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Edited Transcript of AQUA.N earnings conference call or presentation 6-Aug-19 2:00pm GMT

Q3 2019 Evoqua Water Technologies Corp Earnings Call

Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Evoqua Water Technologies Corp earnings conference call or presentation Tuesday, August 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benedict J. Stas

Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer

* Daniel A. Brailer

Evoqua Water Technologies Corp. - VP of IR

* Ronald C. Keating

Evoqua Water Technologies Corp. - President, CEO & Director

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Andrew Edouard Buscaglia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Brian K. Lee

Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* John Fred Walsh

Crédit Suisse AG, Research Division - Director

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Patrick Michael Baumann

JP Morgan Chase & Co, Research Division - Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Evoqua Water Technologies Third Quarter 2019 Earnings Conference Call. (Operator Instructions) 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. Thank you. I would now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.

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Daniel A. Brailer, Evoqua Water Technologies Corp. - VP of IR [2]

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Thank you, Maria, and good morning, everyone. Thank you for joining us for Evoqua Water Technologies conference call to review our third quarter 2019 financial results. Joining me on today's call are Ron Keating, President and Chief Executive Officer; and Ben Stas, 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 our expectations for the remainder of fiscal 2019 and 2020 as well as expected costs and benefits associated with our 2-segment realignment. Actual results may differ materially from expectations. For additional information on Evoqua, please refer to the company's SEC filings, including the risk factors described therein, and our 10-K for the fiscal year ended September 30, 2018.

On this call, we will also have a discussion of certain non-GAAP financial measures. Information required by regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained via Evoqua's Investor Relations website. All historical non-GAAP financial results have been reconciled and are included in the Appendix section of the presentation slides. Unless otherwise specified, references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30. Means to access this conference call via webcast were disclosed in the press release, which was posted on our corporate website. Replays of this conference call will be archived and available for the next 7 days. With that, I would now like to turn the call over to Ron.

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [3]

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Thank you, Dan. Good morning. We appreciate your interest in Evoqua, and thank you for joining us for today's call to review our third quarter results. We are very pleased to report results that are in line with our expectations. Sales growth has been solid. Our price/cost ratios continue to improve, and we saw a favorable mix shift to service and aftermarket in the quarter as anticipated.

As global concerns arise around economic and environmental challenges, we are seeing growing demand for our robust portfolio of sustainable solutions that leverages our vast service network, technologies and digital platform. Our order book continues to be strong, growing faster than revenues, and we see a solid pipeline of opportunities.

The 2-segment realignment benefits are materializing as expected, resulting in more effective enterprise selling across our portfolio of technologies and services. We have strong and growing relationships with significant customers across multiple industrial verticals. One specific application highlights a customer where we have operating assets deployed with the ability to treat approximately 58 million gallons of wastewater per day, enabling recycle and reuse. It is impactful for the customer and sustaining for the environment and the right way to operate.

Please turn to Slide 3. Overall, we're pleased with our third quarter results, delivering revenue growth of over 5% with organic growth of approximately 2%. On a year-to-date basis, revenues are up over 6% and almost half of that is organic. Order growth outpaced revenue growth for the quarter and orders are up low double digits on a year-to-date basis. ISS had solid revenue growth of almost 8% in the quarter driven by service and aftermarket. APT revenues for the quarter were slightly up driven primarily by aftermarket growth.

Pricing actions across the organization continues to be a priority, and price/cost was solid for the quarter, making our fourth consecutive quarter of improving ratios. The management team has been actively engaged in executing the 2-segment realignment and we are on track and pleased to see customer benefits and a lower cost structure continuing to materialize.

Free cash flow continues to be a major focus as we drive profitability initiatives, manage working capital and prioritize our high-return growth investment opportunities. We remain committed to reducing our financial leverage and are on track to achieving our 80%-plus free cash flow conversion target.

We were pleased to complete the ATG UV acquisition during the quarter. ATG has been the exclusive technology supplier for our existing ETS UV product line, and this acquisition positions us to expand our UV business into targeted global markets. This is our third disinfection acquisition and our 13th overall acquisition since 2016, and we welcome the ATG team into the Evoqua organization.

