Q4 2022 Evoqua Water Technologies Corp Earnings Call
Please standby your program is about to begin.
Hello, and welcome to evoke well water technologies fourth quarter and full year 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'll be a question and answer.
Here it is.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star two on your telephone keypad.
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 Investor Relations. Please go ahead.
Thank you operator, thanks, everyone for joining us for today's call to review, our fourth quarter and full year 2022 financial results.
Dissipating on today's call are Ron Keating, President and Chief Executive Officer and Ben.
<unk> Executive Vice President and Chief Financial Officer.
After our prepared remarks, we will open the call to questions. We ask that you. Please keep to one question and a follow up to accommodate as many questions as possible.
This conference call includes forward looking statements, including first quarter and full fiscal year 2023 expectations long term financial targets and statements relating to demand outlook growth opportunities our book to Bill ratio, our net leverage ratio capital expenditures.
Our acquisition strategy regulatory actions material and labor availability inflation and general macroeconomic conditions.
Actual results may differ materially from our expectations for additional information on our golf club. 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 at evoke was investor relations website.
Unless otherwise specified references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30th.
Means to access this conference call webcast were disclosed in the press release, which was posted on our Investor Relations website <unk>.
Replays of this conference call will be archived and available for the next 60 days with that I'd like to turn the call over to Ron front. Thank you Dan and thank you for joining us I appreciate your interest in <unk>.
And I'm happy to provide insight into our results and outlook.
Please turn to slide three.
I'm very pleased with our fourth quarter and full year 2022 results in the fourth quarter. Both segments reported strong organic revenue growth with broad based demand across aftermarket service and capital and across most regions and product lines. Our book to Bill ratio was again above one point O for the quarter and for the second consecutive.
Fiscal year, our full year book to Bill was approximately 1.1.
Backlog reached record levels and our pipeline is strong as demand for clean and available water increases across our customer base and end markets.
While we are actively helping our customers solve complex water treatment challenges, while reducing their environmental impact with recycle and reuse solutions.
Adjusted EBITDA grew double digits in the fourth quarter and over 18% for the full year price cost was positive and accretive to margins in the quarter. Despite challenges that impacted the full year.
Material availability inflationary pressures and skilled labor access continue to provide challenges, but our team has effectively navigating the constraints. We have also driven price and operating efficiency across the organization, which will continue to be a priority in FY 'twenty three.
We're pleased to have achieved two important FY 'twenty, two ESG goals relating to employee safety and water reuse safety is the number one priority at above book and we reduced our recordable incident rate by 20%. This year when addressing water challenges we plan to lead by example, and set and achieved our goal of reusing more than.
55% of our water girl across our top 10 facilities.
Cash flow for the year was strong and we continue to drive improvements to our balance sheet adjusted free cash conversion was well above our target of 100% net working capital improved to 14% of sales liquidity increased sequentially and our net leverage ratio improved to two six times from three one times following the <unk> acquisition.
<unk> earlier this year please.
Please turn to slide four.
<unk> is a performance driven water technology company focused on delivering customer solutions, while driving strong and resilient financial results. As you can see we have generated strong results across the six key metrics over the past several years.
Our results demonstrate the strength of our business model and focused execution.
We're proud of the progress we have made and we remain confident on the execution of our strategy in the coming years.
Please turn to slide five.
This chart represents our first quarter expected order rate by end market relative to the prior year's first quarter.
We expect to see order growth in the first quarter across most end markets, including life Sciences power food and beverage and life General industries.
Strong prior year orders in microelectronics are driving a slight decline in the year over year order outlook, but our revenue should still be strong given our current backlog.
We still expect to see continued growth in micro electronics supported by government and private investments in onshore and manufacturing facilities.
Overall, we expect to see increasing demand across most of our end markets in the first half of FY 'twenty three with potential slowing in the second half, we will discuss our outlook and underlying assumptions. Shortly we will also be happy to address questions about specific end market drivers during the Q&A session.
Please turn to slide six.
Throughout the year, we highlight impactful handprint wins that showcase our contribution to helping our customers improve their sustainability objectives.
