Q1 2022 Evoqua Water Technologies Corp Earnings Call

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Hello, and welcome to the evoke well water technologies first quarter 2022 earnings conference call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.

Speaker 1: Hello and welcome to the Ivoqua Water Technologies first quarter 2022 earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. After the speaker's opening remarks, there will be a question in the answer period. If you would like to ask a question during this time, simply press the star, then the number one on your telephone keypad.

After the Speakers' opening remarks, there will be a question and answer period, if he would like to ask a question. During this time simply press. The Star then the number one on your telephone keypad.

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Speaker 1: As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree to these terms, please disconnect at this time. Thank you. I would now like to turn the call over to the add brailer, vice president of investor relations. Please go ahead.

As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call.

If you do not agree to these terms. Please disconnect at this time. Thank you I would now like to turn the call over to you you had frailer Vice President of Investor Relations. Please go ahead.

Speaker 2: Thank you, Brittany. Thanks, everyone, for joining us for today's call to review our first quarter's financial result.

Thank you Brittany, thanks, everyone for joining us for today's call to review, our first quarter financial results participating on today's call are Ron Keating, President and Chief Executive Officer, and then staff Executive Vice President and Chief Financial Officer.

Speaker 2: participating on today's call, a Ron Keating, president and chief executive officer, and then Staz, executive vice president and chief financial officer.

Speaker 2: After our prepared remarks, we'll open the call to questions.

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

Speaker 2: This conference call includes forward looking statements, including first half and full fiscal year 22 expectations.

This conference call includes forward looking statements, including first half and full fiscal year 'twenty to expectations.

Speaker 2: statements relating to the demand outlook in our end markets, growth opportunities, our order pipeline, our acquisition strategy, and pipeline.

Statements relating to the demand outlook in our end markets.

Both opportunities are order pipeline, our acquisition strategy and pipeline.

Integration and future performance of the core business.

Speaker 2: Integration and future performance of the Markov business, PFAS and infrastructure related legislation, supply chain challenges, inflation, labor shortages, general macroeconomic conditions, statements related to the ongoing impact of the COVID-19 pandemic. Actually results meet different materially from our expectations.

Pos in infrastructure related legislation supply chain challenges inflation labor shortages general macroeconomic conditions and statements related to the ongoing impact of the COVID-19 pandemic.

Actual results may differ materially from our expectations for additional information. Please refer to the company's SEC filings, including the risk factors described therein.

Speaker 2: For additional information on his outlook, please refer to the company's SEC filings, including the risk factors described therein.

Speaker 2: on this conference call, we'll also discuss certain non- GAAP financial measures. Information with respect to such non- GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at a Volquous Investor Relations website.

On this conference call, we will also discuss certain non-GAAP financial measures.

Information with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at a bulk <unk> investor Relations website.

Speaker 2: Plus, otherwise specified, references on this call to full-year measures, or to a year refer to our fiscal year which ends on September 30th.

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 to access this conference call via webcast were disclosed in the press release, which was posted on our Investor Relations website.

Speaker 2: means so access is conference call via webcast where this closed in the press release, which was posted on our investor relations website. Replace 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? Ron?

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 and thank you for joining us I appreciate your interest in Vogue and I'm pleased to provide insight into our results and outlook. Please turn to slide three.

Speaker 3: Thank you, Dan, and thank you for joining us. I appreciate your interest in Invoqua, and I'm pleased to provide insight into our results and outlook. Please turn to slide 3.

Speaker 3: We reported very strong first quarter results measured across all key metrics. Market demand continues to be robust, driven by the growing global need for safe and available water. We're helping customers solve problems and achieve their sustainability target.

We reported very strong first quarter results measured across all key metrics market demand continues to be robust driven by the growing global need for safe and available water, we're helping customers.

Customer solve problems that achieve their sustainability targets.

Speaker 3: Both segments reported double digit organic revenue growth would broad base demand across capital, service, and aftermarket in all regions and most products.

Segments reported double digit organic revenue growth with broad based demand across capital service and aftermarket in all regions in most product lines. Our book to Bill ratio was above one and our pipeline and demand indications remain robust.

Speaker 3: Our book to bill ratio was above one, and our pipeline and demand indications remain robust.

Price cost was positive with solid price realization across both segments supply chain challenges inflationary pressures and talent recruitment continued to result in unpredictable order conversion visibility.

Speaker 3: Price gas was positive with solid price realization across both segments.

Speaker 3: and supply chain challenges and inflationary pressures, and talent recruitment continue to result in unpredictable order conversion visibility.

Speaker 3: Our team has navigated these constraints effectively to date, and pricing initiatives across the organization have then and will remain a priori.

Our team has navigated these constraints effectively to date and pricing initiatives across the organization have been and will remain a priority.

Cash flow was strong and we continue to drive improvements to the balance sheet.

