Q1 2021 Evoqua Water Technologies Corp Earnings Call
Hello, and welcome to the evoke white water technologies first quarter, 'twenty and 'twenty One earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions. Following the presentation after.
After the Speakers' opening remarks, there will be a question and answer period. If you would like to ask the question. During this time and simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press the pound key on your telephone keypad.
A reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms. Please disconnect at this time. Thank you I would now like to turn the call over to Dan <unk>, Vice President of Investor Relations. Please go ahead.
Thanks, Laurie and thanks to everyone for joining us for today's call to review, our first quarter 2021 financial results.
Participating on today's call and Ron 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.
Ask that you. Please keep the one question on the follow up to accommodate as many questions as possible.
This conference call includes forward looking statements, including our expectations for the second quarter and the full year of fiscal 'twenty, one 'twenty 'twenty, one as well as expectations relating to the impact of the COVID-19, pandemic order demand and the end market drivers and execution of our digital strategy.
On the acquisition program and the market for treatment of the emerging contaminants and other potential growth drivers.
Actual results may differ materially from expectations.
For additional information on a bulk of please refer to the company's SEC filings, including the risk factors described there and.
On this conference call. We 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 the vocals 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 to its most directly comparable.
The GAAP financial measure because it is impractical to forecast certain items without unreasonable efforts due to the uncertainty and the inherent difficulty of predicting the occurrence and financial impact of and the periods in which such items may be recognized and.
Unless otherwise specified references on this call the full year measures oradour year referred to our fiscal year, which ends on September 30.
And so access this conference call via webcast were disclosed in the press release, which was posted on our corporate website.
Replays of this conference call will be archived and available for the next seven days.
With that I would now like to turn the call over to Ron.
Thank you Dan Please turn to slide three.
Stated on prior calls on our priorities remain focused on the health and safety of our employees, ensuring business continuity and customer uptime, and improving our balance sheet and the liquidity of the company.
The impact of COVID-19, pandemic has varied across our diverse set of end markets, but we're encouraged as we look into the future with the anticipation of the vaccine rollout.
We're investing and growth opportunities solidify and customer relationships broadening our portfolio of solutions and extending our geographic reach through our M&A program.
We believe our futures price and while we plan for the future. We're focused on navigating the challenges at hand, please start on slide four.
Our first quarter results were largely as expected we were pleased with the overall execution of the business, even as compared to the strong prior year from Q1 of fiscal 'twenty, which was the last and on COVID-19 impact of quarter.
Additionally, this is the last quarter, and which will have the core business and our prior year comparison.
Our book to Bill ratio was north of one and we continue to see solid bookings and a robust opportunity pipeline comprised of both outsourced water and capital projects across the diverse set of end markets.
The first quarter organic revenues were down slightly with ISS impacted primarily by site access challenges due to COVID-19, and strong prior year capital revenues, particularly and microelectronics.
The P T had a solid quarter with notable strength in the APAC region.
Price cost was slightly favorable and we're closely monitoring potential commodity inflation trends and the coming quarters.
We're pleased to report adjusted EBITDA of approximately 45 million with margin improving by more than 100 basis points over the prior year supported largely by positive operational execution and realignment initiatives.
Cash flow was wrong with the conversion rate well north of a 100% target supported by strong net working capital performance and increased profitability.
Liquidity continues to increase and the remains above 300 million with net leverage table of three talks please turn to slide five.
We continue to develop and enhance our strategy around sustainability, we think about sustainability and two ways first our handprint and enabling our customers to become more sustainable through our solutions and service offerings and second our footprint driving evoke would it become more sustainable within our own internal operations the hull.
A lot of recent emerging contaminants of when we were pleased to receive a $1 million to $5 million of order from the municipal drinking water treatment plant and California to provide turnkey solutions, where the three year service contract to remove piece on chemicals.
Our solution includes six vessels on exchange media and service through twos out through 2020 for.
The service contract also includes extended service for our previously installed granular activated carbon solution on another water side, which is also on line to treat P fast and other emerging contaminants.
We're also working to continually improve our operations internally and minimize our own impact.
Our safety incident rate is the primary focus of our operations and as we focus on internal operations as well as service of our customer sites, we dedicated a tremendous amount of time to safety and to the review and root cause solution. When it occurs and we were pleased to reduce our safety incidents and FY 'twenty by 30% overall from the prior.
Year.
We will not be satisfied until we're at zero incidents, but we are pleased with our progress.
And ability as integral to our business. It is what we do we're preparing to release our 2020 sustainability report this spring and we look forward to your feedback the rip.
Port will highlight the progress we've made internally to advance sustainability and expand our governance structure, while providing more details on our handprint and customer sustainability impact.
Please turn to slide six.
Our business has been resilient and sustainable and continues to benefit from stable and recurring revenue growth. This graph presents our revenue and adjusted EBITDA on a rolling 12 month basis from quarter to quarter since 2017.
Our overall revenues have grown at a compounded annual rate of approximately 5% with adjusted EBITDA growth of 9% during the stop.
