Q3 2022 Evoqua Water Technologies Corp Earnings Call
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Hello, and welcome to the Evo Cold water Technologies' third 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.
After the Speakers' remarks, there will be a question and answer period, if he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
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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 with these terms. Please disconnect at this time I would now like to turn the call over to Dan <unk>, Vice President of Investor Relations. Please go ahead.
Thanks, everyone for joining us for today's call to review, our third quarter 2022 financial results participating on today's call are Ron Keating, President and Chief Executive Officer, and Ben Staff Executive Vice President and Chief Financial Officer.
After our prepared remarks, well open the call to questions.
This conference call includes forward looking statements, including our fourth quarter and full fiscal year 2022 expectations long term financial targets statements relating to our demand outlook and end markets growth opportunities our order pipeline.
Cash conversion cash generation, our acquisition strategy and pipeline integration and future performance of our recent acquisitions.
<unk> challenges inflation labor shortages and general macro economic conditions.
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.
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 and the vocals Investor Relations website.
Unless otherwise specified references on this call to full year measures or to a year referred 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 but now like turn the call over to Ron Ron.
Thank you Dan and thank you for joining us I appreciate your interest into vocal and I'm pleased to provide insights into our results and outlook. We had a strong third quarter and I'm pleased with the overall results market demand remains robust despite inflationary pressures on supply chain challenges, we're tightly managing our lead times and any potential disruptions that may impact.
Our order conversion talk we continue to experience a robust pipeline and this quarter's order book was again very strong please turn to slide three.
Overall organic revenue growth in the third quarter was approximately 9% year over year, we're particularly pleased to see broad based diverse diversification of organic growth across all regions, most product lines as well as growth across aftermarket capital and service.
As mentioned demand remains solid and order growth was robust with our book to bill ratio continuing to be greater than one quarter out.
Organic revenue growth on a trailing 12 month basis is above 10% and we've made three acquisitions since January one.
The team has done a great job of pushing price and we remain price cost positive for the quarter and year to date.
Adjusted EBITDA margin was down 40 basis points for the quarter, but expanded 30 basis points year to date, we were pleased to see a P. P X Q3 year over year adjusted EBITDA margin expand by one 3%.
<unk> margin declined by 1.9% based on various items that Ben will discuss in later slides.
We completed our second quarter with Marc lore, and continue to be pleased with the progress there.
Integration is on track and we're working to complete our SAP system conversion by the end of Q2 in 2023.
Our balance sheet and liquidity strengthened and we continue to focus on cash flow generation, our operating cash flow and adjusted free cash flow on an LTM basis improved sequentially versus Q2, our liquidity increased to 267 million and our net leverage ratio improved to two nine times.
Cash flow continues to be a priority to fund investments in organic growth tuck in acquisitions and to further improve the balance sheet through debt reduction.
Please turn to slide four.
Water is an essential element for daily life, whether for human consumption industrial production or commercial purposes manufacturers are required more stringent levels of ultra pure water wastewater reuse has become vital and protecting diminishing water supplies and reducing the strain on municipalities.
As water becomes more complex evoke was essential treatment technologies like clean water more accessible because of this the long term market trends are very favorable and we expect our business to remain resilient through normal market cycles.
This slide highlights key financial metrics that we expect to be annually resist resilient over the long term.
Organic sales growth adjusted EBITDA margin and cash generation.
Each of these graphs highlight our resiliency through the FY 2020, one COVID-19 pandemic with growing and strong free cash flow in a demand constrained market.
This is due in part to our recurring revenue streams with service and aftermarket, making up approximately 60% of our revenue.
Digitally connected outsourced water strong and growing end markets and our industry, leading service are just a few drivers for organic growth and favorable and unfavorable market conditions.
As stated previously we remain price cost positive on an absolute dollar basis intense inflationary costs have been dilutive to margins in FY 'twenty two.
For the quarter inflationary costs impacted adjusted EBITDA margin by approximately 40 basis points, which improved from a 70 basis point impact in the second quarter.
We continue with a robust pricing processes and we expect to remain price cost positive in the fourth quarter.
Despite these headwinds we maintain our long term target of 20% adjusted EBITDA margin are.
Our management team is focused on driving strong and consistent cash generation.
Our strong base of stable profitable and recurring revenue provides an attractive foundation for cash generation, we've managed working capital well and see additional opportunities for improvement over time.
We continue to target adjusted free cash flow conversion of over 100% or higher and we've achieved that on an LTM basis for several years, Please turn to slide five.
This chart represents our fourth quarter expected order activity by end market compared to the prior year's fourth quarter.
As shown we expect to see strong orders in the fourth quarter across most end markets, particularly life sciences, food and beverage and life in general industries.
