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Evoqua Water Technologies Corp. (NYSE:AQUA)
Q2 2019 Earnings Call
May. 10, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Evoqua Water Technologies second-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.

Dan Brailer -- Vice President of Investor Relations

Good morning, ladies and gentlemen. Thank you for joining us for Evoqua Water Technologies conference call to review our second-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.

[Operator instructions] This conference call includes forward-looking statements, including our expectations for the quarter ending June 30, 2019, the remainder of fiscal 2019 and fiscal 2020, as well as expected costs and benefits associated with our two-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 conference call, we will 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 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 this press release, which was posted on our corporate website.

Replays of this conference call will be archived and available for the next seven days. With that, I would now like to turn the call over to Ron.

Ron Keating -- President and Chief Executive Officer

Thank you, Dan. Good morning. We appreciate your interest in Evoqua, and thank you for joining us for today's call to review our second-quarter results. At the midpoint of our fiscal year, our overall results have materialized largely as expected.

Demand continues to be solid. Our order book is growing, and we expect that to continue through the second half of the year. Operational execution continues to be a priority, and we are focusing the organization on expanding our customer relationships, driving profitable growth and meeting financial expectations. We have enhanced our leadership team, particularly in our Applied Product Technologies segment with the recent addition of Herve Fages as the new segment President.

Hervé brings extensive commercial product and digital experience from previous roles at Honeywell, Schneider Electric and Tyco. We expect his experience to serve the organization well and we welcome him to the team. Please turn to Slide 3. Overall, we're pleased with our second-quarter results, delivering revenue growth of almost 5%, with approximately half of that being organic.

ISS revenues grew double digits in the quarter following solid double-digit year-over-year revenue growth and last year's second quarter as well. APT revenues were down mid-single digits, primarily due to lighter capital revenues and foreign exchange, but showed good aftermarket product growth. Both segments reported strong order growth through the quarter, delivering low double-digit year-over-year growth on a year-to-date basis. We expect our strong first half orders to provide attractive growth opportunities in the latter part of this year and into 2020.

We are pleased to see our progress in our pricing actions across the organization and we expect to see continued improvement throughout the year. The management team has been actively engaged in executing the two-segment realignment, which is predominantly focused in the APT segment. We are on track in making solid progress as evidenced by our strong order growth. Free cash flow continues to be a major focus.

During the quarter, we invested $20 million in ISS capital expenditures. These investments were in support of high-return growth opportunities, particularly for mobile service assets and outsourced water projects. We have working capital initiatives under way to improve cash flow, which will be important in achieving our 80% or greater free cash flow conversion objectives. Then we'll speak in more detail about the guidance, but in short, we are reaffirming our full-year 2019 outlook as provided.

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 44% of our last 12 months revenue is currently derived from services with overall contract renewal rates in the high 90% range.

Over the last three years, our revenues have grown at a compounded rate of 8.5%, with adjusted EBITDA growth of approximately 20%. The nature of our business is subject to quarterly variability that may result from shifts in product mix and cost impacts, driven by changing customer demand. However, we continue to have high visibility into our revenues on an annualized basis. Please turn to Slide 5.

When Evoqua was established, we began with three segments, two focused on the industrial and municipal markets and our products business to sell our technologies globally. Our new organizational realignment is refined at initial structure with a goal to improve technology deployment and provide more comprehensive customer solutions, while lowering our cost structure. Fundamental to the success of our strategy is aligning around our customers and how they want their problems to be solved. We now have two distinct segments with clear go-to-market strategies to accomplish that shift.

The Integrated Solutions and Services team is focused on serving the North American market through our direct sales and best-in-class service channel. This opens up opportunities to move from a pay-by-service model to subscription-based revenue using programs like Water One. With Water One, we deploy complete solutions and optimize customer performance by guaranteeing quality and quantity with process guarantees. We're also moving away from regional account selling to a more national account focus, allowing us to better leverage our national footprint and technical talent.

