Q2 2022 Evoqua Water Technologies Corp Earnings Call
Please standby your program is about.
[music].
Hello, and welcome to the evoke Goldwater technologies second quarter 2022 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions. Following the presentation.
After the Speakers' opening remarks, there will be a question and answer period.
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Thank you I would now like to turn the call over to you Dan Frailer Vice President of Investor Relations. Please go ahead.
Thank you Brittany, thanks to everyone for joining us for today's call to review, our second quarter 2022 financial results participating on today's call are Ron Keating, President and Chief Executive Officer, and Ben Staffs, Executive Vice President and Chief Financial Officer.
After our prepared remarks, we'll open the call to questions.
This conference call includes forward looking statements, including third quarter and full fiscal year 2022 expectations statements relating to demand outlook in our end markets growth opportunities are.
Order pipeline, our acquisition strategy and pipeline integration.
Performance of the more core business.
Why chain challenges inflation labor shortages, and general macroeconomic conditions as well as statements related to the ongoing impacts of the COVID-19 pandemic.
Actual results may differ materially from our expectations for additional information on a vote. Please refer to the company's SEC filings, including the risk factors described therein.
On this conference call, we'll also discuss certain non-GAAP financial measures information 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 was investor relations website, unless otherwise specified references on this call.
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.
Replays of this conference call will be archived and available for the next 14 days with that I would now like turn the call over to Ron Bryan. Thank you Dan and thank you for joining us I. Appreciate your interest in evoke and I'm pleased to provide insight into our results and outlook.
Please turn to slide three.
We had another strong quarter of organic growth and margin expansion overall organic growth was up approximately 11% and adjusted EBITDA margin expanded 50 basis points year over year.
We were pleased to see broad diversification of organic growth across most regions and product lines as well as double digit year over year growth across aftermarket capital and service.
Market demand is strong and our book to Bill ratio remains above what we see demand strength across multiple end markets, including including Microelectronics life Sciences, and food and beverage.
ISS backlog continues to grow up 13% year over year and up 6% sequentially.
Digitally enabled revenues grew by almost 13% and we continued to see solid capital and outsourced water demand.
Supply chain visibility material and labor availability and inflationary pressures are challenges that we are managing well today navigating this dynamic time will make your vote for a stronger and more resilient organization.
I'll speak more about this on a later slide.
We have completed our first quarter with more core and we're pleased with the initial progress. The integration is on track and the teams are working very well together, we did see a jump in net working capital this quarter in support of our strong organic order and revenue growth.
Glue remark or our net working capital sales ratio would've been 12, 6%.
<unk> brought significant working capital assets to a broker and provide some nice opportunities for future cash generation.
Our balance sheet and liquidity remained strong and we're focused on cash flow generation.
What are you starting to slide four.
The vocals of 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 and our results demonstrate the strength of our business model and folk.
<unk> 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.
Please turn to slide five.
The macro environment remains challenging on several levels, but we're taking actions to seamlessly serve our customers while driving profitable growth.
This slide highlights four notable macroeconomic challenges supply chain visibility material availability labor availability and the war and you're correct. We're also providing insight into market demand and order backlog as well as price cost performance.
Supply chain and material availability challenges are.
Have no simple fixes and we expect them to remain for some time.
Our team has been nimble in responding to daily issues and focused on mitigating actions as well as over communicating customer delivery schedules against expectations.
Additionally, we are closely monitoring COVID-19, lockdowns in China, and the impact they may have on our supply chain and the China market.
Our China business grew in the single digits this quarter, which is a decline from the double digit growth we've experienced over the last several quarters.
Labor availability and talent retention challenges are confronting almost every organization. We are actively engaged in recruiting retaining and developing our team. We have implemented several initiatives such as trade school partnerships University partnerships internal development programs and skills training and we're seeing positive results.
We've been pleased to see our digitally enabled sales grew double digits over the past several quarters, providing productivity and margin benefits digital connectivity and virtually being on site with customers provides tremendous benefits that pay back quickly in tight labor markets.
While we hope for a quick you out to the Ukraine conflict the implications on the broader markets may be long lasting.
