Q2 2021 Evoqua Water Technologies Corp Earnings Call
Hello, and welcome to the that's what the water technologies second quarter 2021 earnings Conference call.
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I would now like to turn the call over to Dan Taylor, Vice President of Investor Relations. Please go ahead.
Thanks, Maria and thanks, everyone for joining us for today's call to review, our second quarter 2021 financial results.
<unk> on today's call are Ron Keating, President and Chief Executive Officer, and then staff 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 third quarter and the full year fiscal 2021, as well as expectations relating to the impact of COVID-19 pandemic.
Order demand and end market drivers execution of our digital strategy and our acquisition strategy the market for treatment of from merchant contaminants. The impact of the proposed infrastructure legislation and other potential growth drivers actual results may differ materially from expectations.
For additional information on the phone please refer to the company's SEC filings, including the risk factors described therein.
On this conference call. We will also have a discussion of certain non-GAAP financial measures.
Information required by regulation G. <unk> Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained volume <unk> Investor relations website on.
All historical non-GAAP financial measures.
Results have been reconciled and included in the appendix section on the presentation slides.
With respect to our guidance, we have not percentage of quantitative reconciliation on the forward looking non-GAAP financial measure adjusted EBITDA to its most directly comparable GAAP financial measure because it is impractical from forecast certain items without unreasonable efforts due to the uncertainty.
And inherent difficulty of predicting the occurrence and financial impact of the periods in which such items may be recognized.
Unless otherwise specified references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30.
Moving to 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 Juan.
Thank you Dan Please turn to slide three.
Our priorities remain focused on the health and safety of our employees, ensuring business continuity customer uptime, and improving our balance sheet and the liquidity of the company.
The impact of the COVID-19 pandemic has varied across our diverse set of end markets and customers continue to be prudent in their spending levels.
We as a team continue to invest in growth opportunities foster customer relationships broaden our portfolio of solutions strengthen our balance sheet and execute on M&A expanding our geographic reach.
We're encouraged as we look forward with a growing backlog a robust opportunity pipeline strong customer engagement and global economies in various phases of reopening.
Let me start on slide four.
We are well pleased with our second quarter results as the overall business performed well our book to Bill ratio was north of one and our opportunity pipeline comprised of outsourced water capital and aftermarket is strong across a diverse set of end markets. As we will discuss shortly we've seen our ISS service and aftermarket backlog grow at a compounded average growth.
Rate in excess of 20% since 2018.
Second quarter organic revenues were down slightly driven by lower service and aftermarket revenues, primarily due to site closures and delays from COVID-19 cash.
<unk> revenues grew slightly due to solid performance in a P. T across the APAC region, but was largely offset by ISS with strong prior year comps and microelectronics.
Throughout COVID-19, we've been pleased with our supply chain resilience and we're maintaining price discipline in the recovery to combat rising cost per.
<unk> costs were slightly favorable for the quarter and on a year to day basis.
We were pleased to report adjusted EBITDA of approximately $58 million, improving by 60 basis points over the prior year with a margin of 16, 7% driven largely by operational execution and price cost management.
Inventories levels have risen over the past six months due to customer order requirements and to mitigate extended supply chain challenges overall net working capital as a percentage of revenue improved by 100 basis points to 12, 9% supporting strong cash flow conversion well above 100% target.
Our focus on strengthening our balance sheet continues our solid results were recorded across most key metrics operating cash flow improved on a year to date basis liquidity increased sequentially to $336 million and net leverage improved to two nine times.
We expect to make continued improvements to the balance sheet as we invest in organic growth opportunities and continue to pursue tuck in acquisitions.
Please turn to slide five.
As shown on prior calls this chart represents our expectations for evoke was order demand in our primary end markets for Q3.
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 in size to the top accounting for more than 20 per cent of our FY 19 annual revenue.
Looking back our second quarter performance was largely as expected. We noted solid demand in health care pharmaceuticals municipal drinking water and food and beverage.
P fast treatment opportunities continue to drive municipal drinking water opportunities as well.
Overall, we expect to see very order demand in the third quarter with eight of the 10 primary end markets that we serve are expected to be neutral or growing.
Outlook for Aquatics, and refining is approved as economies are also beginning to reopen.
We'll be happy to address questions about specific end market drivers during the Q&A section.
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 compound annual rate over 4% with adjusted EBITDA growth of more than 8% during the stop the.
The business continues to operate on a steady and profitable growth trajectory after adjusting for the divestiture of mentor.
We primarily pursue capital projects to ultimately drive stable recurring and profitable services on 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 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 our model will continue to serve us well during this uncertain period.
I would now like to turn the call over to Beth.
