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Evoqua Water Technologies Corp. (NYSE:AQUA)
Q3 2020 Earnings Call
Aug 4, 2020, 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 Third Quarter 2020 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

Thank you, Laurie, and thanks everyone for joining us for today's call to review our third quarter 2020 financial results. Participating on today's call are Ron Keating, President and Chief Executive Officer; and Ben Stas, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to questions. We ask that you keep to one question and a follow-up to accommodate as many questions as possible.

This conference call includes forward-looking statements, including our expectations for fiscal 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'll 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 Keating -- President, Chief Executive Officer and Director

Thank you, Dan. As we managed through this challenging period, I'm extremely proud of our Evoqua team and how well they responded to an evolving and dynamic set of market conditions. I'm also very pleased with our solid third quarter results that represent the essential nature and resiliency of our business.

As discussed last quarter, our three overarching priorities helped us successfully navigate many of the challenges brought about by COVID-19. Our first and most important priority is protecting our employees by ensuring they have the proper PPE and procedures to safely perform their jobs. We're following CDC and local agency health guidelines and keeping employees informed through frequent Companywide communications. We are an essential business and have deployed resiliency actions intended to maximize customers' uptime, maintain operations at all plants and drive productivity and cost reduction. We expect these actions to support our short-term priorities and to serve as a foundation in driving our long-term strategic goals. We are actively managing the business to improve liquidity and balance sheet flexibility and are seeing success in this area. Throughout the webcast, we will provide details on our results, but again, we're very pleased with the quarter.

Please turn to Slide 4. COVID-19 has represented challenges across many facets of our business, but our team has responded well. As reflected in our results, we delivered a very solid quarter in a challenging operating environment. Our business model is working well, the long-term strategy is intact, and we have an outstanding team that is working to deliver on our expectations. We believe we're well positioned as we move into 2021 and beyond.

Operationally, I'm very pleased with our execution as we maintain continuity of operations across our manufacturing and service branch facilities. We will continue to work through these challenges and have plans in place to keep employees safe, whether working in the field, in the office, or remotely.

We ended the quarter strongly with a book-to-bill ratio of 1 times and our overall order intake was largely as expected. We are pleased to have the strong pipeline of outsourced water opportunities and Water One opportunities that should convert to orders over the next several quarters enhancing our steady and recurring revenue stream over the coming years.

We reported very strong capital growth in both ISS and APT in the quarter. In particular, microelectronics demand continued to be a highlight. Overall demand trends, as expected, were uneven across various end markets, which we will discuss in more detail on Slide 5.

Our service model is resilient and customers continue to rely on Evoqua to maintain operational uptime. We experienced some COVID-induced pressure on our service business due to delays, shutdowns, and productivity impacts, specifically in our refining and chemical processing end markets. The end market trends reviewed last quarter have not changed and we will repeat that outlook on the next slide. As we indicated last quarter, we have taken temporary cost actions in line with our business resiliency and liquidity priorities and to preserve jobs. We are closely monitoring our expenses and have the capacity to respond quickly and according to customer demand and macroeconomic conditions. Finally, I'm very proud of the team for the actions taken on liquidity management. We continue to meet our customers' needs while improving our operating cash flow. As a result, we reported a sequential improvement in net leverage for the quarter.

Please turn to Slide 5. Based on our current expectations, this chart represents what we are hearing from sales and operating teams regarding demand in our primary end markets. To refresh, we serve a broad and diversified set of end markets as represented on this slide. Our smallest end markets are on the bottom of the page representing low- to mid-single digits, rising in value to the top accounting for approximately 20% of our FY'19 annual revenue. And as previously stated, our end market expectations for the reminder of the year have not changed from last quarter. We saw life support end markets and disinfection, pharma, and biotech remaining strong. The need for ultrapure water is in high demand and we're prioritizing our service capabilities to these essential markets.

Healthcare needs vary by region as hospitals manage the number of elective surgeries and normal appointments allowed while maintaining treatment capacity for the expected COVID-19 admissions. Microelectronics continues to have a solid demand and performed well in the quarter. Refining and oil and gas had significant declines in the event-driven business, particularly around vapor degassing and hydrostatic mobile testing.

