Q3 2021 Evoqua Water Technologies Corp Earnings Call

Hello, and welcome to the evoke cold water technologies third quarter 2021earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.

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Thank you.

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

Thank you Nicole and thanks to everyone for joining us for today's call to review our third quarter 2021 financial results participating on today's call are Ron Keating, President and Chief Executive Officer, and Ben Staff Executive Vice President and Chief financial.

After our prepared remarks, we will open the call to questions.

This conference call includes forward looking statements, including our expectations for the fourth quarter and the full year of fiscal 2021 statements relating to the impacts of the COVID-19 pandemic.

Anticipated inflation and macroeconomic conditions.

Demand outlook in our end markets.

Growth opportunities our pipeline, our acquisition strategy and the impact of the proposed infrastructure legislation.

Actual results may differ materially from expectations.

For additional information please refer to the company's SEC filings, including the risk factors described therein.

On this conference call, we'll also discuss certain non-GAAP financial measures information required by regulation G. At the Exchange Act with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained via <unk> investor.

<unk> web site.

Otherwise specified references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30th.

Means to access this conference call via webcast were disclosed in the press release, which was posted on our corporate web site.

Replays of this conference call will be archived and available for the next 14 days with that I would now like to turn the call over to Ron Ron. Thank you, Dan Let me start to slide 3.

We continue to be pleased with the company performance under challenging market dynamics brought about by the pandemic. Our priorities have remained focus on the health and safety of our employees, ensuring business continuity and improving our balance sheet and the liquidity of the company.

The column on the left provides highlights of some achievements since the start of the pandemic. We have grown revenues increased EBITDA margins enhanced liquidity and improved our net leverage ratio.

As the economy transitions to a reopening phase we believe we are well positioned for profitable growth.

Priorities for cash will focus on driving organic growth delivering on our M&A strategy and further enhancing our balance sheet consistent with our priorities prior to the pandemic.

We're seeing solid demand for our products and solutions. However, visibility on timing remains somewhat challenged we're experiencing the same macroeconomic challenges as many of our peers attraction of skilled talent inflationary pressures and material availability.

As we have discussed in the past and we'll continue to highlight vocal has many organic growth drivers as we look to the future.

Our organization has done an excellent job of managing through a difficult period and while market dynamics continue to present, a variety of challenges our organization is getting stronger and more competitive please.

Please turn to slide 4.

We're happy to highlight our third quarter results and the performance of the overall business our book to Bill ratio for the quarter was above 1.1 and our opportunity pipeline remains strong across our diverse set of end markets and geographic regions.

This segment's reported organic revenue growth of service and aftermarket demand increased and our pricing initiatives continue to remain ahead of rising cost.

Price cost for the quarter was positive by close to $1 billion and we expect that trend to continue with positive price cost for the fourth quarter and the full year.

We continue to watch the evolving status of COVID-19, and are following safety protocols published by global Health authorities, we will manage changes in the operating environment with agility and resilience as we have throughout the pandemic still focused on safety and continuity of business operations.

We had another solid quarter in managing our short term assets as net working capital sales to sales improved by 80 basis points quarter over quarter to 12, 3% a sequential improvement of 60 basis points.

Our focus on strengthening our balance sheet and increasing cash flow continues and solid results were recorded across most key metrics.

Our operating cash flow and adjusted free cash flow improved on a year to date basis liquidity increased to $385 million and our net leverage ratio improved to 2.8 times.

We expect to further enhance the balance sheet as we invest in organic growth opportunities and continue to pursue our acquisition strategy.

Please turn to slide 5.

As shown in prior calls this chart represents our expectation for <unk> order demand in our primary end markets.

In addition to our fourth quarter outlook, we have added a recap of our expectations shown in prior webcast since Q2 of 2020.

We started presenting this outlook at the beginning of the pandemic to give investors an indication of the expected short term demand trends when visibility was otherwise challenging.

As commented earlier, we are seeing strong order demand and this chart indicates 8 of our 10 key end markets are expecting improved year over year fourth quarter order demand.