Power and refining our improving from the prior quarter's outlook, where favorable market dynamics across both end markets expected fourth quarter orders in microelectronics are showing a decline from last year's fourth quarter due to very strong Q4 orders last year.
We are well positioned in the microelectronics market, which has undergone a strong cyclical upturn that we expect to remain.
Overall, we expect to see strong order demand across most of our end markets for the remainder of fiscal 2022, we.
We do anticipate supply chain and labor challenges, creating the potential for order conversion delays on behalf of our customers.
At <unk>, we're proud of our diverse team of employees executing on fulfilling this demand every day.
As we continue to expand our company was skilled team members. We are pleased to be partnering with five HBC use for talent recruitment in the fall and the spring.
Please turn to slide six.
Over past quarters, we've highlighted high priority end markets, including Microelectronics, Lifesciences renewable energy and this quarter, we highlight food and beverage food, particularly for wastewater treatment has been a key end market for US is the Adi acquisition in 2017.
We have been historically strong in beverage of process water and are pleased to see gaining traction for wastewater treatment.
With today's strict regulatory environment manufacturing or processing requires high purity water for multiple applications such as sanitizing equipment.
High strength organic contaminants have also driven the need for improved wastewater treatment and our ADR product line has best in class anaerobic digestion for these applications.
Our portfolio of wastewater technologies allow customers to treat the most difficult organic waste streams, while also helping them to achieve their carbon intensity goals by producing biogas a source of renewable energy.
Our core process water portfolio also plays a vital role in providing production process water and utility makeup water into these markets.
Please turn to slide seven.
We look at our environmental impact through our own footprint on the environment, but also through the products and services, we provide to our customers. We're pleased to highlight two recent handprint wins, which are expected to positively impact our customers' water conservation.
And while generating an attractive ROI.
Bakersfield renewable fuels selected evoked to design source and assemble a wastewater system that combined granular activated carbon ultrafiltration and reverse osmosis technologies to treat up to 375 gallons of water per minute.
The system was designed to allow for 75% recovery with an estimated annual savings of approximately 140% and 40 million gallons of water.
We also helped a dairy processing plant, which experienced significant demand increases by replacing an aging wastewater system.
Our anaerobic digester was selected to treat up to 'twenty 100 cubic meters of wastewater per day.
The statement, we will produce an expected 5000 cubic meters of biogas per day, which is approximately the average daily usage of 550 U S hubs.
Please turn to slide eight.
While we continue to invest in our long term organic growth, we see momentum in our program programmatic tuck in M&A process as well.
We have now closed three acquisitions since January one and we welcome our new colleagues from Smith Engineering unethical.
Most engineering strengthens our service capabilities across key vertical markets, including life Sciences data centers, food and beverage and microelectronics.
<unk> was an opportunity to vertically integrate a key supplier of specialty resins for the power market.
These acquisitions support our asset segment.
As I mentioned previously the integration of the more core business continues to be on track and we reiterate our expectation for it to achieve 25% adjusted EBITDA margins in the next 12 to 18 months I would now like to turn the call over Tibet.
Thank you Ron.
Please turn to slide nine.
For the third quarter reported revenues were up approximately 19% to $439 million.
Organic revenues grew approximately 9% driven by broad based price realization and volume growth. We saw organic revenues increase in aftermarket capital and service categories as well as growth across all regions and most product lines versus the prior year.
Third quarter adjusted EBITDA increased 16, 3% over the prior year to $77 million for an overall margin of 17, 5% strong volume favorable price and mix were primary drivers of improved profitability.
As Ron mentioned earlier inflationary impacts drove a year over year margin decline of approximately 40 basis points for the quarter.
Please turn to slide 10.
Our integrated solutions and services segment third quarter revenues were up approximately 24% to $297 million.
Organic revenues grew more than 7% driven by price realization and volume.
Service and aftermarket revenues were strong across most end markets organic capital sales were down slightly due to strong prior year sales in chemical processing, but largely offset by strength in microelectronics and life Sciences.
The opportunity pipeline for capital projects and outsourced water is strong and growing.
Our digital strategy continues to be an important strategic driver for long term growth and profitability.
For the quarter and year to date digitally enabled revenues were up 11% adjusted.
Adjusted EBITDA increased 13, 9% to $64 $1 million due to higher volume favorable price and the consolidation of <unk> operations.
Adjusted EBITDA margin for the quarter was 21, 6% down 190 basis points from the prior year approximately 90 basis points of the decline was the result of prior year, one time benefits from Covid subsidies and favorable settlement of insurance claims as well as the return to more normalized travel costs.
Approximately approximately 60 basis points of the margin decline was from the dilutive impact of inflation.
However.
As we discussed we had favorable price cost benefits on adjusted EBIT dollars.
Please turn to slide 11.
We continue to see strong year over year growth in ISS backlog third quarter backlog was up $81 million or 19% over the prior year.
