Q4 2021 Evoqua Water Technologies Corp Earnings Call
Hello, and welcome to the Evo cold water technologies fourth quarter and fiscal year 2021 earnings conference call.
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Thank you.
I'd now like to turn the call over to you Tien Frailer.
President of Investor Relations. Please go ahead.
Thank you Brittany, thanks, everyone for joining us for today's call to review, our fourth quarter and full year 2021 financial results.
<unk> on today's call are Ron Keating, President and Chief Executive Officer, Ben Staff, Executive Vice President and Chief Financial Officer, and Snag hardest Si executive Vice President and Chief growth and sustainability officer.
After our prepared remarks, we will open the call to questions.
This conference call includes forward looking statements, including first quarter and full fiscal year, 2022 expectations and statements relating to demand outlook in our end markets growth opportunities, our order pipeline, our acquisition strategy and pipeline P Foss and infrastructure related.
Legislation supply chain challenges and inflation.
General macroeconomic conditions, our goals relating to our own greenhouse gas emissions and water reuse and statements related to the ongoing impact of the COVID-19 pandemic.
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 will also discuss certain non-GAAP financial measures.
Formation with respect to such non-GAAP financial measures is included in the appendix of the presentation, which can be obtained at evoke was investor relations website.
Unless 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.
Means to access this conference call via webcast were disclosed in the press release.
Which was posted on our Investor Relations website replays of this conference call will be archived and available for the next 14 days with that I'd now like to turn the call over to Ron Ron.
Thank you Dan and thank you all for joining us I appreciate your interest in <unk> and I'm happy to give our overall highlights.
Mentioned I'm joined by Ben staffs, our CFO irregularly participates on these calls and today I'm also pleased to have say hold aside our chief growth and sustainability officer join me.
Today, we will discuss some highlights on the P fast landscape and our progress on sustainability with that we'll get started please turn to slide three.
We closed a very solid year with a strong fourth quarter performance market demand continues to be robust as customers are increasingly turning to our focused solutions to solve their most complex water challenges on today's call you'll hear how we are investing in technology product innovation and sustainability initiatives.
I'll also talk about the upcoming year and while we're pleased with our position the long term growth opportunities and our expectations to create significant shareholder value.
In Q4, we had a very strong broad based organic revenue growth across both segments and our book to Bill ratio was north of one.
Price cost was positive for the quarter, despite ongoing inflationary pressures on materials and freight.
Supply chain constraints are impacting visibility and availability, but to date, we have successfully navigated through a very dynamic period I would like to thank our supply chain teams for an outstanding performance.
Our working capital performance and cash flow showed additional improvement as did our overall balance sheet strength, our net leverage ratio came in at two five times, which is at the low end of our targeted range.
M&A pipeline is quite active and we expect to supplement our organic growth initiatives over the coming year.
Please turn to slide four.
I wanted to take a moment and highlight the six key financial metrics that reflect the progress. The team has made over the past four years as a public company.
Our customer centric innovation driven company, we're focused on profitable growth and a strong balance sheet, allowing us to better serve our end markets.
We've seen excellent improvement across our results even through the pandemic and we're continuing to invest to serve our strong and growing market more effectively.
We are well positioned to tackle complex water challenges, while delivering sustainable solutions that our customers value as evidenced by our growing backlog.
Please turn to slide five.
This chart represents a vote because first quarter order expectations by end market relative to the prior year's first quarter, we continue to see growth across most of our end markets three end markets chemical processing municipal drinking water and refining marine show neutral to slight declines in expected demand due to challenge.
<unk> prior year comps overall, we expect market demand to remain quite strong throughout the 2022 fiscal year, we'll be happy to address questions about specific end market drivers during the Q&A section.
Please turn to slide six.
During our calls this year, we plan to select an end market and provide insight into the solutions, we provide and why it is important.
Microelectronics is one of our core vertical markets and has an attractive end market with growing demand across many geographies, we support multiple applications in microelectronics that utilize ultra pure process water and increasingly wastewater treatment and printed circuit board and chip manufacturing.
Sustainability continues to take a prominent role for the semiconductor companies and as they look to reuse reclaim and recycle water. They are partnering more closely with about one.
We provide multiple offerings to the semiconductor manufacturers as well as the upstream suppliers through both ISS and a P T.
ISS focuses on selling integrated process and wastewater solutions, while a T T cells products components and technologies for printed circuit board ultra pure process water requirements.
Our on pure brand as a leading edge technology for the industry and in a few minutes, then will provide insight into new innovations with the announcement of on pure ultra.
Please turn to slide seven.
This graph presents our quarterly revenue and adjusted EBITDA on a rolling 12 month basis since 2017, highlighting the resiliency of our business. Our overall revenues have grown at a compounded annual rate of 5% with adjusted EBITDA growth over 8% during this time.
Currently our service business comprises 41% of our trailing 12 month revenues, while service and aftermarket combined make up approximately 60% of our business.
Please turn to slide eight.