Thank you Ron Please turn to slide seven.
For the second quarter reported revenues were approximately 347 million organic revenues, excluding the net impact of recent acquisitions divestitures and the impact of foreign exchange were down three 5% demand varied by end market with gross of healthcare food power and declines in refining in Aquatics regionally.
We continued to experience solid growth in Asia Pacific.
Second quarter, adjusted EBITDA was $58 million for an overall margin of 16, 7% up 60 basis points over the prior year period.
Cost controls operational efficiencies and footprint consolidation benefits contributed to adjusted EBITDA growth.
Please turn to slide eight.
Applied product technologies second quarter revenues were $122 million up seven 6% organic revenues increased $3 9 million or three 5% driven by strong growth across multiple product lines, especially in Asia.
Ongoing impact from the pandemic was evident across several product lines in the Americas and EMEA regions as we experienced customer site access challenges foreign currency positively impacted sales by 4%.
Adjusted EBITDA for the second quarter increased almost 17% to $25 million adjusted EBITDA margin increased 160 basis points to 27% organic revenue growth.
Favorable product mix price and operational efficiencies favorably benefited ATT profitability.
Please turn to slide nine.
ADT is focused on driving organic growth through new product development and international market expansion each quarter. This year, we are highlighting product innovations that are expanding our addressable markets and providing customers with enhanced solutions across the globe last quarter, we highlighted Neptune Benson SP series regenerative.
Media filter for the Aquatics market. This quarter, we highlight our latest UV technology developed from our May 2019 acquisition of Atg assist.
The system is designed to disinfect process and product water using UV light rather than on chemicals. The product is designed to be highly configurable for end users across beverage microelectronics pharmaceutical Aqua culture and other end markets.
New <unk> ex low pressure UV system has a robust non intrusive reliable disinfection solution.
Please turn to slide 10.
Our integrated solutions and services segment second quarter revenues were down five 8% results were driven by a net decline in capital revenue related to the timing of microelectronics projects in the prior year, which was somewhat offset by new products projects across a variety of end markets aftermarket and <unk>.
Service revenues, while impacted by COVID-19 constraints were stable on price realization was positive we continue to monitor customer spending activity, which has been constrained due to COVID-19, we expect the economic reopening to be a catalyst for increased capital investment activity.
Our digital strategy continues to enhance our overall profitability with digitally enabled revenue is growing double digits and customer interest in our capabilities remains very high, particularly as customers restricted site access due to the pandemic adjusted.
Adjusted EBITDA declined to $49 million due to higher absorption costs from lower volume and unfavorable mix driven primarily by reductions and delays in capital spending by customers and lower silver service productivity.
Ongoing cost controls and favorable price realization, partly offset decline.
Adjusted EBITDA margin for the quarter was 22% down 70 basis points from the prior year period.
Please turn to slide 11.
Our sales team typically leaves with an outsourced water solution to demonstrate our comprehensive capabilities to meet our customers' water treatment solution needs.
Whether the customer chooses to use on a vocal on asset or purchased the asset we focus on earning our customer service and aftermarket business over the long term currently over 60% of ISS revenues are comprised.
From service of which approximately one half comes from outsourced water and one half from service contracts on customer owned equipment service revenues are growing recurring and profitable and we believe we are positioned for continued profitable growth over the past two years, we have seen strong interest in outsourced water solutions as customers are increasingly looking.
To utilize our assets to solve their water treatment needs.
The graph shows the magnitude by which ISS service and aftermarket backlog has grown relative to capital backlog over the past two and a half years.
Service backlog is comprised of outsourced water contracts, which include our mobile fleet services utilization and build on operate assets as well as service contracts on customer owned equipment municipal services and carbon services.
This slide also outlines average revenue conversion range for outsourced water asset by category.
As our service backlog increases faster than our capital backlog, we expect to see some short term pressure on revenue, particularly for backlog relates to build on operate assets, which have the longest conversion cycle.
Currently our opportunity pipeline is very strong and we're working with customers on service aftermarket and capital projects.
Please turn to slide 12.
Capital spend primarily for outsourced water orders was slightly over $19 million for the quarter.
As we previously mentioned our pipeline remains robust with a combination of outsourced water and capital opportunities.
Closely monitoring the pipeline given the uncertainties of the pandemic.
Second quarter net working capital was 12, 9% of LTM Q2 sales an improvement of 100 basis points over the prior year quarter.
Over the long term, we anticipate mid teens net working capital to sales range. Given some projects may have varying amounts of working capital requirements. We were pleased with the accounts receivables and accounts payable performance, while as Ron mentioned inventory levels are higher year over year, as we respond to customers quarter requirements in our per.
Parents with the reopening.