And this quarter, we're pleased to announce technology implementations with two of the world's largest companies are chemical processing company located in the Gulf Coast of Texas, and a global consumer products company.
The chemical processing company engaged evoke which will replace a Brian recovery system and provide an outsourced water service contract for the next 10 years for <unk>.
<unk> products company is installing our reverse osmosis system for Brian recovery as they make strides towards our water recycling goal to reuse more water than consumed at manufacturing sites around the globe.
In addition to helping our customers solve their water challenges, we're improving reliability and energy efficiency.
I would now like to turn the call over Tibet.
Thank you Ron Please turn to slide seven for the fourth quarter reported revenues were up 18, 5% to approximately $505 million.
Organic contribution of revenue growth was eight 7% driven by price realization and volume growth.
We saw revenues increases in aftermarket services and capital as well as broad based growth across most regions and product lines versus the prior year.
Fourth quarter, adjusted EBITDA increased 13, 8% to $93 2 million for an overall margin of 18, 5% a decrease of 70 basis points versus the prior year, driven primarily by inflationary impacts higher service labor costs, and lower productivity from training and Onboarding of New service tax as mentioned price.
<unk> was positive and slightly accretive to margins in the quarter.
Please turn to slide eight.
For the full year reported revenues were up 18, 6% to approximately $1 $7 billion, driven by higher volume and favorable price realization.
Organic contribution of revenue growth was over 10%, primarily driven by increases in aftermarket services and capital as well as growth across all regions and most product lines versus the prior year.
Full year adjusted EBITDA increased 18, 7% to approximately $298 million for an overall margin of 17, 1%.
Essentially the same as the prior year.
We realized favorable price higher organic volume and mix, which were offset by inflationary cost impacts.
Please turn to slide nine.
Our integrated solutions and services segment fourth quarter revenues were up 23, 4% to approximately $347 million.
Organic contribution of revenue growth was six 1% over the prior year driven by price realization.
Services and aftermarket revenues were strong driven by life Sciences, food and beverage and light General industries.
Fourth quarter, adjusted EBITDA increased 10% to approximately $78 million due to favorable price realization and higher sales volume from acquisitions.
Adjusted EBITDA margin for the quarter was 22, 4% down 270 basis points from the prior year productivity impacts outpaced price and cost benefits Mark of our margins were also dilutive to segment margins.
Full year revenues grew 23, 4% to approximately $1, one 8 billion with adjusted EBITDA up 18% to $259 million increase in revenues was driven by positive price realization and higher sales volume across services capital and aftermarket.
<unk> and connected sales grew double digits this quarter and overall have increased approximately $100 million since 2018.
As of the end of the year 2020 to digitally enabled revenues were $263 million up from $230 million of FY 'twenty one.
For the full year adjusted EBITDA margins declined 90 basis points over the prior year, driven by material fuel freight inflation and labor costs and Markwest dilutive impacts.
These margin headwinds were partly offset by favorable price realization and sales volume.
Please turn to slide 10, we continue to see strong year over year growth in ISS backlog, which was up $152 million or 20% over the prior year quarter with growth coming from both capital and service orders and as Ron mentioned earlier evoke was backlog was at record levels at year end capital has seen strong growth with four is being driven by food and.
Beverage microelectronics and power end markets, our pipeline continues to be robust with opportunities across multiple end markets and we expect to see book to bill rates remain above one point.
<unk> fiscal 2023.
Please turn to slide 11.
The applied product technologies segment's fourth quarter revenues were up 9% to $157 6 million.
Price realization and strong volume contributed to revenue growth in Asia Pacific and the Americas, while EMEA EMEA reported a slight decline.
Organic contribution of revenue growth was 13, 7% over the prior year.
Driven by price realization and volume across all product lines.
New was unfavorably impacted by $6 9 million in the period related to foreign currency translation.
Fourth quarter adjusted EBITDA increased approximately 14% to 37 7 million adjusted EBITDA margins grew 100 basis points over the prior year with the increase in profitability driven by price realization and higher sales volumes.
<unk> benefits were partly offset by increased inflationary impacts.
Full year revenues grew nine 5% to 552 million with adjusted EBIT up 13, 2% to $119 7 million, while margins improved 70 basis points versus the prior year.