Evoke which celebrates the passage of the infrastructure investment and jobs Act and the 55 billion in funding that it makes it available for clean water.
This legislation is historic in size, marking the single largest investment in water infrastructure that the federal government has ever made.
This funding will be used for modernizing water infrastructure, replacing lead service lines, and then addressing emerging contaminants, namely P fast and our water system in.
In addition, the final bill requires the EPA to set maximum contaminant levels for P. F. L. E N P F O S and drinking water within two years of enactment.
I would now like to turn the call over to <unk> to discuss the P. Fast roadmap and are focused progress related to sustainability.
Thanks, Ron.
Please turn to slide nine.
The U S. EPA recently announced its <unk> strategic roadmap, which presented by the administrations all of agency plan for regulating and progressing fast related actions over the next three years. This roadmap includes some important timelines around planned regulations, namely the establishment of a national primary drinking water regulations for.
<unk> and <unk> and the designation of certain key fob as surplus hazardous substances by 2023 flow roadmap is available on <unk> website.
As Ron previously noted the infrastructure Bill requires the EPA to regulate <unk> and Cfos and drinking water within two years. This requirement matches and further solidifies. The timelines included in this recently announced roadmap.
Please turn to slide 10.
In Lula, a federal regulation for P. Foster patchwork state based standards as form nationwide as you can see on the right hand side of this slide these standards and regulations very widely state the state based on numerous variables, including the number of regulated paphos chemicals as well as the enforceable concentration.
Despite the federal regulations pending for an expected effective date of 2023, many states continue to develop state based regulation for.
For example, following the federal EPA announcement of their <unk> strategic roadmap, Washington State Department of Ecology announced their decision to list <unk> compounds as hazardous substances under the state cleanup law the model Toxics controls.
This followed the Washington Department of Health of August 2021 proposed rule does that state action levels for five DFAST compounds and drinking water.
<unk> is emerging contaminant program continues to support our core sustainability value by helping our customers with their sustainability goals related to Covid related clean water. In addition, <unk> also continues to invest in trade ability assessments and technology pilot testing for our customers, which I will discuss in more detail.
Please turn to slide 11.
We're pleased to announce environmental footprint goals on climate action and water reuse in an effort.
To reduce our greenhouse gas emissions, we plan to set science based targets by 2023. This is an important step on our journey towards reaching our goal of net zero greenhouse gas emissions by 2050, we will set science based reduction targets in line with the Paris Agreement's, one five degrees C pathway to prevent the worst effects.
Our climate change at <unk>.
Water technology company that plays a key role in helping our customers build sustainable water systems. We're also committed to driving water reuse internally.
By 2035, we aim to reuse more water than we withdraw from source to do this we will create water management plans for our facilities to increase efficiency in their water usage and implement additional water recycling and reuse initiatives wire is our business. So we will use many of our own solutions and expertise and our effort.
To achieve this goal.
In line with our commitment to sustainability. We have also implemented a few changes to our compensation structure to further integrating sustainability into our strategy.
Our fiscal year 2020 to annual incentive program will include safety performance and water reuse targets each weighted at 5% in order to align our incentives with our sustainability objectives.
<unk> also is committed to driving a technology driven customer centric culture, along with a broad portfolio of sustainable water treatment products and solutions, we're investing in our commercial organizations and leveraging business development strategy across customer vertical markets to drive profitable revenue growth digital optimization of these solutions will be a central <unk>.
Under this strategy.
In October we opened our sustainability and innovation hub in Pittsburgh that will help us accelerate our ability to develop innovative and sustainable water treatment technologies.
The capability to perform pilot testing training and demonstrations of real world applications in collaboration with strategic partners. We are very pleased to have this state of the art facility now.
Please turn to slide 12.
Our business model is to transform water and enrich lives each and every day, we have highlighted two customer handprint wins, featuring <unk> and ISS solutions.
In Singapore, we are providing APG component technology for an Aqua culture farm to filter and disinfect raw seawater to improve water conditions and support Vishal.
<unk> is providing the equipment remote monitoring and preventative maintenance over the life of the contract.
Customer avoids additional capex cost of the solution and this allows them to focus on their core business. Our water purification system will help the customers fischbach produce an expected 350 tons of sea bass.
Snapper annually.
For the second win if also has significant experience in wastewater technologies and we are responding to a broad and growing number of treatment system opportunities renewable natural gas demand is growing and we believe we are positioned to respond with our Adi anaerobic digestion technology, <unk> technical expertise and core competencies where key <unk>.
Ponant in delivering a solution that allows the customer to reach their requirement of minimum liquid discharge. This facility will generate an attractive ROI for the customer saving them approximately $1 million.
I would like to turn it over to Bert.
Thanks, Nick.
Please turn to slide 13.
For the fourth quarter reported revenues were up 11% to approximately $426 million organic revenues grew nine 5% with both segments contributing to growth service capital and aftermarket revenues grew supported by pricing initiatives across all offerings. We also saw all regions growing revenues.
