITDA down from 3.8 times a year ago.

We're pleased that we have the financial flexibility to continue our M&A program focused on accretive tuck in acquisitions, and we're able to do this while also improving our net leverage ratio.

In September we completed another ISS service acquisition talk Yeah, and I would like to welcome employs a walk from pure technologies to the book with family.

Please turn to slide five.

We continue to refine our strategy around sustainability, we shared in the past that we added sustainable as one of our core values and our impact on a sustainable future continues to expand.

We think about sustainability in two ways first our handprint, enabling our customers to become more sustainable through our solutions and service offerings and second our footprint driving your book to become more sustainable within our own internal operations.

As featured in our 2019 sustainability report, we've highlighted how our carbon region facilities provide an efficient and cost effective process to provide a circular renewable filtration media.

Per our efforts, we provided more than 14000 tons of carbon from being Landfilled and created multi use operations.

Two examples over him from we're pleased to highlight one of our municipal sales earlier in the year per Santa Clarita on Valley Water Agency in California, including three on exchange systems to remove PFS from their drinking water.

In September we expanded that relationship with the sale of another on exchange system had an additional well.

He thought from mobile continues to develop as a small but increasing portion of our sales and we expect the fast and other emerging contaminants to provide excellent growth opportunities for many years in the future.

We're also executing on opportunities in the waste to energy space, our technologies from being specified for future deployment in the biogas fuel market as renewable energy demand increases.

Our broad portfolio of water treatment solutions in our established operations and maintenance capabilities provide an excellent growth opportunity in this expanding market.

We're in the early days of meaningful revenue generation, but both examples have great promise for the future of our technologies impact on sustainable initiatives and operations.

Turning to slide six.

Our business has been resilient and sustainable continues to be a benefit from a stable and recurring revenue growth.

This graph represents our revenue and adjusted EBITDA on a rolling 12 month basis from quarter to quarter since 2016.

Our overall revenues have grown at a compounded annual rate of approximately 7% with adjusted EBITDA growth of 16% during the stub.

We primarily pursue capital projects to ultimately drive stable recurring and profitable service and aftermarket growth.

Currently our service business comprises 41% of our total sales while service and aftermarket combined make up approximately 60% of our business.

As we previously discussed the nature of our business is subject to quarterly variability. However, we have high visibility into our revenues from products and services on an annualized basis and believe that our model will continue to serve us well during this uncertain period.

This can be seen on the strong performance of our service business during the COVID-19 dislocation.

I would now like to turn the call over to Scott.

Thank you Rob Please turn to slide seven.

For the fourth quarter organic revenues, excluding the net impact of the net core divestiture and the acquisitions of frontier and awkward pure were down 1.7% versus the prior year to $384 million.

While demand varied by end market, we saw growth in microelectronics light from general industry and healthcare.

As Ron mentioned Q4 of F.Y. 19 was a very strong quarter with organic growth of 11.5%.

Fourth quarter, adjusted EBITDA was $75.6 million for an overall margin of 19.7% price cost was approximately 2 million favorable in the quarter.

Please note that the fourth quarter of 2019 included men core sales of approximately 25 million and adjusted EBITDA was six and a half value.

Please turn to slide eight.

For the full year revenues were 1.43 billion with organic sales up 1.5% after adjusted primarily from EMCORE divestiture.

Company continues to realize benefits from the two segment realignment as capital growth was strong throughout the year.

In both segments capital growth negatively impacted mix within the year, which we expect will result in greater pull through of services and aftermarket in future periods looking into 2021, we expect outsource water orders to outpace capital orders continuing the trend we saw on the second half 2020.

Adjusted EBITDA increased approximately 240 million for the full year.

Adjusted EBITDA margins increased 50 basis points to 16.8% versus the prior year price.

Profitability benefited from higher gross margins cost reductions and favorable price cost, while being partly offset by the men for divestiture impact.

Please turn to slide nine our integrated solutions and services segment had flat fourth quarter organic revenues.

Capital growth driven mostly in microelectronics service revenue was impacted due to slow downs, primarily in refining oil and gas end markets as well as koby 19 related deferrals on delays.

Our digital strategy continues to enhance our profitability and customer interest in our capabilities remains very high protein.

Particularly as customers restrict site access do Japan due to the pandemic.

In addition.

On to booking our largest outsourced water project this quarter as Ron mentioned, we're also pleased to have book earlier. This year, our first organic waste water treatment facility outsource water water, we expect the waste water plant to come online in the second half 2021 or both of these projects have contracts in excess of 10 years per day.