These numbers of adjusted down from the slide we've previously shown due to the removal of FY 2016, and the impact from the sale of the minimum Corp. The.
The business continues to operate on a steady and profitable growth trajectory as we adjusted for the divestiture.
We primarily pursue capital projects to ultimately drive stable recurring and profitable service and aftermarket growth.
Currently our service business comprises 41% of our trailing 12 months sales, while service and aftermarket combined make up approximately 60% of our business.
As we've previously discussed the nature of our business is subject to quarterly variability. However, we have high visibility and to our revenues from products and services on an annualized basis and believe our model will continue to serve us well during this uncertain period.
And this can be seen and the strong performance of our service business during the periods impacted by COVID-19.
Please turn to slide seven.
Acquisitions have been and important growth of investment over the past five years and we're continuing our tuck in strategy will utilize.
Acquisitions, as a proxy for R&D activity and capital growth investments.
Our targets have been and will continue to be focused on filling product portfolio gaps penetrating target vertical markets and expanding our geographic footprint.
Since 2016, we've acquired 16 companies 10 of them supporting the development of our product and technology portfolio and six expanding our geographic and vertical market service reach we consider all of the acquisitions with the exception of Neptune Benson to be tuck in sized transactions.
Our last two acquisitions of Aqua pure technologies acquired in September and Ultra pure and industrial services and December are excellent fits and our ISS service model. These acquisitions enabled us to expand our service reach and the Ohio, and Texas markets respectively.
Our opportunity pipeline remains robust and we're currently focused on expanding our industry, leading geographic service network. We expect to continue our acquisition program, while also improving our net leverage profile.
Please turn to slide eight.
Last quarter, we highlighted multiple organic growth drivers for both segments new product introductions were highlighted as one of the drivers. We've recently introduced the Neptune Benson defender of P series regenerative media filter.
The product is an expansion of the classic defender product line, which is currently used and large aquatic theme parks zoos and aquariums. The defender F. P is targeted for a market of what we estimate to be over 31000 medium sized applications, including health and fitness swimming pools swarm schools luxury clubs and municipal parks, which more than <unk>.
Doubles, our addressable aquatic and Margaret.
This product is a highly sustainable replacement of sand filtration, providing and improve swimming experience using less water and having a smaller footprint, reducing energy consumption and using less chemicals.
The defender of the ultimately helps to provide of health are healthier safer and more sustainable environment. We look forward of sharing new product innovations over the next several quarters. We're also pleased to have been awarded the 2020 Frost and Sullivan and Best practice award for product innovation, and the water infrastructure market and the APAC region.
This region is highly competitive and a global leader and the water market and treatment market, making just recognition even more special.
And last year, we added senior leadership talent and the region and opened an office and India I'm very proud of our team and the success they've had I would now like to turn the call over to Beth.
Thank you Ron please turn to slide nine.
For the first quarter reported revenues were $322 million organic revenue, excluding the net impact of recent acquisitions, the divestiture of metaphor and the impact of foreign exchange were down three 5%.
The demand varied by end market with growth and healthcare and pharmaceutical services capital decline and microelectronics and service declines and refining regionally, we expect experienced solid growth and Asia Pacific.
For the first quarter adjusted EBITDA was $44 8 million for and overall margin of 13, 9% up 130 basis points over the prior year cost controls and operational efficiencies and realignment benefits contributed to adjusted EBITDA growth.
The first quarter of the prior year included <unk> sales of approximately $14 million and adjusted EBITDA of approximately $1 3 million price cost was slightly favorable and the quarter.
Please turn to slide 10.
Our integrated solutions and services segment first quarter revenues were down five 9%. The decline was driven primarily by the timing of large capital projects and the prior year temporary delays and annual maintenance and the oil and gas and markets and COVID-19 related impacts to service and aftermarket revenues, primarily due to restricted site access and.
The higher service cost and productivity impacts associated with Covid related safety protocols.
Our digital strategy continues to enhance our profitability with digitally enabled revenue is growing double digit rates and customers interest and our capability of remains very high, particularly as customers restrict site access due to the pandemic and.
Adjusted EBITDA declined to $43 million due to higher absorption cost from lower volume and volume and unfavorable mix and ongoing cost controls and favorable price cost, partly offset the decline and adjusted EBITDA margin for the quarter was 21% down 130 basis points from the prior year.
Please turn to slide 11.
The applied product technologies first quarter revenues were $107 million down eight 9%, which included the impact from the non core divestiture on December 31, 2019 or.
Organic revenues increased one 4% driven by strong growth and the Asia Pacific region, FX positively impacted sales by 185 basis points. As we commented earlier men of course Q1 prior year revenues were approximately $14 million and.
Adjusted EBITDA for the quarter increased over 20% to $19 million adjusted EBITDA margins increased 430 basis points to 17, 7% operational execution and cost containment actions favorably benefit of AT&T profitability.
Please turn to slide 12.
Capital spending primarily for outsourced water orders was slightly over $17 million per the quarter and flat versus the prior year.
As we previously mentioned our pipeline remains solid with the combination of outsourced water and capital opportunities we're closely.