There's been minimal direct impact to evoke with sales and operations. However, we are impacted by the resulting supply chain disruptions and the rise in energy cost in steel prices.
Overall market demand remains strong and our order book is growing we're seeing multiple markets with attractive growth opportunities and we believe we're well positioned to grow.
Our pricing actions have been effective as price cost has been positive year to date.
<unk> fleet in steel costs have been challenging, but our team has done a terrific job managing this very dynamic market.
We continue to take actions and have an expectation of delivering a positive price cost ratio for the full year.
Please turn to slide six.
Two key long term financial targets are 3% to 5% organic revenue growth and a 20% adjusted EBITDA margin. This graph shows our performance since 2018 for both metrics, we're pleased with our performance, especially when considering the constraints placed on the business as discussed in the previous slide.
Organic LTM revenues have grown by 9%, while EBITDA margin has increased 20 basis points since the end of 2021.
On the right hand side of the slide we highlighted multiple organic growth opportunities as well as levers to help us achieve our adjusted EBITDA margin target.
We're focused on profitably growing our organic business, while continuing to pursue strategic tuck in M&A targets, we expect to announce additional acquisitions in the second half of this fiscal year.
Please turn to slide seven.
This chart represents our third quarter expected order demand by end market compared to the prior year third quarter order rate.
We anticipate strong order demand in the third quarter across most end markets, including Microelectronics life Sciences, food and beverage and life General industries munis.
Municipal wastewater in a quarter, so our improving from the prior quarter outlook with seasonal demand driving growth across both end markets.
Expected third quarter orders in the power end markets are showing a slight decline due to very strong order growth for frontier in last year's third quarter.
The refining markets orders are flat to last year based on strong comps and a deferral of turnaround services due to refining refinery capacity demand.
The underlying demand from the power and refining sectors are both solid.
Overall, we expect to see strong order demand across most of our end markets in the second half of 2022, we also anticipate supply chain challenges limiting our order conversion visibility and potentially creating order conversion delays. Please turn to slide eight.
There is a global energy transition underway as the market moves to cleaner and renewable energy sources focused on C. O. Two reductions there are multiple sources of energy generation and water treatment is involved in all of them to varying extents, particularly of Biofuels.
The vocal support to many developing applications, where investments are being made in renewable fuels renewable natural gas and blue and green hydrogen.
<unk> legacy processing wastewater experience in traditional downstream refining and the food vertical markets are a natural fit for alternative feedstock processing and renewable fuels.
Our portfolio of wastewater technologies allow our customers to treat the most difficult organic wastewater streams, while also helping them to achieve their carbon intensity goals and produce a source of renewable energy.
Our core process water portfolio also plays a vital role in providing utility makeup water for new Greenfield refinery investments.
Additionally, our Magneto specialty additives and our armed pure brands within the <unk> segment, our leading technologies within hydrogen investments today and will also play a notable role and the buildout of the future hydrogen economy.
Please turn to slide nine.
We're very pleased to have released our 2022 sustainability report on Earth Day April 20 soccer.
This year's sustainability report highlights the accomplishments of our team in the past fiscal year and details. Our path ahead. The report matured from last year to utilize G. R. I core standards and S. ASB, both known and sustainability reporting.
Creating this report was a thoughtful reflection on what we have done to date and where we want to go in the future. We look forward to further enhancing our customer hand print impact and to reducing the impact of our footprint.
The slide also highlights a P fast handprint win within our ISS segment, the Orange County water District selected <unk> to provide ongoing service to remove P. Fast from their drinking water systems on a two year service contract with.
We'll treat the drinking water for a majority of the districts $2 5 million residents.
Samsung Austin semiconductor was recognized as this year at Vocus Sustainability award winner for their commitment to water conservation and reuse it there Austin, Texas plant.
Our sustainability team honored Samsung and passive OCA sustainability award winners with the celebration at the Nyse's opening Bell ceremony on Earth day.
I'd now like to turn the call over to that.
Thank you Ron.
Please turn to slide 10.