And up 10% versus Q2 of this year, we saw strong year over year sequential growth and capital, primarily driven by microelectronics and food and beverage.
<unk> pipeline continues to be robust with opportunities across multiple end markets. We expect to see our book to bill ratios remain above one in Q4.
As Ron mentioned.
Mostly monitoring our pipeline in order book is supply chain visibility creates the potential for shipment delays in Q4.
Please turn to slide 12.
Applied product technologies third quarter revenues were approximately $142 million up more than 9% organic revenues increased $16 6 million or 12, 8% driven by strong volume growth and price realization as well as growth across all regions in most product lines.
Adjusted EBITDA for the third quarter increased 15, 5% to approximately $33 million.
Adjusted EBITDA margins increased 130 basis points to 23, 1% driven by volume favorable mix, but partly offset by inflationary impacts.
Over the last several years, we've undertaken significant footprint consolidation actions in <unk> going from 16 manufacturing centers in 2018 to 10 locations. This conduct holiday season has provided for better fixed cost absorption, which has driven improved margin performance from higher organic revenue growth.
Please turn to slide 13.
One of the Apt's long term organic revenue growth initiatives is to develop new and innovative technologies that expands our product portfolio.
And pursues market share gains in core markets.
We are pleased to highlight two newly opened <unk> global manufacturing facilities in the United Kingdom and Singapore.
The UK facility will serve as a global center of excellence in developing leading edge ATB UV disinfection solutions and the manufacturer of our wallets and <unk> product lines.
Our Singapore facility will manufacture I am sure a leading product in the microelectronics market and is expected to support <unk> growth and market development plans for the Asia Pacific market.
Please turn to slide 14.
Capital spending primarily for outsourced water orders was approximately $22 million for the quarter or approximately 5% of revenues.
Third quarter net working capital was 16% of LTM sales. This includes net working capital acquired in the <unk> acquisition, which was $48 million as of the businesses opening balance sheet net working capital also increased to support strong organic order rates supported by higher inventory levels.
As we've 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.
Please turn to slide 15.
Year to date operating cash flow was approximately $87 million in Q3 versus $103 million in the prior year <unk>.
Adjusted free cash flow as a percentage of adjusted net income was 104% on a year to date basis. We were pleased to see our adjusted cash flow conversion returned to over 100% as we continue to support strong organic growth and capital expenditure investments primarily for outsourced water orders are.
Ported net leverage ratio finished at two nine times and is now within our targeted range of two five to three times.
Containing a strong and flexible balance sheet remains a key priority for <unk>.
Our weighted average cost of debt for the third quarter is approximately three 3% up approximately 60 basis points over the prior year.
Approximately 65% of our $975 million and total debt is at fixed rate or fixed through an interest rate swap which is in place into 2026.
I would now like to turn the call back over to Rod Rod.
Thank you Ben.
Please turn to slide 16.
We had a strong quarter with outstanding results across most key financial metrics market demand remained strong and were pleased delivering broad based organic growth across both segments all regions in most product lines.
Our pipeline remains robust and backlog continues to grow to record levels.
We are managing through a dynamic market, where rising costs and supply chain uncertainties. We are pleased with the positive price cost in Q3, and we're working to maintain that for the year, but margin expansion remains challenging.
Outsourced water continues to make excellent progress and is contributing to the ISS segment's recurring revenue model.
Digitally connected sales were up again double digits.
Heading into the final quarter of our fiscal year, we're focused on sales and operational execution to convert our strong backlog.
Price realization is expected to be positive despite higher inflationary costs and overall labor and material availability.
We continue to closely monitor the timing of customer purchase orders and shipments of supply chain uncertainties could create challenges.
<unk> our prepared remarks, we are maintaining our previously provided outlook for the fiscal year.
We'll now open the call to questions.
And at this time, if you would like to ask a question. Please press the star and the number one on your Touchtone phone.
And we'll take our first question from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone. Good morning, Dan Good morning Deane.
Hi.
I think I should start with the.
The impressive free cash flow in the quarter.
And I appreciate the details you've given on working capital to sales even at 16% you're in the top tier of the sector.
But take us through the kind of net impact on Mar Cor you gave the working capital.
From our core but is there anything on their cash conversion, how does that compare to the total company and was there anything else good.
Good guys are bad guys in the free cash flow number this quarter.
Yes.
Great question, Mark <unk> cash conversion is.
Is markedly higher than evoke was we have some work to do there and some opportunity.
Most of that it will occur after we implement them on SAP.
Both our payables and the receivables they collect slower than we do and they pay faster. So these are opportunities for us inventory. They do have a robust level of inventory on hand, and with the benefits of the business integration into shared services. We feel like we can unlock quite a bit of that at working capital I think the last call we.