I would note that we are seeing strong demand in chemical processing. However, it is shown as red because we booked our largest outsourced water contract for a chemical processing company in the prior year's fourth quarter.

If we were to exclude that contract the CPI Dot would also be great.

We will be happy to address questions about specific end market drivers during the Q&A session.

Please turn to slide 6.

Our business has been resilient during the pandemic and continues to benefit from stable and recurring revenue growth.

Shown in previous earnings calls 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 of almost 5% with adjusted EBITDA growth over 8% during this time.

The business continues to operate on a steady and profitable growth trajectory after adjusting for the divestiture of Mem Corp.

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

Currently our service business comprises 42% of our trailing 12 months sales, while service and aftermarket combined make up approximately 60% of our business.

As we have previously discussed the nature of our business is subject to quarterly variability. However, we have good visibility into our revenues from products and services on an annualized basis I would now like to turn the call over to Beth.

Thank you Ron please.

Please turn to slide 7.

For the third quarter reported revenues were up 6.3% to approximately $370 million organic revenues grew 3.2% with both segments contributing to revenue growth.

Segment demand improved pricing was positive and we saw growth in a variety of end markets, including chemical processing food and health Sciences, while <unk> declined we also experienced growth across all major regions third quarter adjusted EBITDA increased 3.8% to $66.2 million for an overall margin.

A 17, 9%.

Price cost and product mix improved profitability increased service by <unk>.

<unk> positively benefited margin expansion, but was offset by unfavorable operational variances higher operating expenses from employee compensation and travel and general inflation.

Please turn to slide 8.

Applied product technologies third quarter revenues were $130 million up 9.2% organic revenues increased $5 million of for 2% driven by favorable pricing and strong growth across multiple product lines foreign currency positively impacted revenue by approximately 5%.

Adjusted EBIT for the third quarter decreased 1.7% to approximately $28 million adjusted.

Adjusted EBITDA margin decreased.

250 basis points to 21, 8% operational variances, including additional warranty reserves and production variances impacted adjusted EBITDA margins. In addition to higher employee employee expenses price costs and product mix was favorably favorably impacted profitability.

Please turn to slide 9 <unk> is focused on driving organic growth through new product development and international market expansion each quarter. This year, we're highlighting product innovation center, expanding our addressable market and providing customers with enhanced solutions across the globe.

Last quarter, we highlighted our latest UV technology. This quarter, we launched powertrain with our ozone generation system expanding on our Pacific owned zone acquisition from 2018.

On site ozone generation has been used globally for decades as a highly effective treatment method for industrial water applications.

This next generation solution offers enhancements to help companies improve operations and reduce the amount of energy required to achieve water quality targets is more sustainable approach to treatment also has a smaller footprint our <unk> zone offering provides customers with optimized performance for ease.

Of operations. So they can focus on their processes and trust their water quality.

Please turn to slide 10.

Our integrated solutions and services segment third quarter revenues were up 4.8% to approximately $240 million in.

And organic.

And organic revenues grew 2.7% over the prior year.

We were pleased to see broad market demand driving revenues and profitability service and aftermarket revenues increased site access constraints have improved price cost for the quarter was positive while capital sales were down versus last year the cash.

Capital decline was primarily related to timing of microelectronics projects in the prior year, which was somewhat offset by new projects across the variety of end markets.

Our digital strategy continues to enhance our profitability through service efficiencies pricing and competitive takeaways with digitally enabled revenues growing at robust rates.

Adjusted EBITDA increased 11, 3% to $56 million due to higher volume volume favorable price cost and productivity improvements adjusted EBITDA margin for the quarter was 23, 5% up 140 basis points over the prior year.

Please turn to slide 11.

Last quarter, we highlight our ISS backlog composition. The service backlog is comprised of outsourced water contracts, which includes our mobile fleet service Digitization build own operate assets as well as service contracts on customer owned equipment municipal services and carbon services.

Whether the customer chooses to use in a vocal owned asset or to purchase the asset we focus on earning the customer service and aftermarket business over the long term.

This slide outlines the average revenue conversion range for our outsourced water asset by category.