The monitoring the pipeline given the uncertainties of the pandemic.
First quarter net working capital was 13, 2% of LTM Q1 sales and improvement of 90 basis points over the prior year quarter.
Over the long term, we anticipate a mid teens net working capital to sales range. Given some projects may have varying amounts of working capital requirements.
We continued to actively manage the quality of our accounts receivable and inventory levels.
Please turn to slide 13.
As Ron mentioned in his opening comments managing the business to maintain balance sheet flexibility and strong liquidity continues to be one of our corporate priorities given the uncertainties, resulting from the pandemic.
Operating cash flow was $15 $6 million per the quarter versus $4 7 million and the prior year.
You can see over the past four years, we've increased operating cash flow from approximately $29 million to almost $170 million on a Q1 LTM basis.
Adjusted free cash flow was on.
All of those 10 million for the quarter, which was 133% of adjusted net income.
Our net leverage ratio of finished three times adjusted EBITDA, which was down almost a half a turn from the prior year and stable compared to the fourth quarter.
Our weighted average.
Average cost of debt is approximately three 4% and improvement of 160 basis points over the prior year the.
The reduction is driven by lower market rates and a lower credit spread.
We were very pleased to receive debt ratings upgrades from S&P and Moody's during the quarter driven by several factors, including continued improvement and operations as well as cash flows and working capital progress and leverage reduction.
I would now like to turn the call back over to Ron.
Thanks Pat.
Let's turn to slide 14.
This updated chart represents our current expectations for order demand and our primary end markets for Q2, and incorporating insights from our sales and operations teams, we sort of a broad and diverse set of end markets as represented on this slide.
Our smallest and markets are on the bottom of the page each representing a low to mid single digits rising and ties to the top accounting for approximately 20% of our FY 19 annual revenue.
Looking back our first quarter performance was largely as expected, we noted solid demand and health care pharma municipal drinking water and food and beverage.
The fast treatment opportunities continue to drive municipal drinking water opportunities.
Overall, we expect to see varying order demand and the second quarter with seven out of 10 of our primary and market segments expected to be neutral or growing the.
The outlook for Aquatics, and refining is a little more negative but both of those market segments are not large drivers and the overall revenue for the company.
We'll be happy to address the detailed questions about specific end market drivers during the Q&A section.
Please turn to slide 15.
In summary, the pandemic continues to present challenges to the global markets and we are maintaining our priority is to protect our employees service our customers and preserve our financial strength, we will continue to show our resiliency operating through the pandemic as a stronger company.
Our order book is growing and we're actively engaged with customers and helping them solve complex water problems across multiple end markets are large installed base market, leading service footprint and our world class portfolio of component technologies and solutions positions us well for ongoing growth.
Our first quarter results were solid and largely as expected we were pleased to drive profit margins higher through execution and operating efficiencies.
Our digital capabilities continue to expand and enhancing our outsourced water offering and the market interest is growing and.
We've been pleased to see double digit growth and our water one digitally enabled service offerings.
We're a highly sustainable company by the nature of our business every day, we're helping our customers meet their sustainability goals.
The demand to treat emerging contaminants as expense expanding.
We have applications treating DFAST micro plastics heavy metals and other complex contaminants and we expect these markets to grow for the foreseeable future.
We're seeing increased demands for wastewater solutions across the municipal industrial and waste to energy markets.
The cycling and reusing water is a trend that will continue to fuel growth and our front to back treatment solutions.
The first quarter's free cash flow liquidity and overall balance sheet strength for solid.
We welcome the ultra pure and industrial service team two of the alcohol and on.
Our M&A pipeline is robust with tuck in opportunities and we expect to remain active while continuing to improve our net financial leverage.
I will now close by commenting on our outlook.
And the challenges from COVID-19 continue to limit visibility and were navigating dynamic market conditions based on our current view and consistent with last quarter, we're maintaining our outlook of full year revenues and adjusted EBITDA to be flat to up slightly versus 2020.
And the appendix on slide 17, we provided the 2000 and 'twenty one guidance, Fred remark, noting potential drivers of upside and downside.
Given our visibility into the second quarter, we anticipate revenues to be between $325 million to $340 million and adjusted EBITDA to be between 48 and $52 million.
Also consistent with prior fiscal years, we anticipate the first half of adjusted EBITDA to deliver approximately 40% of our full year's EBITDA.
And I will now open the call for your questions.
Thank you at this time I would like to remind everyone if you'd like to ask the question. Please.
And the number one.
Okay.
And uhm.
And for yourself from the queue press the pound key.
Interest of time, we do ask that you limit yourself to one question and one follow up so that everyone has the chance to ask their questions.
Our first question comes from the line of Mike Halloran of Baird.
Hey, good morning, everyone.
Hey, good morning, Michael.
So just wanted to just get some thoughts on how you're thinking about cadence through the year and.
I'll start and let Ben and Mike, but just as we talked about and we typically see 40% of on the EBITDA com and the first half of the year of <unk> 60 in the second half if you'll remember.