Speaker 3: Casual was wrong and we continue to drive improvements to the balance.

Speaker 3: Adjusted free cash flow conversion was north of 200%. Networking capital was approximately 10% of trailing 12 month revenue. Liquidity improves sequentially, and our net leverage ratio improved to 24 and 4 times.

Adjusted free cash flow conversion was north of 200% net working capital was approximately 10% of trailing 12 month revenue liquidity improved sequentially and our net leverage ratio improved to 244 talks will discuss the Mar Cor January 3rd acquisition in a few minutes, however, when including Mark or as expected annualized EBA.

Speaker 3: We'll discuss the Markor January 3rd acquisition in a few minutes. However, when including Markor's expected annualized EBDIM, purchase price on a pro form of basis, our net leverage would have been 2.8 times as of December 31st. This is well within our targeted range with liquidity remaining solid at 270 million.

<unk> purchase price on a pro forma basis, our net leverage would have been two eight times as of December 31.

This is well within our targeted range with liquidity remained solid at $270 million.

Please turn to slide four.

The bulk was a performance driven water technology company focused on delivering strong financial results. As you can see we have delivered outstanding results across the six key metrics over the past several years, we have a talented and dedicated team focused on solving some of the world's most complex water problems our results.

Speaker 3: Evoque was a performance-driven water technology company focused on delivering strong financial results. As you can see, we've delivered outstanding results across these six key metrics over the past several years. We have a talented and dedicated team focused on solving some of the world's most complex water problems.

Speaker 3: Our results demonstrate the strength of our business model and focused execution. We're proud of the progress we've made and we remain focused on the daily actions that lead to executing our strategy.

To demonstrate the strength of our business model and focused execution. We're proud of the progress we've made and we remain focused on the daily actions that lead to executing our strategy.

Please turn to slide five.

This chart represents our second quarter expected order demand by end market, we have updated the relative sizes of our end markets and included more cores pro forma annualized sales, we have renamed the health care end market as a life Sciences, which is now the largest market we serve.

Speaker 3: We have renamed the Healthcare in Market as Life Sciences, which is now the largest market we serve.

Speaker 3: The life sciences in market is a combination of the healthcare, pharmaceutical and biotech industry.

The life Sciences end market is a combination of the health care pharmaceutical and biotech industries.

Speaker 3: We expect to see strong order demand in the second quarter across most end markets, including life sciences, microelectronics, power, food and beverage, and the light and general industries markets.

We expect to see strong order demand in the second quarter across most end markets, including life Sciences, Microelectronics power food and beverage and the light and general industries markets.

Speaker 3: Demand in our municipal wastewater end market is temporarily muted, largely due to spending deferrals aligned with the recent passage of the infrastructure bill.

Demand in our municipal wastewater end market is temporarily muted largely due to spending deferrals aligned with the recent passage of the infrastructure Bill.

Speaker 3: Our municipal wastewater pipeline is robust and we expect to see water flow pick up in the near

Our municipal wastewater pipeline is robust and we expect to see order flow pick up in the near future.

Speaker 3: Overall, we expect to see a robust demand how it looked across most of our end markets in 2022. We'll be happy to address questions about specific end market drivers during the Q&A session. Thank you.

Overall, we expect to see a robust demand outlook across most of our end markets. In 2022, we'll be happy to address questions about specific end market drivers during the Q&A session.

Please turn to slide six.

Throughout the year, we plan to highlight specific end market central provide additional insight into our portfolio of solutions Lifesciences includes a collection of large and growing vertical markets and we expect both segments to execute on long term opportunities for growth.

Speaker 3: Throughout the year we plan to highlight specific end markets and to provide additional insight into our portfolio of solutions.

Speaker 3: Life Sciences includes a collection of large and growing vertical markets, and we expect both segments to execute on long-term opportunities for...

Speaker 3: We have played an important role to the life sciences market throughout the pandemic, providing customers with a reliable source of ultra-peer water for vaccine research and development, manufacturing of COVID test, and use in hospital laboratories.

We have played an important role to the life sciences market throughout the pandemic, providing customers with a reliable source of ultra pure water for vaccine research and development manufacturing of Covid test and use and hospital laboratories.

Speaker 3: APT has seen strong demand for EDI modules in the global pharmaceutical market, and we expect pharma demand to continue.

<unk> seen strong demand for Edr modules in the global pharmaceutical market and we expect pharma demand to continue.

Last year, we announced the rollout of vantage SPD and next generation high purity water solution that provides a water one digitally enabled system for medical device reprocessing.

Speaker 3: Last year, we announced the rollout of Vantage SPD, a next-generation, high-purity water solution that provides a WaterOne digitally-enabled system for medical device reprocessing. This innovative technology has been well

Innovative technology has been well received in the market.

Speaker 3: The addition of Mark Ward spans our offerings in the life sciences market and completes our offerings to the hospital industry.