As the prior year.
Fourth quarter, adjusted EBITDA increased eight 3% to $81 9 million for an overall margin of 19, 2% price cost and product mix improved profitability.
<unk> costs was favorable for the quarter by approximately $2 million increased service volume benefited margin expansion, but was offset by higher material costs freight and operational variances and higher operating expenses from labor inflation and travel.
Please turn to slide 14.
For the full year reported revenues were up two 4% to $1 $4 6 billion organic revenues were up one 6% driven by higher capital sales in the APAC and EMEA regions higher service volume and favorable price realization.
Capital revenues were lower primarily due to the timing of prior year projects in the microelectronics and market and sales in the Americas due to customer site access challenges foreign exchange contributed one 3% to revenue growth.
Full year, adjusted EBITDA increased four 7% to $259 million favorable price cost and cost reductions contributed to the increase while partly offset by higher labor inflation and drought.
Please turn to slide 15, our integrated solutions and services segment fourth quarter revenues were up 12, 8% to approximately $281 million organic revenues grew 11, 5% over the prior year.
Favorable price realization and higher volumes across capital service and aftermarket drove the improvement over the prior year.
Our digital strategy continues to make solid progress revenues were up approximately 15% in the quarter and for the full year.
Adjusted EBITDA increased 16 nine.
9% to $71 million due to higher volume favorable price cost mix and productivity improvement adjusted EBITDA margin for the quarter was 25% up 80 basis points from the prior year.
Please turn to slide 16.
We continue to see strong year over year growth in ISS backlog overall backlog was up $107 million or 17% over FY 'twenty with a significant percentage of that growth coming from both capital and outsourced water orders across multiple markets, including microelectronics power Marine <unk>.
And pharma our pipeline continues to be robust with both service and capital projects, we expect to see our book to Bill ratio remained above one throughout fiscal 2022.
We did an outstanding job of increasing backlog in light of booking our largest ever order in the fourth quarter of FY 'twenty.
In late September we placed a presentation at our investors relations website entitled Deep dive into outsourced water and digital enablement transformation I.
I encourage you to take a look at this instructional presentations that will help you understand important drivers to ISS backlog.
Please turn to slide 17.
Applied product technologies fourth quarter revenues were $145 million up seven 6%.
<unk> revenues increased $7 $8 million or five 8% driven by favorable pricing and <unk>.
Mix revenues grew across all regions foreign currency positively impacted revenues approximately one 8% adjusted.
Adjusted EBIT for the quarter increased one 2% to approximately $33 million adjusted EBITDA margin decreased 140 basis points to 22, 9% operational variances, resulting from supply chain chain challenges, including warranty reserves and production variances impacted adjusted EBITDA.
Margins in addition to higher labor inflation price cost and strong revenue volume favorably impacted profitability.
Please turn to slide 18.
One of Apt's long term organic growth initiatives is to develop new offerings that further our portfolio of sustainable products and to pursue market share gains in core markets each quarter, we've been featuring a new ATT product.
Innovation and we are pleased to highlight the VX ultra.
<unk> builds on our off our well established <unk> product line to deliver a more efficient solution to supply ultra pure water specifically targeted for the growing microelectronics market. The DNS ultra reduces complexity by achieving a higher quality water in a single paas versus a traditional double paas process.
The module reduces the need for mixed media ion exchange resin simplifying operations, while ensuring over 99, 9% removal of constituents, such as boron, which reduces semiconductor yields.
Please turn to slide 19.
Capital spending primarily for outsourced water orders was approximately $21 million for the quarter and $75 million for the full year or approximately five 1% of revenues.
Fourth quarter net working capital was 10, 3% of LTM sales an improvement of 220 basis points over the prior year and a 200 basis points sequential improvement from Q3.
Since 2019, we have improved networking capital to LTM sales by approximately 600 basis points I would like to thank our evoke with team for the outstanding performance in managing working capital.
Over the long term, we anticipate net working capital to sales could now be in the low teens versus the previous mid teens expectation given some projects may have varying amounts of working capital requirements.
Please turn to slide 20.
Operating cash flow was $179 million FY 'twenty, one versus $177 million in the prior year. We continue to maintain a strong focus on cash generation adjusted free cash flow as a percentage of adjusted net income continues to be well above our 100% conversion goal at 181%.
Our FY 'twenty one.
This is the third consecutive year of cash flow conversion above 100% in the fourth consecutive year of increasing annual operating cash flows.
We have significantly strengthened our balance sheet throughout the pandemic, we now have $449 million of liquidity, an improvement of $144 million over the prior year. Our net leverage ratio finished at two five times adjusted EBITDA.
We have reduced net leverage by one three turns and have reduced our net debt by approximately $260 million over the past.
Last two fiscal years.
We are now at the low end of our targeted leverage range of two five to three times as Ron mentioned, we have an active M&A pipeline and the financial strength and flexibility to fund organic and inorganic growth strategies.
Weighted average cost of debt for the fourth quarter was approximately two 7% an improvement of approximately 70 basis points over the prior year.