The first quarter of this year was impacted by Covid, where the first quarter of last year was not and then as we look at the second quarter, we actually had January and February that really weren't impacted by Covid and.
And 2020 of it really hit us in March and and so we're starting to actually.
Lap the Covid years, and and we feel we feel good about the back half given what it looks like and our order activity and then you have comment yes, sure Hey, Mike.
So again, we're thinking about a 40 60, approximately 40 60 split EBITDA first half the second half.
Very much aligned with traditionally what we see but again, that's subject to COVID-19 uncertainty and variability right I mean, the business normally is.
And it's very stable and steady on an LTM basis, the quarters do fluctuate from time to time and Covid has the potential deposit those fluctuations to be a little more significant but certainly each half of the year is more stable than any quarter and our full year is much more stable. So right now we're thinking about 40, 61st half of the circa.
And half.
And maybe an update there and then how are you thinking about what the order trends mean today and how that how that impacts of the next couple of years of orders in other words.
Water one success build on operate and a lot of these outsourced water initiatives you are starting to gain some traction book to Bill is really favorable and it has positive implications for out years.
Maybe just an update on how that's tracking and how youre thinking about those and what kind of information you can do to help us understand what that cadence could look like as you start moving beyond the short term.
Yes, so the long term outsource water contract business is expanding in this environment and continues to be strong and.
And.
The pandemic had ultimate.
Potential to have expanded debt some at the expense of bit of short term capital capital is an area, where we're seeing companies be very cautious on that regards which potentially accelerates their interest and the long term outsourced water type contracts.
So when you look at all of order book It has certainly shifted more towards services and outsourced water.
So that bodes well for the business long term.
And again, the timing of capital projects and the pandemic. The certainly put some short term pressure on capital and the other area that we also highlighted is theres been some pressure on particularly in the refining area of the business on the customer turnaround, which is on demand services for those types of turnarounds now they cant delay there.
Forever and they will have the to accelerate so it's the timing impact but.
As we work through the pandemic. That's another area that had created some short term softness in Q1, Yeah, Mark as you review Slide 14, with what we showed on the end market outlook. The end market outlook is related to our order activity that we typically are seeing and the second quarter given.
Given the feedback from our sales and operations team. So we always try to give guidance against the us and to Ben's point, the refining and marine businesses has been a little less on the microelectronics is really tied to higher comp on the prior year.
And gentlemen, and thank you.
Our next question comes from the line of Nathan Jones of Stifel.
Good morning, everyone.
Morning, Nathan.
And Nathan.
I would like to start off just talking a little bit about inflation on.
Oil prices and steel prices of both come up pretty considerably from the bottom while still down year over year, but steel is up quite a lot year over year.
If I think back to 28 day net with some timing mismatches between when we had that state rise.
And the input costs and your ability to pass that through I know you said first quarter of 'twenty. One had some slight positive price cost dynamics can you talk about what you're expecting.
Here over the next few quarters and maybe how your pricing model.
And now than it was in 2018.
Yes, Nathan this is of Great question, and we are watching the commodity is very closely steel prices has.
As you.
Related jumped quite quite heavily over the past few months.
What we've done versus 2018, we've got very good models that we are staying in tune with the index as we get good visibility from our suppliers.
We have limited the amount of time that our quotes.
And so we have a much shorter cycle on the amount of time that the quota is actually good and then once we are walking and projects. We are hedging the old fashion way, where bond the commodities as soon as we lock it in so we know what a fixed price says and fixed cost sales as we look at the year first quarter, we said was slightly favorable.
We anticipate the full year to be slightly favorable looking at what projects, we have and the pipeline, but we're working against and also where we see the commodities moving.
And there'll be a little bit of pressure and in various quarters, but we think the overall year will turn out to be neutral to slightly up.
That's very good news.
Maybe just a couple of questions on the order rates.
You said that were positive and the quarter book to Bill is above one.
Any color you can give us on what the actual order rates were of growth year over year, and how you're expecting that the progression as we move through the year.
Yes, I mean, the book to Bill stayed above one and.
We were pleased to see that and the first quarter, even with some of the some of the year over year revenue changes, given COVID-19 and and order rate changes, we expect and and we typically we don't give really the numbers over that we just know the backlog of growing as you look at the full year, we expect it to be in line with our guidance that we've already.
On flat to slightly up and that is again, we're coming into five months of of non COVID-19 and the first half of the year.
And that we didn't have last year. So there's always some challenges as you look at the Covid and the Covid visibility, but we're seeing as we showed on slide 14 the.
And the end markets performing as we expected and we are again, giving a little color around that would that's what.
Great. Thanks for the Colorado pass it on.
Thanks.
Our next question comes from the line of Deane Dray of RBC capital markets.
Thank you and good morning, everyone.
Good morning, Hey, can we start with the comment and ISS.
Impacted by the timing of some large projects and just give us some context there with these outsourced projects for day.
What was the reason for the pushout.
As of Covid related and then when do you think they actually start to be and effect.
Yes, so just to be clear on that day and that was prior year strong capital demand in microelectronics alright.
