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Evoqua Water Technologies Corp. (AQUA)
Q4Â 2020 Earnings Call
Nov 17, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and welcome to the Evoqua Water Technologies Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. After the speakers opening remarks there will be a question-and-answer period. [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, Investor Relations
Thank you, Maria, and thanks everyone for joining us for today's call to review our fourth quarter and fiscal 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.
This conference call includes forward-looking statements, including our expectations for the first quarter and full year of fiscal 2021, as well as expectations relating to the impact of the COVID-19 pandemic, execution of our digital strategy, the market for treatment of emerging contaminants, and other potential growth drivers. 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.
With respect to our guidance, we have not presented a quantitative reconciliation of the forward-looking non-GAAP financial measure, adjusted EBITDA to its most directly comparable GAAP financial measure because it is impractical to forecast certain items without unreasonable efforts due to uncertainty and inherent difficulty of predicting the occurrence and financial impact of and the periods in which such items may be recognized.
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?
Ron C. Keating -- President and Chief Executive Officer
Thank you, Dan. Please turn to slide 3. As we finished FY20, our COVID-19 priorities remain constant. We continue to focus on the health and safety of our employees, ensuring business continuity and customer uptime and improving our balance sheet and the liquidity of the company. Our market conditions have been dynamic with demand varying across the diverse set of end markets that we serve. We expect that trend to continue for some time. We're encouraged by the overall balance that comes from our broad portfolio exposure. We have responded by investing in our strategy of delivering connected solutions and outsource water systems and technologies to treat increasingly complex water industry challenges. Throughout the pandemic, we effectively managed our operations and our cost structure and we exited an unprecedented fiscal year in FY20 as a much stronger company.
Please turn to slide 4. I'm very proud of our team's performance, which resulted in year-over-year improvements across most of our key financial metrics. Adjusting for the Memcor divestiture. Our order book grew double-digits during the quarter and mid-single digits for the full year with a book-to-bill ratio above 1.0. We continue to see an increasing amount of outsourced water orders, which result in an asset that produces long-term recurring and profitable revenues in place of more variable capital project revenues. As we experienced increased outsourced water order growth versus capital near-term revenue growth may appear muted relative to our historical results and underlying bookings activities. I'm pleased to report that during the quarter, we booked our largest outsourced water system for wastewater treatment facility in the CPI market and our pipeline remains strong.
Organic revenue growth for the quarter was down slightly, particularly given last year's strong fourth quarter organic growth comparison. We are pleased to report 1.5% full year organic revenue growth and a challenged operational year of COVID-19, which highlights the importance of our mission and dedication to our essential workforce. Adjusted EBITDA increased in the fourth quarter and full year compared to last year after adjusting for the December 31, Memcor sale and acquisitions. Ongoing cost control efforts, favorable price, cost management, and operational execution efficiencies contributed to higher profitability. Overall the resiliency of the business was reinforced as full-year revenues of $1.43 billion achieved the midpoint of the original full year guidance and adjusted EBITDA of $240 million achieved the high end of our expected range, which we withdrew guidance in April, due to uncertainty created by the pandemic.
Our focus on cash generation produced adjusted free cash flow conversion of 184%, which tracked well above our 100% annual target driven by variety of working capital initiatives and ongoing cost management. Liquidity is now over $300 million, an all-time high and net leverage has improved to 3.0 times adjusted EBITDA, down from 3.8 times a year ago. We are pleased that we had the financial flexibility to continue our M&A program focused on accretive tuck-in acquisitions and we were able to do this while also improving our net leverage ratio. In September, we completed another ISS service acquisition tuck-in and I would like to welcome the employees of Aquapure Technologies to the Evoqua family.
Please turn to slide 5. We continue to refine our strategy around sustainability. We shared in the past that we added sustainable as one of our core values and our impact on a sustainable future continues to expand. We think about sustainability in two ways. First, our Handprint, enabling our customers to become more sustainable through our solutions and service offerings. And second, our footprint, driving Evoqua to become more sustainable within our own internal operations. As featured in our 2019 sustainability report, we've highlighted how our carbon region facilities provide an efficient and cost effective process to provide a circular renewable filtration media. Through our efforts we prevented more than 14,000 tons of carbon from being landfilled and created multi-use operations.
