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Evoqua Water Technologies Corp. (NYSE:AQUA)
Q2 2020 Earnings Call
May 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Evoqua Water Technologies First [Phonetic] Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Dan Brailer, Vice President of Investor Relations. Please go ahead.

Dan Brailer -- Vice President, Investor Relations

Thank you, Crystal, and hello everyone. We hope this call finds you safe and doing well. 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.

This conference call includes forward-looking statements, including our expectations for fiscal year 2020 as well as expectations relating to the impact of the COVID-19 pandemic, execution of our digital strategy in the market for treatment of emerging contaminants. 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.

On this conference 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 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 seven days.

With that, I would now like to turn the call over to Ron. Ron?

Ronald C. Keating -- President, Chief Executive Officer and Director

Thank you, Dan. My opening comments will cover Slides 3 and 4. We are living and operating in a dramatically changed world, and our discussion today will primarily focus on how we are thinking about the business, our short-term priorities, actions we have taken and insight into how we expect our business to respond in the second half of the fiscal year.

Our near-term priorities are straightforward. We are protecting our employees, focusing on business continuity and managing the business to preserve liquidity. The long-term macro water trends remain unchanged, and we expect a significant global challenges facing clean water to remain at crisis levels for the foreseeable future. Evoqua has an important role in the water industry, and we are managing the business to get through this challenging time and the thrive coming out.

To our employees, customers, supply chain partners and the communities in which we live, your health and wellness matter greatly and we continue to make safety our top priority every day. We're adhering to the safety guidelines established by public health agencies across the regions in which we operate. We are managing our supply chain to ensure that necessary PPE supplies are available to our personnel and for material inflows to continue enabling us to serve our customers.

I could not be more proud of the efforts of our employees under these challenging circumstances. We've highlighted many Evoqua heroes for going above and beyond to support their fellow employees and serve customers. And I would like to specifically recognize the 470 plus field personnel who received additional compensation with our extra efforts in serving essential customers in COVID-19 hotspots.

Communication and transparency are key components in having an engaged and informed workforce. We've established multiple communication channels to keep our employees up-to-date on the latest developments and focused on our key priorities as we navigate this uncertain period. A few of the communication actions we've put in place include, companywide town hall meetings, daily updates to our COVID-19 intranet site and an email hotline for employees who have any COVID-19-related questions or operational concerns.

We're an essential business, providing mission-critical functions for our customers by proactively engaging and responding to their service needs, which are evolving due to ongoing COVID concerns. Our service programs help customers maximize operational uptime and ensure business continuity, which during times like these has great importance for our customers such as hospitals, laboratories, pharmaceutical, biotech and food and beverage to name a few. These are among the industries that have remained very active during this period.

To date, we've taken targeted cost actions to increase liquidity and preserve jobs. Additionally, we have established a companywide employee reallocation process to maximize productivity levels and have developed contingency plans to support our business priorities and align our cost structure if market demand softens. We are prioritizing liquidity management in our near-term financial decisions and planning outlook.

We established a business continuity planning group that meets daily to review progress on our priorities, to clear obstacles if they arise and to share best practices and organized internal communications. I'm pleased to report that all of our vertical manufacturing and service facilities have remained open and operational.

We've established COVID-related standard operating procedures to ensure safe working conditions, including quarantine and return to work guidelines. Additionally, we've expanded our remote working guidelines to provide additional protection to employees while maintaining productivity levels. To date, we've had five employees test positive for COVID-19. And I'm pleased to report that all are doing well.

As the country prepares for reopening of our economy, we have rolled out reopening protocols for administrative and other personnels that will occur in a phased process aligned with local guidelines. Our priorities will continue to emphasize the ongoing safety of our employees and maintaining our essential service and operations.

Please turn to Slide 5. We were through our full year guidance in mid-April due to the evolving nature of COVID-19. However, we believe it is important to provide further insight into our business. Based on our current expectations, this chart represents what we are hearing from our sales team and operations on demand expectations for the majority of our primary end markets.

To begin, we serve a broad and diversified set of end markets with our largest single market only comprising approximately 20% of our overall sales. Additionally, our customer concentration is quite well with no single customer accounting for more than 1.5% of our revenue in 2019. We certainly don't have a crystal ball on the impact of COVID-19, but in general, we are making estimates given the feedback from customers and the operational request that we're receiving in branches.

As shown on this chart, we estimate demand in six out of 10 primary end markets to either be neutral or growing through the end of FY '20. These markets represent essential businesses that have continued to operate throughout the COVID crisis. We anticipate slight demand reductions in our light and general engineering market and in our chemical processing end market. More visibility into the demand across these markets should become evident as we progress through our third quarter.

Our aquatics business performed well in Q2 with solid sales growth and a strong order book. However, as we approach the summer storm season, we expect to see some delays in pool and water park openings that will impact this business. We're closely monitoring our backlog for delays and we'll implement necessary cost control actions as we gain better visibility.

Our oil and gas business is primarily oriented in downstream refining and is one of our smaller end markets. Given the latest demand numbers and oil prices, we have shifted resources out of our degassing and hydro static services. Our municipal business, divided into wastewater and drinking water, continues to hold steady. Our backlog is solid, and we currently do not expect material COVID-19-related capital order delays. We're also seeing heightened quoting activity for drinking water treatment as concerns over PFAS contamination continues to gain traction. And we recently received a large order in our ISS business for Integrated Systems pre-treating low water where PFAS contamination is above the specified limits.