Year over year reduction is driven by a combination of reduced debt levels lower rates and a shift of that to lower cost facilities. We've reduced our annual cash interest expense to $26 5 million in FY 'twenty, one a reduction of $12 million from the prior year and a reduction of $26 million from FY <unk>.
<unk>.
Please turn to slide 21.
Two key long term financial targets are 3% to 5% organic revenue growth as well as 20% adjusted EBITDA margin. This graph shows our performance since 2018 for both metrics as you can see our annual organic revenues and adjusted EBIT margin have grown throughout the pandemic, we have the business mom.
That has proven its resilience in a very turbulent period, and we believe we have significant opportunities for long term growth.
We have highlighted some of the revenue growth opportunities as well as levers, we expect will help us achieve our adjusted EBITDA margin target.
We have high expectations as we look to the future.
World is facing acute challenges related to clean and available water. These problems are expected to intensify as climate change one downwardly compel the water industry to accelerate innovation and create additional treatment capacity the.
The investments we have made in our people technology footprint and operating capabilities have positioned evoke with to help make the world a more green healthier and safer place to live.
I would now like to turn the call back over to Ron Ron.
Thank you Ben Please turn to slide 22.
As we look to our new fiscal year, we are working to align our outlook across many favorable tailwind while managing the market uncertainties as.
As previously mentioned, we expect to see continued broad based demand and building momentum across the majority of our end markets.
Our ESG journey is accelerating which is in part driving our pipeline of capital and outsourced water opportunities regulatory changes at the federal state and local level and the recent passage of the infrastructure Bill should also provide a favorable backdrop.
Supply chain disruptions and labor availability are expected to limit visibility for the year and may cause some order conversion timing delays.
Increased material and freight inflation pressures are expected to remain.
We have provided key assumptions for our full year outlook on slide 26 in the appendix.
Please turn to slide 23.
Yes.
In closing, we're very pleased with the performance of the business in the quarter and for the full year.
Our pipeline remains robust as demand is strong across most of our end markets.
Supply chain constraints and inflationary pressures remain as we look to the new year and beyond we have navigated. These choppy waters to date and we have become a stronger and more resilient organization as we respond to and manage these challenges.
The management team is focused on driving profitable growth and our balance sheet has never been stronger.
We are investing in inorganic revenue drivers margin expansion initiatives and also expect to execute on identified accretive acquisition opportunities.
For the full year, we're giving balanced expectations for revenue and adjusted EBITDA to be in the range of one five to $1 five 8 billion and 200 $255 million to $275 million respectively.
For the first quarter, we expect revenues and adjusted EBITDA to be aligned with traditionally seasonal experiences over the past two years, we have provided a summary of quarterly revenues and adjusted EBITDA from 2018 to 2021 on slide 27 in the appendix.
I will now open the call for questions.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pankey. Once again that is star one if you would like to ask a question.
How are you.
Thank you our first question from Deane Dray with RBC capital markets.
Thank you and good morning, everyone and nice strong finish to the year.
Good morning, Thanks, Steve Thanks, Steve.
Since we have a stay on the line today as well first question on <unk> and I and I. Appreciate you all coming in the past couple of years, we've seen all kinds of opportunity for <unk> to address your cost Robert P. Fast issues, you've always kept commentary quite measured.
And so now with the passage of the infrastructure Bill with money earmarked specifically for P. Fast how do you see this translating into your sales line.
It will be a state by state basis will what might the timing be are there projects that still need to be scoped because it really this is all now coming together nicely you're already position here you said you have enough capacity, but <unk>.
Now they're responding so how does this translate into our P&L opportunity. Thanks.
Thanks for the question Dean and.
Actually as I was stating inside the commentary it's been very positive to see that.
The new infrastructure, Bill actually called out specifically lending for P. Phosphate, we've seen state by state progress going on over the last couple of years and given the two year timeline that EPA has for setting these limit.
I think that really where we're at we're getting too right now as we continue to see some work at the state level, but frankly, theyre going to see still waiting to see what those limits are Delaware. There are immediate and acute challenges we continue to see opportunity in our pipeline.
And actually this this signal now that money will start to flow will start to get that everybody. The encouragement to start their engineering work and really start to focus on deployment that we're still looking at.
Minimum two years out obviously with those mcl that more of the action in the three to five year period.
Great.
And then just as a follow up Snay are there any technology gaps right now from my perspective, you have all the core technologies to address <unk>.
Remediation of P fast, but it's an active area a lot of innovation do you have all the right technologies and then I've got a follow up for bad.
On free cash flow.
Yep.
Just outstanding year, it at 100 and over 180% conversion.
Any commentary about 2022 guidance on the free cash flow basis.
Especially on the work you've done and while working capital of sales.
Yes, let me, let me start out there and just to your question on how do we sit with solutions.