Ben will give detail about our guidance, but in short, we are reaffirming our full year 2019 outlook which has been in place throughout the year.

Please turn to Slide 4. As a business overall, we continue to benefit from stable and recurring revenue growth. This graph represents our revenue and adjusted EBITDA on a rolling 12-month basis from quarter-to-quarter since 2016. Approximately 45% of our last-12-months' revenue is currently derived from services with overall contract renewal rates in the high 90% range. Over the last 3 years, our revenues have grown at a compounded rate of over 8% with adjusted EBITDA growth of approximately 19%.

As we have previously discussed, the nature of our business is subject to quarterly variability that may result from shifts in product mix and changing customer demand. However, we continue to have high visibility into our revenues and EBITDA on an annualized basis.

Please turn to Slide 5. We launched the 2-segment realignment on October 1, 2018, with the goal to improve technology deployment, enable enterprise-wide selling of our broad portfolio of products and solutions while lowering our cost structure, and it is progressing nicely. We have completed a number of actions to help us achieve the targeted efficiencies and anticipated benefits of the realignment but we have more to go.

For example, our aquatics business production has been relocated from Coventry, Rhode Island into our plants in Holland, Michigan and Bridgeport, Connecticut providing scale at existing Evoqua Centers of Excellence. The front end of that business, sales, marketing, product management and engineering, will be moving into a new customer experience center focused on innovation and showcasing our products in a location close to the prior plant in Coventry. By optimizing our manufacturing process and establishing this showcase of application and innovation, we lower our overall cost and create a better experience for our customers and designers.

To date, we have incurred approximately $13 million of cash costs in restructuring and a $5 million noncash charge related to product rationalization and facility consolidation. As previously reported, we expect cash costs to be $17 million to $22 million, yielding future annualized benefits of approximately $16 million.

I would now like to turn the presentation over to Ben to review the financial results and outlook.

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [4]

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Thank you, Rob. Please turn to Slide 6. For the third quarter, revenues grew $18 million or 5% over the prior year to $360 million. Organic revenues grew 2%. Integrated Solutions and Services revenues grew approximately 8% and Applied Product Technologies revenues increased 1% over the prior year. Foreign exchange negatively impacted overall revenues by approximately 1%.

As Ron commented earlier, we have seen order growth rates outpace revenue growth across the business for the quarter and on a year-to-date basis. This order strength provides solid growth opportunities well into 2020, but conversion timing can create some variability in our business.

During the quarter, we estimate price/cost as favorable versus the prior year by approximately $5 million as compared to $2 million in Q2. Adjusted EBITDA was $60.6 million, up $2.6 million versus the prior year. ISS grew approximately 17% and APT was down approximately 2%. Overall, price, cost, mix and realignment benefit impacts were largely as expected.

Please turn to Slide 7. For the quarter, Integrated Solutions and Services revenues were up approximately 8% to $225 million driven by service, aftermarket and acquisitions. Capital revenues were down primarily in the power market, where we saw strong sales last year. Additionally, we are seeing more customers choosing outsourced water projects that result in long-term service contracts in place of capital sales. Organic revenue growth was approximately 2% in the quarter. Two acquisitions contributed approximately 6% to growth. Adjusted EBITDA increased approximately 17% to $51.4 million versus the prior year primarily due to higher volumes, improving pricing and favorable mix resulting from higher services and aftermarket revenues. Capital growth declined due to year-over-year project timing. Adjusted EBITDA margin was 22.8%, up 170 basis points over the prior year.

We're pleased with our Water One initiative. The benefits of Water One continue to be well received by our customers and our installation rate since the September 2018 kickoff is on track with our expectations.

Please turn to Slide 8. For the quarter, Applied Product Technologies segment revenues increased approximately 1% to $135 million driven primarily by aftermarket growth partly offset by lower capital product sales including softer demand from the Asia Pacific region. Foreign exchange negatively impacted revenues by approximately $3 million or 2%. APT contributed approximately $1.4 million of sales since the acquisition was completed on May 25.