As discussed in prior presentations, we expect service and aftermarket revenues to be more resilient in a challenged market environment. To date, we are seeing that hold true. Service productivity has been somewhat challenged due to the COVID-19-related sanitization procedures and customer access requirements, but our team continues to operate consistently.

Our Water One digitally connected platform is proving out the value proposition in times like these when location access is challenged and we can troubleshoot systems without having to be physically on site. When a service tech is deployed on Water One system, through our digital connection, we can ensure they have the proper tools to service that system on the first go. We'll be happy to address questions about specific end markets during the Q&A session.

Please turn to Slide 6. We are very pleased to deliver a solid Q2 performance. Organic revenues grew over 3% with growth in both segments. As expected, we had very strong order growth in the quarter with a book-to-bill ratio of 1.1 times. In mid-April, we issued a pre-announcement as indicated, adjusted EBITDA would be above the guidance range of $49 million to $51 million given in our Q1 earnings call. We are pleased to report, almost $57 million in adjusted EBITDA driven by organic sales growth leverage, favorable mix and price cost benefits of approximately $3 million. Our March results were solid through the month with minimal impact from COVID-19 and lower oil prices.

As discussed earlier, late in the second quarter, the company responded quickly in establishing new COVID-19 operational requirements across the business as concerns and government restrictions emerged. While implementing these changes, we remain highly focused on serving our customers and continuing to make progress on our strategic operational initiatives such as improving our capabilities to treat emerging contaminants, including PFAS and enhancing our digital capabilities across our platform.

Last quarter, I spoke about the digital enablement of our municipal services business, and those efforts continue to gain traction. This quarter, I wanted to highlight a new Water One, digitally connected, digitally enabled product for the healthcare market. Healthcare is an attractive end market for Evoqua as the need for high-purity water continues to grow.

During the quarter, we launched the Vantage SPD solution, which is specifically designed to produce pure water that meets the AAMI TIR34 water quality specification for medical device reprocessing. This digitally enabled system reduces pitting and corrosion on surgical instruments, microbial filing and mineral scaling and while logging critical quality and operational data digitally. The pipeline for this offering is robust, and we are currently receiving orders from hospital systems even throughout this COVID-19 crisis.

Our focus on digital has never been greater. Living in a COVID-19 constrained world highlights the importance of having 24/7 monitoring capabilities. We are working to digitally connect assets that are not currently connected and to migrate connected systems to digitally enabled systems. Transitioning more of our assets to enabled status will allow us to maximize customer uptime, drive productivity and lower overall operating costs.

As evidence of our progress, we are pleased to have recently been awarded the 2020 Frost & Sullivan Company of the Year for Global Water Technologies. This award recognizes Evoqua for our leading-edge suite of connected solutions and for our focus on maximizing customers' operational uptime. Liquidity remains solid with no near-term maturities of our two primary debt agreements. Our $125 million revolver remains undrawn through April, and cash flow for the quarter was solid. We were pleased to see leverage improve slightly from Q1.

As we look forward, our planning construct for the second half of 2020 is centered around managing liquidity as the economy begins to slowly reopen. We have established contingency actions that should keep our cost structure aligned with our revenues if we begin to experience greater than expected weakness in our demand. Our revolving credit agreement has a 5.55 times net debt financial covenant calculated on trailing 12 months of adjusted EBITDA. We currently have a significant earnings cushion related to the covenant. Our current trailing 12-month adjusted EBITDA of $240 million would need to decline by more than 55% from current levels before the leverage covenant would become an issue.

As previously stated, Evoqua is an essential business serving a significant set of essential designated end markets. We are actively engaged in managing the business. Cost reduction actions have been taken and we have substantial liquidity. Our backlog is growing and we have contingency plans to weather the very difficult market conditions if further action becomes necessary to ensure that Evoqua is well positioned.

Please turn to Slide 7. On April 22, in celebration of Earth Day, we released our 2019 sustainability report, which is our fifth since becoming an independent company. We encourage you to take time to read the report and we welcome your feedback. Through our sustainability programs and initiatives, we are committed to making a positive impact to human health and wellness every day. We strongly believe that our efforts here are especially relevant during this time, and I'm proud of the progress we've made across the organization.

We think about sustainability in two ways. First, by enabling our customers to become more sustainable through our solutions and service offerings. And second, by driving Evoqua to become more sustainable within our own internal operations. One notable customer-driven sustainability initiative is in emerging contaminants, and in particular, PFAS.

We are seeing bipartisan support in Congress for moving legislative initiatives forward and increasing funding. We refined our emerging contaminants go-to-market strategy across the municipal, industrial and military markets. During the last quarter, we had several PFAS wins, and as previously mentioned, the pipeline is growing. We continue to see this as a long-term growth opportunity in which we are very well positioned with a full portfolio of complete solutions.

Finally, on the governance front, we are pleased to announce and pleased to welcome Lisa Glatch to Evoqua's Board of Directors. Lisa joined us in February and has extensive engineering and industry experience in energy, chemicals and infrastructure. She has been a great addition to our board during this critical time.

Please turn to Slide 8. Overall, the business continues 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. Overall, revenues have grown at a rate of 8% with adjusted EBITDA growth over 18% during this time.

We primarily pursue capital projects to ultimately drive stable, recurring and profitable service and aftermarket growth. Currently, our service business comprises 41% of total sales, while service and aftermarket combined make up approximately 60% of our business. As we have previously discussed, the nature of our business is subject to quarterly variability. However, we have high visibility into our revenues from products and services on an annualized basis and believe our model will continue to serve us well during this uncertain period.