We have updated this slide which shows third quarter backlog growing sequentially by $33 million to $745 million. We saw strong growth in capital backlog by service backlog declined slightly from Q2, we expect to see quarterly backlog variations due to timing and billings.

Over 60% of <unk> S.

Over 60% of ISS revenues are comprised from services of which approximately 1 half comes from outsourced water and 1 half comes from service contracts on customer owned equipment service revenues are growing recurring profitable and we believe we are well positioned for profitable growth our opportunity pipeline is very.

Strong and we're working with customers on both service and capital solutions.

Please turn to slide 12 capital spending primarily for outsourced water orders was approximately $18 million for the quarter.

Third quarter net working capital was 12, 3% of LTM sales, an improvement of 80 basis points over the prior year and a 60 basis points improvement sequentially.

Over the long term, we anticipate working capital to sales could be in the mid teens range. Given some projects may have varying amounts of working capital requirements.

Please turn to slide 13.

Operating cash flow was $103 million year to date versus $101 million in the prior year you can see over the past for years, we have significantly improved operating cash flow.

Adjusted free cash flow continues to be well above our 100% conversion goal.

186% year to date, our net leverage ratio finished at 2.8 times adjusted EBITDA, which was down almost a third of a turn from the prior year and down almost a full turn over the past 18 months, we continue to target leverage ratio in the 2.5 to 3 times range, our weighted average cost of debt as of Q3 is.

Approximately 2.7% an improvement of approximately 100 basis points over the prior year sequentially, our weighted average cost of debt dropped by approximately 45 basis points year over year reduction is driven by a combination of reduced debt levels lower rates and a shift of debt to lower cost.

Facilities.

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

Please turn to slide 14.

Infrastructure plan negotiations in Washington have continued and we outlined 2 important legislative proposals with highlights on cooling water on.

On Thursday July 30, the White House and Senate published a summary on the bipartisan infrastructure deal.

On August 1 the final version of the Bill was unveiled and P fast and emerging contaminants continue to receive strong bipartisan support.

This is unfolding in real time, and we're staying close to it the original $10 billion of spending proposed by the Biden administration in March remains intact as currently proposed.

Additionally, the PFS Action Act passed the house within the last 2 weeks with strong bipartisan of White House support. This bill would require the EPA to designate <unk> and PFS as hazardous under cercla and to issue a drinking water regulation for those 2 chemicals within 2 years.

We'll also gives the EPA 5 years to determine whether all P fast should be designated as hazardous.

We continue to closely monitor the legislative process and are encouraged by the strong bipartisan support for clean drinking water investments.

Please turn to slide 15.

We think about sustainability in 2 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.

Recently, a chemical plant in the southern U S was facing increased water demand due to higher production.

Rather than tap into the aquifer by digging the new well the plant reached out to evoke low for an innovative solution.

The result was to reuse the plant's wastewater, which was being discharged into an adjacent marsh.

Initially a large scale 100 gallon per minute reverse osmosis pilot run to establish viability of the project, which was successful and continues to operate with customers now expanding the relationship with the book by having us.

For a point source reuse of water within the plan, which will ensure that the water volumes in the March remained stable and the plant has the needed production resources.

From a footprint perspective, we are beginning our journey of reducing our cotwo emissions from the use of fossil fuel.

As a first step for <unk> thousand 19 to FY 'twenty, we reduced our generated admissions by 1540 metric tonnes the equivalent of removing more than 300 passenger vehicles off the road for 1 year.

Also we were very pleased to have been listed on the clean 200 list and recognition of our sustainability initiatives and our ability to make ourselves and our customers more sustainable.

Please turn to slide 16.

As we summarize the quarter with key highlights our pipeline is robust our order book is growing and our overall market demand is growing.

Economies are reopening at varying rates due to the pandemic and challenges exist fulfilling demand.

For the search for skilled talent rising commodity prices and labor inflation is prevalent.

We continue to manage these challenges well and our price cost impact was positive for the quarter and is positive year to date.

Our visibility to order conversion is improving but it has not fully returned to normal levels. Our team continues to execute and we experienced organic revenue growth in the quarter highlighted by growth in service and aftermarket as well as growth across all of our key geographical regions.