The APT segment remains highly focused on executing the realignment and we are pleased with the strong order book growth. We are seeing continued global demand and the expansion of enterprise selling of our broad portfolio of technologies.

Adjusted EBITDA decreased slightly, approximately $600,000 or 2%, to $27.3 million for a margin of 20.2%. This includes approximately $700,000 of a negative impact from currency.

Please turn to Slide 9. Free cash flow for the quarter was $11 million or 95% of adjusted net income. Year-to-date free cash flow was $30 million or 106% of adjusted net income. Year-to-date CapEx increased $9.3 million over the prior year. On a year-to-date basis, through the third quarter, approximately $16 million of growth CapEx for long-lived assets under contract has been financed. We continue to expect free cash flow to adjusted net income to be at least 80% for the full year. Leverage declined slightly to 4.2x in the quarter. Our current weighted average cost of debt is approximately 5.6%. We also have approximately 119 million diluted shares outstanding as of the 3 months ended June 30.

Please turn to Slide 10. Capital expenditures in the quarter were approximately $23 million or $18 million net of growth CapEx financing. On a year-to-date basis, capital expenditures were $64 million or approximately $48 million net of growth CapEx financing. Approximately 85% of the overall CapEx spend this quarter was in ISS, which includes spending for outsourced water projects. Net working capital increased $25 million in the third quarter over the prior year, which includes $13 million from acquisitions. The increase is primarily due to higher receivables.

Please turn to Slide 11. As Ron indicated earlier, we are reaffirming our full year outlook for revenues in the range of $1.38 billion to $1.44 billion and adjusted EBITDA in the range of $220 million to $240 million. We have maintained this guidance throughout the year while providing quarterly commentary for additional transparency as we continue to season as a public company. For the fourth quarter, we expect to see solid revenue growth across both segments. Based on our current view of the order book, we expect to see higher year-over-year capital growth in the fourth quarter versus the third quarter. Our order book continues to be strong, and while we may experience some quarterly variability due to timing of order conversion, we expect to see, over time, continued favorable service and aftermarket pull-through. For the year, we expect both tax expense and cash taxes to be in the range of $10 million to $12 million.

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

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [5]

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Thank you, Ben. Please turn to Slide 12. At the beginning of the year, we expect the second half results to comprise approximately 60% of full year adjusted EBITDA driven by favorable mix, price/cost benefits and order book conversion. We are pleased with our third quarter and year-to-date results, which were in line with our expectations.

Our robust portfolio of products and solutions are helping customers solve increasingly complex water challenges, and we are continuing to invest in our market-leading service footprint, operational capabilities and technologies. Our order book is growing as customers are looking to Evoqua for sustainable treatment solutions to improve operational uptime and lower cost. As a result, we believe service and aftermarket revenues should continue to show a favorable growth over the long term.

We continue to expand and enhance our digital strategy, and Water One is the central component. Our pay-per-usage model is being well received by customers and we continue to enhance our product offering. We have strengthened our price disciplines across the company, and we are seeing benefits materialize. We're 3 fiscal quarters into our 2-segment realignment, and we have made solid progress. More work is required, but benefits are ramping as we move through the second half of the year and into 2020.

Free cash flow generation is paramount to our long-term success, and we are diligently working on a variety of initiatives to meet and/or exceed our expectations. We are pleased with the ATG UV acquisition in late May, and we welcome the ATG employees to the Evoqua family. They bring competitively differentiated products that can be sold globally through our extensive channel sources. We expect to continue our acquisition strategy of manageable, attractively-priced tuck-ins to supplement our organic growth, fill gaps and better serve our customers. We will now open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Deane Dray of RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Got a couple of questions, and starting with free cash flow is, you've done a really impressive job year-to-date at 106% conversion. You're still holding to that 80% or better. Maybe talk about expectations in your fiscal fourth quarter. Will there be more CapEx for outsourcing projects? And just any kind of messaging around cash flow dynamics in the quarter?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [3]