The addition of Mark or expands our offerings in the life sciences market and completes our offerings to the hospital industry.

Please turn to slide seven.

We're pleased to have the mark or team as a part of the book we were attracted to the opportunity for several reasons, Mark where is the market leader in providing critical water solutions to F. D. A regulated dialysis applications. They have an extensive service branch they have large installed base and highly recurring revenues.

<unk> service tax brings significant expertise and knowhow in providing high purity water to a regulated market.

We were able to purchase the business for slightly over seven times annualized EBITDA, which speaks to the validity of our one to one M&A strategy. We're working on plans to move mark or onto our SAP platform and we're well underway on our business integration plan. This.

This is a highly synergistic transaction and we expect adjusted EBITDA margins for this business to reach 25% over the next 18 to 24 months.

One example of value creation will come from branch consolidations.

25 of Mark Horse twenty-seven service branches are located near evoke with branches, providing an opportunity to optimize our footprint. The addition of the more core service tax will enhance our service capabilities, our capacity and our technical expertise.

We've provided more information or more core product lines on slide 23 in the appendix. Please turn to slide eight.

This slide highlights the many water treatment needs within a hospital, we've been a provider of all of these capabilities for many years with the exception of hemodialysis.

The addition of Mark or satisfies the remaining gap in our hospital water treatment offering, allowing us to provide complete solutions for our hospital campus.

We feel that the life sciences market focus could also provide additional organic and inorganic growth opportunities. Please starting to flatten out.

We were very pleased to gain two notable corporate recognitions recently, the corporate Knights placed a vocal at 19th on its 100, most sustainable corporations ranking we were honored to be recognized for our impact and our commitment to sustainability.

We also received the Frost <unk> Sullivan 2021 Global company of the year Award for sustainability on the water technology market. We appreciate this recognition of our investment in technology innovation and our focus on sustainability.

We highlighted a P fast handprint win in our ISS segment, the city of Anaheim selected evoke which provide the capital and ongoing service requirements to remove <unk> from their drinking water systems and a two phased deployment.

And the first phase we will treat approximately 46 gallon 46 million gallons of drinking water per day for the majority of the city's 370000 residents phase II, we will expand that P fast removal treatment to industrial and commercial businesses and the remaining residents.

We continue to closely monitor the impact of the recently passed infrastructure Bill on the markets we serve.

While it's too soon to see an immediate impact in P. Fast treatment, we expect to see quoting activity ramping as we progress through the year.

We were pleased to see the 2022 National Defense Act signed into law. This authorizes funding for military activities, including $517 million above the President's budget request for cleanup of military communities impacted by P fast and 100 million for environmental remediation to the base realignment and Clos.

As your account.

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

Thank you Ron.

Please turn to slide 10 for the first quarter reported revenues were up approximately 14% to $366 million organic revenues grew approximately 13% with both segments reporting double digit growth driven by broad based volume growth and price realization.

We saw revenues increase in services capital and aftermarket as well as growth across all regions in most product lines versus the prior year.

First quarter adjusted EBITDA increased 21, 2% to $54 3 million for an overall margin of 14, 8% an increase of 90 basis points over the prior year.

Strong volume favorable price cost favorable price cost and mix were drivers of improved profitability.

Please turn to slide 11.

Our integrated solutions and services segment's first quarter revenues were up approximately 14% to $245 million organic revenues grew approximately 13% strong volume and price realization contributed to revenue growth capital sales were up driven by chemical processing.

Microelectronics service revenues were up across all divisions, and driven by light and general industry food and beverage and life Sciences end markets.

Digitally enabled revenues grew 12% for the quarter versus the prior year.

The source water continues to have a robust pipeline across multiple end markets.

Adjusted EBITDA increased.

23, 8% to $54 million due to higher volume favorable price cost mix and productivity improvements adjusted EBIT margin for the quarter was 21, 8% up 170 basis points from the prior year.

Profitability and margins on digitally enabled revenues and outsourced water remains strong and highly accretive to overall ISS margins.

Please turn to slide 12, we.

We continue to see strong year over year growth in ISS backlog first quarter backlog was up $100 million or 15% over the prior year with growth coming from both capital and outsourced water orders our pipeline continues to be robust with opportunities across multiple end markets. We expect to see our book to bill ratio remain above.

One throughout fiscal 2022.

Please turn to slide 13.

Applied product technologies first quarter revenues were $121 million up nearly 13% organic revenues increased $13 6 million or 12, 7% driven by strong volume growth and price revenues grew across all regions and across most product lines, including electro chlorination.

Advanced filtration and separation Aquatics and disinfection.

Adjusted EBITDA for the quarter increased 15, 3% to approximately $22 million.

Adjusted EBITDA margins increased 40 basis points to 18, 1%.

Please turn to slide 14.