The Applied Product Technologies segment will move from individual product sales to offering customers a suite of technologies that best fit their needs. The APT team continues to go-to-market through our established third-party channels across the globe and will sell products through our Integrated Solutions and Services segment, allowing us to expand our reach and, in fact, underserved markets. As previously mentioned, our rate base is leading the APT realignment efforts and we're pleased with the progress to date. Much more work is required and the organization is focused on serving our customers, while executing the realignment actions.

Across the company, early benefits are materializing for our customers and for the company as evidenced by our strong and growing order book. Our digital strategy is an important component of our business model, allowing us to better serve customers, drive profitable growth and enhance operational efficiencies. We were very pleased to be recently named Digital Water Company of the Year by Global Water Intelligence at the 2019 Global Water Summit in London. Please turn to Slide 6.

Our two-segment realignment has been under way for six months and is expected to be completed no later than September 2020. We have taken a number of cost reduction actions to help us achieve the targeted efficiencies and anticipated benefits of the realignment. Actions we have taken had been focused on streamlining our operating structure and optimizing our product offering and our footprint. Today, we've incurred approximately $12 million of cash costs.

We have also taken a $5 million noncash charge related to product rationalization and facility consolidation. We expect cash cost to be $17 million to $22 million yielding future annualized cash benefits of approximately $16 million. I would now like to turn the presentation over to Ben to review the financial results and the outlook.

Ben Stas -- Executive Vice President and Chief Financial Officer

Thank you, Ron. Please turn to Slide 7. For the second quarter, revenues grew $15 million or 4.5% over the prior year to $349 million. Organic revenues grew 2.3%.

Integrated Solutions and Services revenues grew approximately a 11% and Applied Product Technologies revenues grew or declined almost 6%. Foreign exchange negatively impacted overall revenues by 1.3%. As Ron commented earlier, we have seen strong order book growth in both segments in the first half of the year. However, converging timing is an inherent key variable in our business.

During the quarter, we estimate price cost was positive by approximately $2 million as compared to flat in Q1. Adjusted EBITDA was $56.7 million, down $1 million versus the prior year. ISS grew over 11% driven by organic growth in acquisitions. APT adjusted EBITDA was down approximately 25%.

Approximately half of this decline was due to lower volumes and product mix, primarily from large prior-year high-margin shipments. The other half of the decline was from the impact of last year's second-quarter benefit of $3.6 million, primarily from reduced warranty obligations resulting from improved product performance. Overall, mix and timing impacts on Q2 results were largely as expected. Please turn to Slide 8.

For the second quarter, Integrated Solutions and Services segment revenues were up approximately 11% to $227 million, driven by service capital and aftermarket in multiple vertical markets, particularly in the microelectronics and food and beverage markets. Organic revenue growth was strong at approximately 6% in the quarter. Acquisitions contributed approximately 5% to growth. The order book includes a variety of large service opportunities, including attractive outsourced water orders.

Order conversion cycles for these types of projects convert to revenue over an extended period of time. Overall, demand trends across our key vertical markets remained positive. Adjusted EBITDA increased over 11% to $51 million versus the prior year, primarily due to volume and favorable price actions. Adjusted EBITDA margin was up 20 basis points over the prior year.

We are pleased with our Water One initiative and installation rates. The benefits of Water One continue to be well received by our customers, and our installation rate is on track with our expectations. Please turn to Slide 9. For the second quarter, Applied Product Technologies revenues decreased almost 6% to $122 million, driven primarily by lower capital product revenues, down approximately $15 million, while aftermarket service revenues grew by approximately $10 million.

The acquisition of Pacific Ozone contributed approximately $1 million to revenue growth. Foreign exchange negatively impacted revenues by approximately $4 million or 3%. The APT segment remains highly focused on execution of the realignment, and we are pleased with the strong order book growth. Adjusted EBITDA decreased $7 million or approximately 25% to $21 million, a margin of 17.4%.