Two examples of our handprint. We're pleased to highlight one of our municipal sales earlier in the year for Santa Clarita Valley Water Agency in California, including three on exchange systems to remove PFAS from their drinking water. In [Indecipherable], we expanded that relationship with the sale of another ion exchange system at an additional well. PFAS removal continues to develop as a small, but increasing portion of our sales and we expect PFAS and other emerging contaminants to provide excellent growth opportunities for many years in the future.
We're also executing on opportunities in the waste to energy space. Our technologies are being specified for future deployment in the biogas fuel market as renewable energy demand increases. Our broad portfolio of water treatment solutions in our established operations and maintenance capabilities provide an excellent growth opportunity in this expanding market. We're in the early days of meaningful revenue generation, but both examples have great promise for the future of our technologies impact on sustainable initiatives and operations.
Please turn to slide 6. Our business has been resilient and sustainable continues to be benefit from a 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 compounded annual rate of approximately 7%, with adjusted EBITDA growth of 16% 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 previously discussed, the nature of our business is subject to quarterly variability. However, we have high visibility in our revenues from products and services on an annualized basis and believe that our model will continue to serve us well during this uncertain period. This can be seen in the strong performance of our service business during the COVID-19 dislocation.
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 7. For the fourth quarter, organic revenues excluding the net impact of the Memcor divestiture and the acquisitions of Frontier and Aquapure, were down 1.7% versus the prior year to $384 million. While demand varied by end market, we saw growth in microelectronics, light and general industry, and healthcare. As Ron mentioned in Q4 of FY19 was a very strong quarter with organic growth of 11.5%. Fourth quarter adjusted EBITDA was $75.6 million, for an overall margin of 19.7%. Price cost was approximately 2 million favorable in the quarter. Please note the fourth quarter of 2019 included Memcor sales of approximately $25 million and adjusted EBITDA was $6.5 million.
Please turn to slide 8. For the full year, revenues were $1.43 billion, with organic sales up 1.5% after adjusting primarily for the Memcor divestiture. The company continues to realize benefits from the two segment realignment as capital growth was strong throughout the year. In both segments capital growth negatively impacted mix within the year, which we expect will result in greater pull-through of services and aftermarket in future periods. Looking into 2021, we expect outsourced water orders to outpace capital orders continuing the trend we saw in the second half of 2020. Adjusted EBITDA increased approximately $240 million for the full-year, adjusted EBITDA margins increased 50 basis points to 16.8% versus the prior year. Profitability benefited from higher gross margins, cost reductions, and favorable price costs while being partly offset by the Memcor divestiture impact.
Please turn to slide 9. Our Integrated Solutions and Services segment had flat fourth quarter organic revenues with capital growth driven mostly in microelectronics. Service revenue was impacted due to slowdowns primarily in refining, oil and gas end markets as well as COVID-19 related deferrals and delays. Our digital strategy continues to enhance our profitability and customer interest in our capabilities remains very high, particular as customers restrict site access due to the pandemic. In addition to booking our largest outsourced water project this quarter, as Ron mentioned, we are also pleased to have booked earlier this year our first organic wastewater treatment facility outsourced water order. We expect the wastewater plant to come online in the second half of 2021. Both of these projects have contracts in excess of 10 years, providing stable recurring and profitable revenues. We continue to pursue a strong pipeline of capital and outsourced water opportunities.
Adjusted EBITDA declined to $60 million due to COVID-19 cost and service productivity impacts as well as higher employment costs, adjusted EBITDA margin for the quarter was 24.2%, down 50 basis points from the prior year. For the full year, segment revenues grew almost 4% to $944 million and adjusted EBITDA increased over 3% to $214 million versus the prior year. Adjusted EBITDA margins were essentially flat at 22.6%.