Moving stable recurring and profitable revenues, we continue to pursue a strong pipeline of capital and outsource water opportunities.

Adjusted EBITDA declined to $60 million due to COVID-19 cost and service productivity impacts as well as higher employment costs adjusted EBITDA margin for the quarter was 24.2% down 50 basis points from the prior year.

The full year segment revenues grew almost 4% to 944 million and adjusted EBITDA increased over 3% to 214 nine versus the prior year adjusted EBITDA margins were essentially flat at 22.6%.

Please turn to slide 10.

Applied product technologies fourth quarter revenues were 134 million, which included a decline in organic sales of approximately $7 million or 4.3% driven by reduced demand across multiple product lines, primarily due to the COVID-19 customer delays on site closures.

We were pleased to see the Asia Pacific market rebound from the pandemic in the quarter with solid demand in the electro desalinization and disinfection product lines FX posit positively impacted sales by 140 basis points as Ron mentioned net course, 2019 Q4 sales were approximately 25.

5 million.

Adjusted EBITDA for the fourth quarter was down 12.3% M&A impact primarily from the men port divestiture contributed to approximately 17 percentage points of the decline.

The remaining Corp business adjusting for M&A impacts grew approximately 5%.

Adjusted EBITDA margins for the period were 24.3% an increase of 160 basis points over the prior year operational execution and cost containment actions favorably impacted ABTS profitability.

During the year, we consolidated five manufacturing facilities as part of our ongoing footprint rationalization program. We now have 10 operating facilities and in the APC segment down from 16 to 2019.

For the full year ABTS adjusted EBITDA margin increased to 20.4%.

170 basis points over the prior year.

Please turn to slide 11.

Capital spending of $23 million for the quarter and 88 million our year to date year to date basis, which was primarily driven by outsource water contracts our pipeline.

Finished the quarter with a solid combination of outsourced water and capital opportunities. We continue to closely monitor the pipeline given the uncertainties of the pandemic.

Fourth quarter net working capital improved to 12.5% of LTM Q4 sales and no notable improvement from the prior year over the long term, we expect to see mid teens net working capital of sales range. Given some projects may have varying amounts of working capital requirements. We continue to actively manage.

The quality of our accounts receivable on inventory levels.

And our past due receivables balance is finished the year at record lows.

Please turn to slide 12, we.

We've managed the business for cash and liquidity given the COVID-19, uncertainties adjusted free cash flow was approximately $65 million for the quarter, which was 184% of adjusted net income on a full year basis free cash flow increased by almost 14 million to 117 million exceeding our 100%.

Conversion rate target for the second consecutive year on.

Operating cash flow was approximately a $158 million per the here versus 125 million in 2019, a 26% increase.

Net debt leverage finished the year at three times, adjusted EBITDA, which was down sequentially every quarter and that's why 20, improving from 3.8 times in the prior year.

Our fourth quarter weight weighted average cost of debt is approximately 3.4% and improvement of almost 200 basis points over Q4 of last year.

Production is driven primarily by lower market rates and a lower credit spread.

I would now like to turn to call back over to Ron.

Thanks, Ben Please turn to slide 13.

We believe water treatment as well on the most attractive sectors of the water industry, having favorable long term macro growth drivers. Each segment has multiple initiatives to support a book was long term organic growth.

The ISS segment is focused on our outsourced water and digitally enabled capabilities to drive steady stable and profitable revenues.

Also worth water currently represents approximately one third of the segments total revenues. We also have approximately 20% of ISS revenues digitally connected and were working to double that percentage over time.

P. fast so Lenny on macro plastics on other emerging contaminants will continue to drive complexity on water treatment, which create meaningful growth opportunities were from.

Focused on several attractive vertical markets, where our portfolio of solutions and services are competitively differentiated.

As we near completion of the true segment realignment, we've developed a number of organic growth drivers within our APC segment.

We're focused on the development and marketing of next generation products and new product innovations to treat continued challenges with routine and complex water needs.

We see attractive international growth markets for our component technologies as we build out our geographic channel coverage.

We're also actively leveraging our ISS segment as a meaningful channel partner, particularly for waste water and disinfection product lines.

And Additionally, we're developing an E commerce platform that enhances the user experience and utilizes robust digital capabilities to drive aftermarket sales.

This investment should enable the APTP team to drive meaningful aftermarket growth overtime, as we capture rehabilitation and retrofit business from our rich installed base.

Please turn to slide 14.

In the second quarter of the call we provided an expectation on how we thought the second half of that for too. Many end market demand may materialize looking back on our performance was largely as expected.

We did see higher than expected demand in light and general industry and in municipal drinking water supported by PFS treatment.