I would now like to turn the call over to Ben.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Ron. Please turn to Slide 9. As Ron discussed, we reported strong results in the quarter. Organic revenues, which excludes the net impact of the MEMCOR divestiture and the recent acquisitions of Frontier and ATG were up 3.4% over the prior year. All key financial metrics improved or were relatively stable on a year-over-year basis and organic order growth was up high-single-digits. Q2 adjusted EBITDA was flat versus the prior year with higher variable employment cost and the MEMCOR divestiture offsetting volume leverage mix and favorable price cost.

Additionally, we did not see the overall business soften in the second half of March despite COVID-19 constraints and low oil prices becoming more significant. We did begin to see more uneven demand across our end markets. We saw demand increases in microelectronics, healthcare, pharma and biotech, partly offset by slowing demand in aquatics, oil and gas and marine in the second half of March, which also continued into April.

Please turn to Slide 10. Our Integrated Solutions and Services segment had solid results, with revenue growth of almost 5%, driven in part by strength in microelectronics and healthcare related end markets. Adjusted EBITDA increased 5.3% from volume leverage, favorable mix and pricing, partly offset by higher variable employment cost. Outsourced water service backlog grew double-digits versus the prior year as it provides customers with an attractive solution, particularly in a capital constrained environment.

Please turn to Slide 11. Applied Product Technologies organic revenues grew 1.3%. The MEMCOR divestiture, which occurred on December 31, 2019, net of the ATG acquisition, which occurred on May 25, 2019, resulted in a net 6.6% revenue decline. Adjusted EBITDA grew 2.4%. Adjusted EBITDA margin increased 170 basis points over the prior year to 19%. Volume leverage and mix positively impact profitability.

Please turn to Slide 12. Capital spending for the quarter and on a year-to-date basis declined over the prior year. Most of our growth capex spending is for outsourced water contracts that are expected to remain on track. We selectively deferred planned growth capex associated with projects that are expected to be delayed. We are reprioritizing investments to growth opportunities in the current environment. Second quarter net working capital continued to improve to 13.9% of sales. We're also actively monitoring the quality of our accounts receivable and inventory levels. Today, we are pleased with the quality of our receivables, collections remained strong and past dues have been reduced sequentially from Q1.

Please turn to Slide 13. Adjusted free cash flow improved versus the prior year to $17 million with a conversion rate of nearly 100%. LTM adjusted free cash flow increased substantially to $103 million with a conversion rate of over 190%. Leverage improved to 3.3 times, which is down a full turn compared to the prior year.

Please turn to Slide 14. This slide summarizes our current financial and liquidity position as of March 31. We are currently benefiting from our customer diversity, end market balance and stable recurring revenue profile. Our order book expanded in Q2. We have a solid liquidity position, strong cash collections, the revolver remains undrawn and we have no near-term debt maturities.

As Ron outlined, we currently have a sizable earnings cushion for covenant compliance. Should revenues and profitability come under significant pressure in the second half of the fiscal year, we have contingency plans in place that we expect would allow us to successfully operate the business with adequate liquidity and remain compliant with our covenants.

I would now like to turn the call over to Ron for his summary comments.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks, Ben. Please turn to Slide 15. As we transition into a new normal, our number one priority will continue to be protecting the health and safety of our employees and our stakeholders. Our service networking capabilities are the crown jewel of the company, and it provides a wide competitive differentiating moat around the business.

During this challenging time, we will continue to prioritize our resources and service personnel to essential life sustaining customers. We're managing our liquidity and we've established contingency plans to align the cost structure if demand softens more than anticipated. We have no near-term debt maturities and our leverage ratio improved slightly from quarter one. Our current cost reduction actions have been structured to ensure continuity of supply, to preserve jobs and to be prepared to react to a business rebound.

Our first half results were very solid, at or above expectations. Our order book is growing, but we do expect to see uneven demand materializing across some primary end markets over the second half of the fiscal year. Engaged, frequent and transparent communications with all of our key stakeholders will allow us to be agile in adapting to a changing demand environment. The two segment realignment continues to yield internal efficiencies and a streamlined go-to-market strategy that is producing solid order and solid sales growth.

Our digital strategy is well positioned, particularly in a post-COVID world and we continue to innovate and invest in connecting and enabling our assets. We will continue to drive sustainability initiatives, both internally and through our customers. Emerging contaminant treatment and PFAS regulations should provide attractive long-term growth opportunities and we believe we are well positioned to address market needs. Outsourced water is expected to provide long-term recurring and profitable revenues. We plan to continue to invest in growth capex opportunities that support customer orders now and into the future.

We will now open the call for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Deane Dray with RBC Capital.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone. I'm glad to hear the Evoqua team is doing well and staying healthy.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks, Dean. I hope you're all healthy as well.

Deane Dray -- RBC Capital Markets -- Analyst

Yes, sir. First question is, this is a little bit of a high quality problem to have to get asked. But Ron, why did you end up suspending guidance if you had the makings of what was clearly an upside quality quarter here? So maybe we can start there.

Ronald C. Keating -- President, Chief Executive Officer and Director

Dean, thanks for the question. In these uncertain times, it was just prudent for us to suspend guidance. I mean, we obviously have good visibility into what our order backlog is. We have a good expectation of what's coming from the end markets, as we showed on Slide 5. However, there's so many unknowns in what's happening with COVID crisis and a COVID world returning back to work. Unprecedented times, I guess, call for a little bit of unprecedented actions.