The increase in revenue was driven by price realization and higher volumes across all regions, particularly in North America and Asia Pacific.
Organic contributed organic contribution of revenue growth was 12, 1% over the prior year driven by price realization and volume across all product lines revenue was unfavorably impacted by $12 9 million in the year related to foreign currency translation.
The increase in adjusted EBITA was driven by price realizations and higher sales volume and favorable mix. These benefits were partly offset by increased inflationary cost.
Please turn to slide 12 capital spending largely related to outsourced water orders for build on operate facilities and mobile fleet assets was approximately $23 3 million for the quarter were approximately four 6% of revenues. We continue to expect Capex net of financing as a percentage of sales to be in the five.
Percent range in FY 'twenty three.
Fourth quarter net working capital was 14% of LTM sales, an improvement of 200 basis points over the third quarter of this year I.
I would like to thank our <unk> team for continuing to drive improvements in working capital.
As previously mentioned 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.
For the full year operating cash flow improved to $181 4 million versus $178 7 million in the prior year.
Adjusted free cash flow as a percentage of adjusted net income continues to be well above our 100% conversion goal at 121% for the year.
Net income for the fourth quarter included a noncash benefit of $17 3 million associated with the release of an income tax valuation allowance as the result of increased profitability.
Please refer to slide 19 in the appendix for additional details.
Our net leverage ratio finished at two six times adjusted EBITDA well within our targeted range.
We are very pleased to have improved our leverage profile as expected after the acquisition of Marc lore, and the second quarter of fiscal 2022.
Maintaining a strong and flexible balance sheet remains a key priority, particularly given challenging macroeconomic market dynamics and we are now targeting a two times to three times net leverage to adjusted EBITDA range versus the previously stated target of two five to three times.
Interest expense increases have been moderated by maintaining approximately 67% of our total debt at fixed rates, our weighted average cost of debt increased by 110 basis points to four 1% from 3% in the prior year period.
This increase.
Compares favorably to federal reserve actions that increased target rates by 300 basis points to 325% from zero to 5% as of September 32022, and September 32021, respectively.
For the full year, the weighted average cost of debt rose 40 basis points to 339% in 2022 from 299% in 2021.
I would now like to turn the call back over to Ron Ron.
Thanks, Beth please turn to slide 13.
This slide shows our performance since 2018 for three or four long term financial targets.
2% to 5% organic revenue growth, 20% adjusted EBITDA margin and adjusted free cash flow conversion over 100%.
We have multiple drivers supporting the resiliency of our business model and uncertain market conditions, Covid lockdown supply chain constraints or high inflation. This is due in part to our stable and recurring revenue streams with service and aftermarket, making up approximately 60% of our total revenue.
Please turn to slide 14.
Heading into our new fiscal year, we see many opportunities, but also uncertainties on the horizon.
We regularly work to align our outlook across the favorable tailwind while managing for the market unknowns as.
As we have demonstrated our business model is resilient and we're focused on stable recurring and profitable revenues.
Our large concentration of business in North America provides a level of stability in uncertain times, we still see growth opportunities from deeper penetration into target markets and through geographic expansion as we sell our technologies globally.
We have a record backlog with order growth across most end markets and a strong and growing pipeline.
While customers are driven by ROI, when making capital and operating decisions regulation is also driving investments in water at the federal state and local levels.
One example of noted interest as the <unk> market. The near term impact is not expected to drive material revenue growth, but we expect P. Fast remediation to provide long term growth for many years to come.
A slowing global economy is expected to improve labor and material availability and to moderate inflationary pressures throughout the year.
We expect continued demand in North America in the first half of our fiscal year as we deliver against our backlog.
And economic slowdown could occur in the second half of our fiscal year, but we will adjust accordingly.
We have provided key assumptions for our full year outlook on slide 18 in the appendix. Please.
Please turn to slide 15.
Yes.
We had an excellent quarter and we're very pleased with our full year performance, we delivered outstanding results across most key metrics of the business.
We are encouraged by the strong broad based global organic growth coming across both segments and our pipeline remains robust as demand is solid across most of our end markets.