We are pleased with the continued strengthening of our balance sheet cash flow net working capital and liquidity.

This strength enhances our strategic flexibility and enables us to continue investment in organic and inorganic growth opportunities, including bolt on M&A.

We are also at this time reaffirming our full year outlook with revenue and adjusted EBITDA expected to be in the previously communicated range of 1 for 3 to $1.47 billion and $240 million to $255 million respectively.

I will now open up the call for your questions.

As a reminder, if you would like to ask a question you may do so by pressing Star then the number 1 on your telephone keypad.

Again that is star 1 to ask a question.

Your first question is from Nathan Jones of Stifel.

Good morning, everyone.

Good morning Nathan.

Anthony.

I'd like to start off with a question on the debt capital backlog that I think the disclosure this quarter on that backlog plus the disclosure last quarter.

Implies to me that the backlog ISS capital backlog was up about 40% quarter over quarter can you talk about what kinds of things you have been booking and how we should be thinking about that is converting to revenue.

Thanks Nathan.

If you looked at our market outlook, we've sort of highlighted where we're seeing the strength in demand, but specifically, we're seeing across many end markets, particularly microelectronics.

But we are seeing strength in orders.

And how should we think about kind of a I guess.

And average backlog duration, how long does that stop tight to turn into revenue.

This backlog was it was very but there were some are longer.

Larger projects backlog that will take a bit more time as much as 1 to 2 years.

And as you look at slide 11, where we've called out mobile fleet service day organization build own and operate.

Operate imbalanced goes into 40%, 40%, 20% and you can you can do some math around the the calculation on time.

Great. Thanks follow up question I wanted to ask was on the operational variances in the quarter.

Call that can be increased warranty costs and some production variances.

Can you talk about what's driving that.

It did.

Pattern measures deployed.

And fix those things and what the expectations I guess, especially around warranty costs going forward, how is it being fully resolved or should we be expecting more.

So the production variances were largely due to product mix last year, we had a lot of microelectronics orders running through the plant and its great absorption.

There is also some general inflation there on indirect materials.

Also included is a little bit of labor inflation, but that's pretty much offset the leverage that you would normally see on that upside within AT&T because of that mix. The warranty was approximately $1 million and a half and we believe we're fully reserved there were mostly due to.

Supply issues vendor warranty quality issues were certainly going to work to with those vendors.

In terms of recovering that in an abundance of caution we want to make sure. We took care of our customers first and we build the appropriate reserves.

So the production variances wide actually variances in your iron production processes day day, where other things that led to today's variances, yes, it's mostly absorption, but there was some general inflation included in that as well and we're going to offset the inflation with price. We continue to expect to do that but there is no.

Major issues within our production operations itself, but you can get variances due to the type of products that are running across there somehow better absorptions.

<unk> quite as good absorption and last year, we had larger orders that went through the production associated with microelectronics.

Okay that makes sense and is very helpful. Thank you very much.

Your next question is from Deane Dray of RBC capital markets.

Thank you and good morning, everyone, Hey, Dan and good morning, Good morning day.

And lots of underlying positive to talk about here.

Between price cost or the what I'd like to call your traffic light slide page 5 and everything turning green.

But actually Ryan I wanted to start with.

Update on the state of your outsourcing business you see.

Really nice with Nathan's question pointing out.

The growth in the backlog, what's the gating factor for you and building out this outsourcing business.

Has it been temporary or at least be able to get on site access is at the customers, making that decision to flip from Capex to Opex just yet.

<unk>.

Sourcing business today.

What the outlook is over the next several quarters sure. Thanks, Dan and thanks for the thanks for the question. The other comments and first of all I would agree with you. It's a lot of a lot of positives here certainly as you look at slide 5 and we continue to highlight that.

Actually as I commented in the opening remarks, excluding 1 very large order in CPI last year, we would have all but 1 doc that would be green right. Now so we feel pretty good about that gating factor on outsourced water because it continues to gain traction for us.

Is it is a little bit of the above all of the above that you mentioned it is site access which is challenging.

It improved over the past 3 to 6 months, but we're seeing some customers that are very concerned about it with the new variants coming out and customers.