Deane Dray -- RBC Capital Markets -- Analyst

That's completely fair. And if you wanted to talk about visibility and it always show Page 8 that trailing 12-month is a real showcase. But you did give a little bit of forward-looking comments, and Ben talked about April. So maybe you can broaden that, if you could, what you saw in April besides the obvious aquatics being down oil and gas, but how did April shake out? And can you venture any other comments about the fiscal third quarter as you see it today?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yeah. Dean. April actually shaped up very well as we expected. It was basically in line year-over-year on the revenue side. Order activity continued to come in as expected. What we showed on Slide 5 should give some visibility into the third quarter and the second half of the year just in the way that we look at our end markets. Again, what we're highlighting here is the second half of 2020 expected demand outlook for Evoqua. This is not speaking about the markets in general. This is speaking about where we anticipate our outlook by end market to come from. And we would expect that to be very much in line in third quarter as well as fourth.

Deane Dray -- RBC Capital Markets -- Analyst

Great. And just one last quick clarification for Ben. I really like seeing the free cash flow conversion this quarter, and it does look like you included the growth capex. I just want to make sure that's correct. It looked like mobile assets were included in that capex number. Was Water One a factor at all in growth capex? If you could just clarify that, please.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, it was, Dean. Water One remains on track. In this environment, we are seeing more demand for Water One. As you'd imagine, access to sites being limited. And so the Water One value proposition is strong. So yes, it does include Water One as well.

Deane Dray -- RBC Capital Markets -- Analyst

Great to hear. Stay well everyone. Thanks.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks, Dean.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Dean.

Operator

Your next question comes from the line of Nathan Jones with Stifel.

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

Good morning, everyone.

Ronald C. Keating -- President, Chief Executive Officer and Director

Good morning, Nathan.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Nathan.

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

Guys, I'm going to pose a couple of questions to you, which are questions we get regularly from investors that I think is a point of misunderstanding about how your business reacts in times like these. And just let you guys address those things in a public forum. So one of the questions that we get is, investors think that you're going to see reduced service revenues as facilities operate at lower levels. So can you comment on how lower utilization of customer facilities flows through to your guys' service revenue?

Ronald C. Keating -- President, Chief Executive Officer and Director

Nathan, that's a great question, and it's very interesting. We've had a lot of discussion and debate about this in the company. We review this with regularity. And in many cases, it's actually counter to what you would think. So when we're operating on-site with a customer and they're producing product and they're utilizing water to do that, that's very good in the processed water side of things. One of the unique characteristics that Evoqua has is, we're on the processed water as well as the wastewater side for recycle reuse and we have operating and maintenance contracts across the full water spectrum.

In many cases, in larger customers and large water users, when they're not producing product, their water balance actually goes out of sync and they wind up treating more water on the wastewater side because it's not going through their process. So it's water that's being created as a part of just the normal operation. We have to treat it. You put it back into the environment rather than it being consumed inside of the more closed-loop system.

So it's interesting that our service revenue stays very robust. The other thing is when customers have assets on-site, they would be a little bit like you lease an asset just because you didn't use it that month, it doesn't mean you don't pay the bill. And so in many of our contracts, it still is billing just for the asset availability. And so the service business stays as well as our team being on-site and operating.

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

Thanks. The second one investors worry about is that customers are going to reduce new capex installations as they are looking to preserve their own kind of capital and that will see lower project orders flow through to you?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yeah. When customers reduce capex installations, it actually speaks to the aftermarket spend increasing as well as the service spend continuing to be robust, because they're operating the current assets they have in place. And it's one thing that our outsourced water value proposition carries, because in those cases, we're installing new assets for customers. We're operating the assets. They pay by usage rather than pay with a large capital investment upfront. So if they reduce capex, they're looking for it's opex, and that just fits very nicely with our outsourced water strategy that we've been deploying over the past few years.

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

I have thought that this could potentially be a catalyst to get more customers on to this outsourced water model for exactly that reason, it variablizes their costs. Have you seen any customers start looking at that more? Are you actively out there marketing that is something that customers could use to variablize their own costs on the other side of this downturn? I had thought that this could potentially be a catalyst to get more customers on to this outsourced water model for exactly that reason, it variablizes their costs. Have you seen any customers start looking at that more? Are you actively out there marketing that is something that customers could use to variablize their own costs on the other side of this downturn?

Ronald C. Keating -- President, Chief Executive Officer and Director

We absolutely are. In fact, that's the way that our salespeople lead. They lead with outsourced water as the first thing that they want to go in and sell and be able to provide that to a customer and basically a pay-by-the-usage model. That goes to what we've talked about with Water One spreading from just digital connectivity to build by the gallon all the way to outsourced water, which are the larger projects that we go after. And we've seen a very nice uptick in our pipeline against those types of activities as we have been in the middle of this. But ultimately, when we come out the backside.

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

Great, thanks. I'll pass it on.

Ronald C. Keating -- President, Chief Executive Officer and Director

Great, thanks, Nathan.