One of Apt's long term organic growth initiatives is to develop new and innovative technology that furthers our portfolio of sustainable products and to pursue market share gains in core end markets. Each quarter. We featured a new ATT product and we're pleased to highlight the mark for Chlor pack system.

This new generation system as a smaller footprint has improved self cleaning capabilities and lower maintenance requirements. The mark for uses electricity to produce chlorine from seawater that circulated through cooling types and offshore renewable energy electrical transformers.

The flooring prevents zebra mussels and other marine growth in cooling pipes, which improves reliability and lowers transformer maintenance costs, which are critical drivers for our customers.

As the number of unmanned offshore platforms continues to increase.

Please turn to slide 15.

Capital spending primarily for outsourced water orders was approximately $16 million for the quarter or approximately four 2% of revenues.

The Mark for Capex spending is expected to be in the range of evoke was historic who will average a 5% to 6% of total sales, we expect mark horse capex to be less than 2% of sales after completion of integration activities.

First quarter net working capital was 10, 4% of LTM sales, an improvement of 280 basis points over the prior year.

Over the long term, we anticipate net working capital to sales could now be in the low teens range given some products projects may have varying amounts of working capital requirements. Please.

Please turn to slide 16.

Operating cash flow improved to $36 million in Q1 versus $23 million in the prior year adjusted free cash flow as a percentage of adjusted net income continues to be well above our 100% conversion goal at over 200% for the quarter.

Our net leverage ratio finished at two four times adjusted EBITDA.

As Ron mentioned earlier, our leverage as of the end of Q1 on a pro forma basis with the expected annualized impact of more core results is approximately two eight times well within our targeted range, maintaining a strong balance sheet with net leverage within our targeted range over the long run run remains a key priority.

Our weighted average cost of debt for the fourth quarter is approximately two 8% an improvement of approximately 60 basis points over the prior year.

We were very pleased to have received an upgrade in January to our Moody's credit rating to <unk> with a stable outlook following the <unk> acquisition.

Please turn to slide 17.

Two key long term financial targets are 3% to 5% organic revenue growth and 20% adjusted EBITDA margins.

This graph shows our performance since 2018 for both metrics. We are pleased with our performance, especially considering the constraints placed on the business from the pandemic.

On the right hand side, we have highlighted multiple organic revenue opportunities as well as the actions. We expect will help us achieve our adjusted EBITDA margin target. We also expect mark for will be accretive to adjusted EBITDA margins post synergies, helping us to achieve our long term goal of 20%.

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

Beth Please turn to slide 18.

We had an excellent quarter with outstanding results across the key metrics of the business. We were pleased with the strong broad based organic revenue growth across both segments, all regions and most product lines.

Our pricing actions are a priority and are expected to contribute to growth during the year.

Adjusted EBITDA margin expanded 90 basis points, driven by strong volume favorable price cost index.

Outsourced water continues to make excellent progress and is contributing to the ISS segment's highly recurring revenue model.

Our balance sheet remains strong with high liquidity, even after the pro forma addition of the <unk> acquisition.

We're very pleased with the <unk> acquisition, and the growth opportunities and margin enhancement that it brings to the organization.

Our M&A pipeline remains active and we continue to pursue other tuck in opportunities.

We are raising our full year outlook to adjust for the <unk> acquisition and for performance to date.

We expect full year revenues and adjusted EBITDA to be in the range of one six to $1, seven 1 billion and $280 million to $300 million respectively.

Additionally, we expect the first half of FY 'twenty to EBITDA as a percentage of full year EBITDA to be in the low 40% range, which is consistent with prior years as shown on slide 21 in the appendix.

I will now open the call for your 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 pound keay. We once again that is star one if you would like to ask a question and we will take our first question from Bryan Blair with Oppenheimer. Your line is now open.

Thank you good morning, very solid start to the year.

Thank you.

I was hoping you could offer a little more color on the key sources of <unk> synergies and maybe how we should think about the timing of drop through as you progress toward the 25% margin target.

Yes, Thanks, Brian I think as I highlighted in the.

In the remarks earlier 25 out of their 27 branches were located in the same area that the local branches or so being able to optimize our footprint in those locations are going to be key. The other thing I would say is we got a very talented team that's coming over across the service Tech network, giving us additional.

Capacity opportunities for growth and just penetrating that market is going to continue to drive.

Success in this acquisition.

As far as the timing goes it really goes with my remarks, I mean, we as Scott.

Back to hit this in 18 to 24 months, we're working.

Hard on the integration of the business, we've got a dedicated team from evoke with it is there as well as their dedicated team and and we anticipate this will probably ramp up in that timeframe.

Highlighted.

Okay understood and just the scale of the deal in any way restrict your team from moving slowly with the more typical tuck in kind of M&A that you do and I'm not referring to financial catastrophe net leverage pro forma to point out here, you're well within target range and I'm just thinking about potential complexity is.