And so again this is the end market still remains robust and there's a lot going on and microelectronics day. The end market is experienced some supply chain disruptions as you are aware of.
And so that's that and but it tends to be lumpy for us when.
When we get these orders just like all capital and but overall, we had a very strong first half last year and microelectronics. So we're facing these tough comps this year.
Alright, that's helpful. And then that leads me to the next question is we are seeing the impact of the mix shift to do them getting more water outsource contracts and this is exactly what we want to see you doing.
It increases recurring revenues, but the mix shift is happening and where you're going to have fewer capital sales.
And can you quantify for us how much we're seeing and the first half of this mix shift is there any way that you can pinpoint and some of that for us.
Yeah, Deane I'll talk just briefly to the trends, we're seeing and I'll, let I'll, let Ben talk about quantification, but the trends are very positive and this really speaks to the strategy, we rolled out around water one digitally enabled recurring revenue and service and we've seen that become more robust as we've gone through.
Repeat quarters on Covid and customers are dealing with that they are.
Just coming back to doing what they are.
The ore and letting us do our core competency, which is provide them.
Quantity and quality of ultra pure water. So the the good news about it is we're seeing that mix shift as you spoke about.
That we've been discussing for several quarters and and the value that's going to come and that long term steady recurring repeatable revenue is very good Ben you want to talk quantification of it will yeah. So we don't really disclose orders, but what I can tell you Deane is the order growth we are seeing is and services.
The capital.
And obviously as the challenge and the services is offsetting that.
So we are seeing that transition happened just as you articulate.
But again as you know is capital books out over a much shorter period of time and these long term service contracts. So you know as.
As we go through this this is great long term for the business, but it does create some short term pain.
And that's.
Yes, that's exactly the way we're looking at it.
And on the capital outlay for these outsourcing projects. That's all reflected in your current free cash flow performance. This quarter is that correct on this.
All of it is alright, gotcha, you're still doing well in excess of 100% even with that growth capital growth Capex, yes.
Yes that is correct alright, and then last question for me any update on your.
Your share in P fast remediation projects when it first came up a couple of quarters ago. You said you had the lead position.
And we know with the administration change that is likely to be more emphasis on P. Fast remediation by the utilities and any update here in terms of how your position would be helpful.
That's a sort of <unk>.
The question with the New administration, there is a highlight and and emphasis on the US our share remains consistent with what we've reported in prior quarters, where we're coming in and around a third of the opportunities. We watch that pipeline very closely and we actually highlighted another win that we got and of California water district around.
The around resin that the contract through 2024.
So what youre going to see is those will be contracts that are going to come over the next five to seven years they'll grow the good news about them is its capital contracts that have follow on service and aftermarket revenue. That's very good because you have to make sure you're maintaining that system and and what we've seen and our pipeline.
The expanded its somewhere in the neighborhood of $100 million over the coming years, but those are longer term projects that will be service driven as well.
And just to be clear, but do you have the capacity to be able to go after all of these projects as they become available and you're capacity constrained and anyway. We are not we have the capacity and that's one of the benefits of dealing with evoke was you have a multiple technology solution approach that we go.
Laughter and so it's not one size fits all around just try to stick one solution and we have a broad range and a very complete solution portfolio that we can make sure we have the right <unk>.
Acknowledges applied to the right challenge and the PFS terrific. Thank you.
Thank you.
Your next question comes from the line of Patrick Baumann of Jpmorgan.
Hi, good morning.
And I bet, Hey, Pat.
Quick question on on the end markets it looks like Youre guiding power too.
The up and the second quarter and you're guiding for the first quarter power to be down all of the bait, what's what's the change there is there and an improvement and the market is it.
Something specific to your water profile, just kind of curious from your senior.
And again this is speaking to what we have and expectation against our order activity and the quarter and the power market for US has been some of the increases and the L. G guidelines and so we've been very focused on that looking at.
Really a lot of the sustainability.
Actions that the power companies are doing and they're coming to us as the solution for the increasing challenged micro contaminants that they're dealing with.
Okay.
And on the acquisition pipeline.
And do you guys see anything.
More size of I assume the recent deals you did were kind of more small bolt ons and tuck ins.
You're correct me, if I'm wrong, and anything kind of bigger than bolt ons that you're looking at.
And the price yes, not at the moment. We are you know, we're very comfortable with the tuck in strategy that we've been executing on the two that we just did as I highlighted and the my opening remarks, we're expanding our service footprint and Texas and Ohio.
That's where we're putting a pretty strong emphasis this year as we continue to drive steady recurring repeatable revenue, we want to make sure that we have the proper footprint there to execute on the opportunities and.
It is either we go in with Greenfield Capex startup or we find the right opportunity and a tuck in acquisition that the bolt on and as we highlighted we've done 16 acquisitions since 2016, 10 of Ben and product portfolio, six and the service acquisitions and so we're we've shifted a bit of the focus to service.
Tuck ins over the next year.
Yes makes sense.
And then maybe quick one for Ben.
And I.
I think I got the numbers right on the on the near term guidance. It seems like it implies margins are down year over year, what's what's the driver of the margin decline if I may.