For the second quarter reported revenues were up approximately 23% to 427 million organic revenues grew approximately 11% driven by broad based volume growth and price realization. We saw revenues increase in aftermarket capital and services as well as growth across most regions and product lines versus the prior year.
Second quarter, adjusted EBIT increased 26% to $73 million for an overall margin of 17, 2% an increase of 50 basis points strong volumes and favorable price cost and mix contributed to improved profitability.
Please turn to slide 11.
Our integrated solutions and services segment second quarter revenues were up approximately 31% to $295 million.
Organic revenues grew more than 11% driven by volume and price realization.
Services aftermarket in capital revenue all grew double digit rates versus the prior year capital sales were driven by Microelectronics life Sciences, and food and beverage end markets.
M&A continues to be an important part of our growth strategy. We are pleased to report good initial progress on the mark or integration.
The integration and synergies are on track after one quarter.
Our capital project and outsourced water pipeline is strong and growing digital enabled revenues grew approximately 13% for the quarter versus the prior year adjust.
Adjusted EBIT increased 29% to.
To $64 million due to higher volume favorable price cost and the acquisition of Markhor adjusted EBIT margins for the quarter was 21, 6% down 40 basis points from the prior year impacted primarily by inflationary cost increases and the acquisition of Marc lore.
Please turn to slide 12.
We continue to see strong year over year growth in ISS backlog second quarter backlog was up $92 million or 13% over the prior quarter with.
With growth coming from both capital and services <unk> added approximately $31 million of backlog as of March 31, with approximately $20 million being capital 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 2010.
<unk> two <unk>.
As Ron mentioned, we are closely monitoring our pipeline order book supplier lead times and inventory levels and supply chain visibility constraints create the potential for shipment delays in the second half of the year.
Please turn to slide 13.
Applied product technologies second quarter revenues were $132 million up nearly 8% organic revenues increased $11 million or 9% driven by strong volume growth revenues grew in North America, and APAC, while EMEA declined slightly.
Adjusted EBIT for the second quarter increased 8% to approximately 27 million benefiting from volume and favorable mix adjusted EBIT margin was flat year over year at 27% due to operational variances and higher inflationary costs.
Please turn to slide 14.
One of the Apt's long term organic growth initiatives has developed new and innovative technology that expands our product portfolio and to pursue market share gains in core end markets. We are pleased to highlight the VT range UV low pressure total organic carbon reduction system or Trc.
Based off our VX line of UBS. This next generation system has a smaller footprint and combined efficiency and power to reduce the number of UV lamps required in the equipment and the processes to reduce POC.
One application of UV <unk> reduction is for ultra pure water used as part of the manufacturing processes in the micro chip industry.
The lower the POC the less defects in the production processes, producing improved manufacturing efficiency, we're seeing strong opportunities across the market, especially in microelectronics wastewater treatment and reuse.
Our global offering is also included in our North America, ISS build systems as well as in systems abroad.
And has it recurring aftermarket sales.
Please turn to slide 15.
Capital spending primarily for outsourced water was approximately $21 million for the quarter or approximately four 9% of revenues second quarter net working capital was 15, 3% of LTM sales as Ron mentioned, our net working capital to sales was approximately 12, 6% excluding the impact of Mark.
As a result of our strong organic revenue, we have seen increases in accounts receivable contract assets and inventory.
We have been we have indicated in the past over the long term, we anticipate net working capital to sales could be in the low teens range. Given some projects may have varying amounts of working capital requirements. Also we expect to see improvements over time to Mark Force net working capital as we integrate the business and leverage your focus.
Capabilities.
Please turn to slide 16.
Year to date operating cash flow was $29 million in Q2 versus $63 million in the prior year.
Adjusted free cash flow as a percentage of adjusted net income was 47% on a year to date basis operating cash flow was impacted by investments in working capital as I previously mentioned to support conversion of strong backlog growing order rates and higher inventory to help mitigate supply chain uncertainties.
Our net leverage ratio finished at three one times as adjusted EBITDA as Ron mentioned earlier, our leverage as of the end of Q2 on a pro forma basis.