Our price actions continue to be a priority and are expected to contribute to growth during the during the coming year.
Supply chain constraints and inflationary pressures will remain a challenge, but I have great confidence in our team's ability to navigate these and to successfully serve our customers.
Our balance sheet remains healthy following three acquisitions in the year and the completion of the frontier equity purchase we're committed to maintaining leverage within our targeted range as demonstrated by our steady reduction from three one.
One times following the <unk> acquisition.
Two six times as we close the year.
We will continue to focus on tuck in M&A as an extension of our organic growth strategy.
Digital enablement continues to be an important driver of service efficiencies are connected outsourced water solutions continue to grow and we will continue to invest in this capability.
As previously stated we have a strong backlog as we enter FY 'twenty three but economic uncertainty in the back half remains a question for.
For the full year of fiscal 'twenty three with current visibility, we expect revenue and adjusted EBITDA to be in the range of $1 eight one to $1 89 billion and $310 million to $330 million respectively.
For the first quarter relative to the mid point of our FY 'twenty three outlook, we expect revenues and EBITDA to be aligned with traditional quarterly seasonality. We've provided a summary of quarterly revenues and adjusted EBITDA from 2018 to 2022 on slide 20 in the appendix.
In closing, we're pleased with our performance, especially when considering the inflationary impacts over the past year, we have high expectations as we look to the future.
The world is facing significant challenges related to clean and available water and more companies are investing in water reuse and recycling initiatives.
We are confident in the investments we've made in our people our technologies, our footprint and our operating capabilities. We feel that <unk> is uniquely positioned to address the market needs and to drive long term shareholder value.
We'll now open the call to questions.
Thank you at this time, if you'd like to ask a question. Please press the star one you touched on phone you may remove yourself from the queue at any time by pressing star two.
Once again star one to ask a question we will take our first question from Deane Dray from RBC capital markets.
Thank you good morning, everyone.
Good morning, Dan Good morning, Hey, Congrats on a strong finish to the year.
In last quarter and the commentary there was some signaling that there might have been some delayed customer deliveries.
This quarter that could have impacted results, how does that actually play out.
Was that a factor at all.
Deane it was.
Kind of as we expected we've had some delays from customers throughout the year. This was not more than the normal in the fourth quarter, but we're always cautious around that where we had some customers that were delayed we had others that we're willing to take.
We're ready to take projects a little more quickly than we anticipated. So we're.
We're pretty pleased with the balanced as we came through Q4.
Good to hear and Ron on that theme of always cautious I was all teed up here for a discussion on fiscal 'twenty three guidance that looks a little conservative.
You're a measured approach and so forth, but this guidance.
Nicely brackets consensus is actually ahead of consensus so which really like seeing maybe you can just clarify on the record backlog because that gives you. So much more earnings visibility than you might have.
Entering a new fiscal year, so talk about conversion expectations and kind of line of sight on that backlog.
So.
As we highlight the backlog, it's coming across all end markets, which is very positive for us.
We're pleased with the incoming order rate that continues to be very strong as well as we.
Closed out Q4.
The visibility that we have is a little better because.
The backlog and what our customers are doing is starting to normalize a little more than it was earlier in the year with other supply chain constraints that we've been managing through so.
Even giving the guidance, where we did deane, we feel like we're still being very balanced and the outlook as we look forward. We're pleased with the backlog we're pleased with the position we're in.
We feel good going into the year.
The order rates are continuing to flow fairly well.
Great if I could just.
One more.
Question in on digital revenues really like seeing the growth there in the update I think <unk> said before you'd like to get it from kind of 20% of the mix today to closer to 40% over time is that still the goal and.
What might the timeframe be to get there.
It is still the goal, we're still driving forward on that and it really preferring to ISS as revenue, it's north of 20% with the growth that we've seen we think we can continue to drive that to north of 40% of the ISS revenue I think what you are looking at Dean is probably three to five years that we will.
Get there, but it certainly is within the.
The planning horizon.
Great. Thank you.
Our next question comes from Nathan Jones from Stifel.
Good morning, everyone. Good morning, Nathan Good morning, Nathan.