We are and continue to be well positioned with its solutions that year, both with our assortment and carbon technologies that frankly, all of the solutions that we are seeing deployed in the market I think the other thing to point out is number one with the moving landscape. We've had more customers talk to us top mobile solutions solutions that can.
Actually the transition to add the limits changed so that's actually emerging and then just as I pointed out in the commentary the opening of our sustainability innovation hub allows us to continue to keep our finger on the pulse of some new and emerging technologies because as you can imagine.
Our suite of solutions and our proximity to customers. Many of these new types of treatment technology companies are coming our way. So we're working in checking those out as well so I think we're well positioned.
We are today, but we are more than capable to expand our solution set as as they come come forward itself.
I think we're in good shape and Dean. This is Ron just one comment to that as <unk> highlighted we've invested heavily in our mobile fleet over the last couple of years, so being able to respond and react very quickly to individual application challenges that customers are having we can do and then as <unk> said over there.
Next two years and the treatment standard is well known we can then define the permanent solution to go in.
And on casting we feel very strong about being able to stay into the 100 plus percent range on conversion, we've lowered our working capital expectations for mid to low teens as the resolve the work we've done.
So we feel good about being able to potentially exceed that 100% goal 2022, I think the thing we have to keep our eye on is inflationary pressures and how that impacts inventory.
In addition to various types of supply chains chain constraints, and which we'll be holding some safety stock but.
Expect another strong year in free cash flow conversion in 2022.
I appreciate all the color. Thank you.
And we will take our next question from Nathan Jones with Stifel.
Good morning, everyone.
Good morning, good morning.
I just wanted to start off on some of the commentary around 8-K that you had in this line.
Talking about operational variances supply chain challenges project variances that HUD APK margins and I think we can say that in the in the decline we've seen in the incremental margins here over the last couple of quarters. So just hoping that you can talk a little bit more about what's going on there what the strategies are to get around it.
And it looks like from the Incrementals in 2022 that you're kind of assuming that.
Did some of those challenges again.
At least for at least a part of the year.
So Nathan I'll start and then I'll give it to them for a little more color.
On the APC side, if you'll remember that's our most global business, so and that we're dealing with supply chain challenges around shifting around logistics, just being able to move the materials is sufficiently.
As we've highlighted labor and freight challenges and constraints as we dealt with the team has done an outstanding job of being able to manage through and making sure. They have the right inventory at the right locations and they are able to meet customer demand. So we're continuing to.
Meet our customer demand make sure that we are satisfying the needs of the market. There just as you do that in the kind of environment, we're dealing with now theres a little bit of cost pressure that we're dealing with but the margins in a P T.
As you know over the past couple of years of really improved significantly and we anticipate that too.
To get back on track and inside of 'twenty, two but then you have comments, yes. No question about it we are experienced some transitory.
Supply chain challenges.
Particularly with.
Some of our suppliers and alternative suppliers that the team has been effectively dealing with.
This segment is hyper focused on quality and making sure that we are always.
Have pristine quality to our customers and as our some of our suppliers have had been reopening we have experienced some challenges in those areas again, we expect it to be transitory and we put a lot of programs in place to review.
And inspect on supplier quality to make sure that we.
We transition out of these challenges quickly and efficiently.
And as.
They are embedded in the guide.
For at least a few quarters here.
Yes.
I mean, we may build on that and do better but at this point in time, we have factored in.
That into the guidance.
No understood and in a responsible way to go about it.
I wanted to talk about strategic pricing a little bit you guys have been talking about strategic value based pricing as a lever to improve margins. Maybe you can just talk a little bit about what progress that you've made on that initiative you have price cost positive in 2021.
And should we expect to see value pricing start to have a positive impact on the margin profile. Once we get through all of this noise for them from Covid.
Covid induced supply chain challenges.
Yes, Nathan Thanks for the question on that we've made great progress on this in fact, we have.
Put a lot of effort a lot of initiatives around the pricing and price realization getting to market based pricing versus cost plus.
And it's you know it is proving out very well I would say that if we werent experiencing.
A little bit of the hyperinflation that we're dealing with around not only component cost, but labor and freight inflation, we would see that falling through already but we're trying to be very.
Balanced in the guidance that we're giving for fiscal 'twenty two I do absolutely believe that we're making great progress on this we've got the right programs in place.
Right investment.
And the tools for the team to be able to execute on this as a long term.
Our strategy for margin enhancement going forward.
Great. Thanks for taking my questions.
Thank you.
And we will take our next question from Mike Halloran with Baird.
Hey, good morning, everyone.
No.
So first question is just.
I think kind of a follow up to comment on the free cash flow side, obviously strong free cash flow towards the two and a half.
At times leverage which is at the <unk>.
Low end of your target range any thoughts to a change in the philosophy and capital deployment or or how are you thinking about what the M&A opportunity set looks like out there today and how actionable.
I don't think were going to change our priorities will remain the same but we're probably going to we will potentially accelerate the growth.
Element of that priority, both organic as well as inorganic and we haven't obviously, a great opportunity pipeline on both fronts.