Operator

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

Brian Lee -- Goldman Sachs -- Analyst

Hey guys. Good morning. Hope everyone is doing well. I had a question first on the book-to-bill, if you could maybe give us a bit more color around the profile, maybe by segment. Can you give us a sense of how the book-to-bill broke out between ISS and APT? And then on the high single-digit organic orders growth, just wondering if you can talk a little bit about the specific end markets where you're seeing the strength from? And then visibility wise, is this stuff you would expect six months out here? Or is this sort of a year out, just kind of the cadence of the bookings that you're seeing as well as the mix?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. Brian, thanks for the question. I hope you're well as well. So the book-to-bill outlook as we look at it, it was up in both segments, across APT as well as ISS. The ISS bookings are typically longer cycle, they're longer period. They may be multiyear bookings that we're getting around outsourced water projects. APT is typically a quicker turn book-to-bill cycles. So that typically goes somewhere between 6-month and 12-month delivery. But as we showed you on Page 5 our outlook for the end markets, that should give you some good visibility into what end markets really drove the higher book-to-bill numbers that we see as we go through. And those projects will be executed over the next 6 months to 18 months.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Great. That's helpful. And then I guess on that point, I appreciate the color in both the slides and the press release around some of the revenue between service aftermarket and the capital projects. And so if I look at that data, looks like in Q2, you had about 40% of revenue coming from capital projects. Could you remind us how seasonal is that sales stream for you? And then, I guess, how should we be thinking about that particular piece of the business here in the very near term? Just -- how much of those projects are already in backlog, where you have discrete visibility?

And then how much of that pipeline would you say is seeing some amount of slippage? I know you mentioned a couple of end markets. They're smaller, but just sort of what's sort of the visibility around that part of the business, that capital projects area? Thanks.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

So the capital area finished well in Q2, and the orders also finished well in Q2. It's a bit uneven, as we mentioned in the areas that we saw strengthen, the orders continue to be strong. So a little bit uneven demand. We are seeing delays in cancellation in the red areas that we indicated on the chart. But on the other hand, we're seeing increases in appetite on the green areas and some of the neutral areas. So -- so far, it's been relatively stable. The backlog for capital is strong at this point in time. And the pipeline for opportunities remains strong at this point in time. It is subject to change, significant change. We are seeing, as Ron mentioned, more appetite and more interest in the outsourced water projects in this environment. So those are also variables that are likely to take place.

And just, Brian, just a little more color on that. If they choose outsourced water and they convert from a capital to an outsourced water project, that's likely to push revenues out to a longer period of time in the future, right, because you're not going to book that over a shorter period of time. So there's some dynamics there, but the margins will likely be much higher and the cash flow is more stable if that occurs. But overall, at this point in time, the point of being uneven is appropriate, but so far, it's been relatively neutral, and the pipeline remains strong.

Services, very much, as Ron described, and aftermarket has been a bit choppy. Again, uneven in the areas that are red, but also a pickup in the areas that were green to neutral. Okay?

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

All right. Good. Sounds good. Thanks guys.

Operator

Your next question comes from the line of Mike Halloran with Baird.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Hey good morning, everyone.

Ronald C. Keating -- President, Chief Executive Officer and Director

Hey Mike.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

So first, just a higher-level question on how you guys are thinking about managing your investments, internally and externally, relative to the environment. Obviously, Slide 5 implies that there's a little bit of revenue pressure, but not a lot. And you're also managing for liquidity aggressively. But how do you manage those two things in the context of still investing for the future? And given the fact that there isn't as much demand pressure, as a lot of people are thinking, what would it take for you guys to turn a little bit more offensive when it comes to capital usage and capital deployment?

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. Mike, so -- I mean, first priority is managing for liquidity and making sure, as a company, we are laser-focused on that. Managing our receivables, managing our payables, managing our working capital, being very prudent with capex in this environment. That being said, we do see good growth opportunities in this environment, even short-term growth opportunities in some of those green end markets that we'd like to pursue, and we will pursue. So while our capital allocation strategies and our cash usage strategies have not entirely changed, they stay aligned with those priorities. We're going to keep liquidity in making sure we stay very, very focused on cash and even a cushion in cash, in this environment, up front and center.

And we've put daily routines in place to review receivables, payables and making sure we're locking down discretionary spending. And we've also implemented cash conservation measures to the tune of about $13 million, and we expect -- we have readied the tune of $50 million of cash conservation if needed in this environment. So that gives us plenty of dry powder with an untapped revolver. We feel pretty good about our liquidity at this point in time and being able to be opportunistic should those opportunities arise.

Ronald C. Keating -- President, Chief Executive Officer and Director

And Mike, to your question about what would potentially turn our sights toward being more aggressive, we are -- it's very uncertain times. I mean we have an expectation for what the end markets are going to produce. We're going to continue to watch those daily. We have focused very heavily on larger capital projects, making sure they're cash flow positive all the way through the cycle. The other thing that we're doing is, we're focusing on the end markets that we feel are going to be more steady and stable through this. And we're investing resources in time, even shifting internal resources to focus more on those end markets. And ultimately, we want to continue to drive the growth and the resiliency of the business that we've been able to build by focusing on that continuing service and aftermarket as well as on our product side, making sure we're on the right platforms, as a process standard so that they're pulling us through in the aftermarket side as well.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

No, that makes sense. And you touched on the second part of the question I'd like to ask. Maybe just touch on how you're looking at resource allocation internally here in the prepared remarks. And just then, you alluded to the fact that there is some shifting of resources toward these higher opportunity areas. Maybe touch on that and then anything broader that you guys are doing to adjust the cost profile or to make sure that people are positioned, resources are positioned toward the right areas?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. So we took several actions on just resource prioritization going through and prioritizing what we had strong backlog in, where our plants were operating. For some plants, we're more focused on the more highly cyclical markets, such as oil and gas and refining. We actually shifted work from one of our centers of excellence to that facility so that we could continue to keep the team employed and we could execute on backlogs that we had that we're working 24/7 in plants. As I even said in the opening remarks, all of our critical manufacturing and branch facilities are up and running.