I'll follow up on the guidance I guess I'd say at the midpoint.
The guidance kind of implies margins up about 20 basis points, and then an incremental margin of about 20%.
Given some of the positives that you listed on the guidance slide.
We had positive mix with price cost is expected to be positive throughout the year, though it.
Maybe we could get a little bit better than 20% incremental margin can you talk about what are the offsets to that and what could end up driving that above that 20% incremental.
Yeah, So Nathan I'll start and let Ben been pick up on it but again too.
To the last comment I'd make we still feel like we're balanced in our guidance going forward just given some of the uncertainties that we see.
The good thing about our pricing as our pricing is very sticky.
So once we get it driven into the market it continues to stay.
If we see a pullback on inflationary challenges that we've been facing and it doesn't continue to run I think there's some opportunity there.
But we've been pretty measured in what we've given as an outlet venue comments, yes sure.
And I think one of the things we got to stay measured on is fuel and freight.
Particularly with diesel.
At this point in time, the short term, we'll keep our eye on that.
The materials were in really good shape in that side, you've probably noted from the call that we were margin accretive on the price cost versus materials. So, it's really about managing fuel freight and improving our productivity.
Expected we on boarded.
A lot of service techs, so we expect that productivity to improve as we go through 'twenty three.
This is a little bit of the puts and takes overall.
Arms of sustained measured on margin.
So it sounds like despite bracketing consensus this is still a pretty balanced.
Guidance that you've put out here pretty confident in it.
My follow up question's around Mako.
The Mako revenue came in and it looks to be pretty substantially above what we'd expected. I know you guys are excited about the opportunities for that so maybe you could talk a little bit more about the opportunities to leverage model to grow the outsourced water business.
Have you begun to see any any results from that opportunity or is that still on the come.
And where do you think you can take that business. Yes, we are starting to see results from that.
The opportunity to connect a lot of the more core solutions that are in the field and that we're putting in the field.
We will start to we'll start to see that being realized this year in FY 'twenty three what we saw in growth.
Really centered around life sciences fits very nicely with our core business. So we saw outpaced growth in the core businesses that we've had in life sciences because of now the expanded offering.
Carrying more core and so we're able to do more for the customer base that we highlighted when we did the acquisition around the hospital system and a health care system with us being a full service provider now so.
We're positive about what the next two to three years are going to deliver with Marvel.
Some kind of growth targets that you can share on that.
Hi.
We.
We're pretty thoughtful in the way that we did the analysis.
We think we will see double digit growth come in the life Sciences area, just based on our base business that is continuing to expand combined with portfolio.
Great. Thanks, very much for taking my questions.
Okay.
The next question comes from Bryan Blair from Oppenheimer.
Thank you good morning, everyone.
Good morning, Brian Good morning, Brian .
Staying on mark or for for a minute, perhaps offer a little more on <unk>.
Integration and synergies are pacing relative to expectations.
It seems to be great margin.
Perhaps just a little more diluted then.
And anticipated at this point or at least the optics say that.
Just curious what you can offer there and whether we should anticipate that.
Our core gets to a level, where it's margin accretive to ISS during your fiscal 'twenty three.
Yeah, Great question, So I want to be clear Mark core is right now accretive to overflow, but still dilutive to ISS.
Synergies are coming through as expected and.
So the sales synergies or is coming through as expected as well.
<unk> three is probably a long putt to be accretive to ISS, but certainly within reach in 2024, but we will see improvement as we go through the year and the synergies take hold remember a lot of those synergies are footprint related so they take a little bit longer to get done and we want to be very plan full as we consolidate rooftop.
Yes.
Understood that makes sense.
And you noted.
In terms of regulatory tailwind as theirs.
Some continued near term uncertainty on T thoughts regulation and how much of the.
Catalysts that can be during fiscal 'twenty, three perhaps looking to 'twenty four and 'twenty five that becomes much more material.
Your team has been pretty consistent in framing that.
I'm just curious whether the primary consideration remains the stringency of.
Mcl or.
Relatives mcl versus Mcl Chi in terms of what will be proposed.
Alright, if there are other factors that we should keep in mind.