<unk> talked about and as a percentage of sales. They are in the mid <unk> and we would like to bring them down to our mid teens level.
Overall in evoke well if you look at our working capital and our DSO and depot very consistent with the prior quarter. We did see two days more of inventory and Youll note that when you review our results and that inventory. It was put in place to support very strong order rates as well as.
Safety stock in this.
Current period of time.
Yes that makes sense, we're seeing additional buffer inventory in fact, two days is really.
Tiny compared to what we've seen some of your competitors carrying alright.
Alright, So second question and follow up for Ron.
Digital revenues up 11%.
It's interesting that you are not talking about as youre not talking about.
Impacted by chip supplies because.
These products and services do require semiconductors.
So where does that stand and kind of what growth rate are you expecting from the digital businesses going forward.
Thank you Dave.
Actually we have not been overly impacted by chip supply on our own connected systems that we're putting in we have been impacted by chip supply on the APC side, where we're supplying products into.
And to our customers on a global basis, but we're managing that it's actually we're seeing a trend that.
It's stabilizing a little more and we're able to at least have good lead times, good price expectations, where things were going to be and we're able to build that into the product line.
We're pleased with the digital with the connected solutions are digital water growth.
I anticipate that will continue to grow at double digits.
The opportunities are there as you know we invested a lot of money.
Deploying connected systems and even though we have deployed the connected systems until the customer signed up for water by the gallon, we werent charging against that or billing them in that way, we're billing them by that so thats, where you see and Youll see continued ongoing growth of digital and connected water because we already.
We have the systems in place, we're converting customers to that and we anticipate that will bode well as the tailwind of the market are very positive.
Just to clarify how much of the total revenue mix would you characterize as digitally enabled today and where do you expect it in a couple of years.
Yeah, So deane, we're somewhere in the neighborhood of 20% that were connected around our full revenue that.
That we have.
On slide 24, 7% with connectivity, we have said that we feel like over time that could get up to 40%.
Terrific. Thank you.
Yeah.
And we will take our next question from Nathan Jones with Stifel. Please go ahead. Your line is open.
Good morning, everyone. Good morning America.
I wanted to talk a little bit more about the ISS margins in some of the pressures that youre seeing there I mean I would think.
Fuel labor on the on the service side.
Some some contract terms that are maybe more fixed in nature on that side of the business.
All of that reset more slowly than that maybe are a little more difficult to pass pricing through could you give us a little bit more color on on where you stand on those kinds of issues.
You've changed the contract terms over the last few years to enable pricing to get through more easily.
Yes, Nathan I'll speak to the contract terms, let Ben talk to the details on what the what we've seen we have been able to pass on price escalators in the contracts.
We have the ability to go out with surcharges inside of the contracts and we've negotiated a much shorter time period into what different indexes enable us to do as far as the contracts go and then even on our time lead times now I mean, we have somewhere between a 10 day.
Validity on a quote and 30 day ability to unquote, just depending on what the raw materials going into the process.
So we've taken the right actions around being able to move price on certainly on the ISS side.
As far as.
Commodity moves in labor and material costs.
Fuel cost then you want to talk about the percentage of.
So I highlighted on the call earlier, we had some one times that was the majority of the reason for the ISS margin decline, but there was about 60 basis points that were inflationary related.
And that does include labor inflation.
As well as some productivity impacts associated with Onboarding, New service techs to fill positions and in that period of time, you have to tax going to one job is therapy becomes a training center was a little bit of a.
Pressure, there, but that should abate once these techs are up to speed and the last thing is just continue and fuel cost increases, but a lot of that we're able to pass on.
As a part of the way of our contracts work so.
So it's dollar neutral to dollar positive. However, it does put pressure on EBIT margin percentage and so for ISS, we had about <unk>.
60 basis points of headwinds associated with price cost on margin, even though the price cost per dollar.
<unk> dollars were positive and favorable.
So those are the key things.
Nathan yes, thanks very much for that.
Another question on chips and modifying opportunity.
On the chips that finally got passed through Congress.
<unk> enables you probably you see fairly significant microelectronics capacity to go into the U S.
Where you guys can you get some very large projects can you talk about the opportunity here I know you had relationships with some if not all of the day.
Folks that are likely to put in some large capacity just any context, you can give us how big the opportunity could be for borgwarner.
I'm frame to realizing revenue out of them.
Yes, Nathan we see this as very positive we think the opportunities are tremendous and this again.
Continues with the strong tailwind that we have in the marketplace. The one thing we pointed out on slide five is our Q4 expected orders coming in and microelectronics shows read that is simply due to prior year very strong Q4 orders. So this order activity versus order activity, we see a long term.
Opportunity for this for us being very strong the onshoring.
Has helped quite a lot. This chips act is going to help quite a lot.