We've made sure that our team members that have been focused on markets that have shutdown the service techs are actually trained and aligned into markets that have ramped up the need, ramped up the capabilities. And then even in our digital strategy, we've gone through and prioritized our hospitals, pharmaceutical labs, etc that are focused on life-sustaining activities through this, so that they're getting the highest priority, and they are absolutely -- we have broader spectrums of knowing when they're going to need a service, and we have that planned out, and we're shifting our service techs and service resources there.

We've been able to actually shift team members that were in end markets that were softening into areas where we had open requisitions and without having to lay anybody off and ultimately, being able to improve the service level we've had. We even have salespeople that are calling and prescheduling service times for service techs to come in. So they're able to talk to the customers, make sure we're satisfying their need. And then we have them also deployed to help us on cash collections, where we've been identified as an essential service for customers in case any of our past due receivables are stretching at all.

So it's really -- it's been all hands effort across the company and just the results have been astounding with what we've seen and the employees stepping up and doing things that are out of their norm and operating in this new normal environment.

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Thanks for the color, everyone. I appreciate it. Stay safe.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thank you.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

You too.

Operator

Your next question comes from the line of Saree Boroditsky from Jefferies.

Saree Boroditsky -- Jefferies -- Analyst

Good morning. Following up on the liquidity question, you've continued to delever the balance sheet. Could you just give an update on how you're thinking about leverage at this point? And if we should expect you to continue to use cash toward debt repayment for the remainder of the year?

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

I think at this point in time, we would -- we'll conserve our cash. So we would potentially see stable leverage to a net leverage reduction as a result of cash accumulation, at this point in time, should we have additional cash. But we want to keep plenty of dry powder in this environment. So we're not really looking to pay off incremental debt between now until we get through the crisis. But we potentially could see a net debt movement.

Saree Boroditsky -- Jefferies -- Analyst

And then you highlighted a recent order related to PFAS. So could you just provide more detail on that order? And just update us on what you're seeing from a demand perspective or any conversations you're having with customers?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. So we've been very connected to the PFAS initiative all the way from what's happening in DC down to the state levels. And what you're seeing is you're seeing specific states actually changing from the 70 part per trillion detect level down to much, much lower levels. California, for instance, just went down to a 10 part per trillion detect level before treatment has to happen. A couple of states have gone to 14, I think, one went to 17. So as that happens, what's occurring is a lot of the groundwater they've been using that goes in and feeds the drinking water system, well water, for instance, has to be pretreated before it can go into the drinking water system, and they're having to remove the PFAS contaminant out of that.

So we have the full suite of solutions all the way from providing the capital installed to the service and operations on the back side of it by changing out our different unit of operation that actually take the PFAS and concentrate it up or remove it from the water. What we're seeing is a growing pipeline there, and we're also seeing some bipartisan support on the hill where they're focused on water infrastructure and actually PFAS legislation to be potentially included into the fourth stimulus package that's been considered around the COVID crisis.

Saree Boroditsky -- Jefferies -- Analyst

Thanks for taking my questions. That's very helpful.

Operator

Your next question comes from the line of Andy Kaplowitz with Citi.

Andy Kaplowitz -- Citi -- Analyst

Good morning, guys. Hope you are well?

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks Andy. You too.

Andy Kaplowitz -- Citi -- Analyst

I know you're not giving official guidance on margin, but can you give us some more color on how to think about it in the second half of '20? It would seem that mix would be positive for you given service should hold up better than capital. And price versus cost has seemingly been positive as well. But if revenue is down, could decrementals be in line with gross margin or better moving forward?

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. I think they could. I think I would expect it to be typical with our incrementals. But -- and we should -- we have the potential to see stronger margins, considering the mix and the fact that services typically are higher margin than capital. And aftermarket has the potential to have some benefits due to the fact that customers may defer capital and run their equipment longer and that has higher margins as well. So -- and also, we don't have -- our MEMCOR was dilutive. So without MEMCOR, we should do better as a result of that as well.

So yes, I think -- but on the other hand, we have some pressure on margins in the form of productivity due to service techs taking longer and to get out and the safety procedures in our manufacturing facilities, etc. So we are spending some additional employment cost in ours, safety protocols, as you can imagine. And with some of the travel restrictions, those things make things more challenging. So it's a little bit of a mixed bag. But net-net, I think we should expect to see stable.

Andy Kaplowitz -- Citi -- Analyst

That's helpful, Ben. And then, Ron, as you know, Aquatics is a high-margin business that's been lumpy for Evoqua in the past. So the understanding that the majority of the rest of your business seems stable, how concerned are you given Aquatics' focus in commercial amusement applications that it could leave a hole in the applied business?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. That's one that we watch very closely, Andy. And it is one of the areas that we're seeing a bit of concern. And certainly, with some delays in projects that we're getting ready to go, and we had an expectation around going. However, what -- we have aligned that business very effectively. We consolidated the facility from Coventry, Rhode Island and our Holland, Michigan facility, we're able to make sure that we've got it more operational and more streamlined. And we had a strong order book in Aquatics coming all the way through the second quarter.