Please turn to slide 10. Applied Product Technologies fourth quarter revenues were $134 million, which included a decline in organic sales of approximately $7 million or 4.3%, driven by reduced demand across multiple product lines, primarily due to COVID-19 customer delays and site closures. We are pleased to see the Asia-Pacific market rebound from the pandemic in the quarter with solid demand in the electrodeionization and disinfection product lines. FX positive positively impacted sales by 140 basis points. As Ron mentioned, Memcor 2019 Q4 sales were approximately $25 million. Adjusted EBITDA for the fourth quarter was 12.3%. M&A impacts, primarily from the Memcor divestiture contributed to approximately 17 percentage points of the decline, the remaining core business adjusting for M&A impacts grew approximately 5%. Adjusted EBITDA margins for the period were 24.3%, an increase of 160 basis points over the prior year. Operational execution and cost containment actions favorably impacted APT's profitability. During the year, we consolidated five manufacturing facilities as part of our ongoing footprint rationalization program. We now have 10 operating facilities in the APT segment down from 16 in 2019. For the full year, APT's adjusted EBITDA margin increased 20.4%, up 170 basis points over the prior year.
Please turn to slide 11. Capital spending of $23 million for the quarter and $88 million on year-to-date basis was primarily driven by outsourced water contracts. Our pipeline finished the quarter with a solid combination of outsourced water and capital opportunities. We continue to closely monitor the pipeline given the uncertainties of the pandemic. Fourth quarter net working capital improved to 12.5% of LTM Q4 sales, a notable improvement from the prior year. Over the long term, we expect to see mid-teens net working capital sales range given some projects may have varying amounts of working capital requirements. We continue to actively manage the quality of our accounts receivable and inventory levels, and our past due receivables balances finished the year at record lows.
Please turn to slide 12. We've managed the business for cash and liquidity given the COVID-19 uncertainties. Adjusted free cash flow was approximately $65 million for the quarter, which was 184% of adjusted net income. On a full year basis, free cash flow increased by almost $14 million to $117 million, exceeding our 100% conversion rate target for the second consecutive year. Operating cash flow was approximately $158 million for the year versus $125 million in 2019, a 26% increase. Net leverage finished the year at 3 times adjusted EBITDA, which was down sequentially every quarter in FY20 improving from 3.8 times in the prior year. Our fourth quarter weighted average cost of debt is approximately 3.4%, an improvement of almost 200 basis points over Q4 of last year. The reduction is driven primarily by lower market rates and a lower credit spread.
I would now like to turn the call back over to Ron.
Ron C. Keating -- President and Chief Executive Officer
Thanks, Ben. Please turn to slide 13. We believe water treatment is one of the most attractive sectors of the water industry having favorable long-term macro growth drivers. Each segment has multiple initiatives to support Evoqua's long-term organic growth. The ISS segment is focused on our outsourced water and digitally enabled capabilities to drive steady, stable, and profitable revenues. Outsourced water currently represents approximately one-third of the segment's total revenues. We also have approximately 20% of ISS revenues digitally connected and we're working to double that percentage over time. PFAS, selenium, micro-plastics, and other emerging contaminants, will continue to drive complexity in water treatment, which create meaningful growth opportunities. We're focused on several attractive vertical markets where our portfolio of solutions and services are competitively differentiated.
As we near completion of the two segment realignment, we've developed a number of organic growth drivers within our APT segment. We're focused on the development and marketing of next-generation products and new product innovations to treat continued challenges with routine and complex water needs. We see attractive international growth markets for our component technologies as we build out our geographic channel coverage. We're also actively leveraging our ISS segment as a meaningful channel partner, particularly for wastewater and disinfection product lines. And additionally, we are developing an e-commerce platform that enhances the user experience and utilizes robust digital capabilities to drive aftermarket sales. This investment should enable the APT team to drive meaningful aftermarket growth over time as we capture rehabilitation and retrofit business from our rich installed base.