So the cash deployment will be very much focused on the growth side as we head into 2022.
Mike.
We're going to continue to focus on the M&A pipeline that we have around tuck ins that make the most sense service tuck ins product line portfolio expansion, where we have gaps in and we've got a robust pipeline that we expect to utilize some of the capital deployment.
And then at a high level.
<unk> talked for a while here about the jump off point into next year with some of the model conversion that's happening with the how the backlog is translating.
Repeatable service revenue just taken a step back do you still feel the same about we're at that inflection point.
If you think about it a little bit on a longer horizon. How do you see this cadence playing out to get some level of normalization, but maybe a better way to put it is can you just put how this backlog conversion is and kind of put the backlog conversion concepts into context.
And kind of lay out how that looks as we start a new year here.
Yes, so as I mentioned on the call we have a teach and available on our website that really highlights a lot of that for investors. So encourage you might take a look at that but.
Youre still going to see as we book these large outsourced water orders that that backlog will convert over time that will improve our cash flow that will improve our mix and our profitability.
And we will continue to see more.
Of a conversion into the outsourced water model over time, so it's not going to be a rapid conversion is kind of our sales mix will convert over a longer period of time and Mike on the outflows on page 16, as we've highlighted where the revenue conversion timing, we still see that model holding.
Hi, Greg.
Great. Thanks, I have seen the presentation. Good day appreciate it alright. Thank you.
Yes.
And we will take our next question from Bryan Blair with Oppenheimer.
Thanks, Good morning, everyone.
Good morning, Brian.
To follow up on Mikes question, I guess to ask a little more directly what's factored in and.
Contemplated in your guide.
In terms of the net impacts of your increasing service base from prior installations versus the somewhat muted economics through year, one of new wins and outsourced water understanding that the latter factors into the former and then future economics.
We've factored in what you see on page 16 that trajectory and assume that that trajectory would continue.
And again, we've provided more detailed in the teach in.
And but that basically we've looked at the past looked at the trajectory put slight acceleration in there to outsourced water and factor that into our guidance.
Okay understood.
And then maybe I'll share a little more color on order progression into fiscal 'twenty, two and the key considerations for the year.
Some of your end market slide and you provided some good commentary all of which was appreciated.
I'm just wondering how your team is thinking about the.
End markets and applications, where youre most confidence.
<unk> strength throughout the year versus some watch areas.
Fiscal 'twenty two progresses.
Yes, so Brian again, but that is what we highlight on page five and generally what we do is we highlight one quarter out but you can look in the appendix we've got the history that it shows.
By end market for what's happened what we would anticipate is the markets that I highlighted in my comments around chemical processing municipal drinking refining marine <unk>.
Turning to Green as we go through the year, our expectation is we're going to have.
Nice growth across all of the end markets. The one that still has a question for us and continues to be a bit of a challenge market as the large scale aquatics business, that's water parks that theme parks et cetera. So the investment in that still in a COVID-19 environment has been a little slower than we would see historically, but we do anticipate.
That normalizes over time.
Okay I appreciate all the color.
Yeah.
And we will take our next question from Andy Kaplowitz with Citigroup. Your line is now open.
Hey, good morning, guys.
Andy.
So one of them you mentioned takes like normal seasonality in Q1, which I guess I'm a little surprised by as most industrial companies are expecting some supply.
Supply chain easing over the course of the year. So it was implicit in that assumption of normal Q1 seasonality youre expecting to see supply chain challenges last day for the entire year as and as we sit here today are you seeing supply chain challenges still get worse for you or have they started to level off at this point.
Yes, we've kind of seen them level off Andy that's why we're forecasting and giving kind of the normal ratios that we've historically seen.
They've leveled off we've been able to manage it as I highlighted even on the chart around us.
It's really managing the uncertainties in the market around labor around components of block also around freight.
And we factored most of that into.
We certainly factored at all into the guidance, but we've also factored into the pricing actions that we've taken in the market. So we feel like we're in a good position.
As this year goes even with the.
The challenge supply chain markets to be able to deliver against our normal curve.
And so the way to think about it is the upper end of our guide assumes we're conservative in our supply chain assumptions, if things are better I think the upper end of the guide becomes more realistic.
But we also did not want to put our heads in the sand with regards to the challenges that we see out there and the uncertainty and so we tried to factor that into the midpoint of our guidance.
Very helpful guys, and then I know, you've given us sort of the end market bubbles, but maybe if we could just like if you look at your capital backlog growth and really accelerated in the second half of the year I think you talked last quarter about seeing a big uptick in micro electronic ordering so did that continue is that a big reason for Q4 backlog growth or are you really just see.
It across the board now customers are starting to feel better about getting through the pandemic industrial companies are pretty strong and their outlooks for 'twenty. Two I mean, what are you seeing yeah. So we did see as we highlighted in the last call. Good response for microelectronics, but what we're seeing is much more across the board.
At this point.
And we're seeing some some robust capital demand come in.
Across that ISS slide as you can see on there.