As previously mentioned, approximately half of this decline was due to lower volumes and product mix and the other half of this decline was primarily due to the benefit of last year's second quarter reduced warranty obligations. Please turn to Slide 10. Free cash flow for the quarter was $16 million or 95% of adjusted net income. Year-to-date free cash flow is $19 million or 113% of adjusted net income.

Year-to-date capex increased $9 million over the prior period, approximately $11 million of year-to-date capex was financed. We continue to expect free cash flow to adjusted net income to be at least 80% for the full year. Leverage ticked up slightly to 4.3 times in the quarter. Our current weighted average cost of debt is approximately 5.6% as of the end of the second quarter.

We also have approximately 119 million diluted shares outstanding as of three months ended March 31. Please turn to Slide 11. Capital expenditures in the second quarter were approximately $23 million or approximately $17 million net of growth capex financing. On a year-to-date basis, capital expenditures were $41 million or approximately $30 million net of growth capex financing.

Approximately 80% of the overall capex spend this quarter was in the ISS segment, which includes spending for mobile service assets, outsourced water projects and muni service equipment. Working capital in the second quarter sequentially declined $3 million. Overall, working capital is impacted by revenue growth and capital mix. Please turn to Slide 12.

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. While we have visibility on an annual basis, given the recurring nature of much of the business, the company is subject to quarterly variability that may result from product mix and customer schedules changing between periods. As such, we expect third-quarter adjusted EBITDA to be approximately flat to up 8% sequentially over second-quarter 2019 adjusted EBITDA. I would now like to turn the call back over to Ron for closing comments.

Ron Keating -- President and Chief Executive Officer

Thank you, Ben. Please turn to Slide 13. We are pleased with our second-quarter and year-to-date results, which were in line with our expectations and we are positioned for an improved second half. As discussed, we've made substantial progress in our realignment efforts in the first six months, including important actions within the APT segment that should position the segment for long-term success.

We have more to do. And while the organization is focused on operational execution, we are also seeing customer benefits begin to materialize. The order book is growing and our pipeline remains solid. The outlook for demand is stable and customers continue to view water treatment as an integral part of their operations.

As Ben mentioned, order conversion timing will be a factor for the second half performance. We continue to hold the first-mover advantage with our Water One program and our overall digital strategy is a cornerstone of our corporate strategy. While still early days, we continue to see 20% of our Water One adoption as competitive conversions. Free cash flow is an important priority, and working capital improvement initiatives are well under way to help achieve our targeted conversion rate.

We will continue to make high growth -- high return growth capital investments to drive organic revenues and profitability. We also expect to pursue strategic tuck-in acquisitions to supplement our organic growth strategy. We will now open the call to your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] And your first question comes from the line of Deane Dray with RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Ron Keating -- President and Chief Executive Officer

Good morning, Deane.

Ben Stas -- Executive Vice President and Chief Financial Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

When I first looked this morning at the Applied Product Technologies top line a little bit below our expectations, I was half expecting to hear some commentary like your peers were talking about distributor destocking and weather issues, and it didn't sound like that was a factor here. But maybe you just take us through some of the puts and takes and what was the impact on the distributor channel and was there an impact on weather?

Ron Keating -- President and Chief Executive Officer

Yeah. Deane, on Applied Products, we sell through third-party channels that are primarily reps, not necessarily distributors. So it's not a distributor loading up on stock, and we really didn't see that much of a challenge in weather. It really is tied more to the specific mix of projects year over year, what we had last year versus what we had this year.

But the backlog is growing as we highlighted our order activity is very strong, and we anticipate a very good back half in APT.

Deane Dray -- RBC Capital Markets -- Analyst

That's real helpful. And then can you expand on your comments on pricing and more traction there. Where does that stand today and an expectation of pricing contribution to your top line this year?

Ron Keating -- President and Chief Executive Officer

Sure. We made continued progress on pricing. In fact, our price cost in the first quarter of the fiscal year was roughly neutral. Price got on top of cost in the second quarter of the fiscal year, we were pleased to see that.