And the integration that was moving parts, maybe requiring exclusive focus for a period of time.

It gives us a real opportunity I think the scale of the deal it's very similar to any.

A single branch tuck in acquisition will do I mean, so what we did is we dedicated a stronger team of evoke wood.

Team members full time into driving the integration we wanted to integrate quickly.

We want to make sure that we're driving the opportunities there and again doing it 25 times versus doing at once obviously adds a degree of complexity, but that's why we bought that we've captured 18 to 24 months is the timeframe to get there.

Understood and one more if I may a ADT margin was was above expectations that was kind of a watch item coming into the quarter given.

The more global exposure you have there how did Q1 supply chain constraints compare to your Q4 experience and is there any meaningful shifts in the early part of Q2 to date.

No Brian about the same.

Say overall, it's the same type of challenges we saw in the prior quarter, we're seeing now.

Maybe we have a little more experience managing them the one area that's of.

Obviously, the largest challenges electronics components, we have been doing a pretty good job of managing that.

The rest of them are really energy related but it's more of a price situation BMO PRASM pass through versus availability.

The area that we got to keep our eye on very closely is electronic.

Components.

That makes sense I appreciate the color. Thanks again, thanks, Bob.

And we will take our next question from Deane Dray with RBC capital markets. Your line is now open.

Thank you and good morning, everyone.

Good morning, Dan.

Hey, I appreciate all the color on the Mar Cor deal and like seeing that life Sciences is now your largest served end market and.

And so maybe we can start about with <unk>.

Sizing the addressable market here.

For these.

Yes between hospitals pharma et cetera, so for a hospital today what percent of their water treatment is in sourced that theyre doing themselves.

And that kind of gives us a sense of what that opportunity is for evo quite to come in and offer the outsourcing.

Yes, Deane I would say a pretty high percentage is in sourced inside of hospitals today I mean, we provide the products and a lot of cases as we identified on that slide that we showed the the diagram. So we would sell them equipment sell them products and then we've been driving though as we highlighted the vantage SPD.

<unk> into a more smartwater into more applications, where it is truly an outsourced water, where they're worried about quantity and quality instead of the equipment themselves but to date.

The majority of hospitals manage their own water system, we do the preventative maintenance, we service it but the opportunity for outsourcing is certainly there.

That's great to hear what's usually the tipping point, where they flipped the switch and say, yes, yes.

We'd rather outsource source sto and how does that compare to let's say the electronics market semiconductor market.

Similar needs for ultra pure water.

A lot of the tipping point is really us driving the technology and the opportunities that we've been able to show the hospital systems with us being able to be onsite digitally 24, seven without actually having to have team members there.

It's been a great benefit the other.

Driver for them is just the need to find talent I mean their difficulty in being able to staff for what they're going after.

As a as a very good trend that helps us.

Continue to promote let us do what we do well, which is provide you quantity and quality of water and you do what you do well, which is provide the health care services that are that people need.

Far as microelectronics, I would say that.

It's.

It's something that we'll be synonymous going forward, but right now it's the hospital systems are much earlier in the <unk>.

Much later in the cycle of doing that conversion.

Good to hear and just second question.

<unk> for Ben look I know, we're not going to extrapolate the 200% free cash flow conversion, but.

Working capital sales right now is top quartile easily.

But your guidance for low teens is that just giving you some wiggle room here.

Here.

Working capital and what would be some examples of projects that would drive capex working capital a bit higher into that low teens number.

It has given us some wiggle room, Dean and one of the things that could turn on as we head into the second half of the year is wastewater project in the municipal space and in that particular area.

Pressure on working capital generally municipal does.

We feel pretty good about being able to manage that in certain likely to keep at it.

World class levels. However.

Those types of projects if they start coming on line with infrastructure Bill could put some temporary pressure on working capital. So we've left a little room.

And the working capital outlook.

I appreciate that thank you.

Yes.

Sure.

And we will take our next question from Nathan Jones with Stifel. Your line is now open.

Good morning, everyone. Good morning Nathan.

I'll just start with one on micro electronics, there's been a number of.

Fabs announced in the U S South.

Hi can.

Can you talk about the opportunity that presents for of both Brian .

Microelectronics projects can be quite large in terms of.

The water infrastructure, it's got to go in there just any color you can give on what you think the opportunity around those projects are and what kind of timing you might be looking at.

Yes, so the microelectronics.

Bubbles and market as you saw on slide five is certainly agree.

It's very green and we're pleased with it.

Microelectronics fabs, even though they announce them it still takes a fair.

Amount of time for them to place the order, but also just get the infrastructure up and running so that we actually can put the water system out so.

As far as the timing on the projects go Nathan we've got a great pipeline coming in right now.

We highlighted that market is agreeing on quarter over quarter.

<unk> order expected demand coming in the second quarter, but those projects can run out.