Please turn to slide 13.
Overall, our performance through the pandemic has highlighted the resiliency of our business model. We were very pleased with our cash generation performance as operating cash flow was $63 million from the year to date period versus $39 million in the prior period.
You can see over the past four years, we have significantly improved operating cash flow.
Adjusted free cash flow continues to be well above our 100% conversion bolt on.
Our net leverage ratio finished at $2 nine adjusted EBITDA, which is down almost half a turn from the prior year and down almost a full turn over the past 18 months, we continue to target a leverage ratio in the mid two times range, our weighted average cost of debt as of Q2 is approximate.
Three 2% an improvement of 150 basis points over the prior year.
The reduction is driven by lower market rates reduced debt levels, and a lower credit spread.
Please turn to slide 14.
On April one we completed a refinancing of our capital structure, which produced extended maturities lowered our weighted average cost of debt by approximately 50 850 basis points.
<unk> increased our liquidity and carried over most of our flexible covenant structure from the previous credit facilities.
Being a strong liquidity position and confidence on our cash flow generation, we applied $100 million of cash to reduce the term lien loans b balance.
Since the end of FY 19.
We have reduced the outstanding standing balance of our term loan by almost 200 million using cash on hand, we have indicated we are highly focused on strengthening our balance sheet and we're pleased with the results of our refinancing.
I'd now like to turn the call back over to Ron.
Thank you Beth.
<unk> has outlined its America jobs plan 225 trillion dollars infrastructure proposal that includes provisions on climate change renewable energy and clean water.
This slide outlines the current proposals requirements and support for clean water, where strong advocates of the proposed investment to provide upgraded drinking water and wastewater to the infrastructure we.
We believe we are well positioned to benefit from this increased spending particularly related to the remediation of PFS and the modernization of the water treatment systems.
Our focus on active member in the U S water lines and is aligned with their value of water campaigns important messaging to close the water infrastructure funding gap.
Please turn to slide 16.
Continuing our strategy acquisitions have been an important growth driver over the past five years and should continue to be so into the future 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 virtual vertical markets and expanding our.
Graphic footprint.
Our M&A pipeline remains robust and we've indicated our current intent is to focus on tuck in targets expanding our service footprint, while also working to improve our leverage ratio.
Since 2016, we required 17 companies 10 of them supporting the development of our product and technology portfolio and seven expanding our geographic and vertical market service reach.
In April we acquired our third service footprint over the last eight months water consulting specialist the debt.
You see us team is a great fit into our business and in the northeast region was solid positions across many targeted vertical markets, including pharmaceuticals and health care.
Our previous two acquisitions, often pure technologies and ultra pure in industrial services have also been excellent fits into our ISS service model and growing markets located in Ohio, and Texas, respectively.
Please turn to slide 17.
Sustainability is core to what we do and our global reach is expanding daily we're proud to have published our fifth sustainability report on Earth day of this year, where we highlighted our impact as we treat approximately 100 billion gallons of water every day.
More than four five times the amount of water flowing over naira falls.
During the quarter, our APC segment sold products into more than 100 countries and our geographic market penetration is growth.
We think about sustainability in 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 have become more sustainable within our own internal operations to.
To highlight a recent emerging contaminants when we deployed our mobile assets to a construction site in Michigan.
Beside had a high water table, which was contaminated with P fast and needed to be dewatered to the established P. Fast treatment goal of non detect.
A third party lab verified the treatment specification was met by a vote was mobile technologies as we treated approximately 21 million gallons of water and safely returned it to the municipal system.
Recycle and reuse is a growing trend and an important macro trend and we're putting our best practices in place on our own facilities. We're currently we're using 50% of the water drawn at our facilities and are working for that number to expand.
Please turn to slide 18.
In summary, while countries and companies across the world are in various stages of reopening their economies. The pandemic continues to present challenges we are maintaining our priority is to protect our employees service, our customers and preserve our financial strength.
Our business is demonstrating its resiliency as evidenced by our strong Q2 results.
Our order book is growing on our opportunity pipeline is robust as we're seeing material signs of economies and markets beginning to reopen.
We're very pleased to have published our 2020 sustainability report and while we're early on our journey, we're committed to making a positive impact on the availability of clean water Act.
Water treatment becomes more complex, particularly due to the rising risk from emerging contaminants evoke those technologies and services become increasingly important we're here to answer that call.
Having a strong and flexible balance sheet is a priority and our recent refinancing solidified our capital structure.
We welcome the employees of water consulting specialists to above book and we will continue our pursuit of tuck in M&A opportunities to supplement our organic growth.
Beginning FY 'twenty, one we had a full year outlook for revenue and adjusted EBITDA to be flat to slightly positive from that versus FY 'twenty.