Please turn to slide 14. In the second quarter of the call, we provided an expectation on how we thought the second half of FY20 end market demand may materialize. Looking back, our performance was largely as expected. We did see higher than expected demand in light and general industry and in municipal drinking water supported by PFAS treatment. This updated chart represents our current expectation for demand in our primary end markets for Q1 incorporating insights from our sales and operating teams. We serve a broad and diverse set of end-markets as represented on this slide. Our smallest end markets are on the bottom of the page, each representing low to mid-single digits, rising in size to the top, accounting for approximately 20% of our FY19 annual revenue.
Overall, we expect to see uneven demand continuing, but based on our order backlog six out of 10 end market segments sure to be neutral or growing. We expect the Q1 decline in microelectronics given very strong sales in the first quarter of 2020. Our pipeline and microelectronics is strong and we currently expect to see ramping orders from this market segment as we enter the second half of 2021. The outlook for aquatics and refining is a little more negative, but both of those market segments are not large drivers in the overall revenue for the company. We'll be happy to address detailed questions about specific end market drivers during the Q&A session.
Please turn to slide 15. In summary, I'm very proud of the team's efforts and the results we generated in a very challenging year. And we enter the New Year, with a sharp focus on the same three priorities as 2020. Our fourth quarter results were very solid and we saw year-over-year improvements against most key financial metrics adjusting for the Memcor divestiture. We met the market challenges throughout the year with determination and resilience. Our order book is growing and we're seeing more customers turn to outsourced water solutions allowing customers to focus on their core competency, while letting Evoqua hand the increasing challenges in complexities in water treatment. Our digital strategy significant enabler to business continuity and are outsourced water growth. Interest in our digital offerings has never been greater. Throughout this past year, we highlighted digital offerings in Water One SD, municipal services, and healthcare with vantage SPD. In New Year, we will be introducing the expansion of our connected capabilities and digital solution offerings.
We are at our core, a highly sustainable company. It is what we do every day. Our ability to respond to PFAS, micro-plastics, heavy metals and other emerging contaminants are expected to be very favorable in the coming years. And we are seeing increased demand for our wastewater solutions and the waste to energy markets. As Ben mentioned we had a strong year in generating free cash flow and liquidity. We are deleveraging the business and intend to further strengthen the balance sheet.
For our outlook comments, the challenges from COVID-19 continue to limit visibility and we continue to adapt to changing market conditions. Based on our current view of the business, we expect full year revenues and adjusted EBITDA to be flat to up slightly versus 2020 driven largely by potential order conversion timing and lower year-over-year capital sales. Given our visibility into the first quarter, we're providing a more granular view and expect revenues to be between $310 million to $325 million and adjusted EBITDA to be between $38 million and $42 million.
I would like to also note that in the appendix, on slide 17 and 18, we have provided 2021 framework and key assumptions to provide more insight and transparency into how we're thinking about the puts and takes for the year. We hope you find this information beneficial. I will now open the call up for your questions.
Questions and Answers:
Operator
Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Nathan Jones of Stifel.
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
Good morning, everyone.
Ron C. Keating -- President and Chief Executive Officer
Good morning, Nathan.
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
I'd like to just -- just start with the question on the '21 framework, you've got revenue flat to up slightly, EBITDA flat to up slightly. I would have thought with some of the mix shifting to more outsourced water, some of the structural improvements that you've made this year, but if you had flat to up slightly revenue you would have had a little bit better than flat to up slightly EBITDA. So maybe you could just talk about a few of the puts and takes that are in your assumptions in that framework going into '21?
Ron C. Keating -- President and Chief Executive Officer
Sure, Nathan. I'll talk about a few and then I'll hand it to Ben. As we go into '21, I think a little of the cautious outlook that we're giving is based upon just the unknowns and the COVID. It's based on unknowns and what we're going to have to do with service techs continuing to disinfect, continuing to take additional time to be able to get into customer sites. We've had some delays in that over the past few weeks as we're watching the case load start to increase again, but we do see the outsourced water giving us benefits, long term we see good opportunities there. We had a great pipeline and great order activity across that -- that will yield tremendous results for years to come. But those are a little longer cycle projects and also as we look into the year, the shift to outsource water versus capital takes a little longer to get the outsourced water projects installed up and running and then actually executing to hit the flow through. That's -- that's kind of what we talk about a bit on the slide given the puts and takes on the back end.