<unk> to 36 months.

Okay and I wanted to.

Look a little bit back in history.

But three years ago now that you rolled out the outsourced water initiative across the U S.

And the target to meet that you targeted 50% conversion of beer.

Customer base, the applicable customer base onto went out so its water business model within three years.

Where are you with the conversion of that customer base targeted 50%, where did you actually get to be nicer.

Well if you look at what we've identified is outsourced waters of roughly a third of ISS business and so that is pretty much in line with what our targets work. When you talk about a political both customers that we can actually.

Install outsourced water systems the opportunity. So I think we'll continue to grow much to one of the earlier questions. We got as we expand more broadly into vertical markets and that's one of the things that we highlight in the smart core acquisition is the opportunity to be able to.

Take a new solution to outsourced water and by having a full.

Complement of products to service the hospital system and other life Sciences applications. It gives us a real opportunity.

You talked about that 20% of installation state market share gains for outsourced water.

Would that have been asked about that for a while is that still the case.

<unk> and leverage that model to gain market share.

It is.

I mean, I would say it continues in the same.

The number that we've seen historically and a lot of that Nathan is coming again from getting customers to outsource what they in source. So whether it's actually an outsourced water model towards their buying quantity or quality or they are allowing us to provide them with the products and the treatment systems that they haven't.

We have historically put together and manage themselves will preventative maintenance, so being able to continue to convince our customers to outsource what they enforce it gives us an opportunity as the market grows we're gaining share.

Excellent thanks, very much for taking my questions.

And we will take our next question from Andrew Plus Kelly you with Baird Burke. Your line is now open.

Good morning, guys. I was hoping you can give me a little bit more color on the guidance you put out there.

Mainly.

It seems like the guidance.

Or is that how much how much was the raise.

More like if you could parse out core guidance versus.

The.

Acquisition, and then secondly does the guidance does not imply that your margins might be.

Year over year declines in the back half of the year.

Yes, so we factored in the beat plus an extra $2 million on the core so about $5 million was the base business of that improvement the rest was Marc lore.

On the EBIT line.

And then do you believe that the the traditional seasonality when you look at page 21 should be essentially the same.

And so we also are keeping our quarterly outlooks consistent what we've seen with our most recent historical years.

Yes.

Okay and then.

Looking at the ISS backlog composition.

So yes.

Service services versus capital backlog has been relatively the same now for some time.

Yes, I'm, just looking for like what what exactly.

I guess going forward, what you're expecting or what exactly.

What prompts.

So accelerated conversion of that services piece into revenues I guess, what I guess, what's kind of holding it up.

At this point.

Well, it's going to convert we had if you can see the on page 12. We also have the amount of time in which that backlog converts by category to help you with that but it should stay relatively stable our backlogs been converting as we've expected.

And this quarter, we obviously versus the prior quarter due to the pandemic, there's been a little better backlog conversion, obviously, but we.

We have a strong robust pipeline I want to be very clear about that.

We've pretty much broad based across ISS and within that services growth as I mentioned in the script. It was very broad based as well so.

Right now the key for US is managing supply chain, making sure that availability of talent and making sure that we continue to stay focused on managing the supply chain challenges. So yeah.

Demand is good and it's very solid and the backlog remains robust.

Okay. Thanks very much.

Yeah.

And we will take our next question from Mike Halloran with Baird. Your line is now open.

Hey, everyone. Good morning.

<unk> kind of taken on that and taking on somebody had asked earlier a little bit do you think youre at that tipping point than what the model conversion where.

You talked about backlog kind of converting in line with your thinking or are we at the point, where we're starting to see a little bit more normalization between.

There has been a multiyear run of really strong orders and you're starting to see that normalize a little bit towards what that revenue growth number would look like or is kind of the sequential improvement. We're seeing here more tied to a broader range of things than just that.

I think I think we are.

We will see normalization as the pandemic subsides things turn back to normal, but again, we're still got the supply chain remains the key constraint.

Mike.

The pipeline remains robust the end markets are good.

Constraining factor is really.

The supply chain and our ability to convert.

I also want to throw up labor in there as well that's another key issue we have to manage through we've been doing a good job but.

That's also a key part of the equation as well, but Mike with.

Continued outsource opportunities that are multiyear in the pipeline. We expect the backlog will continue to grow right, it's going to be steady and stable.

This business model.

Yes.

And then on the <unk> transaction I think you mentioned in prepared remarks is.

Essentially as soon as the product portfolio gap you feel like you've got a whole hospital solution at this point.

Maybe what was the not having that prevented you from.

Attacking earlier.

And now that you have it what's the opportunity set from abroad and perspective.

Yes.

It's a great question not having it stopped to hospital systems from being able to have a one stop shop, so us going in and providing the full opportunity to take the entire complex and as we've seen hospital systems actually consolidate across the country those opportunities with corporate contracts.