For the first half behind us and visibility for the second half getting better were making a revision.
This upward movement to our outlook reflects our strong backlog robust opportunity pipeline and increased optimism as markets begin to reopen.
We have updated our full year outlook by quantifying the revenue and adjusted EBITDA ranges to 143 billion to $1 $7 billion and $240 million to $255 million respectively.
We've maintained the low end of the range and increased the high end.
The timing of notable pipeline opportunities should be obtained in order conversion on our two important factors and expected performance relative to the ranges provided.
We have also provided our outlook for Q3 with revenues to be between $350 and $365 million and adjusted EBITDA expected to be in the range of $60 million to $64 million.
I will now open the call up for your questions.
Thank you the floor is now open for questions.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the talented team.
In the interest of time, we do ask that you. Please limit yourself to one question and one follow up so that everyone has a chance to ask their questions.
Our first question comes from the line of Nathan Jones of Stifel.
Good morning, everyone.
Good morning, good morning Nathan.
I Wonder if we could just start on slide 11 with that ISS backlog composition chart and I appreciate the additional disclosure here maybe.
Maybe you guys could just spend some time walking through these debates on ours I think it's important for investors to understand how this impacts current on.
Revenue recognition future recognition revenue recognition deterioration of these backlog maybe you can just talk a little bit about when you expect that that growth in backlog to start to flatten out a little bit and for the revenue recognition and the order growth to start to converge.
Well Nathan we are continuing to expect to see based on the pipeline more conversion to outsourced water.
We do think that capital as the reopening occurs we will start to become more robust as we enter into the second half of this year, but the trends associated with foreign customers choosing out will source water is likely to continue well into the future based on what we're seeing in the pipeline that.
Value proposition seems to be.
Well received by our customers. So however capital during the pandemic has been a bit muted for many reasons, we've discussed in the past and as we look to the future our capital pipeline and the activity is increasing so.
We do expect that part of the line to start to to increase as we head into the future.
Conversion, we're expecting ISS to returned to growth in the second half.
And that'll be driven by the convergence and the service orders converting.
<unk> revenue as well as improvement in the capital ended the business as well.
We anticipate Nathan that the trend will continue.
Ben talked about.
The outsourced water selections that customers are going after is becoming more and more prevalent as water treatment challenges or increasing certainly with emerging contaminants and customers frankly, just wanting to do what they do which was therefore competency of producing a product or service and let us do what we do which is provide.
Ultra pure water and <unk>.
I think that trend will continue to flow.
One other key fact that might be of interest Nathan.
We look at our backlog internally and as we've outlined on this page, which is really backlog that's under contract our ISS backlog today is now larger.
And the total company backlog was in 2018. So you can see that the business is really really grown in debt and a lot of that is in that service area.
Yes.
Thanks for that my second question is on the on.
On the margin guidance your margin in the first half of fiscal 'twenty. One we're up 100 basis points, despite having revenue down 3% organically youre looking for revenue to flip to growth in the second half of the year yet the midpoint of the guidance actually implies I think about a 50 basis point decline year over year.
Maybe you can talk about what goes into that price cost on mix or something else conservatism.
On that would suggest that you maybe say a little bit of margin compression in the second half despite returning to growth.
While mix is always a key variable that we want to take in account, especially as capital part of the business turns back on so we wanted to be a little cautious. We also are not putting our head in the sand with regards to inflationary impacts we do expect to stay positive on price cost as we head through the year.
So all of these factors with the uncertainty of the reopening we tried to be measured in terms of of our expectations I.
I think the upper end of the guide shows the more optimistic.
View as well.
<unk>.
We'll see how things occur as we open.
Economy, reopens, but we did provide per uncertainty.
As we get through the reopening of the economy.
Okay. That's helpful. Thanks, I'll pass it on.
Thanks, Nick.
Our next question comes from Deane Dray of RBC capital markets.
Thank you and good morning, everyone.
Hey, this is a bit of a follow up to Nathan's line of question. The other side of this growth in outsourced water contracts is on the free cash flow side, and I think everyone's been bracing for a bit of a give up in the free cash flow as you.
Some of your growth Capex to fund these projects, but we haven't seen that yet instead, we've seen really strong free cash flow performance up over 200 per se year to date conversion. So just put that some contacts if we're expecting a bit of a tempering and free cash flow growth, but we.
Haven't seen that yet are you able to balance this and still show.
The 100 per cent for the year I'm, just kind of take us through those dynamics, if you could place it.
Hi, Ken noted its a high quality problem on high quality question to be asking.
<unk>.
Yes, we are very much committed to our 100% in maintaining that.
