Evoqua Water Technologies Corp.

Hello and welcome to the Evoqua Water Technology second quarter 2022 earnings conference call. At this time all participants have been placed on a listen only mode and the floor will be open for your questions following the presentation. After the speaker's opening remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key 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. Thank you. I would now like to turn the call over to Dan Braylor, Vice President of Investor Relations. Please go ahead.

Thank you, Brittany. Thanks, everyone, for joining us for today's call to review our second quarter 2022 financial results. Participating on today's call are Ron Keating, President and Chief Executive Officer, and Ben Stass, Executive Vice President and Chief Financial Officer. After our prepared remarks, we'll open the call to questions. This conference call includes forward-looking statements, including third quarter and full fiscal year 2022 expectations, statements relating to demand outlook and our end markets, growth opportunities, our order pipeline, our acquisition strategy and pipeline, integration and future performance of the MarCorp business, supply chain challenges, inflation, labor shortages, and general macroeconomic conditions, as well as statements related to the ongoing impact of the COVID-19 pandemic. Actual results may differ materially from our expectations. For additional information on Avoqua, please refer to the company's SEC filings, including the risk factors described therein. On this conference call, we'll also discuss certain non-GAAP financial measures. Information with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at Avoco's Investor Relations website. Unless otherwise specified, references on this call to full-year measures or to a year referred to our fiscal year, which ends on September 30th, means to access this conference call via The replays of this conference call will be archived and available for the next 14 days. With that, I would now like to turn the call over to Ron.