The growth and it's pretty well split across the end markets that are showing as green.
I appreciate it guys.
Thanks Amy.
And we will take our next question from Andrew.
Kris Keller with Bahrenburg.
Hey, good morning, guys.
Good morning, Andrew.
I was wondering.
So you're going to see.
Presumably that that business is going to get a little bit more service intensive.
That backlog converts I'm wondering how much with.
With labor being a challenge broadly how much that affects you.
Yes.
Something you need to get ahead of and higher ahead of this anticipation of.
Being at being.
Having to service more customers more intensively over the next couple of years.
Yes, Andrew.
Theres a few things that we're doing we are constantly watching the labor pool working out watching our service tech pool, and making sure that we have a good pipeline of team members and talent coming through but we're also changing our business model as we've highlighted we're investing much more in digital digital solutions and being able to be onsite 'twenty.
Seven with customers without actually having to be there. So when we were able to deploy or redeploy our service techs and our service team.
Going into fix exactly what needs to be repaired or needs to be adjusted and so in doing that we're gaining great efficiencies out of that labor pool in and out of our service techs, we're going to continue to invest in that.
Continue to drive that and that's one of the things we've talked about on that teacher and is how much is going to digital and what the opportunities look like so.
It's a little bit of a change in the model.
As well as it is making sure that we.
We're constantly keeping a good pipeline of service teams members and service techs coming through.
Okay and.
And can you help us out on free cash flow a bit I mean, obviously very strong in 2021.
You mind going through what the puts and takes I can't imagine that would repeat again in 2022 are there anything is there anything going away that will be a net headwind or.
Anything that anything to think about the puts and takes into next year.
Yes, I think I think we've focused a lot of areas particular shared services.
Much more efficient cash conversion cycle. So those things will stick and we will continue to get benefits from all the work in that area on the headwind side again higher inflation costs supply chain availability puts pressure on inventory.
The other key area is mix that is a bit of an uncertainty as.
As capital business comes in we've been doing a really good job on getting cash upfront on capital projects, but some projects have different levels of working capital requirement and so that puts up a potential for some unknowns with regards to the types of mixed theyre going to come in capital, but overall, we still feel very good about free cash flow in 2020.
But we've got to keep our eye on inflationary pressures that could impact free cash flow.
Okay alright, thank you.
And we will take our next question from John Walsh with Credit Suisse. Your line is now open.
Hi, good morning.
Morning, Joe.
I just wanted to circle back to Andy's question around supply chain. So I think the six to 12 months you highlighted that's all I'll say a little bit more cautious maybe you would use the term conservative, but I just want to make sure that that's macro driven and that.
There isn't something specific to your business or water markets as it relates to labor availability or a certain type of component or material.
That we might be missing.
John that is purely macro driven.
We're just looking at the overall labor markets, we're looking at.
The component supply around different geographies and frankly, just freight inflation. So we're being very balanced in the guidance, we're giving around macro challenges.
Great.
And then maybe just a question for Ben here. So you obviously talked about that.
Q1 seasonality, but is there any finer point you'd like to give or provide just thinking about each one versus each two or or anything as we should think about orders ramping through the years or costs or anything just as we're doing our model to highlight.
Yes, so on page 27 of the webcast in the appendix, we did provide our historical quarterly seasonality.
For FY 'twenty to 'twenty one at this point feels feels about right and use that as a model for as you think about 2022, that's subject to change the business has quarterly variability as we've discussed in the past, but cutting what are the next I think I think that works out okay. I think the second half.
Who knows at this point in time with supply chain could it be better could it be worse, we got we'll get to that when we get to that but for now I would use that as a model.
Great I appreciate it thank you for taking the questions.
And we will take our next question from.
Larry Bartlett with Jefferies. Your line is now open.
Thank you for fitting me in so you talked about the potential for order conversion pushed out as part of your guidance is the same place you know for <unk> do you think the revenues actually get pushed out into 2023 and is this a supply chain issue or are you actually seeing customers delaying deliveries.
Yeah. So sorry, I think it really is talking to the quarterly variability that we see inside of our typical fiscal year.
That's one thing we highlighted we have variability in quarters, but on an annual basis. It generally becomes.
Fairly steady fairly repeatable.
And we can you know absolutely.
It would be pretty confident in what we're giving around animals and Thats. One reason, we don't give quarterly guidance, we give quarterly color.
The other thing I would say is as you've seen the backlog in ISS shift and grow in the capital side.
That is when you sometimes have variability and it's not whether or not we're able to get the components and deliver its whether a customer site is ready for us to be on and to be able to install the capital system. So.
We're again, we're being balanced in the guidance, we're giving and talking about what could happen with order conversion.
Thanks for that color and then just one follow up you talked a little bit about the end market outlook for orders that you lowered Dallas municipal drinking water.
Any color on what you saw in that market today, and you know what's driving the lower outlook for lawyers.
So again on this slide is our Q1 order activity against Q1 of 'twenty. One so Q1 to 22 against Q1 of 'twenty, one and talking about the municipal drinking water.