Indeed, as we've talked in the past the convergent outsourced water long term helps free cash flow and shortens the cycle.
There is a bit of a trade off between the Capex and working capital if a customer chooses outsourced water vs.
Capital project repurchasing it so when they purchase it that shows up in more and more capital vs.
Source water shows up on Capex, so theres, a little bit of a tradeoff there will have to see it will depend a lot of it depends on the capital business, but overall, we expect to continue to see very positive free cash flow long term and we do think we can put some more points on the board as we head into the future we.
We have also done a lot in shared services to improve.
Both our payables as well as our receivables and we're at set a record this quarter in terms of current collections and keeping our receivables current so we're getting paid faster by our customers as well. So when you add this all up.
Overall, we still feel optimistic we can continue to improve our free cash flow and being one of the things Youll note on this slide as well as we still talk about 5% to 6% of revenue is capex.
Typically only 2% of that is maintenance on the other is forecasted and focused on growth and we continue to deliver this kind of cash flow returns would that kind of investment going into outsourced water.
That's real helpful and a quick clarification when you talk about site access on site closures.
When we think about water, one where you're monitoring these customer sites digitally, but youre not I would presume you're not having any difficulty getting access to water one customers because that's the whole appeal is that you only come in when you absolutely need to to.
To upgrade and recharge the systems water one is not an issue when we go in and in fact, we're going into water one customers preemptively.
And making sure that they're continuing to operate and stay up and running and maintained but it does go back to what we talked about with the deployment of water one.
And a bit of a pent up demand, where we need site access to go on site and actually installed the systems and if you'll recall based on last year. We only had really March in North America that we were hit by COVID-19 with the shutdown.
This year, we finally lapped it and we're starting to get more access to sites coming on this same quarter last year was really impacted by COVID-19 by only one quarter I'm sorry, one month out of the quarter. So it's opening up but it has been it was restrictive a little bit through the quarter as we saw alright.
It's really helpful. Just last question from me just help rod and put us in a the thought in context here with the Biden planned earmarking 10 billion in P fast monitoring and.
Remediation and from our perspective, just putting it into the plan and spotlighting. It just puts <unk> in the national spotlight in the debate and if there's anyone that can give some insight into what that $10 billion.
It means that you can so I was hoping you just kind of give us your perspective.
How meaningful is that number or is it more just of a start to be able to put the spotlight on it and how do you think it develops from here I would say it is very much a start to put a spotlight on it I mean, it is something that the Biden administration is trying to bring awareness around this along with the EPA setting.
Limits.
As we get focused on more action and more cleanup happening I mean, you saw the one example that we actually called out even on slide the slide talking about sustainability with removal from P. Fast from a construction site. These opportunities are continuing to grow our win rate actually is increasing.
Because we're because we're becoming more selective on the ones that we want to go after to make sure that our assets are being deployed effectively but we are at the tip of the iceberg on this and the Baidu administration, putting an emphasis on it is going to help drive.
At least action inside of the different market areas that we're focused on.
That's really helpful. Thank you I'll pass it on thanks, Jamie.
Our next question comes from the line of Mike Halloran of Baird.
Hey, good morning, everyone.
I just wanted to follow up on Nathan's first question degree really happy you guys put slide 11 in there maybe just talk about as that normalization happens obviously.
Youre expecting the outsourced water trend to continue and youre expecting that debt service piece to continue to grow but at some point you're going to see some some normalization between how that grows on the revenue gross is that materializes, what does that mean for profitability. What does that mean for returns and how should we be thinking about that.
So like as we've talked in the past our outsourced water margins are higher than our capital margins and our outsourced water margins are higher than our typical service margin. So.
Overall debt that is part of the story on how we're going to drive the 20% EBITDA.
So theres no question Thats going to improve.
Recurring revenue nature of our business improve our free cash flow and our margin profile.
Makes sense and then and then obviously.
You had some slides in there on the capital deployment side, you've done a couple.
A couple of nice regional tuck ins here, what does the pipeline look like currently and is there opportunity on the technology side beyond just some of these regional expansion and how does that kind of funnel look at this point, yes, Mike the M&A pipeline continues to be very robust I mean, we typically at any time have approximately 100 small act.
Physicians that we're reviewing majority of those are service tuck ins, but there are technology plays that we look at as well.
As we highlighted we've acquired 17 companies 10 of those were in the technology space building on our portfolio and frankly, youre seeing that in the <unk> growth and some of the APC margins that we're seeing once we've integrated those businesses and and we anticipate that to continue so it's not one size fits all where we are.
After strictly service tuck ins on iOS us we continue to be very focused on technology expansion and we view M&A as a proxy for R&D around our technology portfolio that we go out from the ICT segment.