With the expected annualized impact of Mark where 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 remains a key priority.
Our weighted average cost of debt for the second quarter is approximately two 8% an improvement of approximately 35 basis points over the prior year.
I would now like to turn the call back over to Ron Ron.
Thanks Pat.
Please turn to slide 17, we.
We had a strong quarter with outstanding results across most key metrics of the business market demand remained strong and we are pleased with the broad based organic revenue growth across both segments, most regions and product lines.
Our pipeline remains robust and our backlog continues to grow we are closely monitoring macroeconomic and supply chain challenges and the potential impacts to order and backlog conversion.
We're managing through a dynamic market with rising cost in material and labor availability constraints. We were pleased to have positive price cost again in the second quarter and were working to achieve a positive price cost ratio for the full year.
We continue to grow through our outsourced water business and to benefit from his contribution to the ISS segment's highly recurring revenue model.
We are pleased to have the <unk> business as a part of our book and we're off to a great start and a successful integration.
In closing, we are raising our full year outlook by increasing the low end of the revenue and adjusted EBITDA ranges by $20 million and $5 million respectively.
We expect full year revenues and adjusted EBITDA to be in the range of $1 six four to $1 7 billion and 285 to 300 million respectively.
For the third quarter, we expect adjusted EBITDA to be consistent with past third quarters as a percentage of the full year outlook, which is approximately 26% as shown on slide 20 in the appendix I will now open the call for questions.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star Antoine if you would like to ask a question. We will take our first question from Deane Dray with RBC capital markets. Your line is now open. Thank you.
Good morning, everyone. Good morning, Dana Good morning, Hey, maybe we can start with sales and earnings visibility for the second half on a lot of like directional positive momentum here.
<unk> cost positive in a tough market a book to bill staying above one, but you did highlight some potential shipment delays and.
I know that if Baxter capital sales.
Less on services, but just kind of take us through visibility and these potential shipment delays.
Or are the weakest links and how you're working through that.
Thanks, Dan I appreciate the question and first of all what I would like to say as I've never felt better about the business I mean, what we've seen in the end markets. The momentum the backlog that continues to grow gives us just great confidence in what the future holds.
We're being balanced in the guide, we're giving around the back half of the year, obviously Dane and as you highlighted it does only effect primarily our capital in some of our product shipments were with the supply chain issues.
But still even with some of the service opportunities we have we.
We need installations to happen for those service expansions to grow in the outsourced water areas and other areas and so you know we've got a lot of confidence in what's coming but we're being we're being balanced with you know China shutdown and the impacts on just supply chain challenges and you know.
<unk> electronic availability chip availability as well so we're we're.
We're being cautious about that.
That's helpful and can we.
Wanted to go back to page six the multiple organic sales growth opportunities in the upper right hand side. They all look real familiar and then he's been growth initiatives for a while it's interesting that you list. The first one water conservation initiatives that.
That's showing up first implies it's got a lot of emphasis right here can you just expand on that.
And I have to think it relates to the sustainability efforts, we're seeing broadly across all companies who need to report what their water use and how that's being lowered and managed but just take us through this.
And talk about the timing how are these initiatives reading into that.
The P&L. Thanks.
That's a great question. It is absolutely being front and center and every company's mind thinking about water conservation recycle reuse doing what's right for the environment.
The whole focus on ESG and sustainability and ultimately Deane I mean, what we see in the water conservation initiatives slides into slide seven.
And it highlights around the end market and the order rate activity, we're having so.
You reflect back on where you see companies investing and being very focused on recycling and reuse it fits very well with microelectronics life Sciences, a lot of what's happening in the more core industrial markets that we operate in so that highlights what the order activity that we.
Dissipate to see in Q3 will lead to and Thats actually on top of.
Very robust order activity in Q3 of 'twenty. One so we're feeling very strong about all of the end markets.
As we look forward and water conservation is one of the things that's helping drive that alright, that's really good to hear and just a quick one for ban on Mar Cor, just take us where do they stand on the working capital to sales and how soon can you get them to evoke was benchmark.
Yes, great Great question Dane Thank you.
Hi.