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, Nathan as you recall last year Q1 and even in the first half, we had some pretty strong growth rates pre-COVID. So our fiscal year ending in September, we really have six months of tough comps within our numbers as well. And as Ron mentioned, as you convert from capital to outsourced water, which we had a lot of capital stick on microelectronics last year at nice margins, when you convert to those outsourced water program, you take a little bit of a temporary dip because you're moving -- you recorded a capital sale and following year you're recording an outside water sale that's over a longer period of time. So that's a little bit of short-term pain in the first half of this year due to tough comps as well as the conversion outsourced water for long-term gain. So that steady stable recurring revenue. A little bit of a replay of what we saw in '18, which we benefited in '19 and '20 in terms of the cash generation of the business.
Ron C. Keating -- President and Chief Executive Officer
Adding just one of more point in the first year of the outsourced water projects, you have a little higher costs going into the installation that carries out over time.
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
Yeah. Those things make sense.
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
This will -- be longer term, this will accrue to stronger margins and free cash flow.
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
Yeah. I certainly understand the delayed revenue recognition from outsourced water and being that's very high -- high margin and high return investment, we're pretty happy about that. But just my follow-up question on price cost. You said you were positive a couple of million dollars in 4Q. You've seen steel prices starting to rise here, oil prices starting to rise here, which are a couple of your bigger input costs. You talk about how you're thinking about first quarter price cost and full year price cost for 2021?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, we'll see some benefits, a little bit of benefits still into Q1. But as the year goes on, it's going to be tougher. We're basically assuming neutral on the price cost front for '21.
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
Great. Thanks I will pass it on.
Operator
Our next question comes from the line of Deane Dray of RBC Capital Markets.
Deane Dray -- RBC Capital Markets -- Analyst
Thank you. Good morning everyone.
Ron C. Keating -- President and Chief Executive Officer
Good morning Deane.
Deane Dray -- RBC Capital Markets -- Analyst
Maybe to start with Ben and the upside free cash flow this quarter and frankly, for the year. Just take us through the -- if there's any one-timers in there like tax payments? And did I hear you say in the prepared remarks about this working capital to sales? Because that's at 12.5%, that's exceptionally -- it's exceptional work here and exceptional improvement. But I think you said you're going to go back to mid-teens. Just clarify that, is that additional inventory?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, we want to make sure that working capital can change depending on growth and as sales flatten and you tend to liquidate some working capital, right. So that certainly happened as sales -- as growth has tapered some but the other thing too, is we had a great year in terms of collections, in terms of our overdue collections, and we're sitting right now at record levels of current in terms of our receivables and record low levels of over dues. We also had the benefits of our supply chain financing program as well that happened this year. Those benefits will stay, but you're not going to get the onetime benefits to come through. In addition to that, we also -- while we accrued for the 401(k), we did get a cash benefit associated with suspension of the 401(k) in the second half of the year, that's about $6.5 million. So those are the things that in terms of this year that gave us some very strong free cash flow. We'll see how it goes. It all depends on what happens with growth, right, if growth accelerates beyond our expectations that could push working capital a little higher into that mid-teens. If it stays where it's at today and stable to the low single digits decline in the downside case, we expect we'll be in the lower end of that working capital percentage as we are today.
Deane Dray -- RBC Capital Markets -- Analyst
Just sticking with free cash flow and the type of capex that you're looking at for 2021, when you see these outsourced water contracts, what sort of capex -- growth capex obligation would there be for the year if you were to estimate it now?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yes, so again a lot of it depends on the COVID uncertainties and how that unfolds and our ability to get these projects up and on line, but it's going to be higher this year. We're expecting to be in that growth capex range in that 8% range versus in total. So we should see a little higher due to that large project that Ron talked about. We booked our largest ever outsourced water program, which is -- we're very, very excited about. So that's going to drive our capex to a little higher level this year. So it's good news. It's a very high return project, very stable, steady recurring revenues for the next 10 years, but it will push capex up some.