No I think as we're looking forward.
Continue to be consistent with where.
It's been framed in the past, we still have a pipeline of around $100 million, where when it about 30% of those projects.
<unk> are set to be released at the end of this calendar year. So the first quarter of our fiscal 'twenty, three we're expecting that to happen and at that point.
Then actually the municipalities and the water systems know exactly what they have to treat too. So you know where the goal line is and Thats. What I think we will start seeing a lot of the engineering work a lot of the work that will start.
Slowing down with funds flow thats coming from.
From the government down to the different water districts will be latter half of 'twenty, three and as you said into 'twenty four and 'twenty five.
I appreciate the color guys. Thanks. Thank you.
Our next question comes from Mike Halloran from Baird.
Hey, good morning, everyone.
Hey, Mike.
So the Capex, 5%.
Sales plus minus.
I'm guessing that high level, it's just a reflection of your confidence in leveraging our balance sheet to drive customer growth through through some of the product offerings correct.
Okay.
Just to make sure and then second one any any areas, where you're seeing any cracks in the portfolio and I already talked about a pretty healthy orders across the board I was wondering if are there any pockets, we have leading indicators that are showing some concerns and anything on the project side.
Because obviously the commentary has been really positive which is good yeah, Mike I would say that.
Show Slide five you can obviously see the incoming order rate and the order expectation continues to be very strong.
We do see some of our.
End markets slowing down the acceptance of capital it doesn't mean, they're not canceling anything is still in the pipeline still in the works, but theyre slowing down some of the <unk> being cut I think being cautious.
We continue as you kind of think about a canary in the coal mine, we watch light and general industry would be the first one that we think we would see slowing but we're still seeing very favorable order activity there and as we highlighted on slide five we expect to see that in the first quarter of 'twenty three as well.
Thanks for that last one quick just any comments on the pipeline action ability on the M&A side and your willingness to move at this point.
As far as the M&A pipeline.
Correct, Yes, I mean, we continue to work with tuck in acquisitions, we were able to close out three last year as well as.
Closeout the acquisition of frontier as equity to.
To get full ownership of that we have a number of small tuck in acquisitions in the pipeline.
We feel like Theyre going to be actionable in 'twenty three much as they have in the past year.
Great really appreciate everyones. Thank you okay.
It's Mike.
Your next question comes from Andy couple.
<unk> from Citigroup.
Hey, good morning, everyone.
Good morning, Andy Good morning, Eddie Lehner, Ben just maybe talk a little bit more about Q4 in terms of that adjusted EBITDA margin I think it was down 70 basis points a little worse actually then Q3 I know you talked about price cost being margin accretive, but we could productivity I think you talked about pressure on your margin.
Is labor productivity.
Stable getting worse, better and how do you factor that in looking at that 23 guidance.
Yes.
Question so.
ISS that was where we saw the margin pressure and a lot of the margin pressure came from productivity, particularly in the service Tech area. We made a lot of Onboarding of new service techs.
In the quarter.
And the last two quarters to gear up to support that strong service backlog.
So we do expect the productivity to improve overall within ISS in the coming quarters, but part of this is temporary as youre continuing to onboard these service to execute amongst speed and I think one of the things the strong digital growth and revenue will help us as we go into the fall and into the future once we get through.
Some of this onboarding period.
And also in our factories, we had a lot of new.
Labor adds in the factory is gearing up for that strong backlog.
And as we're onboarding them as well there is some period of lower productivity, but thats predominantly what drove.
The challenges for ISS.
And that's helpful. And then maybe just can you give us a little more color I know, there's always a level of EBITDA adjustments that you would take there was a little higher in Q4.
Would you say this is the high watermark for those adjustments.
How do you factor those or think about those into 'twenty three.
Yes.
There are a lot of the adjustments for the.
The cash noncash exposure on FX on intercompany loans.
But we should see 2023 relatively similar to 2022 theres not anything that's an outlier maybe a little higher as we do some rooftop consolidations some of the adjustments you've probably noted was in the area of restructuring as we've ramped up <unk>.
And so we still have mark more work to do in that area.
But 2023 should be relatively in line with 2002.