And we expect that to continue ramping as we go into the back half as well.

Deane Dray -- RBC Capital Markets -- Analyst

Great. And then just last question. It's a bit more forward-looking, if I could. Lots of focus in the water industry on remediation efforts, really nationally on PFOS.

And the way we look at all the treatment technologies and who would potentially benefit or have a solution, it looks like Evoqua is nicely positioned, both with your ultrafiltration capabilities, MEMCOR, but also deionization. There's not going to be one treatment technology, but it looks like you've got a number of the ones that would look to be most effective. Where and how do you think Evoqua would be positioned? And are you getting any early traction on this? And what do you think the opportunities are?

Ron Keating -- President and Chief Executive Officer

It's a great question. This is a growing challenge as you know in the industry and the market as a whole. The very nice position that we sit in is we have a full suite of technologies to address this. And we've got a growing pipeline because we look at it, whether it's activated carbon of which we're reactivating it.

And in most cases, you destroy the PFOS in the reactivation with heat, all the way through to resin ion exchange, concentrating it up with RO or UF. We've got a full suite, and we're positioned very well, not only in providing the treatment technology, but providing the vessels and the capability to do it in both a fixed or a mobile application.

Deane Dray -- RBC Capital Markets -- Analyst

Great. We'll pay attention to that. And then I forgot to congrats to you guys on the digital award. That's a big deal.

Ron Keating -- President and Chief Executive Officer

Thank you, Deane. I really appreciate it.

Operator

Thank you. Your next question is from Nathan Jones of Stifel.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning, everyone.

Ron Keating -- President and Chief Executive Officer

Good morning, Nathan.

Ben Stas -- Executive Vice President and Chief Financial Officer

Good morning, Nathan.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Just starting with guidance here. 3Q guidance is a bit below where we were expecting and where consensus numbers were. Can you talk about the inputs there, timing, mix, how that impacts the 3Q guide? Would you say you're currently tracking toward the low end of the full-year guide? Or do you have enough visibility into 4Q that you can keep getting into the top half of that guidance range?

Ben Stas -- Executive Vice President and Chief Financial Officer

So we reaffirmed our guidance, and so we're within the range. And we feel confident about our reaffirm at this point based on what we see. The business inherently always has quarterly variability, as Ron discussed, and we discussed on in our opening remarks. In terms of the 3Q guide, we're looking at the roll forward of our backlog and when do we expect that to convert.

As we noted on the earlier comments, our order book is very strong, but we also look at that and say, once the timing of that based on customer demand schedules and when do we expect that to convert. That is all factored into our guidance.

Nathan Jones -- Stifel Financial Corp. -- Analyst

OK. Then I was interested, Ron, you said that 20% of Water One installations are still competitive takeaways. Can you talk about how that's progressing? Why do you think that number should increase as we go forward by more competitive takeaways? And any interest you've had from an outside of those targeted ultrapure water markets that you were going after to begin with that might be starting to increase that your view of what the addressable market is for that product and service?

Ron Keating -- President and Chief Executive Officer

Yeah. Nathan, thank you. That's a great question. We anticipate the ramp up will continue in the competitive takeaways.

We see a real unique value proposition that we're bringing into the market by going to a subscription-based model, where customers are actually playing for quantity of water used or quantity of water treated. We've been primarily focused on processed water to date and we continue to focus on the processed water area because that's ultimately where the customers are most concerned about quantity and quality on a steady flow rate. We are seeing and opening in some of the wastewater side of the business in industrial wastewater primarily, where they have an interest in seeing recycle reuse brought back into the processed water side and ultimately is driving a growth in the sustainability efforts in a lot of our customers are going after as well. So we're focused for the next two to three years as we anticipated early on and we've articulated around converting the business that we have on service DI and processed water, but ultimately, we'll see this continue to deploy much more broadly across the full spectrum of the water applications in the industrial space we feel.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Do you have -- I mean, you guys I think started with an idea that this was a billion-dollar addressable market somewhere in that range. Do you have any indication of what you think that could grow to over time?