Ron? Thank you, Dan, and thank you for joining us. I appreciate your interest in Avoqua and am pleased to provide insight into our results and outlook. Please turn to slide three. We had another strong quarter of organic growth and margin expansion. Overall organic growth was up approximately 11%. An adjusted EBITDA margin expanded 50 basis points year-over-year. We are pleased to see broad diversification of organic growth across most regions and product lines, as well as double-digit year-over-year growth across aftermarket, capital, and service. Market demand is strong, and our book-to-bill ratio remains above 1. We see demand strength across multiple end markets, including microelectronics, life sciences, and food and beverage. ISS backlog continues to grow, up 13% year-over-year and up 6% sequentially. Digitally enabled revenues grew by almost 13%, and we continue to see solid capital and outsourced water demand. Supply chain visibility, material and labor availability, and inflationary pressures are challenges that we are managing well today. Navigating this dynamic time will make Evoqua a stronger and more resilient organization. I will speak more about this on a later slide. We have completed our first quarter with MarCorp, and we're pleased with the initial progress. The integration is on track, and the teams are working very well together. We did see a jump in net working capital this quarter in support of our strong organic order and revenue growth. Excluding MarCorp, our net working capital sales ratio would have been 12.6%. MarCorp brought significant working capital assets to Avoqua and provides nice opportunities for future cash generations. Our balance sheet and liquidity remain strong and we are focused on cash flow generation. Please turn to slide four. Evoco is a performance-driven water technology company focused on delivering strong financial results. As you can see, we've delivered outstanding results across these six key metrics over the past several years. We have a talented and dedicated team focused on solving some of the world's most complex water problems and our results demonstrate the strength of our business model and focused execution. We're proud of the progress we've made, and we remain focused on the daily actions that lead to executing our strategy. Please turn to slide five. The macro environment remains challenging on several levels, but we're taking actions to seamlessly serve our customers while driving profitable growth. This slide highlights four notable macroeconomic challenges, supply chain visibility, material availability, labor availability, and the war in Ukraine. We are also providing insight into market demand and order backlog, as well as price-cost performance. Supply chain and material availability challenges have no simple fixes, and we expect them to remain for some time. Our team has been nimble in responding to daily issues and focused on mitigating actions, as well as over-communicating customer delivery schedules against expectations. Additionally, we're closely monitoring COVID-19 lockdowns in China and the impacts they may have on our supply chain and the China market. Our China business grew in the single digits this quarter, which is a decline from the double-digit growth we've experienced over the last several quarters. Labor availability and talent retention challenges are confronting almost every organization. We are actively engaged in recruiting, retaining, and developing our team. We have implemented several initiatives, such as trade school partnerships, university partnerships, internal development programs, and skills training, and we are seeing positive results. We have been pleased to see our digitally-enabled sales grow double digits over the past several quarters, providing productivity and margin benefits. Digital connectivity and virtually being onsite with customers provides tremendous benefits that pay back quickly in tight labor markets. While we hope for a quick end to the Ukraine conflict, the implications on the broader markets may be long-lasting. There has been minimal direct impact to Evoqua sales and operations, however we are impacted by the resulting supply chain disruptions and the rise in energy costs and steel prices. Overall market demand remains strong and our order book is growing. We are seeing multiple markets with attractive growth opportunities and we believe we are well positioned to grow. Our pricing actions have been effective as price cost has been positive year to date. Rate, fleet, and steel costs have been challenging, but our team's done a terrific job managing this very dynamic market. We continue to take actions and have an expectation of delivering a positive price-cost ratio for the full year. Please turn to slide six. Two key long-term financial targets are 3 to 5 percent organic revenue growth and a 20 percent adjusted EBITDA margin. This graph shows our performance since 2018 for both metrics. We're pleased with our performance, especially when considering the constraints placed on the business, as discussed in the previous slide. Organic LTM revenues have grown by 9%, while EBITDA margin has increased 20 basis points since the end of 2021. On the right-hand side of the slide, we've highlighted multiple organic growth opportunities, as well as levers to help us achieve our adjusted EBITDA margin target. We're focused on profitably growing our organic business while continuing to pursue strategic tuck-in M&A targets. We expect to announce additional acquisitions in the second half of this fiscal year. Please turn to slide seven. This chart represents our third quarter expected order demand by end market compared to the prior year's third quarter order rate. We anticipate strong order demand in the third quarter across most end markets, including microelectronics, life sciences, food and beverage, and light and general industries. Municipal wastewater and aquatics are improving from the prior quarter outlook with seasonal demand driving growth across both end markets. Expected third quarter orders in the power end markets are showing a slight decline due to very strong order growth from Frontier in last year's third quarter. The refining markets orders are flat to last year based on strong comps and a deferral of turnaround services due to refinery capacity demand. The underlying demand from the power and refining sectors are both solid. Overall, we expect to see strong order demand across most of our end markets in the second half of 2022. We also anticipate supply chain challenges limiting our order conversion visibility and potentially creating order conversion delays. Please turn to slide eight. There is a global energy transition underway as the market moves to cleaner and renewable energy sources focused on CO2 reductions. There are multiple sources of energy generation, and water treatment is involved in all of them to varying extents, particularly in biofuels. Evoqua supports many developing applications where investments are being made in renewable fuels, renewable natural gas, and blue and green hydrogen. Evoqua's legacy process and wastewater experience in traditional downstream refining and the food vertical markets are a natural fit for alternative feedstock processing and renewable fuels. Our portfolio of wastewater technologies allow our customers to treat the most difficult organic wastewater streams while also helping them to achieve their carbon intensity goals and produce a source of renewable energy. Our core process water portfolio also plays a vital role in providing utility make-up water for new greenfield refinery investments. Additionally, our Magneto specialty anodes and our IonPure brands within the APT segment are leading technologies within hydrogen investments today and will also play a notable role in the build-out of the future hydrogen economy. Please turn to slide 9. We are very pleased to have released our 2022 Sustainability Report on Earth Day, April 22nd. This year's sustainability report highlights the accomplishments of our team in the past fiscal year and details our path ahead. The report matured from last year to utilize GRI core standards and SASB, both known in sustainability reporting. Creating this report was a thoughtful reflection on what we have done to date and where we want to go in the future. We look forward to further enhancing our customer handprint impact and to reducing the impact of our footprint. The slide also highlights a PFAS handprint win within our ISS segment. The Orange County Water District selected Evoqua to provide ongoing service to remove PFAS from their drinking water systems on a two-year service contract. We will treat the drinking water for a majority of the district's 2.5 million residents. Samsung Austin Semiconductor was recognized as this year Evoqua's Sustainability Award winner for their commitment to water conservation and a reuse at their Austin, Texas plant. Our sustainability team honored Samsung and passed a vote with sustainability award winners with a celebration at the NYSE's opening bell ceremony on Earth Day. I would now like to turn the call over to Ben.