Right about that and the second quarter in terms of the guide again, it's it's project timing.
Last year was a very strong first half of last year was very strong microelectronics net we're very profitable.
So and it's so.
I was just the based on just the base of the basic base, which had a good margin mix and it basically last year and again, it's the.
The typical quarterly Lumpiness that we have on the time that normalizes over the year.
And yet of course, okay. Thanks, a lot guys appreciate the time.
Your next question comes from the line of <unk> <unk> of Jefferies.
Thanks, Good morning.
Good morning, the Morningstar has at the.
Microelectronics facing from some.
And the tough comps from the first half the year with the end market remains favorable and so do you expect this market to improve in the SEC.
And how should we be thinking about that.
And do we expect it to improve and the second half I mean again, what Ben referred to earlier was just year over year comps with the prior year with large installations and orders that we had but the.
On the microelectronics market overall is very favorable for us on both the.
The outlook for projects that are going to come as well as the services offered.
And then I believe you saw demand churn of bounce back starting last quarter, and you noted strength and APAC for HPT and this quarter. So could you just talk about what you're currently seeing and China and if there are any lessons there that we can apply to the other regions and hopefully the vaccine allows facilities to start opening up yeah.
Our our team and China is fully operational and executing it's been very good and in fact, we saw as you referred to a very nice bounce back and the second half of last year, that's continuing to show strength, we see that strength both.
Along the pharmaceutical side as well as highlighted and microelectronics and other business areas that we we supply.
Technologies and modules. We're also very pleased to.
Highlighted on the the comments open up our operation in India that is going to provide us some opportunity going forward.
Things that we brought to the back to other markets that we should follow and the operations is and we've done that from the very beginning.
Was make sure that our supply chain was very robust very sustainable and we didn't run into and two component technology challenges. The other thing that we've done is just to ensure that we of the right protocols in place that our team is able to continue to operate and through this entire COVID-19 challenge and the pandemic.
And our teams and our major operations and facilities of continued.
And to run very effectively and very efficiently and we thank the team members that are part of evoke where they've been delivering on that.
Great. Thanks for the color.
Thank you.
Our next question comes from the line of Andy Kaplowitz of Citigroup.
Hey, good morning, guys and good.
Good morning, and and so obviously you've had significant tailwind from the segment alignment that you've done and focused on a P. T. But you did record and this quarter of higher a P. T margin on lower sales I know some of that is likely EMCORE on men Corp, but could you give us any more color on how to think about the tailwind from the cost out.
<unk> of it a P T going forward.
Yes, sure. So <unk> was certainly a part of that but the also the post them core.
Footprint actions that we've taking and optimization actions also contributed to that.
And then.
We mentioned the footprint actions, but that also sets us up well for the future.
And the <unk> team has done a great job of really improving its overall operational effectiveness post <unk> and streamlining of lot of the aspects of their business.
The majority of of it was really related to the actions taken by a BT and better execution and they also the business also has a lot of mix right and that can impact it quarter to quarter, but.
The long term these actions should bode well for the continued.
<unk> profitability of <unk>.
And that's helpful. And then you mentioned the transition to wastewater continues to fuel growth, maybe you could give us little more color on what youre seeing with industrial customers, given COVID-19 and maybe the difficulty of the customers.
The staffing their business do you see maybe a faster evolution to more outsourcing now what are you guys doing about that transition.
Yeah, we actually are seeing and improvement and the adoption rate around outsourced water and thats something <unk> been actually spoke to earlier on the call and.
And it is it is having an impact as we see and and you see a little bit on capital sales that are are taking more time. They are stretched out over longer term contracts that are coming in because customers as of <unk>.
Part of Covid, and I mentioned earlier, they want to focus on their core competency, which is producing a product of providing service not providing ultra pure water to their own applications are relying on us to do that so it's been very positive for us is quite favorable.
And my my opening remarks speaking about recycling recycle and reuse of wastewater and the industrial space, we're seeing that continue to gain momentum and getting growth and and I think that's going to be of growth market for the foreseeable future companies are doing what they need to do to provide sustainability into the marketplace and to.
A more sustainable company themselves. We are very focused on ESG, we actually enable sustainability inside of our customers speaking about our handprint and that is ultimately going to drive very long term very steady repeatable revenue when companies are saying recycle and reuse will minimize our liquid.
Discharge and let's make sure that we're doing what's right for the environment and frankly <unk>.
Who are the right partner to bring in with solutions that are treatment from the front end to the backend backing off of the.
So it's a.
It's an exciting time in the marketplace and.
And I think we'll see that continue to grow.
And just one more quick one from me municipal budgets, I mean, you're pretty bullish on municipal.
It looks like going forward anything youre seeing there as we start the new calendar year. It seems like you know the customers are spending when they need to spend but you tell me any more color day, you'd guess, yeah, I think what youre seeing Andy and this is one of the reasons that we stay pretty bullish on it and you see that being highlighted is green and our markets one of them.
Round municipal drinking water, which we spoke around its emerging contaminant treatment. So P fast micro plastics et cetera on the wastewater side.