Ron Keating -- President and Chief Executive Officer

We're testing with our initial thesis around this until we continue to deploy it and evolve it more deeply, we're still early days in this, Nathan, but I do believe, it's got a vast expansion opportunity across a more broad market. Ultimately, you can get customers data, but if it's not something that they can act on, it's just nice to have. So being able to provide them with quantity and quality against a defined implement is where they get value out of it. So as we can continue to drive that the opportunities for the market to expand obviously are there.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Great. Thanks very much for taking my questions.

Ron Keating -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Pavel Molchanov of Raymond James.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. At the very end of your comments, you mentioned that you're still on the lookout for bolt-on M&A opportunities. I guess, at this point, it's been almost a year since you've last made an acquisition and, obviously, you've been in restructuring mode for a lot of that time. I'm curious if you're now getting kind of back into the comfort zone of where you could realistically begin to pursue M&A after the transition of the past year?

Ron Keating -- President and Chief Executive Officer

Pavel, we are, and I appreciate the question. We wanted to complete the realignment. The realignment is well under way as we defined in the opening comments. Once that has been completed and we're starting to see the synergies of the organization come together and the integration of the more than the 12 acquisitions we made over the past two years, which we've seen and we're yielding the benefits from those, we are in the position to identify additional tuck-ins.

We have a very long list of them as we have historically. And we're mostly focused around product portfolio expansion. So that's the area that we're focused on and I would say we're back in the mode that we anticipated to be in at this time.

Pavel Molchanov -- Raymond James -- Analyst

OK. OK. That's clear. And given that this entire week, market's been thinking about little else other than tariffs, I thought, I would raise that issue as well.

Last year, you blame tariffs as one of the causes for margin compression. Now that tariffs on a lot of Chinese products have increased from 10% or 25%, I realize it's kind of breaking news here, but any thoughts right off the bat on what this means for your business?

Ron Keating -- President and Chief Executive Officer

The majority of our products that we're acquiring from China were already at the 25% range. So we don't see this being a first-line challenge for us. The more difficult challenge will be component suppliers that we purchase from that purchase from China that may see movements. It's early days to know what that's going to look like, but we don't see it being a strong impact on the back half of the year.

Pavel Molchanov -- Raymond James -- Analyst

All right. Appreciate it.

Operator

Thank you. Your next question is from Andrew Buscaglia of Berenberg.

Andrew Buscaglia -- Berenberg Bank -- Analyst

Hi, guys. Just to go back to the guidance, you're implying Q3 a little more muted, but then a ramp in Q4. Can you go into maybe some detail on the orders that you got that gives you confidence that they're going to roll off? What kind of types of things are in there? And how at risk would it be that that doesn't transpire?

Ben Stas -- Executive Vice President and Chief Financial Officer

So three factors, if we break this down, price actions, cost realignment benefits and line of sight opportunities that are typical within our backlog. There's nothing in there that's atypical of historical periods. These are typical types of projects, both in terms of outsourced water projects, services, as well as capital projects rolling through the backlog.

Andrew Buscaglia -- Berenberg Bank -- Analyst

OK. OK. And with regards to the --

Ben Stas -- Executive Vice President and Chief Financial Officer

I think, Andy, if you go back and look at 2017, if you look at the years, we put the quarters out there, and you can see that there's changes depending on the year, the quarters vary as we talked earlier. However, if you look over several period -- of several years, you can see that this year is going to be a little bit like 2017 in terms of the quarterly rollout.

Andrew Buscaglia -- Berenberg Bank -- Analyst

OK. Yeah. That's helpful. OK.

And the -- with the expected benefits, are you able to kind of wait though that like when those are going to flow through the year, also into 2020, what of the remaining benefits will flow through then just try any kind of help where we can piece that together them all?