Deane Dray -- RBC Capital Markets -- Analyst
That's perfectly fine with us. And then for Ron, and we really do like that slide, Page 14, with the end markets. And if I had to pick two that I would love to get some more clarification on. Healthcare, pharma, biotech neutral, just given all the demand for ultra-pure water, I would expect that would have been higher. And for municipal growth, I'm happy to see growth there. Is -- how much might PFAS be contributing because it sounds like you're including that PFAS contribution there as well? Thanks.
Ron C. Keating -- President and Chief Executive Officer
Yeah certainly, Dean. On the healthcare, pharma, biotech, again we're lapping a pretty good first quarter that we had in the prior fiscal year and we do see very good growth on the pharma and biotech side. And some of the hospital systems as, certainly, you've heard about have had mixed volumes going up and down given the restriction on elective surgeries and other things that are happening due to the requirement to keep COVID beds open. So we've seen a little bit of mix across the hospital systems with pharma and biotech being up very nicely. We also highlighted a couple of new products that we rolled out on the digital side in the middle of last year with the Vantage SPD that I mentioned earlier. That's got great growth trajectories that we're excited about, and we're expanding that into that business. So overall I think on the year that will be turn to green as we get to the latter half of the year, but we're entering Q1, just giving a Q1 expected outlook against demand and our ability to get in and actually install products as neutral.
Then on the municipal side, again it is Q1 that we're highlighting. This is against our order activity, our backlog, what we're going to be executing across. Municipal does have PFAS inside of that the green. And then on the municipal wastewater, it's really recycled or it's retrofit and rehab that we've got some nice order activity around as municipal systems are wanting to make sure that they can operate to their full efficiency. They may not be spending a lot of money on large capital expansions, but they are spending money on retrofit and rehab to make sure that the operating assets that they have in place are delivering. And then with municipal drinking water basically is the same thing, but obviously protecting around the PFAS applications we see.
On Slide 14, just to give some context for this. As we talk about growth, the green, for everyone's knowledge on the call, green is mid to high single-digit growth. Neutral is basically going to be up or down 2% to 3% organically. Slight decline is going to be mid-to-high single-digit decline and then a red decline is going to be where we'll see double digits. Again, what I highlight on this is this is our Q1 outlook, strictly based on year-over-year comps and also what we see in our order backlog.
Deane Dray -- RBC Capital Markets -- Analyst
Thanks for all that color Ron.
Operator
Our next question comes from the line of John Walsh of Credit Suisse.
John Walsh -- Credit-Suisse -- Analyst
Hi, good morning.
Ron C. Keating -- President and Chief Executive Officer
Good morning John.
John Walsh -- Credit-Suisse -- Analyst
Maybe first, you obviously have been able to do some small tuck-ins here. You did make a comment about kind of strengthening the balance sheet. Could you just give us a little bit more color on how you're thinking about the M&A pipeline, it is still a very fragmented market. Just any color you can share there?
Ron C. Keating -- President and Chief Executive Officer
Sure, John. Thanks for the question. We actually put a bit of a pause, as you would expect, on our M&A activity as we entered into the COVID phase of the last fiscal year. We saw September come through and we had relationships with the acquisition we made in September. We've been discussing it with them for quite some time and we were able to do it at a very accretive and nice number. There's a tremendous opportunity for us around the fragmented business as you highlight, to do complete tuck-in M&A activity. We have a very long list in a large pipeline. Our expectation as we go forward would be doing somewhere around five to six tuck-in acquisitions a year, which was the activity level we were on pre-COVID. And typically, those tuck-in acquisitions range somewhere between $5 million to $10 million in acquisition cost, typically around the same level as their sales revenue is to slightly below that and then we're buying them pre-synergy 7 times to 8 times post-synergy somewhere around 5 times or below.