Helpful. Thanks, a lot.
Your next question comes from Joseph Giordano from Cowen.
Good morning, this is Michael on for Joe.
And Michael.
I just wanted to touch briefly again I know this was mentioned earlier on the call, but revenue growth expert expectations for next year.
It seems a little higher than most were expecting so.
Kind of pairing this back how much of this would be like classified as new type business.
How does that work in terms of segmentation does <unk> grow little faster due to the backlog in.
As a P pes decelerate at all.
You should see relatively balanced growth next year.
Both segments have very strong backlog.
A lot of it depends on what happens in the macro.
As the year develops.
<unk> is sitting if you notice on page 10, you see that capital backlog has increased and it's ramped up over the.
I have a little higher mix of capital that will convert over a shorter period of time. If you just look at the conversion rates on that chart. So ISS is well positioned in that standpoint, and Apt's thing an all time record backlog as well so both segments have great opportunities as we head into the future.
Thanks, that's helpful and one more Paul if I may.
The drinking water side. It appears it is kind of a second quarter of consecutive neutral outlook.
What are some of the expectations for next year and what are some drivers.
For that business as well.
If you think about municipal drinking water that a lot of the investment that's going to come there's going to be around <unk>. That's also going to be around some of the treatment systems that are flowing down from the government funds that are coming.
We expect that those will be.
Coming in the latter half of 'twenty three into 'twenty four 'twenty five as of the funds flow.
Great. Thank you.
Your next question comes from Brian Lee from Goldman Sachs.
Hey, guys. Good morning, Thanks for taking the questions, Brian Hey, Brian .
Hey, maybe just kind of zooming out a bit.
On the margin question here I know it sounds like then.
So Brian you're embedding some conservatism as per the usual.
Into the guidance, but this would be kind of a third straight year, where youre hanging around the 17% plus or minus.
EBITDA margin range, you, obviously has talked about.
Longer term target to get to 20% or so so can you kind of give us a sense of what you would need to see.
Necessarily in 'twenty, three but just kind of moving forward.
For that trend line to kind of start putting you back on track to that long term target whether it's supply.
Supply chain price makes just trying to get a sense of when we might start to see some of that inflection towards your target, yes, Brian great question.
As we know the last couple of years have not been overly normal years, we've been dealing with Covid and then runaway inflation and I think we've focused very heavily on being disciplined in offsetting our cost increases with price now it's time for us to get the spread.
So this year, we're being pretty balanced and it looking forward not knowing what kind of economic pullback may occur and really what's going to happen as Ben highlighted earlier.
With a lot of the diesel fuel a lot of freight challenges that we've dealt with but.
What I would say is our prices very sticky.
As we roll price increases, it's not something that is going to go up and then be pulled back we'll roll. It forward, we see a little bit of an abatement in inflation will start to see the spread.
Happen and we think that thats going to occur certainly over time.
Become very disciplined in our pricing actions in the way that we go forward in the way that we quote jobs now and I think we will start to see.
The latter half of this year.
To make things as things start to abate on the inflationary side into 2425, I think I think youll see us getting back on track to achieving that 20% EBITDA margin we're focused on.
Okay. That's great I appreciate the color and then just talking about the back half since you you did call out the.
Potential for slowing again.
Anna embed some conservatism given the uncertainty that exists in the economic environment, where do you potentially see that arising it sounds like you'd be on the capital spending front, but are there specific end markets or geos, where youre thinking the slowdown.
Could arise and then just kind of the implications for mix I mean, it almost dovetails with the comments you just made about margins maybe.
Towards the latter half starting to get back on track maybe that's.
Comment on mix as well, but.
Just any thoughts there around the second half commentary.
I think it really.
Go back to our page five that we pointed out you can see the diversification of our end markets.
A lot of these end markets are fairly resilient to different types of recessions I mean, obviously life sciences is going to continue to be robust micro electronics looks like there's going to continue to be robust certainly with the chips Act and some of the onshoring or near shoring thats occurring right now.
The one that we really watch is light and general industry.
As on the upper right hand side of the page.
So a fairly good market for us that's one that we think.