Municipal demand overall was stable and we are monitoring new budgets, announcements for the coming year. Aquatics was impacted in the quarter from COVID-19 as contractors experienced delays on active projects and various regions delayed pool openings. Overall, the end market demand in Q3 was largely as we expected. We have seen increased interest in our digital offerings that provide efficiency, increased uptime and in this environment, increased safety for our customers. Also, we expect the treatment for PFAS and other merging contaminants to remain highly visible and important to customers despite COVID constraints. We'll be happy to address questions about specific end market drivers during the Q&A session.

Please turn to Slide 6. We are committed to drive sustainable initiatives across our business. We think of 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. As featured in our 2020 Sustainability Report, we have called out two Companywide initiative for eternal sustainability: one to reduce our water usage; and second to reduce our total number of accidents. To date, we are showing progress. From 2017 to 2019, in our five leading US facilities, we reduced water usage by 26%, and across the Company, we have reduced the total number of accidents by 14%.

This slide also highlights two case studies on how we have helped our customers become more sustainable. Through our technology deployment in APT, our BioMag and CoMag systems have become well-established solutions treating wastewater for nearly 500,000 people daily, and we recently surpassed a milestone of more than 100 billion gallons of water treated. And the second, after facing droughts in Southern California, Air Products called on our ISS team to design a solution, including our digital and water reuse technologies to save up to 75 million gallons of water per year. This allowed their facility to increase their capacity and lower their overall costs.

Last quarter, I mentioned that we had received a letter of intent for a large PFAS treatment system for a West Coast water purveyor. I'm pleased to report that we received a purchase order for 30 large treatment systems to remove PFAS at the wellhead before being transported to the main drinking water system. The systems are uniquely designed providing built-in flexibility by allowing the customer to switch between different treatment medium. We continue to have additional opportunities in the pipeline to treat PFAS, selenium and other emerging contaminants. This system is designed to treat up to 86 million gallons per day, providing clean and safe drinking water for approximately 1.3 million people. When it comes to PFAS and other emerging contaminants, customers continue to call in Evoqua for the full suite of solutions, both temporary and permanent.

Please turn to Slide 7. We're pleased with our third quarter results. Organic revenues adjusted primarily for the Memcor divestiture were essentially flat. Our book-to-bill ratio was above 1 and the size and quality of our pipeline continues to improve, specifically related to outsourced water and Water One opportunities.

Adjusted EBITDA was approximately $64 million, up more than 5% from the prior year. We have strong operational execution across the business supported by favorable cost control comprised of permanent changes and also temporary COVID actions.

Our liquidity increased by $36 million sequentially to $256 million, driven primarily by strong working capital management. I would like to specifically note that working capital of trailing 12-month sales decreased to 13.1%, down from 17.7% in the prior year. I'm very proud of the employees across the Company involved in managing our working capital and specifically collections during these challenging times.

Adjusted free cash flow conversion was well over 100% and net leverage improved to 3.1 times from 3.3 times in the second quarter. We are actively monitoring our capital structure and we have no near-term maturities.

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. Our overall revenues have grown at a rate of 7% with adjusted EBITDA growth of 17% annually 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 our 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. Ben?

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

Thank you, Ron. Please turn to Slide 9. As Ron noted, we reported stable revenues in the quarter with strong cash generation. Organic revenues, which exclude the net impact of the Memcor divestiture and the acquisitions of Frontier and ATG were essentially flat versus the prior year.

All key financial metrics improved or were relatively stable on a year-over-year basis. Q3 adjusted EBITDA was up 5.3% to approximately $64 million for an overall average margin of 18.3%. Cost reduction actions taken across the Company, both permanent and temporary, solid operational execution, favorable price and mix, mostly in APT helped drive adjusted EBITDA growth. Price-cost was favorable approximately $2 million in the quarter.

Please turn to Slide 10. Our Integrated Solutions and Services segment had organic growth of approximately 1%, mostly driven by the strength in the microelectronics and life-sustaining related healthcare end markets, partly offset by soft demand in refining-related end markets. Service revenues were impacted by COVID-19 as Ron discussed earlier. We are pleased to see customers continuing to move to our digital offering with Water One pay-per-gallon sales growing at high-single-digit rates versus the prior year. Our outlook for outsourced water opportunities continues to be very positive. Adjusted EBITDA declined slightly due to unfavorable mix and COVID-19 impacts. We experienced some lower demand on on-demand service volumes and negative service productivity in the quarter.