Ben Stas -- Executive Vice President and Chief Financial Officer

So yeah, it will be most significant in Q4 in terms of the benefits, but effectively in line with what we previously communicated. We've contemplated that in our guidance.

Andrew Buscaglia -- Berenberg Bank -- Analyst

OK. Great. OK. That's it for me.

Thanks.

Operator

Thank you. Your next question comes from John Walsh of Credit Suisse.

John Walsh -- Credit Suisse -- Analyst

Hi. Good morning.

Ron Keating -- President and Chief Executive Officer

Good morning, John.

John Walsh -- Credit Suisse -- Analyst

Hey. So just a question around EBITDA margin expectations. So appreciate the guide on Q3 adjusted EBITDA, but just trying to level set everybody here. If we were to think about what the Page 4 chart looks like next quarter and Q4, should we anticipate that there is maybe one more step, modest step down on the 12-month role or do you think the 15.5% on the 12-month role is the bottom here for the year? I'm sorry, the 15.5%, I misspoke.

Ben Stas -- Executive Vice President and Chief Financial Officer

So we should start seeing for the next two quarters, I'm going to go into the quarters, as you can do the math based on our guide, we start seeing our EBITDA margins improve sequentially, OK? And versus the prior years, if you do the math on that as well, you'll see -- that we'll see a modest, a very slight tick up to flat in Q3, but then Q4, you'll see that we should start to see a flattening and we won't see a continued decline, we'll start seeing a flattening based on the guide.

John Walsh -- Credit Suisse -- Analyst

OK. Thank you. That's helpful. And then, maybe just a conversation around the leverage, it's been, I think, very topical this morning.

You have that kind of goal longer term out there, I think the 2.5 times, but how should we think about the progress and where kind of may be leverage ends this year in your model? Maybe on a net basis as well.

Ben Stas -- Executive Vice President and Chief Financial Officer

We're quite happy because it's certainly higher than first. So we should start seeing leverage improve based on second half EBITDA improvement.

John Walsh -- Credit Suisse -- Analyst

Yeah. I know, I guess, I understand the math on that because you gave the guide. But just how do we think about it coming down from here or kind of the pace of progression, any color around that?

Ben Stas -- Executive Vice President and Chief Financial Officer

We have a three-year goal, three- to five-year goal of bringing our leverage to the 2.5-times range within the next three to five years. And again, part -- that will partly depend on acquisitions, but that's our long-term stated goal.

John Walsh -- Credit Suisse -- Analyst

OK. Thank you.

Operator

Thank you. Your next question is from Andrew Kaplowitz of Citi.

Andrew Kaplowitz -- Citi -- Analyst

Hey. Good morning, guys.

Ron Keating -- President and Chief Executive Officer

Good morning, Andrew.

Ben Stas -- Executive Vice President and Chief Financial Officer

Good morning, Andrew.

Andrew Kaplowitz -- Citi -- Analyst

Ron, you've mentioned before that your higher margin service revenue will improve in the second half of '19 following some of your larger capital installations. Can you give us more color on what that ramp-up might look like at this point? I think, if I look at the LTM service revenue, it grew about 5% for you in Q2, but most of that was probably a higher mix of service in ProAct. So what was organic service growth for you in the quarter? And could it be up mid-single digits in the second half of your fiscal year?

Ron Keating -- President and Chief Executive Officer

Yeah. So typically, what we see is a lot of our historic growth rates in the service business, Andy. So kind of that 4% annual growth rate around the service revenue as a whole. The benefits we have is we have some of the larger capital installations that have gone through, and they will have a follow-on service on the backside of that.

The installations obviously are bigger volume hits when they come. And then as they level out, their growth rate on the service isn't quite as high because it's carrying out over a year and you're charging over the month, so it takes a while for it to hit the lap itself. But a lot of the service applications we dawn into has been around some of the power industry with ash pond dewatering, some of the opportunities with wastewater services that are there that follow on with mobile applications that come behind that typically are longer-term service contracts that in some cases can stay in between a year to up to 10 years.