So we're watching it closely. We feel like we can balance that on the applied product side. And APT has done a nice job in several of the other market areas to make sure that softness that they see in Aquatics, they feel like they can help cushion. I will tell you, again, that is our more lumpy business as we look at the APT business, it's closer to book-to-bill. And what happens in the end market with a little bit of the unknown around the more global nature of that, creates a bit of a challenge as well. But we -- as Ben has highlighted, we have liquidity actions and cost actions in place that we can pull as levers if we see demand softening more in the second half of the year.

Andy Kaplowitz -- Citi -- Analyst

Appreciate it, guys. Stay well.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks Andy, you too.

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Andy, you too.

Operator

Your next question comes from the line of Joe Giordano with Cowen.

Joe Giordano -- Cowen -- Analyst

Hey guys. Good morning.

Ronald C. Keating -- President, Chief Executive Officer and Director

Good morning, Joe.

Joe Giordano -- Cowen -- Analyst

I was wondering if you're willing to kind of dig in a little bit on sizing, maybe what you're doing right now, either on a year-to-date basis or like an annualized basis in PFAS and Water One outsource? Because just like on the end market breakdown, it's just -- you've been hearing from players -- other players in municipal and in general, light industrial, people talking 20% to 30% decline. So there's obviously something happening here different. So I'm just curious of how much of it is potentially from areas like that? And how would you kind of bridge that gap?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. Joe, thanks for the question. Again, what we've highlighted in this is what our expectation is for the second half of the year, again, what's the impact on a book would not necessarily the market itself. And a lot of that, as you know, when we look at the municipal market, that's a longer cycle business for us. It has been for quite some time around the wastewater side. So we anticipate that business to stay neutral against what the backlog is and what our incoming order rate has been. And then, as you know, we have a strong service business in the wastewater around odor and corrosion control that occurs in the back half of the year. And that's really driven by the weather patterns and what happens is it gets [Technical Issues] Again, it's service business. [Technical Issues] and it stays more recurring and that just really speaks to the strategy of what we've deployed as the business overall. That's also what we're seeing across Power business, the Microelectronics.

A lot of the business that we have where we've highlighted them very upfront in the early days of the company, we try to sell capital installs to make sure we have the steady rents and recurring revenue around operations and maintenance on the backside. So that's a lot of why we see possibly less of a downturn than others. And then as we focus on emerging contaminants, we still see that business growing. That business is going to grow in the future. It's not overly meaningful for us right now, with the exception of some decent backlog that we have in orders that have come through. We still have around 30% to 35% of the medium to larger site installations around PFAS treatment, and as the government action makes it cold and states continue to lower the PFC [Technical Issues] target PFAS, we think that will kind of grow over time.

Operator

Your next question comes from the line of John Walsh with Credit Suisse.

John Walsh -- Credit Suisse -- Analyst

Hi, good morning. Glad to hear that everybody is well.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks John, you too.

John Walsh -- Credit Suisse -- Analyst

I wanted to take a look at -- going back to that slide, when you talk about your end markets, obviously, things that are related to healthcare, microelectronics. I'm wondering how much -- and maybe this is beyond the back half, but how much of the demand as you look forward is around the existing infrastructure facilities that are there versus -- there is this view that we're going to see some hybrid type applications coming back, whether it's pharmaceuticals, other things that are going to be using water. Are you seeing that or having conversations with that yet with customers, particularly in those verticals or maybe other verticals?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. So we are seeing a nice uptick in healthcare, pharma and biotech. Through this crisis time, we've seen water service customers that would go as much as 3 times the usage they've historically used, where we've seen other ones that have stayed steady to even declining a little bit if they weren't in an environment that had a lot of COVID treatment or COVID challenges. So overall, what that's balanced out to us to be is a growing end market, though, and what the outlook is and how they want to operate going forward.

It also speaks to even some of the product development that we're working on, as I highlighted in my opening remarks. Microelectronics, I think, we'll see, we have a nice backlog there that is delivering growth for us in the back half of the year. We anticipate, as the world is more connected, microelectronics devices will continue to increase in capability, and they'll continue to increase in need. And that's been a good business for us for quite some time, and we anticipate it to continue to be into the future.

John Walsh -- Credit Suisse -- Analyst

Great, thank you. And then obviously, there was some news around the Supreme Court with the Maui water discharge. Just -- does that have an impact on your business at all? Or how are you guys thinking about the update there?

Ronald C. Keating -- President, Chief Executive Officer and Director

Yes. It's really -- it's not overly impactful on what we're doing. In fact, I mean, it's an area that we don't play quite as heavily in. And so we don't see that being a major move.

John Walsh -- Credit Suisse -- Analyst

Great. I appreciate taking the questions.

Operator

Your next question comes from the line of Steve Tusa with JPMorgan.

Steve Tusa -- JPMorgan -- Analyst

Hey, good morning.

Ronald C. Keating -- President, Chief Executive Officer and Director

Hi Steve.

Steve Tusa -- JPMorgan -- Analyst

Congrats on getting that equity deal done. Good timing on that, certainly. On the -- on Slide 5, I think you guys have some interesting kind of commentary on the market outlooks. I mean, is that essentially to suggest that you think you can have kind of flat volume in the back half of the year?

Ronald C. Keating -- President, Chief Executive Officer and Director

No, it's not suggesting that, Steve. What we're trying to make sure that we're highlighting here is the resiliency of the business. We're highlighting the essential nature of what we're doing and that we're continuing to operate. So if you look at -- with many of the businesses that people are concerned are just shut down, we want to make sure that we're highlighting that we're an essential business. We're continuing to execute. There's very good visibility in what we have against how we've highlighted these markets to be growth versus not. And what we want to make sure that we're pointing out is that we continue to operate and execute in these, and we're fairly diverse.