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Yes, Deane. This is Ben. So we are very confident in being able to achieve 80-plus-percent. As you know, we continue to have a robust pipeline, as Ron discussed on the call, of capital opportunities as well as outsourced water project opportunities. Those things, depending on when they come to fruition, always can put short-term pressure on free cash flow. But overall, we felt comfortable with reaffirming the 80-plus-percent, and we feel good about the outlook. You'll notice the working capital did step up slightly in the quarter. That was mostly due to receivables. And while our overdues actually declined, our overall receivables went up partly due to the mix of some of these projects. Okay.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [4]

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That's real helpful. And then just can you clarify for the outsourced projects that were put on in the second quarter -- or excuse me the third quarter, what kind of the range of returns are you seeing on those?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [5]

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Very typical to our traditional returns.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Can you clarify that versus more the product side of the sales or the aftermarket, just to refresh us on why these outsourced projects are particularly attractive?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [7]

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Yes. Normally, we see margins -- EBITDA margins that are 10 points or more higher than we typically see on a capital project. That can exceed that, but normally, as a general rule, at least 10 points higher.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Good. That's exactly what I was looking for. And then for Ron, this is now the third quarter of in-line quarter reaffirmed guidance, and it really does feel like you've turned a corner here versus last year's challenges. So how do you reflect on this? Do you feel like you've turned the corner? And what specifically has changed? Is it the alignment -- the business realignment? Is it better forecasting? Is it aftermarket becoming more traction and services? Just take us through what's changed and the sustainability here, please?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [9]

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Yes, Deane, Thank you. Thanks for the question and comments. I'd say, overall, the team continues to mature as a public company, which is nice to see. And we're seeing a very nice realization of our strategy, which includes the 2-segment realignment. It includes this shift to service and aftermarket and the tail that goes behind our capital installations. And the rollout of Water One, frankly, with our connected solutions has been very effective for us as well. So as we refer to on each of the calls, we have very good recurring nature around our business. We can predict it much better on an annualized basis than the quarterly basis, but we do a backlog roll forward, and we're getting more consistency in being able to predict that against the backlog. A very nice thing that we're actually seeing that we highlighted in the call as well is the pickup in our order rates. And the pickup in our order rates, heavily around recycle and reuse wastewater projects that are coming through. And even though wastewater carries sometimes a lighter margin than processed water, it does have a very good recurring revenue base that goes with it around service and aftermarket. So overall, I think it's just the realization of the strategy that we rolled out when we became a public company that's coming to fruition.

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Operator [10]

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Our next question comes from the line of Nathan Jones of Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Following up on some of the Water One things here, I think you guys have provided some updates on kind of how monthly installations have been going. Have you seen any acceleration on that kind of thing? And also, the mix of those installations you'd previously commented that you were running about 20% of those as competitive takeaways. Any update you can give us on that?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [12]

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Yes. Nathan, that's -- we continue to see the mix be a 20% competitive takeaway as we've rolled it through even in the third quarter. One thing we did in the third quarter is we took a bit of a pause on driving heavy installations because we're rolling out our generation 2 of Water One. Generation 2 gives us a lot more data points and feedback around the quality of the water that's going through, measuring multiple different points of contact through it versus where we were a little more single-threaded on the version 1, but it is right on track. It's ramping as we expected, and we certainly are on track to meet the 3-year outlook that we gave when we rolled Water One out.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [13]

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So we were aware that you were bringing out that gen 2 product. Have you had enough installations of that or enough customer interactions with that new product to judge how they're reacting to that, whether or not that makes it significantly more attractive for them to install that product?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [14]

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We've rolled about 50 units out to date, and that's what we've been measuring. And so as we've rolled these out, we're seeing very good results from them and great feedback from the customers. It's -- I think we'll see that drive the installations significantly over the coming years as well.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [15]

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Then I know you guys had a fairly narrow kind of targeted market that you were looking at, at least initially, and you had seen some interest in food and beverage applications in some places outside of that specific ultrapure water end market. Can you maybe talk a little bit about interest you're seeing outside of that market? Is it broadening? Any color you can give us there?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [16]