Companies are getting benefit for <unk>.
Investing in the proper technologies and in a lot of cases, where.
These these micro electronics fabs are they are water stored regions for water challenged regions, even inside of the United States. So it's a huge benefit.
Fits us very well on the wastewater side as well as the processed water side.
So we're positive on them.
Great. Thanks, very much for taking the questions I'll pass it on thank you.
<unk>.
And we'll take our next question from Andrew Buscaglia with Sandburg. Please go ahead. Your line is open.
Hey, good morning, guys.
Alright, good morning engine.
Just a clarification on the mark of our contribution.
And he gave me a little bit below my expectation it was around 40% to $41 million.
Sequentially Wood.
What's going on there and then going forward do we.
As below 40 sort of where you would expect that.
They come in.
No. We just had a little bit of supply chain disruption in the quarter associated with the concentrates business that should rebound this quarter, but we expect that to be.
And that mid <unk> range in terms of sales is ongoing basis, a lot going on there, including an SAP implementation.
Integration of the business.
But the demand looks.
Very stable and certainly strong in this concentrate area as well as other our other key product lines and Andrew one.
One piece that Youll see in that Mark orders growth that's coming in.
We'll also show in as organic growth because we're aligned on those customers, we're selling to a more broad customer base through ISS and thats going to be reported as organic growth.
It's growth in our revenue going into those key accounts at more for servicing.
Okay.
Okay and then.
Just looking at the guidance that you held guidance if that makes sense just given what's going on in the world.
But your guidance would imply organic growth would probably go negative in one segment I would think that given the comp.
Is that the way to think about that and is that really just tough comp that kind of optically looking like that.
Fine.
Last year was a very strong Q4, if you look so ISS had some very very robust sales in Q4 the prior year.
And that was sort of the opening up of of Covid as well, but.
I will say, we'll see how it all shakes out Thats why we put a range out there and it's still wide to reflect various possibilities, but as I highlighted in the script. There is the chance for customer delays, we do have very strong comps and we wanted to take headed into.
The potential uncertain economic conditions, we wanted to take.
Balanced approach I think thats the key.
We've talked about our backlogs are terrific order activity is fantastic.
Even as I highlighted on the on the end market charts, where we see order conversions delays as it's really on the behalf of our customers being ready to accept the.
The products that we're delivering not not necessarily on our behalf being able to deliver lot sounds where we're waiting for them to say go and so we were balanced in the fourth quarter was up.
Okay fair enough. Thank you. Thank you.
And we'll take our next question from Saree <unk> with Jefferies. Please go ahead.
Hi, good morning.
The EPA issued a health advisory that basically said there was no state level Keith that how do you expect this influenced the upcoming Lanier clothes and ultimately the revenue opportunity can be for you.
Hi.
I mean, we see this continuing to be a positive just as we've highlighted and what the EPA still has to do is come out of it but.
What the regulatory requirements are going to be and as you know.
Define that specifically so that we will see the local water districts and states and municipalities starting to adopt it.
But it's a little like we've highlighted in the past I mean, we have a pipeline that's north of $100 million, we're running about a third of the projects that are left as the projects. We really choose to go after and we think the opportunity is going to be very strong as we go forward, but I think it is something thats going to be.
More more like a dimmer switch turning on rather than a light switch on and off.
And I think it'll it'll start ramping up in order to continue to ramp and that's going to be here.
As a market tailwind for quite some time.
Thank you, Steve a little deeper into your order outlook to more positive from power. What are you seeing in this market in kindergarten to continue.
Yes, I mean, we continue to see opportunities around power and power distribution some of the Gulf of our power plants are continuing to operate.
So they are treating their wastewater they're treating the water.
Coming off of the stacks and then as far as the ones that have shut down we have very positive outlook with what we do around dewatering of the ash ponds and it speaks to the value prop that a broker brings with all of our technologies being able to be mobilized. So we've built.
Mobile applications for each text technology, where we can treat.
Very tough emerging contaminants as well as contaminants that have been in the market for a while and.
Power is a great place to apply those those products in those assets.
Great. Thanks for taking my question.
And we will take our next question from Bryan Blair with Oppenheimer. Please go ahead. Your line is open.
Thank you good morning, everyone.
Good morning, Ryan.
Circling back to Mark or for a second he noted and integration is on track. The key points that you are you're pacing towards the 25% margin target over the next 12 to 18 months.
You are very positive in that sense you did cite.
Implementation, you've discussed that for a while are there any other callouts in terms of.
Heavy lifting for the time being in terms of integration and are you willing to speak to synergies realized to date.
I'll talk about some of the key drivers Ben can talk about synergies but.