We are of such a long history of installations and side of the North American wastewater systems customers are doing retrofit and rehab on their wastewater systems, because theyre not going in with the massive projects to do very large expansions there making sure of what they have is actually opera.
<unk> at spec and then doing that that brings us and for retrofit and rehab work, we've had a little bit of the difficulty getting on site.
Through COVID-19 with some of those but our team has done some pretty remarkable things were actually taking out.
And you know electronic glasses. So people can look at it point out of our engineers can be on the phone and they can highlight take a look at this area. This may be where we need to be.
Replacement or rehab on some of the systems and so we're getting creative around how to operate and the new norm and and that's a little bit of what you see about some of the bullishness on retrofit and rehab and the municipal wastewater side.
And I appreciate it guys.
Thank you.
Your next question comes from the line of Brian Lee of Goldman Sachs.
Hey, guys. Thanks for taking the questions.
Maybe just a couple of real quickly on on the the guidance here for two Q.
That is representing the first quarterly of fully lapping them quarters. So is that correct. There is no medical of divestiture impact embedded in there are there any of their divestiture impacts that you would be.
And then they kind of call out there.
It's the only ma'am Corp.
Okay, Great and then.
You made a comment earlier I think in response to the another question about the margin.
Guidance and mix for Q2.
The microelectronics.
And the kind of project heavy and that being and mix, which is driving down margin for Q2 on a year on year basis fair to assume that.
That's mostly coming out of ISS. So we may see a similar trend where ISS as weaker into Q2 versus <unk>.
And kind of holding up a bit better here.
Yes.
Okay Dave.
And then yeah.
And really the question.
And then I think in relation to commodities and cost inflation can you kind of level set us again as to where you have the most exposure of commodity wise and if you can quantify it that'd be great. And then are you starting to see that impact already or just what's sort of embedded and the outlook as you think about navigating the current and go forward cost environment.
Yeah sure so cash.
<unk>.
Plastics steel and these are the kind of the larger commodities that we have.
In terms of impact.
And any sort of quantification and also commentary around the kind of sales you are seeing real and versus what you think kind of the outlook is embedding free for the cost of lifestyle and I'll, let Ben speak the quantification on this but I will say that we have been very focused on on watching.
And what's happening with these commodity movements and impact as we go through them.
Get real time prices real time quotes from our team as we're getting close to the customers, we're making sure that our supply chain organization is connected with our suppliers. We've got a lot closer loop than we had back and 18 to an earlier question we had and.
And so as we're doing that we're locking in.
Quoting against longer term quotes, but we're also limiting the amount of time the.
And the quotes are so we felt pretty good through the first quarter and feel like price cost as we look at the year will be neutral to slightly favorable, but then you want to talk.
And I think based on what we see at this point and time again I think it's it's neutral to slightly favorable.
Commodities can move right. It's a market that can move fast one way or the other but at this point and time, we're monitoring it very closely we are also staying very disciplined on our pricing actions and are prepared to respond accordingly, but.
I think I think based on what we see at this moment.
Neutral to slightly favorable price cost per the year would make sense for us.
Okay, and maybe just last one if I could squeeze it in and with respect to price actions or there are there any price actions that you've taken already I know, it's totally and the air or any contemplated here and the next month or so.
We have we've already taken price actions and and actually we will continue to do that through the year.
One thing you may remember is that our contracts typically are annual contracts around services, so where we see commodity movements. It's one year renewals that gives us an opportunity to make the take.
Take the right price actions as we see commodities move because we aren't setting long term contracts typically on our life of industry services.
Okay. Thanks, a lot guys I'll pass it on.
<unk>.
Your next question comes from the line of John Walsh of Credit Suisse.
John Your line is open please state your question.
If your phone is on mute please on mute.
Yeah.
Yeah.
And there is no response from that line and your next question comes from the line of Joseph Giordano of Cowen.
Hey, Good morning, guys. This is from Cisco on for Joe.
Good morning, Good morning, Francisco I wanted to get your outlook on ISS basically where when you think it's going to begin to ramp up again is there maybe sort of the margin tipping point, where the service revenue starts to push that materially higher from here.
Yeah, I think again, we have tough comps and the first half we have a lot of Covid challenge and site access and we also have as we mentioned earlier some of the challenges and some end markets like refining where they've delayed some of their annual maintenance.
So.
A lot of it depends on vaccine rollout of effectiveness.
Hopefully the second half of this year.
Yes.
We don't have the COVID-19.
Of Covid neutral comps if you will for the second half of this year and hopefully some of the the access issues et cetera.
Beth and the virus and successful and we should see a better second half of our ISS and.
Francisco I think one thing I would point to is on slide 14, and that gives the outlook for the end markets that we play and and typically you can.
Gleaned from that and what the North American markets that ISS is typically serving and and refining and marine has been a pretty big pullback.
Ben talked about earlier with micro with year over year comps has been tough, but we think that and the back half of the year and the beginning of next year, we're going to see side ex us open up a little more on the service.
Service opportunity flow better.