Becoming much much stronger.

Again hospitals are facing the same challenges other companies dealing with water issues are emerging contaminants challenges on what they have as well as a labor shortage. So that provides us a real opportunity to go in and be able to be you know.

The full solution provider for them.

And the market size itself I think in the dialysis market as a whole.

We size it around $300 million.

But it could you know it will continue to grow over time, and and has had pretty good growth trends in the past.

Is that differentiated that one stop shop within that market differentiator I know, that's differentiated and a lot of the end markets you serve more curious on that one specifically it does fully differentiate us in that market, having that ability to take the entire water challenge that a hospital campus would face.

Okay.

Thank you really appreciate it.

Okay.

We will take our next question from Andy Kaplowitz with Citigroup. Your line is now open.

Good morning, guys.

And Bryan and Ben I know you mentioned that you're still seeing some delays in municipal wastewater, but it is still a positive to see that market in aquatics and the bubbles there turned from yellow last cleared a blow this quarter do you think municipal wastewater actually begins to pick up by the end of your fiscal year here and then have you seen any significant improvement in aquatics.

It gets yet or are they still being held down by various virus related uncertainty.

That's a great question, we absolutely do feel like we will see the municipal wastewater turned to green.

As we progress through the through the fiscal year.

And that was one thing I commented in the remarks, the infrastructure Bill is going to be fantastic for fueling demand fueling the opportunities for growth, but it does create a bit of a pause.

While municipalities wait to see what kind of funds flow theyre going to get and so we've got.

Terrific indications as we're looking out looking at our pipeline and seeing what the opportunities are certainly there to lock in the prelim stages, but this chart specifically is highlighting what books in the quarter and we think that will come in the latter half of the year Aquatics is is getting better again as we.

Said I mean there.

Think a lot of the delays.

We've seen on new parks opening still exist, but a lot of the opportunities to make sure that things are up and operational and running to the standard is actually whats, helping the market return.

Thanks for that and then Ron you've been highlighting new products basically every quarter now from a PT when you update us on your quarterly earnings presentation. So how should we translate the proliferation of new products into potential growth.

Your new product vitality index, you know continue to go higher here. So we should think about all these new products contributing more to that sort of 3% to 5% longer term guide organic guide that you asked.

Absolutely.

And that's one of the things that we're focused on we continue to.

Drive innovation and drive patents, we just opened our new sustainability and innovation hub here.

You know very close to the headquarters in Pittsburgh, where we're investing.

And bringing out new solutions and new opportunities just like you know again, highlighting the more affordable or.

We're thrilled about that and really as we see the markets evolve we see.

Continued challenges in treating water with emerging contaminants.

We have to change our product range and we're going to continue to drive the vitality index and and I would say a P. T has done a terrific job of launching those.

I appreciate it.

Thank you.

And we will take our next question from John Walsh with Credit Suisse. Your line is now open.

Hi, good morning, everyone.

Good morning, Good morning, John .

Wanted to go back to the the Mar Cor.

Transaction, obviously, it looks like you were able to get it at a very attractive value.

Evaluation, especially for what's going to bring to the organization.

Just can you give us a little bit more history about.

How that came to be and maybe a little bit about what youre seeing.

For valuations in your pipeline.

Yeah, we have been working on being able to close the <unk> acquisition for quite a number of years as they've been owned by different.

A different entity, so we've had communications with them.

Back four or five years.

And the opportunity came to fruition once stairs had closed on the acquisition of Cantel, which gave us.

An opportunity to move that forward and progress it more quickly. So you know again in my remarks I made the comment about we typically are in bilateral negotiations one to one we don't participate in a lot of auctions. Our process has really worked and this is more evidence of our process working.

As we look at our pipeline again Thats a lot of tuck in acquisitions that we've identified the opportunities on and we continue to see those at.

Seven to nine times pre.

Pre synergy of somewhere around four to six post synergy.

Great. Thank you for that and then I guess.

Last couple of quarters, you've talked a lot about <unk>.

Emerging contaminant, Steve you've talked about.

<unk> it looks like the EPA is starting to do some more regulations around air quality and air pollution, just curious if youre seeing anything broader on the waterfront tricky.

Trickling out there that might be additional kind of regulatory drivers.

Either state or federal level.

The opportunities are really what we've been highlighting in the past a lot of it's b Foss Thats micro plastics, it's different kind of pharmaceuticals in water as well as you know the power industry is the power industry converts to more renewables and coal fired power plants are shut down we continue to treat around.

Challenge contaminants, such as selenium with technologies that that are very unique in the marketplace and give us a competitive advantage.

Great. Thanks for taking my questions. Thank you.

And we will take our next question from Brian Lee with Goldman Sachs. Your line is now open.

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

Maybe just going back to my core.

Maybe they see the seasonality issue, but I think when you.