Customers that are actually requesting that we'd be we validate that our service techs and our team members who are vaccinated before they can come on site. So we're all watching what's going to happen with the Delta variant a little cautiously.

The other piece is customers actually pulling the trigger.

You have some very nice projects that are in the pipeline that have been delayed and customers are delaying decisions because of the availability of their materials to operate as effectively as they would like to be as well as some of the inflationary challenges that theyre concerned about theyre dealing with right now they feel like May subside.

Over the next 12 to 18 months. So we're still very positive the pipeline is growing things look very nice on the outsourced water front, but we do have a little bit of cautiousness from from the marketplace overall.

Other pulling the trigger on larger orders right now.

Yeah.

That's real helpful. And then second question for Ben.

It's just kind of a nice problem or a question to be asked is your free cash flow conversion is significantly higher year to date and what we had been modeling.

We were bracing for some of this impact of growth Capex with the outsourcing business and it really has not been that significant in terms of weighing on the conversion so.

What does it say about fourth quarter conversion and set up for next year from a free cash flow standpoint. Please.

Yes so.

It'll depend on mix as capital kicks in that will put more pressure.

On free cash flow conversion as we head into next year, but we do expect to stay well above our first day above our 100% goal and we remain very confident doing that.

So as we head into Q4, we also feel good about Q4 as well to stay within our.

Our expectation so we've done a lot in this area, particularly with our shared services receivables collections overall cash conversion cycle reduction across the organization there could be some pressure on inventory as we continue to manage through some of these supply chain challenges and make sure that we have.

Enough stock to weather any any hiccups that we get from suppliers, but we feel very good about collections and we also feel very good about our payable process as well to help offset the majority of that.

Just to clarify are you carrying.

For a higher buffer inventory at this time, yes. We are yes that makes that makes sense for seeing that everywhere. So I appreciate hearing that thank you. Thanks.

Thanks Kim.

Your next question is for Mike Halloran of Baird.

Hey, good morning, everyone.

Chuck.

So kind of continuing on a couple of questions.

We've been asked.

First.

Last quarter, we would've talked about fourth quarter, implying really healthy exit rate in the next year. There is some supply chain challenges and things like that happening.

Didn't change guidance for the fourth quarter range. The implied range is awfully wide. So I guess the question is just the confidence that youre going to exit this year at a really high.

Good momentum kind of run rate.

And any thoughts on that or an update on that.

Yes, Mike. Thanks for the question 1 thing we wanted to do on guidance, we continue to maintain.

Balanced with what we gave as guidance I think you've seen that from us for the last several quarters is just making sure that we are.

Down the middle of the fairway kind of taken the tree tops out certainly with a lot of the.

Some of the uncertainty I would say with the delta coming out, but again as we highlight on slide 5 what's happening in the end markets, what's happening with our order activity our book to bill ratio to be north of 1.1 in Q3.

Really shows very strongly for what we expect to enter into.

FY 'twenty 2.

Yes, so it's still a high degree of confidence in the momentum that youre going to take exiting the year correct, yes, great.

So then when you think about some of the supply chain challenges.

Obviously, the price cost piece had been very good so far.

How are you thinking about the timing of those does price cost day positive through the fourth quarter or there is some lag to start materializing.

And then as Youre looking ahead to the supply chain side any other kind of internal challenges through your networks.

How do you think those flatten out and when do you see normalization yes.

Yes, so I think I actually made a couple of comments on that during the opening we do see price cost staying positive all the way through the end of the fiscal year.

And we think there'll be some sort of normalization as we start to see cost balance out coming into.

For the FY 'twenty, 2 time frame and during that fiscal year as well, so, but we've got terrific momentum from the team.

We're continuing to look at inflation across many areas not just material cost but across labor free.

Rate et cetera, there is a lot of challenges in the marketplace with inflationary.

Impacts on the different services, we provide.

And we're having to make sure that we get the we get the appropriate price for that as well.

Thanks, gentlemen.

Your next question is from Eaton bookbinder of Citi.

Hi, good morning.

Good morning, Good morning, Hey, Tom.