Really the key drivers we've got SAP implementation, we've got we've aligned all of the back office on our benefits all the plans that are their medical et cetera. The opportunities that are coming ahead of us are really around facilities and facility consolidations. If youll recall when we did the acquisition. We highlighted 27 service locations are mark.
Sure.
25 of those or in a market area that we also have an ISS branch.
So whether we move into the more core facility they move into ours or we find a combined facility that fits.
For both of you know for both businesses to be and because we need more space, that's really what the heavy lifting going forward. So we're making great progress on that we feel pretty pleased with what's happening and again being able to reiterate their 25% EBITDA.
Certainly right within the center of the Bell curve.
Yes, Brian margins are strong and they are growing but the best is yet to come as we get into the footprint consolidations and the more heavy lifting those have been mapped out more in our processes are improving and running those through our internal processes to gain approval, but so far the early synergies are our start.
To come through but we still really haven't seen the lion's shares of those synergies and that will come when we.
Finished the SAP implementation and we get to the footprint consolidation.
And also.
Mind, you also on working capital post SAP implementation.
There's a healthy opportunity to really size it really reduce their working capital as a percentage of sales.
Understood makes sense you quickly highlighted the.
The deals closed in July .
I realize there is smaller but can you speak to expected financial contribution from Smith and Evercore.
I'm curious if economic uncertainty has impacted your M&A pipeline.
If at all for the kind of strategic tuck ins.
Is that driving strategy.
I'll speak to both of them are we're thrilled to have the Smith and <unk> teams as a part of evoke but now <unk> is one that we've done business with quite some time for quite some time with resin processing for the specialty power markets that we go offer so that is really more of a vertical integration play we've already had.
The sales and the opportunities that we were executing on and it was a vertical integration that it will support us with EBITDA, but not necessarily a lot of a lot of top line growth, but then Smith gives us a great potential for topline growth.
Very key markets as I highlighted in the script Lifesciences Datacenters microelectronics, but.
It's bigger than in the Minneapolis areas, where they're located so we now have a very large footprint in that market.
<unk> and Smith that we've tied together and it fits with the strategy we've talked about around geographic penetration that we highlighted and we wanted to go after once we were able to close on the mark or transaction, which is very heavily focused on the Minneapolis market Smith became a great opportunity for us as well.
The pipeline for M&A tuck in M&A still very robust.
And I think we'll see that continue just as we highlighted.
On slide eight in the deck.
I appreciate all the detail. Thanks again, thank you.
Yes.
And we will go next to Joe Giordano with Cowen. Please go ahead. Your line is open.
Hey, good morning, guys. Good morning, Joe Good morning, Joe.
You mentioned.
To bill in <unk> right.
I need to be above one and you also mentioned some stuff about shipping delays like just wanted to kind of circle circle back to that is that book to bill more because orders are accelerating or more because shipments are delayed.
Maybe any color on some sort of like average daily order metric you would look at for fourth quarter relative to third quarter or something like that yes, Joe I would say the book to Bill.
<unk> is not a.
Its orders coming in at a very high very positive rate, it's not as a result of us not being able to show up I mean, if you look at ISS, specifically for the quarter I mean, they had revenue growth organic revenue growth of seven 3%.
<unk> had organic revenue growth of almost 13%. So between those two we're really pleased with the growth that we're delivering and having a book to bill ratio that continues well above one means that we are building backlog and it's.
Really.
The tailwind in the market and just the strategy being executed on by the team.
And I guess, maybe one just high level thing and maybe you can just comment, but just been reading a lot more lately about what's going on in areas like lake need in Salt Lake City, and those areas seem so a better reward screwed and.
Just curious if youre hearing.
Mike more incremental.
Action plans.
<unk>.
Leaders in those areas about how whether its residents businesses there need to do things fundamentally different and like.
Is it something that you guys have been looking at involved with any commentary there.
Good question. It is it's a very difficult.
Situation that the western half of the United States or around the droughts that are been continued there and it's something we pay attention to for quite some time.
And we do see business is operating differently I mean, they are so focused on wastewater capture recycle reuse, making sure that if they are expanding capacity theyre doing it by being more efficient with their water chain rather than go more broadly. So so we're pleased with.
Our our impact that we can have on that situation and frankly, we were partnering with our industrial customers in those market areas every single day to be more efficient with what they do it's one of the things that we like to highlight on our sustainability and what <unk> does as a company is the hand print opportunity that we have to preserve.
<unk> very precious natural resource of water is what we're focused on and industrial customers are aligning with us too to make sure. They are investing in that.
Thanks, guys.
Thank you.
And we will take our next question from Andy Kaplowitz with Citigroup. Please go ahead.
Hey, good morning, guys.
Good morning Ann.
I know you mentioned labor availability and hiring cost impacting ISS as that issue for you would you say stable within your services business is it getting better or worse than you mentioned fuel costs.