This updated chart represents our current expectation for demand on our primary end markets for for Q1, incorporating insights from our sales and operating teams we serve a broad and diverse set of end markets as represented on this slide our smallest end markets are on the bottom of the page each representing low to mid single digits rising insight to that.

GAAP accounting for approximately 20% of our up on 19 annual revenue.

Overall, we expect to see uneven demand continuing but based on our order backlog six out of 10 end market segments show to be neutral or growth.

Expected Q1 decline in microelectronics, given very strong sales in the fourth and the first quarter of 2020.

Our pipeline and microelectronics is strong and we currently expect to see ramping orders from this market segment as we enter the second half of 2021.

The outlook for aquatic on refining is a little more negative but both of those market segments are not large drivers of the overall revenue for the company.

We'll be happy to address detailed questions about specific end market drivers during the Q on ice session.

Please turn to slide 15.

In summary, I'm very proud of the team's efforts and the results we generated in a very challenging year and we entered the new year with a sharp focus on the same three priorities as 2020.

Our fourth quarter results were very solid and we saw year over year improvements against most key financial metrics adjusting for the Midcore divestiture.

We met the market challenges throughout the year with determination and resilience.

Our order book is growing and we're seeing more customers turn to outsource water solutions, allowing customers to focus on their core competency, while letting evoke will handle the increasing challenges and complexities and water treatment.

Our digital strategy as a significant enabler to business continuity and our outsourced water growth.

Interest in our digital offerings has never been greater.

Throughout this past year, we highlighted digital offerings and water, one SD municipal services and health care with vantage SPD.

In the new year, we will be introducing the expansion of our connected capabilities and digital solution offerings.

We are at our core a highly sustainable company. It is what we do every day.

Our ability to respond to PFS micro plastics heavy metals and other emerging contaminants are expected to be very favorable in the coming years, and we're seeing increased demand for our waste water solutions in the waste to energy markets.

As Ben mentioned, we had a strong year in generating free cash flow and liquidity.

We are deleveraging the business and intend to further strengthen the balance sheet.

For outlook comments.

The challenges from COVID-19 continue to limit visibility and we continue to adapt to changing market conditions based.

Based on our current view of the business, we expect full year revenues and adjusted EBITDA to be flat to up slightly versus 2020, driven largely by potential order conversion timing and lower year over year capital sales.

Given our visibility into the first quarter, we are providing a more granular view and expect revenues to be between 310 million to 325 million and adjusted EBITDA to be between 38 million and $42 million.

I would like to also note that in the appendix on slide 17, and 18, we have provided a 2021 framework and key assumptions to provide more insight and transparency into how we're thinking about the puts and takes for the year. We hope you find this information beneficial.

I will now open the call up for your questions.

Thank you.

The floor is now open for questions. If you wish to ask a question. During this time simply press star from the number one on your telephone keypad.

If he would like to withdraw your question. Please press the pound key.

In the interest of time, we do ask that you limit yourself to one question and one follow up question.

Everyone has a chance to ask their question.

Our first question comes from the line of Jason Jones of Stifel.

Good morning, everyone. Good morning note from Lauren.

I'd like to just to start with.

Good question on the 21 framework.

Revenue flat to up slightly EBITDA flat to up slightly.

Absolutely.

Some of the mix shifting to more outsourced water on some of the structural improvements that Youve made this year debt. If you had flat to up slightly revenue you would have had a little bit better than flat to up slightly EBITDA. So maybe you could just talk about a few of the puts and takes that are in your assumptions in that framework on each 21.

Sure Day I'll talk about a few and then I'll hand, it to bet on as we go into 21, I think a little of the.

Cautious.

Look that we're giving is based upon just the unknowns in the Cove. It it's based on unknowns and what we're going to have to do with service techs continuing to disinfect continuing to take additional time to be able to get into customer sites. We've had some delays in that.

Over the past few weeks as we're watching the caseload start to increase again, but we do see the outsourced water, giving us benefits long term we see.

Good opportunities there, we had a great pipeline and great order activity across that that will yield tremendous results for years to come but those are a little longer cycle projects and also as we look into the year the shift to outsource water versus capital takes.

A little longer to get the outsource water projects installed up and running and then actually executing to hit the flow through but it's.

That's kind of what we talk about a bit on on the slide given the puts and takes on the Bakken.

Yes, Nathan as you recall last year Q1 on any.

Even the first half we had some pretty strong growth rates pre cove. It so our fiscal year ending in September we we really have a six.

Six months of tough comps within our numbers as well and as Ron mentioned as you convert from capital to outsource water, which we had a lot of capital microelectronics last year.