Within the cash flow walk.

And gross Capex was about $34 million year to date. That's already ahead of the full year of 2020 and almost the 2019 levels with 1 quarter to go so given customers may be hesitant to spend on Capex. There 1 for our capital projects have you seen the quoting pipeline for build own operate improve and do you anticipate that.

It surpassed the 2019 levels.

Yes build the build on operate pipelines again, how this works as customers choose whether they wanted to do capital will build on operate many times they choose debt at the end, but the pipeline for these types of projects continues to be robust.

So we will see which way they choose.

Historically, they've chosen more and to build on operate area, we're seeing more conversion to build on operate in 1 of the big opportunities I taught us we.

Approach a customer with that as a first option. So it gives us a tremendous opportunity and a competitive advantage, where we're going in and bidding on a project to be able to lead with outsourced water first.

That's helpful. Thank you.

And then the midpoint of your guide implies about 17, 1% adjusted EBITDA margin, which would represent a second straight quarter decline in trailing 12 month adjusted EBITDA margin. So have you seen operational variances that price cost headwind accelerate which could lead to Q4, adjusted EBITDA margin down year over year.

Is it more conservatism than taking it off the tree tops.

Would just highlight what I've mentioned earlier, we're being very balanced as we go forward, we didn't see a need to move guidance just for based on a little bit of the uncertainty, we're seeing with Covid and we wanted to make sure we were down the middle of the fairway.

Okay. It sounds good thank you very much.

Your next question is from Steve Tusa of Jpmorgan.

Hi, good morning.

Good morning, Good morning, Steve.

Just on the and any other.

Thoughts on 'twenty 2.

And kind of sense of organic growth versus the kind of longer term targets that you guys talk about.

Yes, Steve we haven't given any guidance on 22, yet we certainly anticipate based on the strong order book in the backlog that we've been building.

That will continue to be.

In line with our long term targets that we feel okay I had to try.

And then just on the infrastructure Bill.

And anything coming out there that you see.

That drives growth in the near term or maybe some people stepping back and delaying and kind of looking for better visibility on how this is all going to work just high level questions. There look overall I think it is very positive for us that we're getting such a bipartisan support around clean water and I think thats the key.

As we go forward. So it speaks to fantastic secular trends for the industry as a whole for us in the solutions, we provide and the emphasis on emerging contaminants. It gives us a.

Very positive outlook as to what's going to happen that the EPA and the federal government are starting to.

Really highlight this as something that needs to be addressed and will be addressed as very.

Very positive for the long term outlook.

Right.

I appreciate it thank you.

Yes.

Your next question is from Andrew Buscaglia of Bahrenburg.

Good morning, guys. Good morning, good morning, Andrew.

I was wondering if you could comment on.

For some services and aftermarket I thought.

It's growing a bit but.

It sounds like Delta delta bearing and kind of pushing that out due to site access issues.

Are we setting up for a pretty robust year going forward or maybe quarter going forward, if if that lifts and by that I mean can you talk about the nature of the spend Baird.

Is that the way to think of it like people are pushing out these the services and maintenance of the stuff that they're going to need a lot of that going forward basically.

Yes, Andrew I think a little bit of what we've seen and we continue to experience is there is there is a bit of about that columns as people ramp back up their production. So there's opportunities for Ross debt.

Debt will be expanding a little more greatly than they potentially have in the past and as people open back up to full capacity and thanks short operating but the other thing that I want to highlight through this is.

We see capital projects come through and we've discussed this in several other calls for a dollar of capital that we sell so if we go out and sell low $20 million capital.

System typically.

18 months 24 months later, you see about 22 and a half cents of service that flows from that capital sale and so it's a little bit slower to get that that services growth.

Is tied on to the capital projects that we highlighted when we speak of.

There's a very nice benefit as you see that ISS backlog growing.

Indicates we will see the services that are stable and recurring revenue that will follow suit.

Got it.

And maybe 1 on capital allocation.

Any updated thoughts on M&A and then.

M&A is not likely what about focusing on.

Moving to pay down that debt.

Well I'll speak to the M&A piece, and we've got a very nice pipeline coming and Ben can talk about paying down debt, we're going to continue to do that.