Please turn to Slide 11. Applied Product Technologies organic revenues declined 2.5%, driven primarily from soft demand in the aquatics and disinfection product lines as we saw delays in projects and pool openings. FX negatively impacted sales by approximately 100 basis points. Adjusted EBITDA grew 5.9%, or 410 basis points to a margin of 24.3%. Favorable overall product mix, price, cost containment actions and operational benefits from the two segment structure realignment improved profitability year-over-year.

Please turn to Slide 12. Capital spending of $27 million for the quarter and $66 million on a year-to-date basis was mostly to support outsourced water contracts that are expected to remain on track. We are monitoring growth capex projects under way, as well as a robust pipeline of opportunities that have the potential decision dates in the coming months. Third quarter net working capital continued to improve to 13.1% of LTM Q3 sales. We continue to actively manage the quality of our accounts receivable and inventory levels. Overall, we improved net working capital days 11 days versus Q3 of the prior year.

Please turn to Slide 13. Adjusted free cash flow improved significantly versus the prior year in the quarter and on an LTM basis exceeding our 100% conversion rate targets. Leverage improved to 3.1 times, which was down sequentially from Q2 and improved more than a full turn compared to the prior year. Our weighted average cost of debt is approximately 3.8%, down almost 180 basis points over Q3 of last year. Interest expense declined $4.4 million due to reduction of debt from the Memcor sale, benefits of the February refinancing and overall lower interest rates.

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

Ronald Keating -- President, Chief Executive Officer and Director

Thanks, Ben. Please turn to Slide 14. In summary, we had an excellent quarter against a challenging macro environment. We will continue to prioritize the health and safety of our employees and customers, while remaining focused on our business resilience and enhancing our liquidity and financial strength. Liquidity improved during the quarter, adjusted free cash flow was strong and our net leverage ratio improved sequentially. I'm very pleased with how we executed operationally and financially. We expect the overall market to be challenged with uneven demand as we progress through the fourth quarter. We have good overall momentum going into the quarter, but the market is still difficult to read with certainty.

Our book-to-bill ratio was north of 1 at the end of the quarter and I'm very pleased with our pipeline of opportunities, particularly with a number of outsourced water and Water One projects on the horizon. We continue to see the operational and sales channel efficiencies across the business from the two segment realignment.

Our digital offerings provide customers with increased safety and operational uptime and we continue to see strong interest in growth as we expand our capabilities. We are well positioned to respond to the growing demand for the treatment of emerging contaminants. We have the branch network and portfolio solutions that we believe allows us to be the go-to-provider. We're very pleased to have been awarded the large PFAS project that was highlighted.

Outsourced water is expected to provide long-term recurring and profitable revenues. We will continue to invest in growth capex that supports customer orders now and in the future. Our pipeline is strong and growing across the broad portfolio of solutions, due to our leading position in servicing our systems and ensuring customer uptime.

As a final point, historically our fourth quarter is our strongest quarter with an average sequential third to fourth quarter EBITDA increase of 24%. Given the macroeconomic uncertainty and order conversion timing, we expect this year to be a bit muted with a sequential increase from third to fourth quarter in the range of flat to up 10%.

I would now like to open the call for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Deane Dray of RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning, Deane.

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

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, Ron, maybe we can start with a theme here. We were hearing more of the industrial companies talking about how post-COVID they need to change the business model, they need to pivot more to doing things like remote monitoring. And it looks to me that Evoqua has a big head start already, especially outsourced water, especially all your digital offerings. But where and how might Evoqua's business and business model change in this post-COVID landscape?

Ronald Keating -- President, Chief Executive Officer and Director

Deane, thanks for the question. It is a part of our strategy. It's what we've been focused on for quite some time, deploying outsourced water solutions and certainly connected solutions across the entire enterprise. So, as you'll recall, we started this in service deionization and we've expanded it into a much broader portion of our portfolio over time. And so, as you look forward, what our customers are asking to do is to do what we do well, so they can do what they do well. So treat their processed water, treat their wastewater, help them close the loop around recycle and reuse, but do it in a manner in which we are on-site 24/7 remotely and watching what happens without having to have people on-site. So, that's a little bit of the methods that we see transforming into the future, and frankly, the basis that we have established and the footprint that we put into place enables us to really be successful on that going forward.