Not atypical of what I saw when I first came to evoke.
So they are in that 20% range.
And so we would like to once we get them on our systems and integrated into our processes that allows.
And inventory management, and receivables management et cetera, and so we believe that we'd like to get them down closer to what we are traditionally <unk>.
Overtime, and obviously thats a lot of cash we can pull out of working capital.
This effectively reduces what we paid from our core.
But the first step is to finish the integration and get them on our systems make sure that we're taking care of customers. During this very difficult time on the supply chain, but then we will certainly be working net working capital down there is some low hanging fruit that will take advantage of immediately but it's going to take a little bit of time to get through the integration before we see.
The real benefits and get them down to our level.
Yeah that sounds like a great opportunity. Thank you.
We will take our next question from Nathan Jones with Stifel. Your line is open.
Good morning, everyone. Good morning, Nathan Good morning, Nathan.
I'm going to ask another one about the guidance range.
A little bit of math and over the last several years second half revenue has averaged 14% higher than your first half revenue.
The guidance is for the second half revenue to be 7% to 14% higher than the first half and you've got some extra revenue in natura Mark or is this really just caution around.
Capital shipments and potentially delay now.
Yeah.
It is Nathan I mean, basically we want to we want to make sure. We're balanced in what we're giving US a guide going forward a lot of its tied to availability of.
Some of the components that are needed for capital shipments for installs and it's not even our availability to be able to ship it as a customer site being ready for us to be able to ship. So that's where you run into a little more.
Challenges with clarity on what the conversion rate is going to be as it's not because you know when we were managing and our team is doing a remarkable job managing having the components that we need to complete our projects. It's the customers being ready with site approval with things that theyre getting done and actually just the rest of it.
The infrastructure they need for us to be able to install.
And we will take our next question from Mike Halloran.
From Baird. Your line is open.
Hey, good morning, everyone.
So on the on the digital conversion strategy.
A lot of what we've talked about here is just not understanding.
Backlog delays timing in the environment et cetera.
Do you think customers are going to be are more engaged on that strategy today than they would have been a year ago because of the complications youre seeing in the labor challenges out there or do you think this is just still.
Iterative progression that that just continues to be a positive one.
Yeah, Mike honestly customers are much more engaged in this and I would you know even in my opening remarks, I made the comment that you're being digitally connected and onsite virtually in a tight labor market creates a pretty quick payback. So the value prop of what we've rolled out with our strategy over.
The past three to four years with our digital deployment is absolutely coming through.
I think what you will wind up having now is just the challenge of.
Making sure that what we are.
Delivering to customers, they're actually able to take and so you know the value props, there, it's just them being ready.
With their transfer transition or at least with their site that they're preparing for us to be able to put it on site.
Thanks for that and then just on the capital priority side obviously.
Some nice nice moves you've made recently here how are you thinking about what pipeline looks like external.
<unk> ability to be aggressive is the right transactions come in and kind of balancing that with your targeted leverage range and all the initiatives you have internally yes.
While we still have a very robust.
Funnel of tuck in acquisitions and acquisition opportunities.
And so we're executing on that we feel good about the balance sheet, where it is our capital deployment availability and capability to do it.
And we're continuing to execute on that.
I appreciate it thanks for the time.
<unk>.
We will take our next question from Andrew Buscaglia with Baird. Your line is open.
Good morning, guys I was hoping you could talk a little bit more about.
Some of the bigger drivers specifically.
It seems that every quarter about the bass.
What where do we stand with that in terms of data points you are tracking.
There anything on the Horizon you got your eyes on board in terms of.
That's a catalyst to increase spending in that area.
That was one of the things we actually highlighted on the the sustainability slide with the first one that we've received I would say Andrew It continues to track as it has in prior quarters, where you have certain water districts that are moving faster than others still waiting on the final.
Mcl's to be sat and what level, they're going to be treating two but we anticipate that will be coming in the next 12 months and I think that the pipeline is continuing to stay fairly consistent at what we've seen where it's north of $100 million and we typically are a win at about a third of the.
Actions that we're going after.
Okay got it.