But on the M&A side, we have a robust pipeline of opportunities that we anticipate we will be able to.

Continue to execute on our bolt on strategy that we've highlighted in the past, but do you want to talk about the debt pay down yes, sure M&A and organic growth are clearly priorities, especially in this environment, but we do we do are focusing on reducing debt. We're currently at 2.8.

We've stated a goal of 2.5 to 3 times so within the range.

We still got room to get to 2 and a half. So we're going to continue to focus on net debt reduction as well.

Alright, thanks, guys.

Your next question is from John Walsh of Credit Suisse.

Hi, good morning.

John.

I Wonder if we could talk a little bit more about.

The pricing actions, you're taking and just thinking about on the other side of this.

We get some deflation in these input costs.

Hard to go back and look at history because of the way you've kind of transitioned the business model here. So how should we think about price stickiness and the ability to kind of naturally push push through price with <unk>.

90% plus renewal rate.

Yes.

As you look at that John obviously.

Sure.

It's a little harder when you have longer term contracts to get the price immediately but that also leads to a benefit on the back side. When you have longer term contracts of the price being much more stable.

For more sticky so.

We've had to go out with some surcharges just given the immediate nature on some of the inflationary pressures that we've seen surcharges go.

And they typically will bleed off as we see deflationary.

Moves, but as we go to annual contracts and we renew annual contract from surcharges, we typically roll those more into the contract for new contract pricing, which allows it to last longer than typically.

Alright, Thanks for that and then maybe just 1 more around <unk>.

Capital allocation, obviously, you've articulated your strategy of bolt ons, but just curious what youre seeing or what your thoughts are on maybe larger industry consolidation, we've certainly seen a pickup in acquisition activity.

Love to get your thoughts there on potentially larger industry consolidation moves.

I think that there are certainly some potential industry moves that are out there.

They are few and far between and much more difficult to 2.

To action and so our focus continues to be on the strategy, we've articulated around accretive tuck in or bolt on acquisitions that will continue to focus on that.

Great. Thanks for taking the questions. Thank you.

Your next question is from Pavel <unk> of Raymond James.

Thanks for taking the question.

<unk> International things that went into ask about first on.

Supply side of the equation after you sold the <unk>.

<unk> core business in Australia, a few years ago do you have any exposure to the Australian market at this point and of course.

I'm asking in the context of the Sydney and Brisbane locked down.

We do have access to it we still have a team.

On the ground that is providing systems and services as well as product technologies into that market, we sell through other integrators.

In Australia, as well that deploy our products and technologies, Australia and New Zealand.

But it's not a large portion of our business per barrel, it's much smaller since we sold them core business all.

Okay understood.

Then.

Few people asked about the U S infrastructure package in.

Water treatment modernization.

On the other side of the Atlantic very similar conversation also involving PFS in places like Northern Italy, Belgium, Southern England.

How do you assess that opportunity.

We think the opportunity certainly is there for integrators and service providers in those markets to deploy our technologies, our advanced technologies that we have in the <unk> portfolio.

And a lot of thats around UV opportunities.

Types of concentration up and.

With Aro and ion exchange systems, and where we can deploy some of our <unk>.

Product technologies, we're very supportive of that but.

But we are not there.

System provider in those markets, we're simply providing technologies.

Okay.

Thank you very much thank you.

Your next question is from Joe Giordano of Cowen.

Hey, guys. Good morning, good morning.

Joe Hi, Joe.

Do you have a sense of like day, the inflection in your business on revenue on the capital side, just given the backlog timing and visibility you have there.

Joe.

Inflection.

Talking about conversion of backlog to revenue.

You had to service and service business.

Aftermarket up in the quarter, our capital down I think thats been a couple of quarters like that just given the nature of that.

When that flips to positive for capital.

Yes, if you look at the backlog chart for ISS, you saw that debt ticked up and we did point to the fact that general strength in orders within capital.

Including microelectronics so.

Some of those orders are longer in duration, so they're going to take some time to convert because they're larger microelectronics types of orders, but on average it depends on the size of the order for it can be 3 months to 2 years, depending on the size of the order, but I think Joe as you see this as capital average is 9 to 12 months on that slide.