Sandoz Cosby, starting to come down now.
Any more color on sort of the cost in that service business would be helpful.
Yes, so I'll highlight and talk about the service business specifically it has stabilized.
We certainly went through a period of having to make sure that.
We were addressing wage compression in certain market areas.
What's happening just in labor rates and the overall market certainly unskilled labor markets. So, but it has but it has stabilized now Andy and I feel like we are in a good place we've.
Some of the turnover that happened right at the end of Covid that seem to be.
Pretty strong across the industry has stabilized and we've been able to fill positions.
And fill more quickly and accurately film with.
Very skilled team members with some good experience behind them. So.
I think that we're at a pretty good spot as far as labor goes Ben can talk about fuel and challenges there.
I think fuel is still uncertain and certainly we saw higher fuel costs at the beginning of the quarter then started having some.
<unk> abatement towards the end of the quarter.
I think some of the outlooks suggest.
Maybe more stability for Q4, but the big question Mark for what happens next year at this point in time, but.
Most of our fuel cost.
Are able to push to our customers we have a full fuel surcharge in place. So we pass that through however, the higher it goes it also puts pressure on margins because of the.
The fact that youre pushing it through as a surcharge and not necessarily at your traditional margins. So that does give a bit of a margin drag for ISS.
That's helpful guys and then I know, it's a small part of your business that you highlighted municipal drinking water is blue for Q4, maybe you could talk about that market and then just leave commentary around municipal wastewater. Obviously, that's much bigger standalone government seem relatively flush with cash and then you've got eventual AAJ contribution. So what did those businesses look like.
Moving forward, yes, so I'll talk about municipal drinking water first of all we said we.
C B and stable.
It is a smaller portion of our business as you can see worth represented on page five.
But we're continuing to work with municipal systems around retrofit and rehab their upgrades to their systems and what they're doing and so that fits the municipal drinking water side as well as some beautiful municipal wastewater I would tell you across wastewater it as green it'll continue to be green, we see for the foreseeable future certainly with.
Whats.
What's being addressed on the infrastructure spending bill as well as what's happening we're trying to recycle and reuse water. So they are trying to make sure of the wastewater plants are operating efficiently theyre up to capacity and so very good retrofit and rehab their book to Bill ratio there is well above one.
Should continue to go that way and we anticipate.
The infrastructure Bill actually a lot of the projects are being designed.
<unk> designed and engineered now we would expect to see orders from that come early 'twenty three with revenue starting towards the latter half of 'twenty three.
I appreciate it guys. Thank you.
Yeah.
And we will take our next question from Jose Mas.
<unk> with Raymond James Please go ahead.
Thanks for taking the question.
As you build capacity or expand capacity I should say outside of North America.
Last fiscal year International was maybe 12% of revenue.
Do you have a target for how big you want the international footprint to be or media prediction for what that slice of the pie will be this year or next year.
<unk> I think if you look at our international revenue, it's closer to 20% now some of that is reported.
In North America, because it's North America selling into some of the international operations, but we like where it is we like 20% is a pretty good number we want to continue to grow overall at <unk>, but we think that the international market. So we're going to grow at a much faster pace for us, meaning the emerging markets and we've seen that.
I mean, we.
A little bit of a challenge.
Was experienced certainly through the Covid lockdowns, but our team in China has continued to operate very efficiently our team in Singapore.
Writing more deeply into India. So there's some good opportunities for us as we grow and then our team in Europe has done an excellent job continuing to deliver.
And some tough market environments. So we were happy to be able to open the two new facilities, we highlighted in the deck.
It's really a continuation of our build out on centers of excellence that are going to serve the various markets that we participate in.
In that context are you looking at.
Non north American M&A opportunities Thats part of Europe consolidations roadmap.
We do we continue to look at those around product portfolio extensions more than service level extensions.
And.
As evident of that would be the atg acquisition that we just did back in 19, where we consolidated.
That into that was out of the U K. It was out of a facility called we're going to we just moved it to a much larger facility because that business has grown tremendously so a lot of our historic acquisitions.
In the product space have been internationally based.
Based acquisitions and we continue to focus on those as we go forward as well really looking more around technologies there.
Alright, Thank you very much.
Thanks Bill.
Okay.
Well go next to Andy Kaplowitz with.
City, sorry, we will go next.
John Walsh with credit Suisse. Please go ahead.
Okay.
Good morning, and band I liked your Sinatra quote earlier in the Q&A.
[laughter].
[laughter].
Got it I got to be nice because I was going to ask.
<unk> question or I guess, maybe that that's not the right way to frame it but I wanted to go back to the guidance.
I understand the year over year bridges, you're kind of talking about but I'm kind of confused by the quarter over quarter Q3 into Q4.
It looks like it's kind of below your normal seasonal sale and kind of margin lift that you get.