And then.
Secondly.
I think on the ISS backlog conversion I know that.
Yeah, you got a lot of questions on that given your level of conservatism in your guidance, but at this point what is the conservatism.
Iterating around.
No.
I guess trying to manage what you expect in terms of supply chain issues being able to deliver product relative to like any other delays around.
Covid or.
Yes, I guess.
I wouldn't I wouldn't that be converting in the back half of <unk>.
Yes.
It really goes to a comment I made earlier on Nathan's question, I think it's around customers being ready for us to actually deliver so we've historically had a little bit of COVID-19 delays because it was site access and getting on site and now that we have solid access capabilities. We can get onsite is.
Customers, having their operation ready for us to actually deliver and it's a lot more of that than it is us actually having the components to develop our own arc to complete arm products.
We're able to manage that much better than.
The larger systems that have customers, putting in that our water system goes into than you want to comment on the backlog.
Yes, Andrew as you can see in our working capital we've prepared ourselves to be able to deliver.
So there is obviously potential.
For upside, but we wanted to take a measured approach.
For the very reasons that Ron talked about is there are certain things that are not in our control.
And and also on the macro front there are certain things on the macro front that aren't in our control such as the potential for China, Lockdowns et cetera.
That we just have to keep our eye on and so we tried to make sure. We're very balanced but also very ready to take potential advantage of an upside.
Got it okay. Thank you guys.
We will take our next question from John Walsh with Credit Suisse. Your line is open.
Hi, good morning, and thanks for taking the questions.
Hey, John .
Yes.
Guess, maybe first just following up on the SaaS line of questioning.
You, obviously highlighted a lot of demand at different water districts.
We've seen some.
Food chains, and packaging manufacturers say theyre going to remove it from you.
Their products are you, having conversations with manufacturers that they want to actually start installing systems as well as the water districts to treat for.
<unk> is a contaminant.
Yes, John we are we have actually had conversations with that with various manufacturers of different types, where they feel like theyre going to have an issue or they have an issue that's coming off site. So they want to do some some pre treatment it's still on that.
Moved much.
Much more quickly on this because frankly, they're testing for P. Fast they see it and you know in their aquifer and in their wells and they want to make sure that they treat it before it gets to the to the drinking water plant.
But I do think you'll see that emerge more with actually industrial operators.
Paying attention to what's happened in their water, but system, because theyre going to wind up planning so all is well.
Great and then maybe just looking at slide five obviously, you highlighted being positive price cost in Q1 and Q2. It looks like the language here is working to achieve positive price cost for the full year.
Do you need more price or just can you on packaged add a little bit just the confidence you have in getting the price cost positive for the full year.
So we have we have confidence that we will deliver a.
You know price cost ratio that is positive for the full year, we watch commodities with regularity and we've got a very disciplined.
Disciplined pricing approach that we've had for the last several years that that's paying off now. So you know again, it's the the operating execution that the team has delivered on that they are able to drive price on some of the challenges. We still have though is making sure that we're getting the price high enough to see the margins fall.
And we've had a little margin impact on that as well.
Yeah, Ron so just.
There is if you really look at our margin. We're very proud that we've been able to continue to expand EBIT margins. During these unprecedented inflationary times, so great job by the team as well as the strategy in terms of mix that has helped that.
Including outsourced water.
If you adjust for that the net impact of price cost year to date for both quarters, that's been about 70 basis points drag on our EBITDA margin.
And so that's a pretty pretty impactful. It just shows the overall impact of the strategy. When you take that out but so we're proud to be able to expand at a price cost, but we're also cognizant as there is a drag associated with price cost on margin. Even if we stay ahead on price versus cost and that led to the comment I made John .
Our EBITDA target of 20% adjusted EBITDA and being a little delayed in the progress there, but still making progress which is great. During these times.
Yeah.
Yeah No. That's that's great really appreciate you taking the questions. Thank you. Thank you.
Yeah.
We will take our next question from Brian Lee with Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
Maybe just stay on that margin topic for a moment.
Speaking of the margin progression.