Andrew Kaplowitz -- Citi -- Analyst

OK. That's helpful. And then, Ron, you've been talking about sort of this move to industrial wastewater now often for a while, you mentioned it today. How much is it helping your organic bookings in ISS? And is it possible may be for Ben to give us some more color on the backlog coverage that you have the second half of the year, what's the backlog up year over year as we sit here today?

Ron Keating -- President and Chief Executive Officer

Yeah. I'll say briefly on just what we're seeing in orders as far as the -- where it's coming from and let Ben talk a little bit about the backlog and what coverage is. But we have -- the order rate has been very strong as we discussed in the opening remarks and they continue on. There are some very nice sized projects around wastewater, wastewater recycling.

A lot of that is coming from the food and beverage industry that we highlighted earlier. We're actually seeing some of that bleed over into areas like microelectronics where companies are very interested in minimizing their liquid discharge and we are in a very unique position to have a full product portfolio to be able to do that. So not only are we seeing the processed water start to build. But on the back end, when you need to recycle and reuse the water, you're adding variability into the processed water side by bringing a recycle wastewater in.

And so it gives us a benefit where a customer comes to us as a whole service solution provider, and it's showing actually in our order rates that we're very pleased to see. I'll let Ben comment a little bit on the backlog.

Ben Stas -- Executive Vice President and Chief Financial Officer

Yeah. So I guess, we don't disclose order rates specifically, we provide some color. So obviously, by not doing that, it's difficult to get into backlog. I could -- I would say this is -- that we're in line with traditional norms.

It sounds like that.

Andrew Kaplowitz -- Citi -- Analyst

OK, Ben. And if I could ask you to clarify one other thing then, you've had a write-off in products that you talked about this quarter. Was that in association with the realignment or something else?

Ben Stas -- Executive Vice President and Chief Financial Officer

It was the realignment but we're looking at our footprint, as we now have aquatics business on SAP that gives us opportunities to truly integrate them into the business and also the visibility we have into the business is far greater than we had in the past. And so as we looked at all that, we have to be able to scale this business going into the future, and so we took the opportunity to address some of the inefficiencies we had in the business, particularly with regards to consolidation of a warehouse. And then -- OK? And then as we did that, we obviously looked at product rationalization and simplification were the key products we make the money on versus the ones that we don't want to participate in the future.

Andrew Kaplowitz -- Citi -- Analyst

Thanks for that.

Operator

Thank you. Your next question is from Brian Lee of Goldman Sachs.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking the questions. Just maybe going back to APT for a second. Just based on some of the earlier commentary, is it fair to characterize it as really being all or mostly tough comps in APT that led to some of the weaker top-line optics here? And then, is it fair to expect that APT gets back to positive growth starting in fiscal 3Q? And then just related to that in terms of the end markets or product categories, can you give us a little bit more color on where specifically the APT order book is seeing the most strength here?

Ron Keating -- President and Chief Executive Officer

Sure. So I would say, it's yes on both of those, Brian, that you said. So it is fair to say, it was tough comp last year. And it's fair to say that in the back half of the year, we're going to see a pickup because our order rates actually are demonstrating that as well.

Some areas across APT that we're seeing nice order bookings come in. Our disinfection business, anodes business, the wastewater business, we have very good year-over-year order increases and order opportunities for the back half that should be executed on.

Brian Lee -- Goldman Sachs -- Analyst

OK. Great. That's helpful. And then just on the price cost side, I know you guys have been sounding more positive on that over the past few quarters and it's back to being in positive territory.

So it sounds like you've budgeted for the increase in tariffs up to 25%, but just as we think about price cost and some of those trends of the levels you're at here in that new environment, does it hold here or do you see that trail off as kind of we move into the back half of the year for you guys?

