Evoqua Water Technologies Corp.

Hello and welcome to the Evoqua Water Technologies first quarter fiscal 2023 earnings conference call. At this time, all participants have been placed on a listen-only mode. 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 key followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star key, then the number 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. Thank you. I would now like to turn the call over to Dan Braylor, Vice President of Investor Relations. Please go ahead.

Thank you, Todd. Thanks everyone for joining us for today's call to review our first quarter 2023 financial results. Participating on today's call are Ron Keating, President and Chief Executive Officer, and Ben Statz, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to questions. This conference call includes forward-looking statements, including our full fiscal year 2023 expectations long-term financial targets statements relating to our pending merger with xylem statements relating to demand outlook in our end markets growth opportunities our order pipeline order conversion cash generation our acquisition strategy and pipeline integration and performance, future performance for recent acquisitions, supply chain challenges, inflation, labor shortages, and general macroeconomic conditions. 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 a Volquist 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 via webcast were disclosed in the press release, which was posted on our Investor Relations website. Replays of this conference call will be archived and available for the next 60 days. With that, I would now like to turn the call over to Ron. Ron?

Thank you, Dan, and thank you for joining us. Before we present our results, I'm once again pleased to announce that on January 23rd, we entered into a definitive agreement for Xylem to acquire Evoqua in an all-stock transaction at a 30% premium to our closing price on the Friday before signing. Joining forces with Xylem is an exciting development for the market and an exciting opportunity for our team members. The combination provides a platform to leverage our combined strengths, and we look forward to increasing our collective impact as we address increasingly complex global water challenges. As a company, we remain focused on executing our plan until the deal closes. We will operate as business as usual until the combination is approved by regulatory agencies and both sets of company shareholders. I'm pleased to provide insight into our prior quarter results and will appreciate you limiting your Q&A to our results and not to the combination or transaction. Please turn to slide three. We're very pleased with our start to fiscal 2023. Our first quarter revenues were up 19% over the prior year period, with organic growth contributing 9.1%. We're pleased to report strong revenue growth across both segments. ISS organic revenue growth was nearly 8% and APT organic revenue growth was more than 12% year over year. We had strong sales across all regions and most end markets with price realization and volume both contributing to growth. FX continues to be a headwind primarily for APT as the dollar weakened throughout the quarter from its late peak in September. Adjusted EBITDA was up approximately 34%, and margin expanded 190 basis points over the prior year quarter. We are very pleased that our LTM adjusted EBITDA margin grew 40 basis points to 17.5%. We continue to see broad-based demand across our key end markets, particularly in life sciences and food and beverage. Our order flow remained healthy as well, with our book-to-bill ratio again over 1.0, and our pipeline remains robust. Given the first quarter performance and the order momentum, we are confident in delivering on the year's commitments made in our Q4 earnings calls. Networking capital increased in the quarter as we intentionally built inventory to support our order activity. Operating cash flow was in turn impacted, though we still expect to exceed our 100% adjusted pre-cash flow conversion target for the fiscal year. We were able to reduce our net debt leverage ratio to 2.5 times, and our balance sheet is healthy and flexible and remains a top priority in this rising interest environment. Please turn to slide four. Water is essential for daily life, whether for human consumption, industrial production, or commercial purposes. Manufacturers are requiring more stringent levels of ultra-pure water, while wastewater reuse has become vital in protecting, diminishing water supplies, and reducing the strain on municipalities. Water is becoming increasingly complex, and Avoqua is an essential treatment provider, making clean water more accessible. The long-term market trends are very favorable, and we expect our business to be resilient through normal market cycles. This slide highlights key financial metrics that demonstrate our resilient business model, driven in part by our recurring revenue streams, with service and aftermarket making up approximately 60% of our revenue. Digitally connected outsourced water, strong and growing in markets, and our industry-leading service are just a few drivers for organic growth in favorable and unfavorable market conditions. As stated previously, cash flow is down for the quarter, but we continue to target adjusted free cash flow conversion of 100% and have achieved that level for several years. Our management team is focused on driving strong and consistent cash generation that is supported by our base of stable, profitable, and recurring revenues. We're making strategic decisions on working capital, and we'll see opportunities for improvement as supply chain performance becomes consistent. Please turn to slide five. This chart represents our second quarter expected order activity by end market compared to the prior year second quarter. We continue to expect strong orders across most end markets, particularly life sciences, food and beverage, and aquatics. Microelectronics has been very strong in the prior year period, and we expect similar results in the quarter. Microelectronics remains in a long-term upcycle, though timing and project schedules could create some volatility in this key end market. Overall, we expect to see stable growing order demand across most of our end markets for the remainder of fiscal 2023. And as I previously commented, our inventory investments have us well positioned to convert our backlog effectively and to achieve a higher rate of on-time customer delivery. We've seen some project delays related to permitting issues and customer schedule management, but cancellations remain immaterial. Please turn to slide six. We look at our environmental impact through our own footprint on the environment, but also through the products and services we provide to our customers. We are pleased to highlight two recent handprint wins, which are expected to positively impact our customers' water conservation and reuse initiatives while generating an attractive return on investment. Our first highlight showcases the potential impact of the infrastructure law with an industrial chemical manufacturing partnering with a regional municipal wastewater facility in Virginia. Evoqua was selected for the pilot to design, source, and assemble a wastewater treatment system that combined ultrafiltration and RO technologies in a mobile platform. The pilot will test the treatment of wastewater for recycling and providing high quality feed water for plant use. The goal of the pilot is to determine the potential for a full-scale system with support from the new infrastructure bill. A full-scale system would be designed to reduce the demand on the water treatment facility by 3,000 gallons per minute and to open additional drinking water capacity that could serve more than 14,000 homes in the region. We also help the supermarket chain divert high-strength organic waste using our anaerobic membrane bioreactor. The biological process converts the waste into biogas that is then converted into renewable energy. This system will treat up to 230,000 tons of food waste annually. reducing the landfill burden while producing 1,400 million BTUs of biogas per day, which is the average daily use of approximately 7,000 US homes. Please turn to slide seven. While helping our customers improve their sustainability with our solutions, we're still addressing our own operations to minimize our footprint. We are very pleased to announce that we were recently selected as one of only 19 companies to receive the Terra Carta seal. The Terra Carta seal was launched at the COP26 conference by King Charles III when he was the Prince of Wales. It recognizes global companies that are driving innovation and demonstrating their commitment to the creation of genuinely sustainable markets. The TerraCarta was awarded to companies with ambitions aligned with the recovery plan for nature, people, and the planet, which was launched in January of 2021. We are also privileged to have ranked sixth this year on the Corporate Nights list of the 100 most sustainable companies in the world. It is the second year that Evoqua has been included in the top 100 rankings, and an improvement from our 19th position in 2021. We are honored to be recognized as a sustainability leader, enabling our customers to become more sustainable through our solutions and with our services. Last but not least, we received the Frost & Sullivan 2022 Global Company of the Year Award in the Water Technology category. The company was honored for our visionary innovation, market-leading performance, and unmatched customer service. We thank Frost and Sullivan for recognizing us at the forefront of innovation and growth in our industry. Our team has worked tirelessly to achieve these great awards, and I'm thankful for their efforts and the progress that we continue to make. I would now like to turn the call over to Ben.