If I look at the guidance EBIT margins, I think you're implying or up roughly 20 or 30 basis points.
Versus second half EBITDA margins from fiscal 2021.
This quarter I guess this was down a bit APG was flat. So how should we kind of think about where you get that year on year margin expansion in the second half across the two segments because they both sort of.
We get to year on year margin expansion exiting the year.
Well, it's kind of it's going to be tougher in the second half as price and cost continue prices continue to rise with cost continuing to go up as I mentioned earlier, but.
But on the other side, we do have some healthy programs in place, particularly in the area of outsourced water as well as a good mix with microelectronics capital as well that should provide some relief.
It's too tough to call at this point.
We certainly want to continue to provide margin expansion, but it will be more difficult as we work through the second half of the year for the reasons, we just talked about.
The guide that we talked about you can do the cap on that that does reflect a measured approach.
And margins as well and certainly we will hopefully work to be able to to do better on that if the macroeconomic supply chain constraints, including our customers provide that opportunity.
We anticipate.
The bigger benefit from the more core integration, which more core was a bit of a drag in the second quarter that really comes in the first half of next year as we're integrating facilities through the latter half of this year. That's a good point mark or we will improve their margins as we integrate those facilities and that should help as well.
Okay, Great. That's Super helpful. And then I know you guys talked about this a bit earlier in the call but the.
Sort of the conservatism around the commentary around.
Order conversion are you actually seeing any trends there shifts in that.
As of today or what are sort of the areas, where you're kind of seeing some reason to be a bit more prudent than maybe signal a pause. If you will just kind of thinking about.
Your commentary here into the second half and then any way to sort of quantify or are we talking weeks or months or what's sort of the discussions that are being added in terms of.
The potential for.
The delays on some of that.
Brian I'll just echo the comment I made at the very beginning of the call. We've never felt better about the business, we feel great about the backlog where it is.
The backlog will deliver its a great backlog it continues to grow.
And we're in the right mix and the right portfolio of what we want to execute on.
Which we rolled out in the strategy. So we feel we feel very strong about that.
The other comment I made is this is really much more tied to customer availability for us to deliver than ourselves and so that's that's where we have you know.
A little bit less visibility and we're marching.
Marching down a path and thinking we're hitting the timelines that are requested we're getting a lot of.
Our request for delays on our side to hold up because of customers just not ready. So that's one reason we've been very balanced in this.
Back half guidance that we're giving but the confidence that you can have is know that it's very strong. It's a robust back book backlog and it will deliver.
You know, whether its a quarter or two quarters later.
Okay. Thanks, a lot guys I'll pass it on thanks, Brian .
Well take our next question from Pablo <unk> with Raymond James Your line is open.
Thanks for taking the question.
A few weeks ago, you acquired the remaining interest in frontier water that you did not previously own already.
Are there any other.
Historical M&A situations, where you own.
The controlling stake, but not 100%.
No <unk>.
That was the only one that really we have a how to JV with that we needed to clean up and we also the CW low.
JV, we also cleaned that up this quarter I should say and Q Q2 Q3.
So frontier and both tw on the minority interest are now effectively going forward Q3 on.
Our fully owned by <unk>.
Okay understood and then more broadly about M&A, so obviously, mark or your second largest acquisition ever.
Kind of back on tuck ins bolt on size opportunities.
What is that pipeline looking like compared to the.
The two years of Covid.
Yes, I would say that the pipeline is actually expanding that we're seeing it's it's continuing to grow and actually even more than the pipeline to see action ability that's expanding.
Even highlighted I think in one of my comments on our slide that we anticipate.
Announcing additional tuck in acquisitions in the back half of the year.
And we absolutely do expect that to happen.
<unk> I will just add as supply chain initiatives or supply chain issues are.
Our hurting our the smaller players as well so.
Strong supply chain and our ability to to really manage well through this is attractive to a lot of these smaller players in this very difficult environment.
Got it thank you very much guys.
Thanks.
Well take our next question from Joe <unk> with Cowen Your line is open.
Hey, guys. Good morning, Hey, Joe Good morning ammonia.