So these are unknown times right now. What the back half and what COVID is going to deliver obviously, is a little bit unprecedented, and the recovery is very unknown, but we do anticipate, based on what we've seen in the second half of the year, to deliver this type of outlook from our end markets.

Steve Tusa -- JPMorgan -- Analyst

Great. And any like -- any cash dynamics that we should keep in mind? Obviously, you're not really a short-cycle company where the revenues go -- volumes go down and working capital liquidates. There is some contract and project-related cash flows that we have to keep in mind for you guys? How do you think about kind of the cash dynamics in a more kind of -- and maybe like a down environment? How does that play through?

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Well, typically, in a down environment, you tend to see some liquidation of working capital. Right now, our working capital has been very stable through the end of Q2 and even through April. Our collections remain stable. Our receivables remain stable. And it's -- and we built cash from last quarter adjusted for MEMCOR. So this -- in this environment, but we're also continuing to invest in outsourced water projects where we see those demand. And in some cases, we're seeing increased demand for outsourced water projects that bring that steady, stable recurring cash flow in. And again, as Ron mentioned earlier, there's a base level of our revenue that is fixed in terms of reserve.

It's like when you run a car, whether you use it or not, you're going to pay the fee. And so there's a part of that aspect to our business that creates that stable cash flow. There is -- but to date, we see stability in that area. But we are ready if things change. And we're not putting our head in the ground on this. We realized that things can change, and they can change rapidly in this type of an environment. So we've ready cash conservation plans -- significant cash conservation plans if needed. To date, through April, it's been steady as it goes. And our cash flow has been very stable. And surprisingly, we've seen our overdues actually reduce from the end of Q1 to Q2. And even from the end of the fiscal year, last fiscal year until now, so collections have been very strong.

Part of what has happened is some of our customers have put us on notice saying, hey, look, we expect you to perform in this environment. And we consider you essential. So we've used that as a collection, saying, OK, yes, we're going to perform, but let's make sure we get paid, too. So we continue to perform. And that's also been part of how we've been able to help on collections in our sales force. They've been significantly helpful. Some of them cannot access customers in this environment because of restrictions. So we've deployed them to help on collections, and that's been very, very fruitful in this period of time. So right now, Steve, we see stability. But again, we're ready should things change.

Steve Tusa -- JPMorgan -- Analyst

And, sorry, one last question on that. You talked about kind of utilization. Would your industrial business kind of use -- move with their capacity utilization? Is it at all kind of tied to that? And then what are you seeing actually so far in April? A lot of companies are commenting on what they've seen in the last few weeks. Maybe I missed that in the beginning of the call, but what are you seeing so far in April?

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

So what we see so far in April is very, very similar to what actually is almost identical to what you see on Page 5. That's what we see in April, uneven demand. Our industrial business is to date relatively strong, particularly for this environment. Our facilities are operating. All of our branch networks are up, running and operating. We've had none that have not been able to operate. Our manufacturing, our key manufacturing facility in Colorado Springs is very full with a stable and steady backlog.

And the opportunities in the pipeline look -- appear to be good. Again, there -- oil and gas, refining, marine, those areas we're seeing delays in cancellations. But on the other side, healthcare, pharma, biotech, microelectronics, we're seeing increased opportunities. So it's uneven, it's choppier. And we have deployed some capex from the areas that were delayed and constrained in the areas of growth, but it's been OK so far at this point of crisis.

Steve Tusa -- JPMorgan -- Analyst

Great, thanks a lot. I appreciate it.

Ronald C. Keating -- President, Chief Executive Officer and Director

Thanks Steve.

Operator

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

Ronald C. Keating -- President, Chief Executive Officer and Director

So thank you all for your interest in Evoqua. Thank you for spending the time with us this morning to discuss the operations. One thing I want to make sure we leave you with is the strategy that's been deployed. And ultimately, the great work of our team that's executed against it has created. A very resilient business that's operating well even through the challenging times that we're dealing with now. The future is as good as we can predict it to be. And frankly, there is some uneven challenges that we're going to deal with in certain end markets, but we have other end markets that are going to perform well, as we've highlighted in the call today that we feel like.

I'd ultimately like to thank our customers, the frontline healthcare workers that are dealing in this very difficult time through the challenging environment that we're all dealing with. And frankly, I'd like to thank our team at Evoqua for executing on the strategies and ensuring that we have continuity of business, ensuring the health and safety and welfare of our team members as well as our customers, our supply chain partners and ultimately preparing for the rebound once we get to the other side of this challenge that we're dealing with around the COVID crisis.

But I want to, again, thank you all for your interest in the company. I wish you all a safe and healthy time ahead, and we look forward to speaking with you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Dan Brailer -- Vice President, Investor Relations

Ronald C. Keating -- President, Chief Executive Officer and Director

Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer

Deane Dray -- RBC Capital Markets -- Analyst

Nathan Jones -- Stifel, Nicolaus & Company -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Mike Halloran -- Robert W. Baird & Co. -- Analyst

Saree Boroditsky -- Jefferies -- Analyst

Andy Kaplowitz -- Citi -- Analyst

Joe Giordano -- Cowen -- Analyst

John Walsh -- Credit Suisse -- Analyst

Steve Tusa -- JPMorgan -- Analyst

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