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Yes. Sure. It is broadening. And in fact, we're developing more uses and more applications for it across our fleet as a whole. So one of the things that we rolled this out was typically around just the light-industry service deionization business. I anticipate we'll be able to roll this much more heavily across other divisions that are inside of our ISS segment as we continue to develop the product line.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [17]

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When you initially had that 3-year rollout plan was the expansion into some of these adjacent markets part of that plan? Or is this incremental to that plan?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [18]

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It was part of the plan around the heavy industry side of the ISS business with our mobile fleet. I think what we're seeing is a little more broad applications that may go even to some of the wastewater sides of the business where we're able to get more real-time feedback on the water quality coming out.

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Operator [19]

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Our next question comes from the line of Andrew Kaplowitz of Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [20]

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Ron, if you look at your organic revenue growth, it's been in the low single digits now for the last couple of quarters versus your commentary, for instance. This quarter, you were continuing to accelerate and [being] that below double digits. So can you talk about the disconnect? Has there been some issues converting orders to revenue? And would you expect organic revenue growth to accelerate from Q3's level?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [21]

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Yes. I think what you've seen, Andy, is our incoming order rates have been really tied more to some larger capital projects. Those, in some cases, are longer-term projects that are multiyear as well as some of the outsourced water projects that we've highlighted historically as well. So as we're going forward, we're seeing service and aftermarket growth that is realizing itself and the revenue flow through. In fact, our organic service growth in this third quarter was around 5%. So we're very pleased seeing that. And some of the capital projects that are coming through, that's what ties to some of the quarterly variability that we talk about in the business as when that will flow, but these projects will be rolling out over the next couple of years. Some of them are longer cycle, and then some of them are the outsourced water contracts that are multiyear, but they will manifest themselves in a lower revenue base in each year that they're actually realized.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [22]

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That's helpful. And then Rob, maybe a related question. Just talking about your industrial-focused business within ISS, and for ISS, growth obviously slowed but the comparison was much more difficult. So I know you've mentioned you're seeing strong bookings. But was any of that revenue flowing with your industrial-related market? And if so, can you just talk about your outlook for the industrial business moving forward?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [23]

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Yes. Our business has actually been very strong across the industrial landscape in multi markets. One of the benefits of the portfolio of products that we have, we service multiple industries, all the way from power, microelectronics through food and beverage. So we have a little bit of a hedge built into any single industry going up for any single industry falling with the outlook that we have. And then the sustainable solutions that we're driving, as I even talked about on the comments earlier in the webcast, is really growing around recycle and reuse and the opportunities we have. The customer -- or the application that I highlighted, where we have 58 -- the capability to treat 58 million gallons of wastewater a day creating recycle and reuse in one specific customers' locations is greatly beneficial to us and helps shield us from a little bit of what's going on with the ups and downs in the economy right now.

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Operator [24]

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Our next question comes from the line of Andrew Buscaglia of Berenberg.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [25]

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Just a couple of questions on you saw pickups in the service and aftermarket element. What -- was that expected in terms of how you guys are forecasting things? Or is some of this a function of just the market dynamics, maybe, companies that were taking time to, I guess, upgrade facilities rather than move forward with larger capital expenditures? Is this expected, I guess, is what I'm trying to get at.

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [26]

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Yes, Andrew. It was certainly expected. I mean, this is a continuation of the strategy we rolled out when we became a public company. And it's one of the reasons that we showed that one slide where you can see our revenue continuing to grow on both sides, but it grows in the service business as well. So we review that against the backlog. We look at the incoming order rates, and this quarter came in right on track with our anticipation.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [27]

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Okay. And you guys talked repeatedly about orders. What's your visibility like with what you're seeing in terms of the orders you booked this quarter and the past couple of quarters? And can you parse out exactly, amongst the 2 segments, what the mix of those orders is?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [28]

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Yes. So certainly, overall, it's been developing as we've expected. ISS is typically more predictable than APT, APT being more of a product business. So there is a little more lumpiness there. And then so -- but overall, we are seeing, this year, the first 3 quarters, that the order book and the conversion of that order book has been largely in line with our expectations, and we've added some features to our business including S/4HANA for several areas of the business where we didn't have the visibility. That helped us improve our visibility in the backlog and order rollout. So we continue to work that end of the equation so we're better at forecasting. But overall, it's been developing largely as we expected.