It makes sense I appreciate it.
Yes.
Our next question comes from the line of Andrew Kaplowitz with Citi.
Hi, This is a time buchbinder on brand and good morning.
Hey, Don how are you.
About 60% of your sales or service and aftermarket and you tend to have good visibility to about 80% of revenue on a rolling 12 month basis.
Given what appears to be an improving mix.
And the ISS backlog and potentially ongoing delays in customer capital spending where would you say visibility is for the upcoming 12 months.
I would say visibility it continues to be on the same space that we've been and where we're getting better visibility with the reopening of economies seeing what our customers are doing our customers coming back on line.
And so we're rounding the corner back to getting into that 80% to 85% very good visibility on a 12 month outlook.
It's pipeline that we're seeing around capital projects that customers are actually starting to cut pose again, but there still we're entering into this with some degree of.
Measured outlook just because.
The delays in customer capital expenditures, sometimes and certainly through COVID-19 have been a little longer cycle than they historically work, but I'd say, our visibility is pretty much standard, which it's coming back.
Or it might have been a much more muted as we entered into COVID-19 last year, Yeah, Hey.
Hey, Tal, we provide quantified guidance. So I think that is in line with debt proved visibility and that's the reason we did that quantified guidance I think the range reflects reopening uncertainties and we haven't been through a reopening of a pandemic so what's that.
That looked like and so we tried to make the range a little wider wider than you would normally see to reflect those those potential uncertainties, but I think the optimism is reflected in the fact that we provided quantified guidance and return to that.
Thank you that's helpful and as a follow up you highlighted that capital related revenue was down and that's due to prior year Microelectronics project given the strength that we're seeing in global semiconductor end markets.
However, microelectronic orders on the corridor has your outlook for fiscal 'twenty, two improved for that end market.
Yes, it absolutely has I mean, if you reflect upon on slide five that we showed this time I believe low microelectronics, we have being neutral last quarter, we had it being read because year over year order comps what was happening in the quarter.
And so now I think we see neutral coming out which is a return to some of the investment and spending.
On that are more normalized looking forward into the third quarter on through the back half of the year.
Thank you I'll pass it along.
Our next question comes from the line of Andrew Buscaglia on Vanguard.
Hey, guys. Thanks for taking my question sure.
So I just wanted to follow up on the mobile infrastructure and Pete that commentary.
Yes, you are sent that.
This sort of a proposal for funding is sort of a precursor to a potential regulations are you hearing anything on the regulation front and then.
Secondly are you seeing customers what are your conversations like customers around regulation considering.
And then there is a proposal for funding now and secondly.
They pose as greater risk to two companies to.
To comply.
Yes, it's a great question Andrew.
I would say that we do feel like this is a precursor deregulation and frankly I think we're all a little bit ready for some limits to be set so everybody's not trying to set their own limits and guests across different water systems in different states.
I think our customers are prepared for it where they feel like they need to be and frankly, everyone feels the need to treat this if you actually see it inside of your systems or operating inside of the operations of the company. So I think the Biden administration is highlighting it they are getting it.
Inside of the Bill So people are aware of it they are starting to drive that drumbeat around the regulatory trend that's coming forward and I believe again as I mentioned when being asked the question I think this is the tip of the iceberg on what's going to happen.
Okay.
Helpful.
And I wanted to ask another one on the on the Microbrew microelectronics.
Then youre facing tough comps on that one.
Is it a minor it's my understanding you youll lap those starting in Q3, I believe and then.
And then also it's interesting.
Somewhat positive on microelectronics, I guess, how is the chip shortage affecting.
That business or are you guys.
Indirectly, yes. So we are lapping that that's why we went to blue I think youll see us go to green as we get toward the low.
The latter half of the year on the fourth quarter and the beginning of next year.
We see.
Real opportunities there and we are seeing.
A larger pipeline of projects on increased.
Appetite for spending and investment.
Yes.
Okay. Thank you.
Sure.
Our next question comes from the line of <unk> <unk> of Jefferies.
Hi, good morning.
Could you talk a little bit about the impact from adverse weather in Texas.
Just on the quarter related to that.
Yes, so we actually did have an impact in taxes certainly through the latter half of February we had custom.
Customers that had shutdown that had not shut down in 50 years of operations and but our team was deployed we sent assets down. So we had a very <unk>.
Soft.
Part of February where the basically the Gulf Coast region.
Was frozen and non operating and then came back and started rebounding into March and certainly will rebound through this quarter, where they're investing bringing their systems back up and running and we deployed a lot of mobile assets there. So.
Team members, there that wed sent from around the country in fact.