Nice margins when you convert to those outsource water program to take a little bit of a temporary dip because you're moving you reported capital sales falling year, you're recording on outside water sales thats over a longer period of time, so thats a little bit of short term pain in the first half of this year is tough.

Comps as well as the conversion outsource water for long term gain that steady stable recurring revenue a little bit of a replay of what we saw on 18, which we benefited in 19 and 20.

In terms of the cash generation of the business and just one more point in the first year of the outsource water projects you have a little higher costs going into the installation that carries out over time right.

Yes, Thats makes sense. This will this will be longer term this will prove to stronger margins and free cash flow.

Yes, I understand I understand the delayed revenue recognition from outside of Florida.

And being that that's very high high margin high margin high return on investment by pretty happy about that.

Just my follow up question on price cost you said your positive a couple million dollars in book here.

Good day steel price is tied to dry hero price is starting to rise he will share a couple of your bigger input costs, you talk about how you're thinking about.

First quarter price cost in full price cost per 2021.

Yes, we will see some some benefits on little bit of benefit stealing from Q1, but as the year goes on it's going to be tougher basically assuming neutral on the price cost spreads were 21.

Great. Thanks, I'll pass it on.

Okay.

Our next question comes from the line of Deane Dray of RBC capital markets.

Thank you good morning, everyone. Good morning day, Hey, maybe start with Ben and the upside a free cash flow this quarter and frankly for the year I just take us through the if there is any one timers in there like tax payments.

And did I hear you say in prepared remarks about this working capital to sales because that's at 12.5 per cent thats exceptionally.

Thats exceptional work here and assumption on improvement, but I think you said you're going to go back to mid teens, just clarify that is that additional inventory, yes, we want to make sure that working capital can change depending on growth and his sales flatten you tend to liquidate some working capital right. So thats certainly happened as sales.

As growth has tapered song.

But the other thing too is we had a great year in terms of collections in terms of our overdue collections on we're sitting right now at record.

Record levels of current in terms of our receivables and record low levels of Overdues. We also had the benefits of of our supply chain financing program as well that happened. This years those benefits will stay but you're not going to get the onetime benefits that come through in addition to that we also.

While we accrued for the four on K. we.

We did get a cash benefit associated with suspension of the four on K in the second half of the year, that's about six and a half million dollars. So those are the things that in terms of this year that gave us some very strong free cash flow.

We'll see how it goes it all depends on what happens with growth right.

If growth accelerates beyond our expectations that could push working capital a little higher into that mid teens, if it stays where it's at today stable to the low.

Single digits decline and the downside case, we expect will be on the lower end of that working capital percentages we are today.

And just sticking with a free.

Free cash flow and the type of Capex on that you're looking at per 2021. When you see these outsourced water contracts what sort of capex.

Growth Capex obligation would that be for the year. If you were to estimate it now.

Yes so.

Again, a lot of it depends on the coated uncertainties and how that unfolds and our ability to get these projects up and online but.

It's going to be higher this year.

We're expecting to be net growth capex range in that 8% range versus.

In total so we should see a little higher due to that large project that Ron talked about we booked our largest ever outsourced water program, which is we're very very excited about so thats going to drive our capex.

Two a little higher level. This year. So that's good news, it's a very high return projects very stable steady recurring revenue for the next 10 years, but it will push capex on that.

That's perfectly fine with us and then for Ron and really do like that slide page 14, with the end markets and if I had to pick to that I would love to get some more clarification on on health care pharma biotech neutral.

Just given all the demand for ultra pure water I.

I would expect that would've been higher and for municipal growth.

Im happy to see growth there is.

Is how much might p. foster be contributing on because it sounds like you are including that Pos contribution there as well thanks, Jeff certainly day on the health care pharma biotech you know again, we're lapping a pretty good first quarter that we had in the prior fiscal year and we do see.

Very good growth on the pharma and biotech side and some of the hospital systems. As you know certainly you've heard about have had mixed.

Mixed volumes going up and down given the restriction on elective surgeries and other things that are happening due to due to the requirement to keep covert beddoes beds opened so we've seen a little bit of mix across the you know the hospital systems with.

Pharma and biotech being up very nicely. We also highlighted a couple of new products that we rolled out on the digital side in the middle of last year with the vantage SPD that I mentioned earlier, that's got great great growth trajectories that that we're excited about and we're expanding that into that business. So.

Overall, I think on the year that will be turned to green as we get to the latter half of the year, but we're entering Q1, just giving a Q1 expected outlook against demand and our ability to get in and actually install products as as neutral.