Deane Dray -- RBC Capital Markets -- Analyst

That's good to hear. And the second question is on this PFAS win, which is a big deal. And if you could just provide some more color? When you talk about the 30 large systems, these -- are these skidded systems that you ship to the customer, but this is not a remediation where you're running it for them, they are still going to run these systems and maybe talk about what that aftermarket is because it sounds like you can swap out what type of filters you're using?

Ronald Keating -- President, Chief Executive Officer and Director

Sure. So, they are permanent systems actually, so not skidded, but there are permanent installations that are going in. They're going in around water wells in a large water purveyor that provides water to 1.3 million people on the West Coast. So, what we're doing is, we're doing a pre-treatment from the well before it goes to the water treatment plant itself to take the PFAS out. And what we've designed these for is, where they can use either granular-activated carbon or resin and to actually take the PFAS out and concentrate it up. And so, the ongoing service on the backside of that will be around the granular-activated carbon -- reactivated carbon or resin exchanges, which we do as well. They'll run the systems, we'll provide the aftermarket and the support on the backside.

Deane Dray -- RBC Capital Markets -- Analyst

Good to hear. And with the success and the scale of this type of PFAS, when -- what's the pipeline look like? And just if you project out the next one or two years, how meaningful can this be for Evoqua?

Ronald Keating -- President, Chief Executive Officer and Director

The pipeline continues to grow very strongly and it can be significantly meaningful. And a lot of it is happening based on what the local water districts are requiring. As people are testing more, the federal government is getting involved and they are applying funds at a federal level for PFAS treatment, PFAS remediation. But it's much more focused at the local level and that's where we continue to operate across the larger systems in PFAS at the local level being very connected to the water districts themselves and making sure they have the right solutions in place.

Deane Dray -- RBC Capital Markets -- Analyst

Great to hear. Thank you.

Ronald Keating -- President, Chief Executive Officer and Director

Thanks, Deane.

Operator

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

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

Good morning, everyone.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning, Nathan.

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

I'd just like to start following-up to that -- the very last of your prepared comments there, Ron, when you said 4Q sequential EBITDA seasonality is going to be a bit depressed this year, flat to up 10%. Maybe you can talk a little bit more about the puts and takes there? Are there temporary cost things like T&E that were out in the third quarter that come back in the fourth quarter that kind of moving things around a little bit? Or just any more color you can give us on what's modifying that normal seasonality?

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

Hey, Nathan, it's Ben. Yeah. Most of it is the uneven demand on the top line that we're looking at, that we've already highlighted on Page 5. Regarding the bottom line, we feel very confident we'll be able to continue to manage our expenses to help offset some of that sequential bump that we would normally get through seasonality that might be a bit uneven in this period of time. So, we feel good about the cost reduction actions we put in place, both permanent and temporary and are very much in line with what we communicated last quarter, which will help us mitigate that top line impact that we expect to see in the COVID world.

Ronald Keating -- President, Chief Executive Officer and Director

And that's -- we just want to be very mindful of what's coming Nathan, as we go into Q4 with a little bit of uncertainty in the end-markets, we're still watching those. Page 5 highlights some of the ones again that are strong versus not. And I think that historically when you see that big ramp-up in fourth quarter we've seen, it's a big fall through we want to make sure that you're aware of what the outlook is.

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

Fair enough. Follow-up question is going to be on working capital and cash flow. I think I can remember the first due diligence meeting before you guys IPO'd and we were talking about 26% working capital targets or something like that, which is now about half of that. Where do you think the right level of working capital is to run the business? Does working capital naturally come out of the business with more outsourced water runs through capex rather than maybe running through your balance sheet here? Do you think there are more opportunities or does working capital getting much lower than they start to impinge on service levels or anything like that?

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

Well, we certainly improved the working capital profile of the Company due to the sales mix of the Company, and certainly the outsourced water, you're absolutely correct does help our working capital profile. Obviously, jettisoning the Memcor business and increasing our industrial versus our municipal exposure has shortened our working capital days. But we've also have several programs in place that we've actually worked on, our receivables quality has never been better, and while we do have some inventory safety stock on hand during this COVID crisis just to make sure that we don't have any disruption, we also continue to improve our inventory days out in our SIOP process and I don't want to ignore payables.