On a thank our service team.
Broad and wide for answering the call on a lot of people who lived in the north and South east moving over to Texas to help us operate and support our customer base and frankly, the value proposition of evoke and the investments in our mobile assets and our emergency response absolutely.
<unk> brightly through that difficult time.
And then just another follow up on the infrastructure side. It's the bottom plans implemented as is how would you think about the investments limited.
Excellent revenue opportunity for you what would be differently.
Yeah.
It's going to happen over time, obviously, the Biden administration plan is over numerous years and so we would anticipate.
As project start.
Seeing.
Our meaningful flow that would happened 12 months post the plan being announced.
Hey, Thanks for taking my questions today. Thank.
Thank you.
Our next question comes from the line of thought that the <unk> of Raymond James.
Yes.
Thanks for taking the question.
You've talked a lot about the infrastructure proposal in Washington.
Talk about the other side of the Atlantic.
Can you just give an overview of your exposure to the European market.
And what your conversations in Europe have been pointing to Pete that's clean up in the.
The EU as part of their infrastructure plan, yes.
<unk>. Thank you.
On the other side of the Atlantic what we historically and typically do is we are selling products through other integrators and Oems. So we're selling our product technologies through third parties that are selling into people and companies that do what we do we do see a tremendous.
<unk> opportunity around different technologies, there to actually address the <unk> issue. It's one of the things that we're working on on product development with regularity.
<unk> different types of IOP systems, I think I've, even highlighted on a couple of calls that we've had we are testing out with a.
System that actually breakthrough molecules using boron diamond that we're working in trial on so our excitement around the opportunities there or developing and deploying advanced technologies for treatment capability.
Across the across the pond as well.
Yes.
That's helpful.
And then one more on M&A I suppose the flip side of economic improvement is that.
Asset valuations corporate valuation can tend to go up as well have you noted any.
Meaningful change in the multiples that potential sellers in water tech.
Our demanding maybe over the last six months.
Actually I think were you see larger assets that are being.
That are actually being auctioned youre seeing multiple accretion so the multiples are going up pretty significantly.
We are historically focused on as we've kind of highlighted on the cost per barrel and certainly discussed as we are focused on the one to one negotiations generally bilateral where it's a tuck in acquisition around day technology, or a geography or vertical market that we're going after we're viewing this very much as.
Our R&D spending or M&A capital spending for expansion or M&A and so we're able to keep the multiples in the historic range that we've been buying got we've historically highlighted that we are acquiring pre synergy.
Eight times and post synergy, it's even down in the 5% to 4% to six times and we're seeing that continue on with our most recent acquisitions.
Got it. Thank you very much thank you.
Our next question comes from the line of Joe Giordano of Cowen.
Hey, guys. Good morning, Hey, Joe Good morning, Jeff.
I just wanted to clarify the question on Texas, I mean, you were talking about sending teams in and mobile assets down there with Texas, a net benefit to you guys or a net.
Net headwind because of site closures I would've thought maybe an ADT could be selling product down there to replace stuff that got busted from this but just wanted to clarify what the actual impact was.
Slightly positive Joe.
Overall you can.
By something like that but you also pick up business, particularly on mobile D. I fleet. So.
Net net net for the quarter it was slightly positive.
Okay, and then more broadly as a follow up are you seeing.
On maybe again on the product side customers.
Placing orders ahead and maybe pulling forward.
Some orders that maybe it would be in second half of calendar year, just now because here's a stock outs and things like that.
Very very.
Small amount so I would say, we see a little bit of that where we've got precious metal exposure in some product lines, but it's very small and those typically would be some of our international operations. We're not we're not seeing that heavily inside of North America, which was the launch of our of our revenue, Yes, we took a stab at that.
And looking at that.
There was some of it as Ron mentioned could have been about 1 million Bucks of EBITDA debt.
We got a benefit from in the quarter Okay.
Hey, guys. Thank.
Thank you.
Our next question comes from the line of Brian Lee of Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the questions.
Most of mine have been answered, but maybe if I could just follow up on the price cost.
Topic I know Ben you said early on you're expecting it to be it sounds like slightly positive for the balance of the year let's.
That's consistent with what you said last quarter as well. So just just wondering on general thoughts around you.
Our own supply chain, whether youre seeing any tightness in any.
Greater than expected inflationary pressures and if you've gone out to the market with any.
Sort of non.
Normal cycle pricing increases were expecting to do that as part of your.
Price cost positive EBITDA for the year.
Yes.
<unk>.
Brian first quarter as we talked before we're basically flat slightly positive this quarter, just under a million bucks on price cost favorability at like 700000 to be exact we.
We do it right now our modeling suggests that will get better as we go through the year.