Then on on the municipal side again. It is Q1 that we're highlighting this is against our order activity our backlog, what we're going to be executing across.

Municipal does have PFS inside of that.

The Green and then on the municipal waste water is really recycle or its retrofit rehab that that we've got some nice order activity around as municipal systems are wanting to make sure that they can operate to their full efficiency. They may not be spending a lot of money on large capital expansions, but they.

Or spending money on retrofit and rehab to make sure that the operating assets that they have in place are delivering and then with municipal drinking water basically the same thing going on obviously protecting around the PFS applications, we see.

On on Slide 14, just to give some context for this as we talk about growth the green for everyone's knowledge on the Paul Green is mid to high single digit growth.

Neutral is basically going to be up or down 2% to 3% organically slight decline is going to be mid to mid to high single digit decline in then.

Net decline is going to be where we will see double digits again want to highlight on this is this is our Q1 outlook strictly based on year over year comps and also what we see on our order book our order backlog.

Thanks for all that color on share.

Your next question comes from the line on John loans of Credit Suisse.

Hi, Good morning, good morning, Orange on.

Maybe first.

You, obviously have been able to do some small tuck ins here.

Did make a comment about kind of strengthening the balance sheet can you just give us a little bit more color on how you're thinking about the M&A pipeline.

It is still a very fragmented market.

Any color you can share there.

Sure John Thanks for the question.

We actually put a bit of a pause as you would expect on our M&A activity.

As we entered into the Cove in phase of the last fiscal year as we saw September come through and we had relationships with.

The acquisition, we made in September we had been.

Discussing it with them for quite some time and we were able to do it at a very accretive and non cash number.

There is a tremendous opportunity for us around the fragmented business as you highlight to do complete tuck in M&A activity, we have a very long lift on large pipeline our expectation as we go forward would be do you know somewhere around five to six tuck in.

Physicians, a year, which was the you know the.

Activity levels, we were on pre coated and typically those tuck in acquisitions range somewhere between $5 million to $10 million.

On acquisition cost.

Typically around the same level as their their sales revenue is slightly below that and then we're buying them pre synergy.

Seven day times post synergy somewhere.

Around five times or below.

Great. Thank you for that color and then you know I don't know if it's possible.

Sect kind of some of the site access.

Comments between what might be impacting the install business versus maybe what might be more on the MRO side your business actually held up very well during cove. It from a site access perspective.

So maybe just some more color around that and then I guess if it is MRO is there do you see pent up demand in parts of the portfolio, where theres been site access restriction or is it kind of a law on geisha and of demand when that site access comes back yes. So that's a.

Great question primary.

Primarily where our delays have occurred is around new installations and this expansion of the offering that we have inside of a customer's facility what happens around side access on the service and the maintenance and operations side is strictly an additional delay.

Or a slowdown of what we see inside of our service ability to.

Execute and ultimately to gain density of route. So it takes a little longer little less goals takes a lot more time through the protocol of disinfecting going in and coming out of a customer because we're ensuring that our customers have continuity of operations and we have to ensure the safety of our team members going.

On the in and out in the safety of their team members. So as you think about what we saw when I actually highlighted in my comments like general industry were higher than we expected in the second half of the year a fair amount of that was due to some of the pent up demand you talked about day shut off.

Yeah.

On the shutdown occurred in kind of early late March and so we had a delay in the access we had when they came back online it.

It had a bit of a pent up demand of about ways that we had to go and flush systems and get them started up and so we saw a bit of a higher demand in the second half of the year than we had initially given as our outlook. So we're pleased by that we anticipate you don't see the customers shutting down as much in.

This next wave that they're expecting we're just seeing a reduction in application. They are still utilizing water are still dave's team still goes on we still do operational ex us. We just feel like it may be a bit of a delay as their demand levels may drop due to lockdowns or additional risk.

Frictions on business activity.

Sure.

Great appreciate the color I'll pass it along thank you.

Our next question comes from the line of Saree Boroditsky of Jefferies.

Hi, Good morning, good morning, similar to your comments on the health care market as you look at the end market charts highlight areas that are one color to the first quarter, but you think will turn for the full year, So give us a better sense of what you're seeing index from the markets from thanks, Yes, three so we really did.

Hi, give this as a full outlook on the year and the reason we did it is because we it's a little uncertain as we go into the cold shutdown to know how each one of these markets are going to react.

I would say that.

We anticipate possibly you know as we've.

We've highlighted here Q1, I do believe in the latter half of the year, we'll see.

On micro electronics on some other markets rebounding and hitting a bit of a better order activity coming on whether the execution activity as they are not just depending on access and ability to get to sites, but.