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Operator [29]

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Our next question comes from the line of Brian Lee with Goldman Sachs.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [30]

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Maybe just one more on the order book, if I could add to some of the earlier commentary here. Just can you give us maybe some context? I know you're talking about low double-digit growth here in line with expectations. But I guess, relative to last year, would you say that the order book, you're seeing accelerating growth into the new fiscal year, fiscal 2020 here, that gives you better growth visibility entering the new year? And then from a mix perspective, I just want to clarify. I think earlier in the call, you talked about more capital equipment and some of the conversion rates on that having the longer lead time but then I feel like you're also sounding a bit more positive on the service and aftermarket. Just wondering where you're seeing really the order momentum and sort of the margin implications of that mix?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [31]

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Yes. So I would say the order momentum is going across both sides of the business, Brian. So that's a very positive sign for us. In some of the orders -- we'll get some large-scale orders that go over multi-years on both sides of the business, whether it's capital or it's actually a service order that we may get to provide services for 3 to up to 5 years. And so as we're seeing that come in, what that's giving us a very good sign for is the longevity of the business along with the predictability and the visibility of the revenue that's going to come through as well as the recurring nature of what we have in service business. So when we book a 3- to 5-year contract around providing services, it's a lump order that, each year, there's a portion of it that's exhausted. But typically, I mean, we have north of a 90% renewal rate on those types of contracts as well. So it's very good when we're winning these because what we're talking about is winning something that lifts the water level that's going to continue on for years to come.

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [32]

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We're also seeing a shift -- I won't say shift, but a growth in wastewater and recycle/reuse as more and more customers are looking for sustainability solutions. This is an area that, well into the future, looks very attractive. And we've added a lot of capability in that area with acquisitions over the recent years and things that Ron talked about with digital water technology, but that's also an area that continues to be very robust in terms of our opportunities.

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Brian K. Lee, Goldman Sachs Group Inc., Research Division - VP & Senior Clean Energy Analyst [33]

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Okay. That's great. And then just on the mix implications for margins, are you seeing anything meaningfully changing on a year-on-year basis, would you say, given the composition of the order book?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [34]

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Well, this quarter, we certainly saw a favorable mix impact on the ISS side of the business associated with service and aftermarket pull-through and tough comps on capital on a year-over-year basis. But that's -- again, that's just part of the quarterly variability of the business. As I mentioned in my comments regarding guidance, as we look to Q4, we are seeing some nice capital conversion as we head into Q4 and robust growth rates continuing to be present in the Q4 sales. And we're also seeing some benefits of price/cost as well in the results.

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Operator [35]

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Our next question comes from the line of Pavel Molchanov of Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [36]

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You've alluded to the kind of environmental or then to, for example, the ATG acquisition. I'm curious if your capabilities in those kind of ecologically premium solutions are already kind of at the level that you need to serve that segment of the customer base or if you think additional M&A is needed to kind of more firmly establish that.

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [37]

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Yes. So Pavel, you broke up a little bit on me, but I think I can answer -- I got the back half of the question. We are at a position with technologies where we are serving that premium customer base now, and we'll continue to do that. The ATG acquisition was a real benefit to us around being a technology acquisition that enabled us to carry our solutions globally. So we already had a lot of the technology as they were the technology provider to our ETS business in the U.S., so it enables us to expand our footprint and our reach pretty broadly.