That would give us indication inflection would occur within the next 12 months.

Fair enough.

Your comments on the net working capital that could be like mid teen is that something that you see happening kind of now as a matter of course or like what are the conditions that would need to be in place.

To move that higher for that level.

It depends on mix and it depends on.

Market and where that capital occurs.

As a reminder, a lot of the longer capital that was kind of a negative in terms of <unk>.

Municipal segment, we've reduced our exposure with the seller for them for.

We feel good about staying in the lower end of that range, but it's possible that larger types of projects could come through that put pressure on the capital area on working capital short term.

But again Thats correct itself relatively soon we do think that the lower teens as is where we should sit long term.

Thanks.

Your final question is from Brian Lee of Goldman Sachs.

Hey, guys. Good morning, Thanks for squeezing me in Hey, Brian Good morning.

Maybe just on the backlog and.

Order strength.

In that context.

Can you kind of give us an update on whether or not youre seeing increased activity around the <unk> pipeline I think the last time you guys updated us it was youre still talking about $100 million visibility on the pipeline for PFS related.

Adams.

Wondering if there was anything related to that specific in terms of the updates around backlog and order trends.

Yes, so Brian I would say that thats remaining fairly stable with what we see a lot of what's going on in the federal government is causing.

People, just or water districts to continue to address there.

Immediate need but not to advance the ball on really expanding it until they see what's going to happen with the EPA and with the federal government. So it's.

Staying pretty steady our win rate is staying very steady as well.

And so we continue to see to see it.

<unk>.

A piece of our business that has great promise, but is not.

Contributing.

Greatly to the overall picture yet.

Okay Fair enough and then maybe a second question for Ben.

Kind of around the model and margin trends here.

Speaking of inflections I think this is the first time in fiscal 'twenty 1.

T cell margin decline year on year, and then ISS went positive so we kind of turning the corner here in ISS, where we should be expecting year on year margin trends to remain positive into Q4 and heading into fiscal 'twenty 2 and then.

I wasn't clear on some of the residual impact of the warranties and operational factors is that going to weigh on <unk> in the near term, where we continue to sort of see that.

Negative on a year on year basis, thanks, guys.

Yes, sure so for ISS again margin trends, we're expecting to continue to be favorable.

As volumes improve and increase in the microelectronics microelectronics comps are in our rearview mirror this quarter fourth quarter, we still have 1 more tough comp left I just want to remind you of that then.

The comps get better as we head into next year service volume within ISS is certainly helping margins and on the other hand, we still got to keep our eye on inflation and I want to remind you.

<unk> costs, even though we're positive can put pressure on margins. If you don't maintain your margins on the price. So just.

From a from a thought process, we can be positive and recover all our cost plus have additional price, but if that does not maintain the margin that can be a little put some short term pressure on margins within the.

The warranty we believe is.

Fully reserved for we don't expect additional issues as we head into the future and an abundance of caution we wanted to make sure. We are aggressive with our customers. So they don't feel any impact of these issues were certainly going to work with our suppliers to resolve these issues.

So we don't see any hangover from that fact, and the other point within APC margins. They were also a little bit of a victim of tough comps because there are a lot of microelectronics and the prior year large orders.

Produce great absorption.

Within the segment in the prior year, so they had some tough comps as well.

So again, we don't see a lot of hangover effect from this ADT margin challenge that we had this quarter on a quarter over quarter basis.

I appreciate the color. Thanks, guys. Thanks. Thank you.

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 first of all I'd like to thank our dedicated team at <unk> for continuing to deliver continuous operations and continuous support for our customers and somewhat challenging times and certainly for <unk>.

Providing the tremendously strong technology and sustainable solutions that we deliver to market. Thank you all for participating in the earnings call. Today, We hope you will be safe and we appreciate your interest in <unk>.

Thank you that concludes today's Evo cold water technologies third quarter 2021 earnings conference call you.

You may now disconnect your lines and thank you for your interest in Evo Quest.

Okay.

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Yes.

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Yes.