I mean I think this is a good outlook for the you know the first quarter as we go through and it truly is based on what our order backlog in our activity is expected to be in the first quarter. So.

We'll give we'll get a better outlook as we go through the first quarter, we hit that we'll continue to update this chart.

And put it into future presentations as we get more visibility.

Great. Thank you.

Good luck developing ecommerce sales CBP you talk about the cost of this investment and when you expect this initiative to the fully on right.

Investments already behind Us. So we've we've largely on may the investment you'll see that in our refresh website and you will see that disclosure on disclose the cash.

Perfect. Thanks, so much.

Our next question comes from the line of Andrew Kaplowitz of Citi.

Hi, This is a kind of book Binder on Fran do you good morning page on ice on.

And so.

The framework for fiscal 21 and revenue.

Adjusted EBITDA flat to slightly up how should we think about incremental margins between the two segments. So let's go from anyone in light of outsourced water backlog potentially driving mix headwinds and I assets versus ABT, where volume on a cash.

Could be picking up in a gradual recovery.

Yes, Theres a lot of moving parts there and on one hand, you have the benefits of outsourced water right as you as you noted.

On the other hand, you have the challenges due to co bid and higher cost associated with servicing customers.

In this environment, that's likely continuing particularly in Lockdowns on.

On become more prominent so overall.

Hopefully for the year, we can achieve.

On a slight increase in margins continue to do that but a lot of it depends on what happens.

With regards to coated and how things unfold this year.

As Ron mentioned between first half and second half we have tough comps in the first half as we talked about earlier on in the second half in theory, we said easier comps should kill the debate in the vaccine.

Benefits get out there and we return to more of a normal.

Situation, so it's a bit tough to call at this point in time on but.

Overall, we want to continue on journey towards 20%, we'd like to put some points on the board this year.

Thanks, that's helpful.

And then as a follow up.

Organic growth JV for APTP, you list channels and market expansion, including an international focus.

With the understanding that your China business is about $50 million to $60 million on sales what do you see on your potential growth trajectory in China, where the economy is experiencing a faster recovery relative to other geography.

Yes that hopefully will return into that double digit growth area. This year again lot of it depends on uncertainties coated but certainly the fourth quarter was extremely encouraging we saw large snap back we did record on a single digits growth. This year in total for China.

And most of that occurred in the fourth quarter after some tough quarters.

Early on because they were hit the hardest, but we feel good about where China sat and on.

Assuming that the Kobe debates and we don't get into more shutdowns on we expect to return to that double digit growth rates that we've experienced.

That's great. Thank you I'll pass it along thank you.

Our next question comes from the line of Brian Lee of Goldman Sachs.

Hey, guys. Good morning, Thanks for taking the questions.

Hey.

I know you touched upon this a couple of times throughout the call but.

Given the moving pieces here that seem to be muting, the fiscal 21 outlet versus order trends, you're seeing real time.

Can you help maybe quantify EBITDA, what the assumptions are expectations are around a couple of these pieces I guess the way you're calling out the typical order conversion, maybe potentially having some delays there so what is that.

If you can quantify it in any terms and then on the.

Mix the outsourced versus capital is sort of how much of a shift year on year are you expecting and then just.

Kind of giving us a sense from for what could benchmark to see if things sort of.

Moving to normalize or potentially pull in as we move through the year.

Yes on the outsource to cap shipped.

Our outsource service backlog has significantly increased and are set in our capital backlog has decreased on or outsource service backlog has increased.

More than the capital backlog has decreased obviously.

Now again part of that is the microelectronics, we had a very strong first half of the year last year. We are expecting that orders will come in that will impact more in the second half of this year, but those are in the pipeline, but have not actually from.

Time.

Regarding on.

Again, a lot of it comes down to what happens with coated the uncertainties related to coated.

On that impacts the ability to do a lot of things and it also potentially impacts cost should we should cobot not be as bad as perhaps feared we don't get the costs.

The revenue starts to flow and maybe we hit the upside case that we have on the chart on the Cove. It happens worse than we thought maybe more on the downside scenario in both scenarios, we still expect to be relatively stable.

Year over year may be a slight decline may be slight increase but again, if you think about it more standpoint pre coping to post code you don't have a full year of those cove. It in the results you have a half year recoded assets.

Post code, which makes a more of a muted at fly on 21, considering those comps.

Yes fair enough that makes sense and then just second question and I'll pass it on just on.

Any initial thoughts maybe on the on the election implications for the water sector, I guess, particularly in the case of legislation or funding for addressing water contaminants like like PFS I know the.