One of the things that we've been very focused on over the past 2 years is creating those technology solutions in a mobile application. So we've invested very heavily in the fleet, as Ben has highlighted in several previous earnings calls, but it is around us being able to fully deploy technology solutions for these ecological applications and mobile applications so we can go in treat something quickly. We can treat it long term or we can solve a problem immediately while we create a permanent installation for that solution as well.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [38]

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Okay. Thinking back to 2017 and the hurricane season, particularly on the Gulf Coast, Hurricane Harvey, you guys played a very active role in restoring water supply at the time that it was damaged. And I'm curious, as hurricane season gets underway over the next 6 to 8 weeks, I suppose, what kind of pre-positioning or other proactive steps have you taken to be able to deploy quickly should those services be required yet again?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [39]

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We do this every year with the expectation of what the weather looks like. So we have a very consistent process of mobilizing our assets that are not already being applied into the regions that will most likely be hit. We have service branches, as you know, across the country and with more than almost 90 branches, and we're within a 2-hour radius of 95% of the U.S. population. So we've moved those assets to the service branches that historically have been hit or have risk of being hit so that we can react very quickly.

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Operator [40]

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Our next question comes from the line of Joe Giordano of Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [41]

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Just curious on the guide. Like, I mean, you've maintained the range for a while here. But I guess it's still fairly wide given 1 quarter left. So just curious if there's been any nuance in how you're kind of thinking that through. I mean, if we look at, like, EBITDA, for example, I mean, it's a 5% year-on-year to hit to the low end but 20% year-on-year to hit the midpoint. So curious as to how you're kind of thinking that through and if it's shifted around internally within that range over the last couple of months here.

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [42]

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It's been very consistent. We've maintained a consistent view of the business for the year, and we've met those expectations, and we remain comfortable with the range we provided as we did at the beginning of the year. So I think the message is consistency.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [43]

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Okay. Maybe shifting to M&A. At what point do you -- does that -- at what leverage rate do you guys feel more comfortable deploying kind of more meaningful capital over the -- whether it's small deals, a bunch of them or however?

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [44]

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Joe, I mean, we've stayed very consistent with our M&A, really, process and expectations as well as we rolled it out. We've identified our M&A targets around portfolio product extensions, around geographic extensions or vertical markets that we want to go after. ATG, I think, marks our 13th acquisition, that's a tuck-in. And we'll -- we see consistency in the way that we're approaching that as well. And we feel like the leverage levels we're at now, we can continue to identify and bring in the right tuck-ins. But obviously, we're focused on bringing our leverage levels down into the numbers that we've rolled out and have communicated on these calls.

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Operator [45]

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(Operator Instructions) Our next question comes from the line of John Walsh of Credit Suisse.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [46]

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Just wanted to follow up on a couple of earlier questions thinking about the order strength and -- just given the nature of your fiscal year as we sharpen our pencils on 2020. Could you guys help us, even high level, with the headwinds, tailwinds? You'll have the realignment benefits, some incremental goodness there. I would expect price/cost continues favorably. Maybe there's some mix to offset that but maybe kind of just walk us through high level what you're seeing in those buckets. And then, I guess, collectively, The Street has 4% organic -- or 4% growth modeled for next year, which is the midpoint of the long term. I mean, how should we think about next year relative to that 3% to 5% range that you have out there?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [47]

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Yes, we're not really prepared to talk about 2020 guidance until, obviously, we publish Q4. But heading into 2020, we feel good about our order book. We feel good about our backlog. We talked about the order growth rates, and overall, we feel good about the opportunities. I think, this year, we performed in line with what we've said. And the reaffirming guidance was very consistent with what we said at beginning of the year. So overall, it's been coming together as we've expected. I think the one caveat is we've -- when you look at quarters, we always have the quarterly variability that we've talked about due to timing, seasonality and expected consequences of such. But overall, we feel good about our momentum going in. There's still the macro uncertainties that are out there. That being said, we're seeing increased demand for customers still wanting sustainable solutions, recycle/reuse, and service opportunities right now seem to be relatively abundant. So these are the good side of the bad side on the macro or the uncertainty of the macro situation. But we'll be prepared to talk about 2020 after the end of Q4.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [48]

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Okay. And then, I guess, maybe shifting back to kind of the CapEx discussion. So I think the 4 main buckets that we kind of have here are the investments around mobile, outsourced water. We have the maintenance CapEx, which you've given us. And then there's, I guess, some growth CapEx outside of mobile and outsourced water. How do we think about those buckets over time? I mean, outsourced water obviously is going to be dependent on the project activity, but maybe where you are on the mobile investments and then kind of your other Evoqua growth CapEx opportunities as you see it?