We've done several things in terms of supply chain financing and working with vendors to extend payment terms and it's been all three in terms of that 11-days improvement. So, we think we've actually shifted the working capital profile of the Company more positive through all of those things, but I don't want to under-emphasize the importance of the Memcor divestiture, increasing our industrial sales mix and reducing our municipal sales mix.

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, Nathan, as we continue to drive the strategy bound -- around recurring and visible revenue that is serviced that has a significant impact on working capital.

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

Service revenues clearly helped our working capital.

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

Yeah. So it sounds like you do think there is potential for this to drift even a little bit lower than where it is now?

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

Potentially yes, I think as a stated goal we've been targeting that low-to-mid teens working capital, and we feel very good about being able to stay in that range.

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

Great, thanks for taking my questions.

Operator

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

Aton Bookbinder -- Citigroup -- Analyst

Hi, this is Aton Bookbinder [Phonetic] on for Andy.

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

Good morning.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning, Aton.

Aton Bookbinder -- Citigroup -- Analyst

Good morning. So with a book-to-bill above 1 in the quarter?

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

Yeah.

Aton Bookbinder -- Citigroup -- Analyst

With a book-to-bill above 1 in the quarter and realizing that you may have better visibility on a 12-month basis than any specific quarter because of shipment timing. Can you give a high level view of what you're seeing over the next 12-months?

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

Yeah, I mean, we continue to see order activity be fairly robust, we're pleased with it, as long as book-to-bill stays above 1 that's always a great indication for us, but I think the thing that we want to make sure that we continue to emphasize is how we're driving outsourced water projects, we're driving more Water One connectivity and more digital deployment, which creates longer-term contracts, that actually will give us enhanced more visible revenue over years to come. So just because the book-to-bill is over 1, in a lot of cases we are booking outsourced water contracts that are longer term, that will continue to feed the business as we go forward into the coming years.

So, over the next 12-months, I would say that we're still being a bit cautious on just the uncertainty of the end-markets but we've seen the end-markets stabilize, we're actually seeing some of the supply challenges that we dealt with early in COVID materialize, start to subside a bit, and we're continuing to execute on the business, which we're very pleased with.

Aton Bookbinder -- Citigroup -- Analyst

Thanks, that's helpful. And I guess generally service and aftermarket businesses are expected to be more resilient in a challenged environment, but in the quarter, capital sales increased across both segments while service and aftermarket declined in both. Can you talk about maybe what you're seeing that might be causing this dynamic or if there is potential for deferred service and maintenance to bounce back over the coming quarters?

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

Yes, Aton, as we highlighted, actually during the opening remarks or during the remarks earlier, the microelectronics business continues to be strong for us as we sell capital into microelectronics and into other end-markets, that has a significant pull-through of service and aftermarket business that will continue. So, we are seeing stability in our service and aftermarket business with the exception of some small disruptions that we've had out of COVID with customers actually being shut down in some of the end-markets we highlighted, pool start-ups, a lot of the aquatics business we spoke about on the disinfection side. But what we do anticipate seeing is, when those markets normalize, they'll come back to normal. The service and aftermarket business again continues to be very resilient, and then the capital business that we put into microelectronics and some other end-markets that have had an uptick will continue to pull service and aftermarket through.

Aton Bookbinder -- Citigroup -- Analyst

Thank you. I'll pass it along.

Ronald Keating -- President, Chief Executive Officer and Director

Thanks.

Operator

Your next question comes from Brian Lee of Goldman Sachs.

Brian Lee -- Goldman Sachs -- Analyst

Hey guys, good morning. Thanks for taking my questions.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning.

Brian Lee -- Goldman Sachs -- Analyst

Good morning, maybe first on APT, margins here seem to have broken out a bit, just wondering how sustainable are these levels as we think about the price mix benefits you mentioned this quarter and also the savings from the realignment, even with the near-term revenue uncertainty, is it reasonable to assume we are kind of seeing a bit of a new normal for APT going forward. Any reasons we -- you would want to back-off that view?

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

Brian, I think what we've seen is APT historically has been, had some variability in the margins, but what we've been able to do is more normalize the operations, we've gone through significant amount of restructuring in the business as we went through the two segment realignment that's helped quite a bit and we're starting to see the benefit pull-through. So we're pleased with, there's always a bit of a mixed impact in that business but we're pleased with what they've been able to deliver, and I'm very pleased with the margins that are falling through as a result of the two segment realignment.