I think the Biden environment total Justice plan had some.

Enforceable limits that they were pledging, but seeing anything.

In terms of development.

Either at the federal level or state level or expectations maybe.

As you think about 2021 in general Thanks, Yeah, we're seeing a fair amount of opportunity come Brian.

Just due to the election and getting some certainty around it I think thats going to be the big key.

You do have the Biden Harris administration that has already put out the environmental justice and equitable economic opportunity and that what they have defined as theyre going to tackle p. fast pollution by Desi designating it as a hazardous substance and setting enforceable limits for P. fast.

And now I think thats important on a federal level, but we still.

It will take some time for that actually to take hold and it'll take some time in a fair amount of negotiation on the hill to.

Get that wrapped up and complete I would anticipate however states are still moving forward. So we're seeing nice order activity a nice pipeline activity on the PFS side would individual water districts and states wanting to.

Make sure that day or taking the correct action against that and then you know while we.

I have a little bit of a supply chain shifts still back to the United States from other areas. We've had industrial customers that have been investing very nicely on that spoke to our capital sales that we saw on F Y 20, and some of the light general industry and other areas and we anticipate that will deliver longer term service and on.

Aftermarket pull through just as we focus on all of our capital sales and as.

As we go forward. So the great thing about water is it really doesn't matter who's in office everybody has to focus on it and make sure that we all have reliable clean safe healthy water ultimately for us as human beings, but also for industry to operating.

Yes, that's great. Thanks, guys I'll pass it on thanks.

Our next question comes from the line of Andrew This Kalia of Fam Baird.

Morning, guys. Good morning, Good morning, I wanted to I wanted to ask on.

Into Q1.

I think on the framework day layout on slide.

17, how much.

It seems conservative to me about how much of that assumes some maybe some risks from lock down just given the headlines more recently.

I would say that we do have.

Concerns about locked down and its not necessarily lock down more slow down so what we've built into our outlook is more slow down a little more challenge of getting into locations. This does not have a.

That has potentially been.

Discussed as a four to six week lockdown built into it.

Okay.

And then for the full year.

Is there any color you can give us on.

The guidance.

As it relates to the bolt on both your segments. You do you expect similar growth in each segment I know, there's a lot of puts and takes in either by any other additional help in modeling that out to be.

Good day.

I would say right now we want to stick to the annual color that we're giving around flat to slightly up.

I think you could apply those across.

Each of the segments.

Early consistently.

And we expect that ISS in this environment is on March service revenue base.

During revenue base.

They are a better fit better position than HCT, but BT will typically move a little more with the market and.

They also have a larger international footprint may PT. So in this environment I assets should fare is slightly better than any day.

Okay. All right. That's helpful. Thank you guys.

Our next question comes from the line of Joseph share Donny Kelly.

Kelly.

Thank you Hi, guys. This is from these go on for Joe.

Hi, Fran you Hey, guys could you expand on your municipal expectations over the next year given some of the uncertainty specifically on the Capex budget side and any color for that for the full year would be appreciated.

Yes, I think if you go back to slide 14.

Just walk through again, what I gave us as the colors. So the colors that we have on the first quarter of 21 is green Green is up mid to high single digits. So that's what we have is municipal wastewater municipal drinking water. This is tied to our pipeline is tied to our service footprint.

And what we have and what we do as well as the backlog that we're sitting on a lot of that is around retrofit rehab not necessarily the expansion and extension of large capital projects.

And then the drinking water side is tied to some PFS activity that we're already servicing and we anticipate servicing based on some of the orders that we've highlighted on prior conference calls.

And again, so green mid to high single digits blew up or down 2% to 3% around zero and then.

Yellow is mid to low single digit decline and then read as a double digit decline then you can you.

You sum those those kind of expectations against modeling with these numbers.

Great. Thanks, that's helpful and then starting from the aquatic market, giving sort of strength, we've seen in other pool exposed companies can you expand a little bit on in terms of what your mix is there I'm guessing you guys have also led commercial maybe like theme parks exposure, but what does it look like in that part of the business hubs allow.

Lastly, on 100 per cent of our aquatic business is large it is large applications around water parks theme parks law.

Large U.S facilities with multi day. There's this is not single home single family or even small hotel type. So that's the difference in what you see on the aquatic center again. This aquatic highlight is for the first quarter and it's based on backlog. It's based on what we have currently in our pipeline.

On looking at year over year against first quarter of last year that was pre coated.

Great Thats helpful. Thank you for taking my questions.

Our next question comes from the line of Patrick Bohlen with JP Morgan.