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [49]

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So mobile, outsourced water, those are all supporting growth and growth initiatives, particularly in the service area, and so they're largely depending on growth opportunities. As an example, we use mobile assets for ash pond remediation projects as an example. These are all part of service contracts. So they're all a part of what we're calling long-lived assets and contractual commitments. Maintenance CapEx is about 2.5%. The remaining portion of that CapEx for the most part is -- all went to support growth and/or operational efficiency activities.

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Operator [50]

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Our next question comes from the line of Patrick Baumann of JPMorgan.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [51]

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Just maybe first for me, if you could talk about -- well, first off, congrats on the results and kind of getting on the stuff that you're putting out there. In terms of the fourth quarter, I'm just trying to understand if there are any key variables we should be aware of in terms of what could drive results to the upside or to, I mean, the upper end or the lower end of the guidance. Are there projects that you guys are watching in terms of timing or anything else? That would be helpful to just get some color on that.

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Benedict J. Stas, Evoqua Water Technologies Corp. - Executive VP, CFO & Treasurer [52]

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Sure. So as I mentioned, quarterly variability and projects are all the key variable. Certainly, as mentioned earlier, hurricanes, unforeseen events like that can be a variable that can have timing implications. Typically, those types of events are long-term positive, net-net, depending on size and scale of the impact. You never hope for one of those, but we are typically a part of the remediation after an event, but it can cause timing impacts. What we've built into our guide is what we typically see and based on our backlog roll forward and what we know at this point in time, but that's always subject to change based on the things we just described and unforeseen customer events, et cetera, and/or weather events.

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Patrick Michael Baumann, JP Morgan Chase & Co, Research Division - Analyst [53]

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Got it. Understood. And then maybe if you could talk about -- I'm not sure if you discussed this before, just curious, the services you provide with respect to PFAS and from an environmental perspective and kind of the demand you're seeing in that particular area, if you can kind of cover it.

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [54]

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Yes. Patrick, that's actually a good question and certainly, a growing concern in the markets that we serve. One of the benefits of Evoqua is we are a complete solutions provider around PFOS removal and PFOS treatment. So whether it's carbon, whether it's resin services, RO systems, concentration to concentrate them up but also then to actually remove the PFAS and destroy it with reactivation of some of the opportunities we have. We're also exploring new technologies around UV deployment and some additional higher technical solutions that are in development against treating that challenge that the environment has and certainly many communities have now. One of the big benefits we also do is we can do it in a mobile application. So we can very rapidly deploy solutions and systems to treat a problem that has come out as just an emerging need suddenly and then, again, as I spoke earlier, while we create a permanent installation solution that we can bring on the backside. So the trends are continuing. There's legislation that is being strongly considered around this, and they're trying to set the limits over the next 2 years and -- for what's going to be acceptable. But we are certainly in a position to be able to be the solution provider against the water challenges with PFAS.

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Operator [55]

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And thank you, ladies and gentlemen. That concludes our question-and-answer period. I would now like to turn the call back over to Ron Keating for his closing remarks.

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Ronald C. Keating, Evoqua Water Technologies Corp. - President, CEO & Director [56]

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So thank you all for participating in the earnings call today. We certainly appreciate your time and your support of Evoqua. I would like to thank our team members as they're executing against our strategy and doing quite a nice job as we're seeing the strategy turn into reality in the business.

The 2-segment realignment continues to provide benefits to us selling enterprise solutions. We're able to see the deployment of our technologies much more broadly and much more successfully. And ultimately, we'd like to thank the customers that we serve and the markets that we serve as we're going into the rest of the year. So thank you, again, for your time. We look forward to speaking with you again soon as we close out the fourth quarter. Thank you.

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Operator [57]

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That concludes today's Evoqua Water Technologies Third Quarter 2019 Earnings Conference Call. You may now disconnect your lines at this time, and have a wonderful day.