The deal you talked about $180 million of annualized revenue.

If you just kind of beat expectations.

By a decent amount here in the quarter.

And if I, if I kind of take the three quarters of revenue contribution Annualizing that and then you're raising that.

Your your guidance at the midpoint is up about 120 I think it.

It would imply a lot of course, adding like $135 is there some.

Ah seasonality.

Seasonality in the core business or is there something else, we're missing as to why the revenue from this quarter, which was nice and one of my core contribution isn't adding up to maybe if they get a guidance range just if I look at the numbers here.

It's the first quarter right that we owned them, we've got to assess the business, we get understand a lot about the seasonality et cetera, and anytime you do an acquisition, there's always a little bit of disruption until people settle in so we did stride to make sure that we took a measured approach until we really get to know the business and understand.

And at which we're in the process of doing more to come on that later.

As you know in our next earnings call, but.

For now we.

Did we cut with an axe on this on how we.

Rolled out the totals are fine, we're very confident in that but getting down to a monthly expectations. It takes a little more work considering the integration plan that we have in place.

Alright fair enough makes it makes that makes all the sense in the.

The second question on the infrastructure.

The structure and you mentioned some times munis are pausing as a child.

I'm trying to figure out the new state of the state as it as it relates to the <unk> side of things can you give us an update as to what youre seeing in terms of.

Backlog trend as well as any feedback post the infrastructure bill passing here on the people side, specifically for you guys.

I think.

A little bit of what we're seeing is across three fast is the same thing that we're seeing across.

Municipal wastewater theres a bit of a pause to wait and see what the dollars are going to look like and see where the regulations are going to be set but the pipeline is very strong I think in the latter half of the year, we will see a pickup in orders around P fast.

Specific treatment.

We highlighted the one and a two phase approach that we won in the city of Anaheim.

<unk> remarks, but I think we will see more of that continue but I imagine it's going to happen more towards the back half of the year.

Alright, Thanks, a lot guys I'll pass it on.

Yes.

And we will take our next question from Paul <unk>.

They'll come off with Raymond James Your line is now open.

Thanks for taking my question.

Follow up on what you guys were just asked regarding.

In the infrastructure package.

Given that <unk> as a single contaminant.

Is there is difficult to kind of disaggregate from the overall issue of water quality, what does it mean in practical terms.

Sure Bill.

Billions of dollars to be allocated to cleanup of just one contaminant within a spectrum of dozens of others.

Yes, I mean, <unk> I think it's just it's going to give us.

Give the market as a whole you know very good secular tailwind that the government's going to address and fix so billions of dollars going there or is your as you are cleaning up the P fast you're going to be cleaning up.

Other contaminants inside of the water trained and inside of the chain and so I think the.

The opportunity there.

<unk> is very strong for the years to come in.

The one thing that does have to happen is we have to define the treatment specification and we have to.

Define what it means to have clean water on the back side when youre identifying something like three five.

Okay. That's helpful.

With the Arris acquisition your leverage is obviously higher.

Then it has been maybe in the last 12 months or so although still well below.

Historical highs.

Can you just remind us where you want to kind of cap debt to EBITDA or any other metrics that we should focus on.

Yes, so we still remain committed to our 253 times range.

Over the long run.

And I think when we look at our outlook, we could stay within that range. It's not that we would not exceed that for a very very good deal that made one heck of a lot of sense, but we would delever quickly into that range. So we feel.

Very committed to staying keeping our our EBITDA range after three times.

Alright, Thank you very much guys.

Thank you take care of it though.

And we will take our next question from Joseph.

<unk> <unk> with Cowen Your line is now open.

Good morning. This is Michael nice to see you in for Joe.

Good morning, Mark.

I wanted to touch on the organic growth results for the <unk> segment.

Any demand has been cold flow did anyway can you provide any color for this development.

Actually no it's probably been the other way around.

We could have grown more within ATP had it not been for some of the supply chain challenges. So there was nothing in this quarter that I can.

That was obvious in terms of a pull in it was more of a push out.

Yeah.

Thanks, and one more if I may I apologize. If this was covered prior but is there a breakdown of organic growth by segment for the full year.

No we did not break it down in organic growth outlook for the full year, but.

For the most part you can take out mark or the remaining portion of our outlook was really organic.

Great. Thank you for that.

Thank you that concludes our question and answer period I would now like to turn the call over to Ron Keating for his closing remarks.

Thank you again for joining us today, we greatly appreciate your interest in evoke and thank you for your time and attention and questions. We are absolutely thrilled to welcome the <unk> team.

Into the evoke organization and we.

Thank our team members everyday for executing on our mission and our purpose of transforming water enriching lives. So we'll talk to you again next quarter. Thank you.

Thank you that concludes today's Evo cold water technologies first quarter 2021 earnings Conference call. You May now disconnect your lines and thank you for your interest in <unk>.

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