Brian Lee -- Goldman Sachs -- Analyst

Okay, fair enough. And then maybe just another question on the PFAS opportunity, the design win, the 30 sites that you mentioned in the West Coast for that one particular design, I think New York recently announced a new drinking standard for PFAS and PFOA, can you kind of speak to whether you have any footprint in that region, maybe how big of an opportunity that might be and then -- the legislation, the ink is not really drying it, but any sense for how quickly the needle could move in a situation like that where the standard being set is fairly stringent at that 10 parts per million from what we understand?

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, we do operate throughout the country, obviously, in fact the East Coast is generally where we have historically operated more strongly on emerging contaminant removal, that's where our service business is more concentrated. So, we have a very good footprint on the Eastern side of the United States, in fact, that's where our initial PFAS treatment systems were going into, into the Northeast. We will continue to expand our portfolio and our footprint on the Eastern side around emerging contaminants that are PFAS and then other emerging contaminants that are even much more broader, selenium and others that we referred to.

Tom will tell on what's going to happen with the legislative bills that have passed as well as what's happening in the individual Water District in New York and New York State. We will continue to monitor it. We're staying very close to customers and obviously the full suite of solutions that we have which I actually highlighted generally makes us one of the very first calls to come in and one that can come in on a temporary system and solve the problem while we develop and determine the right permanent solution that goes in. So, we're pleased with the changes that are occurring, it actually bodes very well for the pipeline that Evoqua works through and PFAS is just one of the many contaminants that we focus on.

Brian Lee -- Goldman Sachs -- Analyst

All right. Thanks, guys, I appreciate it.

Ronald Keating -- President, Chief Executive Officer and Director

Thank you.

Operator

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

Joe Giordano -- Cowen and Company -- Analyst

Yes, good morning.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning.

Joe Giordano -- Cowen and Company -- Analyst

You called out the microelectronics a couple of times, that's a business where we're seeing growth across suppliers into that industry. Just curious how you think about the sustainability of that and can you talk about, you're putting in capital now to get the aftermarket down the road, which makes a lot of sense, but how does that transition look like when you have a big ramp of the capital going in and how does that transition from that to like a slowdown of the capital into the aftermarket, what does that look like?

Ronald Keating -- President, Chief Executive Officer and Director

Yeah. So, Joe, what we see on the microelectronics businesses, it is a good market. The market is very strong. We have an anticipation that it will continue to be strong. One of the things that microelectronics' customers are trying to do is they are continuing to increase the density around the chips that they provide, increase the capabilities in that, increases the need for more and more purities in water and the focus on very, very micro contaminants to be removed. The other thing they are starting to do is minimize their length of discharge and get into a recycle reuse environment so that they're doing the right things for sustainability, which is ultimately what Evoqua provides. So, [Indecipherable] someone that enables our customers to be very sustainable on what they focus on. So with the capital systems that go in what we've spoken about many times is typically following a capital sale around processed water. There generally is about $22.5 [Phonetic] of service and aftermarket that flows, a little over a year to year and a half after the capital system has gone in, we would anticipate seeing that kind of flow through occur in these capital investments or capital installations as well.

Operator

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

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking my question guys. I asked this three months ago, I thought I'd get your perspective again. M&A for you guys I think the last acquisition was Frontier, so almost a year ago now, clearly there are some distressed situations out there given that the climate, what are kind of, what are you seeing in terms of deal multiples and any motivated sellers that are potentially opportunistic for you?

Ronald Keating -- President, Chief Executive Officer and Director

Pavel, it's a great question and thank you for following up with that three months later. We are actually seeing some good opportunities that are coming forward in the pipeline around M&A. We have a pretty strong focus as we've really discussed from the very beginning of, the Company being an IPO, is build out our product portfolio. One of those acquisitions was the Frontier acquisition but also expanding our service capability and service region to vertical markets and geographies that we feel like we can get better customer concentration, that's where you'll see the focus come over the next few quarters. I anticipate is going to be around service, tuck-in service opportunities.