Oh, Hi, good morning, Ron Good morning, Ben.

First off congrats on a strong year in a tough environment definitely helping improve the recession recession resiliency in the business model here I expect this key metric.

My question is in the context of the lower.

Year over year capital sales do you expect for 2021, and then the comment that outsourced water is now one third of sales, which implies it's maybe 22% of the total company with my math right.

It is this a profile we should expect beyond this year as the business transitions to more outsourced maybe you could.

Moving on how that.

The 20 sales.

The total.

His daughter.

Next five years from now maybe.

I'll talk a little bit about the demand curve, we're seeing and let Ben discussed the percentage of specifically, but what we've seen and I would say the strategy we've deployed debt.

On the broad industrial markets that we serve driving them to outsource water and leaving without force water is playing out extremely well compete.

Companies are.

More and more focusing on what their core competency is and how they execute and improve their operational effectiveness in doing this the value proposition that of vocal on our sales teams have been on delivering against let us provide you worry free.

Clean pure water for your application take it on the backside help treat the waste water recycle and reuse it back into your facility is resonating extremely well so our customers are starting to rely more and more on AOS for out force water activities.

And to treat the full cycle of the water in fact, what we highlighted even during the call was our largest outsourced water booking that we've had to date is actually a waste water bookings historically that was all focused on process water. So we're seeing that actually shift into the waste water side of the business or customers.

Typically did not do that but the cost of treating their concentrated industrial waste is continuing to be more challenging for them. So they are enabling us and bringing us to come in to help them manage their operations. So they can bring it around full circle minimize their liquid discharge and drive sustainability and Theyre operating.

And so I would say the trends are going to be very positive going forward. As you did the math on 20 per cent of the company's revenue approximately we would anticipate that will continue to grow and Ben you want to highlight some of the growth rates, we've seen and what you'd expect we'll see from going forward on that yes, I think Ron nailed it and we're on.

Net in our backlog.

And I think the whole co that situation has the potential to accelerate some things maybe would have taken a longer period of time certainly on source water is one of those things that we could see acceleration in addition to digital.

Those two things we should expect will will continue and more and more customers have an increased appetite for outsource water I think time will tell but certainly.

What we're seeing in this year's backlog in our pipeline is more of that conversion and more opportunities on the outsource water area.

That's helpful, but as the function is the.

Is the slight growth you expect for this year more a function of kind of the fact that capital demand was diminished.

Versus the shift outsourced water such that when.

Turns you could still put up the kind of low to mid single digit organic growth can you talk about yes, yes. So what we are highlighting in the outlook for this year is a larger shift outsource water that is.

Less revenue in year, one that carries out longer term at a higher revenue level on a higher profit level. So if we're comparing it year over year, we had higher capital sales and 20, then we're giving the outlook for 21 on because it fair.

Fair amount of the projects are shifting dollars horsepower.

Helpful. Helpful. And then my follow up is on.

On the first quarter revenue guide it if I did my math I think youve momentum for divestiture out.

It looks like the guidance like down, 5%, 8% year over year organically and.

It just looks a little bit.

Lower than what the market slide would imply from though maybe I'm, just mis calculating but maybe.

Maybe if you could highlight anything on the comps debt would very large project last year or is this just conservatism just trying to understand kind of this little bit of a disconnect. There on revenue versus end markets and little both on both but remember last year. We still had meant for Q1, so thats about 14 million Bucks on that wont occur. This year. So when you do that you're more like that.

Mid single digits decline year over year with the mid if you take the midpoint of that guide and in addition to that last year again pre co the tough comps and a lot of capital, particularly in the microelectronics area.

Got it okay. Okay.

Yep. That's that's helpful color I appreciate it best of luck guys. Thanks, Thanks for taking the time.

Again, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad again net of Star one.

So is that all the questions operator.

At this time Im showing no further questions. Sir. Thank you. So in summary, I would like to again. Thank the team members of a book with growth terrific up like 20 for delivering on the fourth quarter, making sure that we continue to stay safe and healthy and ensured continuity of operations to our customers.

On to our communities in the markets that we serve.

We're pleased to be able to increase the liquidity and come out of a very unprecedented in China challenged year as a stronger company we entered into 21.

We're very focused on how we're going to execute ensuring that we will continue to deliver to our customers continue to maintain the health and safety of our team members and continue to manage our balance sheet and the capital of the business very effectively while investing in our strategy going forward. So thank you all for joining us for the call.

We showed the questions on the interest in the company and look forward to speaking with you again in the future.

Thank you. This concludes today's vocalist water technologies fourth quarter 2020 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.

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