But it's very uncertain I mean, theres a lot of moving parts out there.
But we think that our pricing is in really good shape and we're ahead of this and we plan on doing that but there's a lot of news out there that suggests that it's going to be a volatile situation as we go through the second half so.
We are optimistic that we can stay ahead of that.
It's one of those areas that.
We are cautious and monitoring very very closely.
The areas that you are seeing the cost increases Ron already mentioned in precious metals, particularly iridium that impacts our <unk> business.
Steel is another key area that we're seeing a lot of activity.
And certain types of of plastics and chemicals, but not a lot in that area. At this point that there is the potential for that as well.
Okay Fair enough that's helpful and then.
Just a quick one on P phosphate I might have missed it but I think last quarter, you talked about the $100 million plus <unk> pipeline.
Have you seen any incremental.
Five soldiers in the quarter.
Now that you're halfway through either close to halfway through.
'twenty one just.
Wondering if you have any.
Forward visibility into maybe the 2022 pipeline deal on on the people side as well.
Yes, Brian. Thank you that's a great question I would say that it is ramping up so the $100 million pipeline that we've highlighted continues to stay very consistent but we do see.
Projects that are going to be ramping up into 2022, certainly as the by the administration is highlighting <unk> clean up as an initiative that they're going after we.
We do think with regulation that will come that will continue to expand and it's one of the reasons that we highlighted.
The win that we had in the high water table <unk> removal down to non detect level. The mobile assets that evoke was able to deploy for rapid response, while we determine what the proper solution is going to be is exactly whats needed for the marketplace and we're we're very positive on this and we're making sure that we're.
We're deploying these on the proper locations and that we can do it very rapidly.
Alright, Thanks, a lot I'll pass it on.
Yes.
Our next question comes from the line of Patrick Baumann of Jpmorgan.
Hi, good morning, Thanks for taking my questions.
The first one.
I don't know if you talked about this at the beginning of the call.
Missed it.
<unk> for the year seems to imply a pickup in the fourth quarter revenue growth into kind of a double digit type growth range.
Can you talk about.
Yes, the visibility to that.
Specific projects driving that or.
Are you seeing maybe you've mentioned.
Yes.
I have missed earlier on I'm not sure if I missed it sounds like share Pat I'll comment and I'll, let Ben add some color as well, but we do have better visibility into into the next two quarters.
Just as we talk about with 60% of our revenue approximately being service and aftermarket that's generally very steady outside of that we look at our build on operate projects that are going to come online as well as capital projects that are in the pipeline and we.
We give an outlook against that because thats, where we get pretty strong visibility as we go into the fourth quarter. So.
The implication that we've given on guidance certainly doesn't take.
As a guiding towards guarantees or even as Ben noted the range would have been tighter it goes towards what we see in customers with the communications, we've had around their pipeline and their projects and when we anticipate.
For them to cut P S.
Yes, exactly so pad, it's really about the rollout of ISS projects and the expected timing and when we see those converting to revenue as well as as we talked earlier some of the service conversion to revenue as well and so based on our current look and the visibility on when we expect that to convert to revenue that would suggest.
<unk>.
A strong Q4.
Got it that's helpful color and then.
I thought the free cash flow was really really strong in the quarter.
Did you did you walk through kind of whether there was anything timing related that supported that.
Or how to think about that relative to the year just seemed like a pretty good result for the second quarter at least versus our expectations.
Yes, so again, we talked earlier about the fact that youre seeing the benefit of outsourced water youre seeing the benefit of.
The conversion cycle outsourced water all time record.
Current receivables the benefits of those as well as far as one time theres nothing in there.
Out of the normal typical collections that we have.
Just as a reminder is a capital business turns on there's a little bit of an off set between capex potentially and in working capital because the capital customers choose that that shows up on our <unk>.
Balances so.
There is the potential for a little bit higher working capital as a percentage of sales throughout the reopening, but we still expect to continue to generate strong free operating cash flow and we expect to continue to delever as we go through the year.
Great. Thanks, a lot for the color I appreciate the time and good luck. Thank you. Thanks.
Thanks, Matt.
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. Thank you Maria and thank you for your interest in <unk> today, I would be remiss if I didn't take the time now to thank our team.
We have operating over on the globe per operating safely executing on our strategies and delivering on the sustainable solutions that our customers in the marketplace.
Require and look for.
Thank you again for your interest in a vocal I look forward to chatting with you throughout the quarter and we'll look forward to following up on next quarters conference call. Thank you very much.
Thank you that concludes today's a vocal water technologies second quarter 2021 earnings Conference call. You May now disconnect. Your lines at this time and have a wonderful day.
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