We are seeing the multiples hold pretty much where they were historically. Even on a little bit of depressed EBITDA, the multiples haven't accelerated, they are continuing to hold where they are. So, we see great opportunities for us to be able to complete some tuck-in acquisitions around the service side, bring those in at very good multiple certainly post synergy because in a lot of cases we consolidate the facilities into ours and we can see EBITDA -- our gross margin fall to EBITDA, because we take the overhead cost out. So, we've said before they're kind of mid to high single digits in the multiple post synergy they're somewhere in the mid to lower single digits, and we continue to see that as an opportunity.

Pavel Molchanov -- Raymond James -- Analyst

Okay. One of the slightly quirky aspects of the pandemic is an increase in household waste, particularly plastic waste, some of which obviously makes its way into the wastewater and so forth. I'm curious to what extent this again slightly kind of bizarre if you, has come on your radar your customers' radar specifically over the last 100 days or so and potentially adding to some service revenue for you?

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, I think that we've seen a fairly consistent request around wastewater improvements, wastewater capabilities and treatment trains, it hasn't necessarily changed dramatically over the last 100 days, we were already dealing with micro plastics as an emerging contaminant that was creating a lot of challenges inside of wastewater treatment systems. We continue to focus on that with our service offerings that we have as well as our capital offerings around treatment expansion and the upgrades of treatment facilities.

Pavel Molchanov -- Raymond James -- Analyst

Thanks very much guys.

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, thanks for that.

Operator

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

Patrick Baumann -- J.P. Morgan -- Analyst

Hi, good morning, Ron. Good morning, Ben. Thanks for taking my questions. First time orders, the book-to-bill you said north of 1 in the quarter and you said that the orders were in line with your expectations, just curious how they look versus last year and year-over-year basis? And then if you could on that basis, whatever the pluses and minuses by end market and versus equipment and equipment versus service within that would be helpful?

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

Yes. We don't disclose orders in terms of year-over-year performance. Unfortunately, I can't really talk about that other than what we've already said, but overall I think when you turn to Page 5, our orders really manifest itself very much in line with what we expected on Page 5 and our expectations for the second half are very congruent to Page 5. So --what was the second part of your question?

Patrick Baumann -- J.P. Morgan -- Analyst

I think that kind of answered that. Was the -- PFAS order you mentioned was that recorded during the quarter, I think it was, but I just want the West Coast one?

Ronald Keating -- President, Chief Executive Officer and Director

Yeah. The order was reported during the quarter, but no revenues coming of that yet.

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

The revenues will come later on that.

Patrick Baumann -- J.P. Morgan -- Analyst

Understood. And then on APT, the margins there were much stronger than we expected in the quarter. I'm just trying to understand better what the adjusted base margins were for 2019 if you pull out Memcor that would be able to properly model the fourth quarter right and third quarter we are obviously too low. So, I'm just wondering if you give us some help on prior year based margins excluding Memcor?

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

Yeah. So, if we disclosed that Memcor in a prior year overall for the year is about $60 million in revenue and about $8 million of an EBITDA. For Q3, Memcor was just under $14 million in revenue and just under $2 million in EBITDA. But it was a business that was very strong in Q4, so Q4 revenues were about $26 million in the prior year. Just so you can see it, it was a pretty steep ramp and we had about $6 million of EBITDA in the prior year in Q4.

Patrick Baumann -- J.P. Morgan -- Analyst

That's super helpful. Thanks for the color on that. And then you mentioned higher sequential EBITDA fourth quarter versus third quarter and you also typically have higher free cash flow sequentially, can you just confirm that you still expect that this year?

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

Yes. I think very much, Ron gave you the revenue or the EBITDA sequentially, but obviously that would be driven by the increased revenue sequentially.

Patrick Baumann -- J.P. Morgan -- Analyst

Yes, makes a ton of sense and then last one from me if you could, help me understand how to read slide 5, like what is the embedded like weighted end-market profile for you? What does that all equate to? It is hard to tell if it's you expect the end-markets to be down a bit or if they're flat, just not sure how to read that slide?

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, so, slide 5, as you look at it starts with the lowest markets on the bottom refining and food and beverage, so that would be our smallest end markets. Leading up to the top, growth obviously is going to be up in the high single digits to low double digits, neutral is going to be flat to probably call it up or down 2% or 3%, slight decline down mid-single digits. Delays and cancelations are going to be down in the double digits. So, as you look at it, you can see that six out of ten of our end-markets are all performing extremely well or growing. Two of the markets that are decent size for us are slightly declining and then two of our smaller markets we're seeing delays and cancelations.