Great. That's very helpful. And then just a quick follow up on on the Muni expectations.
And you guys have seen some some pretty good growth. There do you expect the the strong demand to hold through the rest of the year and do you have any comments maybe on the budget expectations.
Yes, we do I mean, we feel we feel good about muni. That's the reason that both of those are green as Youre looking at slide 14, we showed and it speaks to an earlier comment I made about the installed base that we have and the wastewater.
Some sense out of North America that we've been providing products from.
For more than.
The center now so it's started.
And late 18 are the la <unk> hundreds on one of our product line. So I mean, so we're going back and we're doing retrofit and rehab two and installed base, which is fantastic for us and that's where we see the municipal operators still investing money, where they don't have huge budgets to go out and expand capacity.
Certainly have the budgets for retrofit and reached up to make sure that they are operating at the specification of the plant.
That's helpful. Thank you.
Your next question comes from the line of Andrew Buscaglia of Aaron Berg.
Hey, guys.
Everything has kind of picked over at this point, but I had a clarification on <unk>.
Slide 14.
You're talking about some of the comps from.
Year over year comps Meg of electronics, I get that that's difficult and refer.
And kind of taking a step back but can.
Could you just clarify I thought I would think that youre seeing some easy comps and light and general industrial and maybe even some of the health care areas, where we're entering that kind of year over year of Covid comp.
So Andrew again.
So I'll hit that real quickly what we're calling out on the since our Q2 expected demand and if you look back at last year's Q2 and.
I've made a comment earlier the.
On the Covid impact did not really happen until March for Us January and February were pretty robust. So we're now coming through in January and February.
The COVID-19 impacted.
So this is the year the quarter will actually lap it compared to last year March was really the only quarter or the only month of the second quarter impacted by that.
Okay, and just the one month impact Okay alright.
Alright, that's it thank you.
Thanks.
Your next question comes from the line of Graham price of Raymond James.
Hey, Good morning. This is graham price on for per BOE Shlomo.
Just following up on the prior question, you mentioned and the slides the municipal drinking water and wastewater and both growth areas.
But there's been some concern the because of the recession Muni is we've seen a shortfall on tax revenues from the best These days.
Kind of wondering how the think about that and sort of kind of reconcile those two things yeah. So Graham once again on slide 14. This is our outlook based on what we expect our demand and the second quarter and order activity to be the municipal drinking water, we're seeing driven by P fast and emerging contaminant challenges that the.
And that they're having to invest and even to the point of the municipal order on.
I called out on one slide that we got and California. That's the contract through 2024. So we're seeing some of that happen around drinking water on the wastewater side of it is <unk>.
Retrofit and rehab against the installed base that we have and the municipal wastewater systems that have been there for quite some time, so that's going back and replacing chain of scrapers, replacing.
The different types of filtration et cetera that are there.
It gives us a good opportunity and because of the rich installed base that evoke what has had over many many years, we're able to make sure that we're connected to those municipalities and their spending not unexpected because that's where budget constraints strength com, but really just on making sure that they are operating at the design.
Passivity and Thats.
Aftermarket generally is something that does well when the when capital declined.
Got it thank you.
And then quickly from my follow up.
Clearly a lot of appetite and Congress for infrastructure the.
And at least price of a portion of the next Covid stimulus package.
Just wondering your thoughts on what role and water and will play and then maybe especially as it relates to DFAST pointed out yes.
Yeah, So we've been pretty involved and that around.
And what the water role is going to be.
We feel like where they are spending.
A fair amount of effort and energy is going to be more on the transmission system of water, so actually getting water from the municipalities and the municipal treatment system.
Two the homes and to the homeowners into the industry in general.
We think a fair amount of the the spending is going to be.
Occurring and transmission not necessarily on treatment with the exception of what I referred to and treatment being retrofit and rehab and us making sure that the system is operating at the design capacity of what it was.
We do believe <unk> will be something that they continue to focus on and but we still think that's you know of five to seven year timeframe before it becomes really meaningful because they they haven't even defined what the the mcl are yet and what the limits are going to be as the EPA, even though they did called <unk>.
Us out as of hazardous substance.
Great. Thank you that's it from me.
And.
Thank you that concludes our question and answer period I would now like to turn the call back over to Ron Keating for his closing remarks.
So I'd like to say, thank you to you all for joining US today, it's a pleasure to be able to present.
Of the close of the first quarter, we continue to be very mindful on what's happening with the pandemic and the second quarter. We continue to focus on the three priorities I called out earlier and that's of the health and safety of our team members.
Making sure that we're providing continuity of supply to our customer base and and satisfying and serving their needs and then ultimately ensuring that we of balance sheet flexibility and the companies.
And the capabilities to execute or continuing to improve I would like to thank you for your interest I would like to thank our team members per operating safely and providing just fantastic service to our customer base into the marketplace. We serve I hope you all stay safe and I look forward to speaking with you again next quarter. Thank you operator.
Thank you for participating and the vote.
Water technologies first quarter 2021 earnings Conference call you may now disconnect.
Okay.
And.
[music].
Great.