Bubbles, specifically, we had a very large prior year order come in Q1 of 'twenty one.
We don't see that same size single order come in Q1 of 'twenty two although the market is as robust and looks strong as the year goes on certainly with the passing of the upper scale infrastructure Bill. This is specifically talking quarter.
122 over quarter, one 'twenty one.
Okay perfect.
Company specific and that kind of a comment on that any end market outlook, yes correct.
Perfect. Thanks for taking my questions.
And we will take our next question from Steve Tusa with Jpmorgan.
Hey, guys good morning.
Hi, Steve.
Can you just talk about the opportunities you guys see in power and then Muni wastewater going forward, what's what's what's going on there.
Sure. So a lot of the change in power, we continue to see investment that's being made is.
Companies are moving to alternative energies are moving to different types of of power generation to move away from coal fired power plants. Our opportunity there is on recycle reuse I mean ultimately.
It is doing what it Boko does around sustainability, it's taking water that has contaminants in it cleaning it up putting it back into their environment and making sure that we are enabling the power companies to close sites.
Actively inefficiently around that so as the conversion happens.
From from coal into natural gas into renewables that a lot of the coal fired power plant are being taken offline and we help solve that.
That's for wastewater there is going to be investment that's going to come and we're seeing it already around plant specific action, where they're bringing it back up to the designed capacity.
And back up to the design specification. So we've got a very nice pipeline of opportunities executing with plant direct.
Applications around retrofit in rehab and that really speaks to the history of it.
With more than 100 years that we've been servicing municipal wastewater plants.
Got it okay. Thanks, a lot I appreciate it.
Okay.
And we will take our next question from Brian Lee with Goldman Sachs.
Hi, guys. Thanks for taking the question. This is Greg on for Brian I guess first one question is on <unk>.
Your revenue guidance. So your revenue guidance range for 2022, it's a bit wider than what you have given in prior annual targets just a little bit.
What what is.
The implied organic versus inorganic growth and is it simply supply chain uncertainties are there any other nuances to.
Heading into the year than the year path is it price is it makes our just any sense there thanks and.
And I have a follow up.
Sure. So the guidance <unk> uncertainty around inflation and as inflation occurs we feel confident will stay positive on price cost, but as you price the cost that has the potential to create.
Higher higher revenue, but youre not necessarily going to get the EBIT fall through you'll get you'll get some but not at your traditional margins.
That's what's implied in there in terms of the wider guide on revenue, but at the same time there is.
<unk>.
Commodity costs stabilize and there is a potential for the other direction. So thats, how we thought about that revenue guide okay.
Okay got it and what's the implied organic.
Organic growth there.
We have not put an implied organic growth out there at this point in time.
Again, when you think about organic growth part of that is how do you think about prices in part of organic growth and we don't we don't differentiate between price and volume in our guide and I would say the other thing is as we look at our M&A pipeline and we've highlighted this in the past.
Doing tuck in acquisitions around service locations, either we're going to put in.
Capital expenditure and build a site and develop or we're going to find something that we acquire and tuck in and they are very small so we call that.
Organic like inorganic growth because it's either deploy capital install a facility or find someone that you can bring in as a tuck in opportunity long term.
We expect to stay true to our goal of 3% to 5% organic growth.
Okay understood I guess.
One more question from me.
Great.
<unk> color on the call.
And realize that this is not a near term.
But can you guys give us a sense for what you are hearing from your customer than any more activity or engagement and then also maybe any updates on the 100 <unk> hundred million <unk> water contaminants pipeline you have referenced in the past su.
Head into 2022.
Sure, Yes, I can follow up on that so first of all we see the opportunity in the market similar to how we've talked about in the past in the near term.
Pipeline still continues to be quite robust in that range.
And then as the.
Limits are starting to unfold that'll start to give our customers much more confidence around engaging engineering studies and doing the work that they do.
<unk> the order don't flow until the engineering work is done and of course, the revenues outflow until after that so we kind of still see it playing out over the next three to five years, but but this new passage of the Bill really starts movement and a more positive direction.
Remember, it's the money and the limits together that are going to set the stage for exactly the timing and the type of solution that our customers will deploy.
And on the pipeline that we have our pipelines continued to be robust with a specific state led efforts that they actually highlighted on one of his slides and but we do anticipate that that will increase as time goes on certainly with the passing of the bill and the focus that's being placed on pretty fast.
Great. Thanks for the color I'll pass it on thanks. Thank you.
Thank you. This 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 very much for joining us today and thank you for your interest in evoke I wanted to again highlight.
The appreciation we have for our team managing through the supply chain challenges and making sure that we are continuing to deliver to deliver new innovations and new solutions to the marketplace. I'll look forward to speaking with you. All again next quarter have a great day capex.
Yeah.
Yes.
That concludes today's ebor water technologies fourth quarter and fiscal year 2021 earnings Conference call. You May now disconnect your lines and thank you for your interest in <unk>.
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