I was just wondering if you could kind of unpack that a little more what's happening on the quarter to quarter walk.
Yes, sure I think if you look at.
History would suggest we have upside and Thats why we have the top end of the range.
But then you look at the current circumstances that we face.
Potential for a recession.
Macro uncertainty supply chain challenges potential for customer delays.
That's really why we left the guidance the way we did because there are.
The potential for those uncertainties Q4 as you can see is traditionally our strongest quarter.
So if certain delays were to occur or things that are outside of our control. We wanted to make sure we are measured and accounted for that but.
So again.
I just feel like in this environment, it's important to stay balanced.
Yeah.
Okay.
Fair and then you got the PFS question earlier as it relates to the United States, but.
Curious as we're starting to hear more and more coming out of Europe .
Whether it be Belgium, Germany.
There's a lot more activity now would there be any kind of difference in technology that you would maybe offer.
And do those markets or maybe it's more of a channel.
Thing you just have to have the right channel in those markets, but we'd love to hear how you think about that opportunity as PFS broadens.
I'll actually tag that onto the prior question around international opportunities for acquisitions, which I talked about product technologies. One of the areas that we're very focused on is disrupt in field on DFAST. So theres a lot of different types of technologies that are throughout Europe that theyre working on answer.
<unk> destruction of P fast and there are a lot of trials that are happening.
That's very interesting to us so we're engaged in those we're paying attention to what is there and what is available.
And that's the technology evolution that we would hope to see in <unk>, not just capture it concentrated landfill or incinerate it is disrupt.
Onsite, so you're not actually having to move the <unk> central location. It is.
Great. That's very helpful. I appreciate you taking the questions and thank you. Thanks, John Thanks, John .
Thank you we will go next to Brian Lee with Goldman Sachs. Please go ahead. Your line is open.
Hey, guys. Good morning, Thanks for squeezing me in here.
Maybe sort of a follow on to the prior question here just as you think about.
Year end, and we tried to sort of true up the model.
Ben the nice margin expansion in <unk>, it's the highest we've seen since early fiscal 'twenty one.
Are we expecting further improvement into Q and kind of early thoughts into 'twenty. Three is this sort of kind of a new normal on the PT side.
And then I guess secondly, just still on the second question here.
You guys had talked about customer availability I think you just talked about customer delays and potentially wanting to be prudent around that as well. If you think about the forward outlook.
Have you seen any shifts either for the better for the worse around.
Customer availability in that.
Yes.
How that's been impacting your capital sales.
Either deployment or visibility.
Yes, I'll talk to you about about the customer availability and we've been to cover the others.
It's been it's been very spotty and it totally depends on the end market.
It is not availability with us being able to get on site, which historically has been through the COVID-19 shutdown and we dealt with a lot of challenge around that what the availability difficulties that we faced.
Throughout this fiscal year, it's been primarily.
Yeah.
Measured by has been whether or not they are ready to take our product or our application or they turn on their system for our service to occur. So that's where we see the challenges I mean as we've highlighted our backlog is tremendous order activity is great. We're managing supply chain our team has done.
<unk> remarkable job managing supply chain and so now what we're balanced again as against as the supply chain of our customers when they're getting their site ready or theyre ready to turn on their production line and that's created the delays.
It.
It kind of varies by end market, what we're seeing but but I think its works for larger installations versus the smaller that tend to have more delays and a big challenge for us.
Yeah on the margin side.
<unk> has done an excellent job of their structural cost.
We talked a little bit about earlier as well as portfolio and these benefits we expect will stick.
A lot of hard work has been done in that area.
On the downside they still face price cost headwinds like there'll be positive on the dollar amount, but the pressure associated with inflationary impacts and also supply chain disruptions impacting productivity.
And the business and particularly our manufacturing facilities under HPT.
The majority of them. So they continue to face situations, where a part does not show up in item does not show up a person is out sick with COVID-19 and have to battle through those types of challenges as well, but yes, very very proud of the margins that they've been able to deliver and again thats been majority of their structure and their portfolio decisions.
Yeah.
Okay. Thanks, guys I'll pass it on thanks.
Thank you.
Okay.
And at this time I will now turn the call back over to Ron King for any closing remarks.
Thank you again for your interest in a vocal we greatly appreciate the time that you've given us today I would like to just close with those.
A sincere thank you to all of our team members around the globe.
I've been incredibly impressed with the way that they've operated the way they've delivered and we continue to focus on meeting customer demand everyday and really staying true to our cause and the purpose of what evoke with us which is transforming water and enriching that so thank you for your time, we look forward to speaking with you again next quarter.
Thank you and that concludes today's new local water Technologies' third quarter 2022 earnings Conference call. You May now disconnect your lines and thank you for your interest in <unk>.
Yeah.
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