We do see a slowing we will see it come there first and it will come and capital projects.
We think that the benefit of us having approximately 60% of our full revenue.
Sticky steady recurring service and aftermarket.
Everyone is going to continue to run their water systems. They just may not be investing strongly in capacity expansion or new capital in light in general would be where we will see it first.
Okay. Thanks, a lot guys.
The next question comes from Patrick Baumann from Jpmorgan.
Hi, good morning, Thanks for taking my questions.
Just wondering if you could.
Give us some more color on the magnitude of pricing increases you're seeing in terms of revenue contribution.
Both in the fourth quarter and kind of where it landed for 2022, and then kind of what are the expectations for price into your fiscal 'twenty three and then just kind of along those lines.
Talk about the process by which you are pushing price in the services business in particular, and whether you've seen any attrition as a result of that.
Pushing price as those contracts come up for renewal.
Sure. So this quarter we saw about.
80, 515 split price to volume.
Next year, we're expecting to see.
Price to volume be in that 60, 40 range, we've highlighted that in the appendix for you on our assumptions so more volume.
And we are not seeing much attrition at all the price has been very sticky and stable.
And we continue to push it.
The good news is we're seeing that price to become accretive to margins in Q4, which is one of the areas that we wanted to to really push for.
So the key for US now is in margin expansion as Ron mentioned earlier is just getting our labor productivity.
<unk>.
Improvement as we onboard the service techs in our plant employees. So we feel good about being able to work that margin expansion, but overall.
We do expect to see a little more volume.
Next year as we liquidate that very strong backlog and continue to focus on driving revenue through backlog.
On our on our pricing on our service contracts are service contracts are annual contracts. There is no single month that they all start and stop so it's a rolling 12 months.
Been able to roll price increases into those we have not seen.
Tremendous amount of attrition from it in fact it.
Stayed very strong.
I would say over time and we've grown in our service business.
You can see on our backlog chart.
Throughout Covid.
Really related with our customer base that they knew that we were there to serve them to take care of them and we set a standard that the customer expects to to see and to achieve and there they are willing to compensate us for.
Brian Let's make sure it's correct that we're going to be 60% volume, 40% price next year okay.
Sorry, Ben.
The 2022, where did that land for the full year I think you said $85 <unk> price volume for the fourth quarter.
Fiscal $85 15 and for the year.
<unk> 39 volume 61 price next year, we're expecting 60% volume 40% price.
That's clear thank you.
And then one quick follow up clean up I guess I thought <unk> was like I think a $180 million annualized revenue business as the way you were describing in when you acquired it.
Just wanted to I wanted to kind of be clear was the entire $49 million.
Acquired revenue in the quarter from our core.
And then how is that business growing organically since you acquired it and.
What do you expect it to grow.
Looking into 2023.
It was not all for Mark or we also acquired Smith engineering and.
And then at <unk> as well so.
We closed <unk> very small, but as we look forward in the year and what we saw growth coming from our core when I highlighted earlier, it's really coming from our traditional life Sciences business <unk> been steady.
We anticipated it would be steady and it would we would get a lot of synergies coming.
From the.
The efficiency side that we highlighted as we called out.
<unk>.
Seven branches 25 are in the same location as our service branches that we already have in quarter of Oakwood and so where we've seen the growth has really been on our base business life Sciences with us being able to do more with that customer base.
Understood. Thanks, Thanks, so much for the extra color and congrats on the strong results. Thank you very much.
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.
Thank you for joining us today and thank you for your interest in our book.
Absolutely want to recognize the team that we have that executed tremendously throughout 2022, and and we will continue to execute throughout FY 'twenty three.
We were most proud of.
The impact that we had on our safety scores as I said in the opening remarks safety is number one priority at a book when our team through a very strong focus was able to improve.
That metric significantly as well as our ESG goals as we're driving with water recycle reuse inside of our own facilities is we're allowing other customer to do that so we wish you all.
Good weekend and thank you again for joining US we will speak to you again next quarter.
Thank you. This concludes today's <unk> water technologies fourth quarter and full year 2022 earnings Conference call. You May now disconnect your lines and thank you for your interest in of Aqua.
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