Ron Keating -- President and Chief Executive Officer

No. We see it holding, even with the announcements that have come out today. We see this holding into the fourth quarter as we forecasted and have built it into the models coming -- going forward. And we think that as we talked about first quarter was at parity.

Second quarter, we got momentum on it. We see that ramping up through third and fourth quarter.

Brian Lee -- Goldman Sachs -- Analyst

OK. Great. That's helpful. Thanks.

Operator

Thank you. Your next question comes from Joe Giordano of Cowen.

Joe Giordano -- Cowen and Company -- Analyst

Good morning, guys.

Ron Keating -- President and Chief Executive Officer

Good morning, Joe.

Joe Giordano -- Cowen and Company -- Analyst

So on the guidance here on the EBITDA, so just curious as to how the third-quarter or fourth-quarter split is compares to how you would have thought that cadence looked three months ago? And if there was a shift, when did it start happening? And just how do you handicap the risk of spillage and further push out into 2020 on some of that stuff?

Ben Stas -- Executive Vice President and Chief Financial Officer

So we've always -- we don't provide quarterly guidance at the beginning of the year. Obviously, we look at things on an annual basis. And we have pretty good visibility. Each quarter as we go into that, we look at that backlog and say, how that's materializing.

So it's -- I don't know if that's materially different than the way we saw it at the last quarter and the beginning of the year. Models are models from the analysts, but we always take a look at them, but we also look at our internal forecast. But things do shift based on customer demand and timing, as we've already highlighted. If you think about the -- I don't know, Joe, if you're asking about would you see revenue in third quarter?

Joe Giordano -- Cowen and Company -- Analyst

No, I'm just curious as to like when -- I know you have your own internal like how you thought this year is going to play out. I'm curious when did that, if and when it started to like see you guys that it's probably going to be a little bit more fourth quarter-weighted, when did that start to like become clear to you guys?

Ron Keating -- President and Chief Executive Officer

Joe, I think we had anticipated it being fourth quarter-weighted already because of what we saw in the order activity, the backlog, and also, the benefit of the two-segment realignment comps in the quarter.

Ben Stas -- Executive Vice President and Chief Financial Officer

Right.

Ron Keating -- President and Chief Executive Officer

In fact, when we rolled out the year, we communicated early on that we anticipated seeing the benefits from the realignment actually beginning in late in the last half of the year and certainly that was toward the fourth quarter.

Joe Giordano -- Cowen and Company -- Analyst

Fair enough. And then just curious on the free cash flow bridge. Your guide obviously has upside to 80%, but given you're at 113% year to date, what kind of the changes in the back half to bring that year to date down?

Ben Stas -- Executive Vice President and Chief Financial Officer

We're not looking to bring it down, but we're sticking with the 80% guide, 80%-plus guide.

Joe Giordano -- Cowen and Company -- Analyst

OK. Thanks.

Operator

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

Ron Keating -- President and Chief Executive Officer

So thank you for joining us today. It's always a pleasure to get together and discuss our quarter performance. Again, as we highlighted, we're pleased with the progress we're making. On behalf of certainly the management team and the Board of Directors, I want to thank all the employees of Evoqua for the hard work and delivery in the first half of the year, and we look forward to a very strong back half.

We were awfully proud to be able to become the Digital Water Company of the Year, and we see that ramping up and the success continuing as we deploy that strategy more broadly across the marketplace. So thank you all for joining us and we'll speak again next quarter.

Operator

[Operator signoff] 

Duration: 43 minutes

Call participants:

Dan Brailer -- Vice President of Investor Relations

Ron Keating -- President and Chief Executive Officer

Ben Stas -- Executive Vice President and Chief Financial Officer

Deane Dray -- RBC Capital Markets -- Analyst

Nathan Jones -- Stifel Financial Corp. -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Andrew Buscaglia -- Berenberg Bank -- Analyst

John Walsh -- Credit Suisse -- Analyst

Andrew Kaplowitz -- Citi -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Joe Giordano -- Cowen and Company -- Analyst

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