Patrick Baumann -- J.P. Morgan -- Analyst

And then I am surprised you have neutral muni. Are you seeing like -- what you seeing from budget announcements for muni? is it too early to see any impacts from a COVID on that, Ron?

Ronald Keating -- President, Chief Executive Officer and Director

Little early right now. We're watching the municipal budgets and obviously that's based on their tax revenue and where things are coming in, we actually still do have a very nice pipeline of opportunities that are coming up for treatment, investment and we're very focused on retrofit and aftermarket in the installed base that we already have, as well as in the installed base we have a unique capability and a field direct team that can actually go in and treat it on site operating as the contractor as well as the supplier. So we've got some capabilities there that our municipal team is very well able to make sure that they are executing well with the municipal contractors and in a lot of cases we can do one to one negotiations with them.

Patrick Baumann -- J.P. Morgan -- Analyst

Great, thanks for the color, I appreciate it. Good luck.

Ronald Keating -- President, Chief Executive Officer and Director

Thank you.

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

Thank you.

Operator

Your next question comes from Andrew Buscaglia of Berenberg.

Andrew Buscaglia -- Berenberg -- Analyst

Good morning, guys.

Ronald Keating -- President, Chief Executive Officer and Director

Good morning, Andrew.

Andrew Buscaglia -- Berenberg -- Analyst

Can you just talk a little bit -- can you -- the book-to-bill question earlier, I know you don't give a ton of granularity but are you able to talk about the split by segment, it is one segment, are they both above water, is one higher than the other?

Ronald Keating -- President, Chief Executive Officer and Director

We typically, Andrew, we really don't give that kind of granularity but I would just tell you that we continue to, to do well in the business. If you think about ISS, that's our, our longer-term business that's typically going to be longer outsourced water contracts and longer term, even service contracts coming in. APT is more tied to our book-to-bill business because it's more of a products business other than some of the areas like wastewater treatments that are a little longer cycle because they're municipal.

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

To give you a good granularity there, Andrew. And just as an FYI, most of your aquatics businesses is APT as an example and also most of the refining is in ISS OK?

Andrew Buscaglia -- Berenberg -- Analyst

Okay. And then you talked about some, maybe some areas that our team had more disruption with COVID and maybe with the lock down that could see some pent-up demand coming back, and I think you mentioned aquatics, what were the other ones and then what would that do to your or how does that frame your mix going forward? I would imagine that be a positive contribution.

Ronald Keating -- President, Chief Executive Officer and Director

Yeah, it should be. As you think about markets coming back online, such as chemical processing, some of the refineries, as they start back up, it's a fair amount of prep work and water usage as they get going. Even in some of our light industry in general engineering, general industry type businesses, if they've shut down and they are ramping back up, they have to clear the lines, they have to do some flushing on the lines and so it brings a fairly nice bow wave of demand across our industrial business, our ISS businesses, they are assisting these customers in ramping up their operation again.

Andrew Buscaglia -- Berenberg -- Analyst

All right. Thank you.

Ronald Keating -- President, Chief Executive Officer and Director

Thank you.

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 Keating -- President, Chief Executive Officer and Director

So thank you very much for joining us for the call today. First of all, I would like to thank the Evoqua team members for their care, safety and their dedication on supporting our customers in our operations and ensuring that we're driving sustainable solutions throughout the marketplace. We continue to execute on our strategy and I think it's paying -- it's paying nice dividends and it's showing well in the results. The business is very resilient.

We're continuing to operate very closely. We're staying close to the end-markets, and we'll continue to deliver, but we're going to actively manage the business against the market challenges in what's happening as we see macroeconomic changes unfold, but ultimately what Evoqua has provided -- providing is required it's necessary, the customers continue to rely on us for our full suite of solutions and we're pleased with the portfolio and the strategy that we've developed. So, again thank you for participating. Thank you for your interest in Evoqua and I wish you all a safe quarter and look forward to speaking to you again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Dan Brailer -- Vice President of Investor Relations

Ronald Keating -- President, Chief Executive Officer and Director

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

Deane Dray -- RBC Capital Markets -- Analyst

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

Aton Bookbinder -- Citigroup -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Joe Giordano -- Cowen and Company -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Patrick Baumann -- J.P. Morgan -- Analyst

Andrew Buscaglia -- Berenberg -- Analyst

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