Yes, so I think the last couple of quarters. It was slides on there about like the infrastructure deal and things like that because there's more front of mind as we've gone through just curious what youre seeing there are you starting to see one kind of unlocked.
From that package so far.
We actually we are actually and that's one of the reasons on on slide seven you have municipal wastewater that turned degree.
This quarter, we've got a really nice pipeline that we're starting to see.
No go across there and a lot of it tied to the infrastructure Act.
But I think on an actual funds flow.
We will see order activity the latter half of this year, we will see order activity in the first half of next year and the you know the more dollar flows will start towards the back half of 'twenty calendar 'twenty three.
Yes that makes sense.
And Ron to your point on cost you.
You are ready to deliver a lot of things, but customers are not.
Not ready to take them, what's the ability to reprice things that are in your backlog, but.
Current cost structure.
That stuff is booked at Enlink.
When you have the sort of when do the service.
That you have in place what are they available to kind of repriced to market.
So we actually do have built into the majority of our contracts that if we don't have back to back commitments from our suppliers that we can move the pricing based on the commodity moves.
And based on what our supply chain.
Cost or so that's there.
We are also looking at and having customers signed delays as change orders, so we're actually able to get.
A little bit of benefit out of the costs that we're incurring by.
Still holding onto the asset and not delivering to customers and making sure. That's offset that's one of the things we built into our price cost analysis as we go forward.
And in most cases the <unk>.
Service contracts are tied to.
A flexible.
Pricing model around.
Different key indicators and different indexes that we build in and then.
Majority of the cases and in our daily service and kind of normal service contracts I think youll remember, we typically are those are annual contracts not multiyear and an annual contracts you can reprice you know obviously on a rolling basis.
But just to be clear most of this stuff things like mechanical not like you having to go back to the customer and like renegotiate price right.
Stuff, that's contractual and prices went up so we charge you more and you accept that and that's kind of.
Not much of a conversation around it that is correct.
Great. Thank you.
Thank you.
And we will take a follow up question from Nathan Jones with Stifel. Your line is open.
Good morning, everyone, I think I need to let them buy digitally enabled supply chain.
You dropped.
Yes.
A question first on Labor you talked about labor shortages are they more in manufacturing and the service from the <unk> Sky call Brett what are you seeing.
The biggest issues around labor availability.
And inflation on later, our biggest challenges Nathan are primarily on the service scribes and into manufacturing plants, and I would I would rank them in that order.
The service team.
It is difficult to find drivers difficult client service techs, but our team has done a done a really nice job managing against that but it certainly is.
Strain that we feel just like everybody else.
And I had one I guess this is probably more of an R&D question I went to a conference in April that had a lot of discussion about recycling and reuse of water and one of the big pushback from people who would be your cost of note is on Greenfield sites.
Yeah.
Space is an issue is there.
Initiatives underway for you to look to reduce that footprint.
Shrink the amount and size that it did it takes to put it in that in order to increase that penetration.
We work on that with regularity, that's something that our technology and innovation team is constantly looking at one of the benefits.
Now that we have that a lot of other a lot of other water treatment companies don't have is we have a full suite of technologies. So all the way from bringing in the wastewater the recycle reuse being able to process. It back to go in and be fed in as as process water on the front end.
That footprint availability is pretty unique to what we're able to create and we're also looking at technologies.
At all times one of the you know one of the most compact.
So lending them treatment technologies as frontier system. That's one reason that we acquired the frontier.
But we think there's additional opportunities we continue to look at that.
Great. Thanks for taking my follow ups.
Thanks Nathan.
Thank you that concludes our question and answer period I would now like to turn the call back over to Ron Keating for his closing remarks.
So I'd like to say thank you again for your interest in <unk> and thank the team that we have here for executing every day, obviously, what we do is impactful and important and.
We are focused on continuing to execute on the strategy and deliver.
The kind of results that we would expect over the long term. So thank you for your interest in everyone be safe, we'll talk to you next quarter.
Thank you that concludes today's Evo KWA water technologies second quarter 2022 earnings Conference call. You May now disconnect your lines and thank you for your interest any farquhar.
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