John Walsh -- Credit-Suisse -- Analyst
Great. Thank you for that color. And then I don't know if it's possible to dissect kind of some of the site access comments between what might be impacting the install business versus maybe what might be more on the MRO side? Your business actually held up very well during COVID from a site access perspective. So maybe just some more color around that? And then I guess if it is MRO, is there -- do you see pent-up demand in parts of the portfolio where there's been site access restriction? Or is it kind of a elongation of demand when that site access comes back?
Ron C. Keating -- President and Chief Executive Officer
Yeah, it's a great question. Primarily where our delays have occurred is around new installations, and it's an expansion of the offering that we have inside of a customer's facility. What happens around side access on the service and the maintenance and operation side is strictly an additional delay or a slowdown of what we see inside of our service ability to execute and ultimately to gain density of route. So it takes a little longer, a little less goals, takes a lot more time through the protocol of disinfecting going in and coming out of a customer because we're ensuring that our customers have continuity of operations, and we have to ensure the safety of our team members going in and out and the safety of their team members.
So as you think about what we saw when I actually highlighted in my comments, light and general industry were higher than we expected in the second half of the year. A fair amount of that was due to some of the pent-up demand you talked about. They shut off and when the shutdown occurred in kind of early late March and so we had a delay in the access we had when they came back online, it had a bit of a pent-up demand of a bow wave that we go and flush systems and get them started up. And so we saw a bit of a higher demand in the second half of the year than we had initially given as our outlook. So we're pleased by that. We anticipate you don't see the customer shutting down as much in this next wave that they're expecting. We're just seeing a reduction in application. They're still utilizing water. Our teams still goes on, we still do operational access. We just feel like it may be a bit of a delay. As their demand levels may drop due to lockdowns or additional restrictions on business activity occur.
John Walsh -- Credit-Suisse -- Analyst
Great. Appreciate the color. I will pass it along. Thank you.
Operator
Our next question comes from the line of Saree Boroditsky of Jefferies.
Saree Boroditsky -- Jefferies -- Analyst
Hi, good morning. Similar to your comments on the healthcare market. As you look at the end market chart, could you just highlight areas that are one color for the first quarter, but you think will turn for the full year. Just to give us a better sense of what you're seeing in the markets? Thanks.
Ron C. Keating -- President and Chief Executive Officer
Yeah, Saree. So we really didn't give this as a full outlook on the year. And the reason we didn't is because we -- it's a little uncertain as we go into the COVID shutdown to knowhow each one of these markets are going to react. I would say that we anticipate possibly, as we've highlighted here Q1, I do believe in the latter half of the year, we'll see microelectronics and some other markets rebounding and hitting a bit of a better order activity coming in, whether the execution activity is there not, just depending on access and ability to get to sites. But I mean, I think this is a good outlook for the first quarter as we go through, and it truly is based on what our order backlog and our activity is expected to be in the first quarter. So we'll give better outlook as we go through the first quarter, we hit that, we'll continue to update this chart and put it into future presentations as we get more visibility.
Saree Boroditsky -- Jefferies -- Analyst
Great. Thank you. And then you talked about developing an e-commerce site for APT. Could you just talk about the cost of this investment and when you expect this initiative to go fully online?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, the investment is already behind us. So we've largely made the investment. You'll see that in our refreshed website, and you'll see that disclosed when we disclose the K.
Saree Boroditsky -- Jefferies -- Analyst
Perfect. Thanks so much.
Operator
Our next question comes from the line of Andrew Kaplowitz of Citi.
Eitan Buchbinder -- Citigroup Global Markets -- Analyst
Hi, this is Eitan Buchbinder on for Andy. Good morning.
Ron C. Keating -- President and Chief Executive Officer
Hi Eitan.
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Hi Eitan.
Eitan Buchbinder -- Citigroup Global Markets -- Analyst
So your framework for fiscal '21 in revenue and adjusted EBITDA flat to slightly up. How should we think about incremental margins between the two segments during fiscal '21 in light of outsourced water backlog potentially driving mix headwinds in ISS versus APT where volume could be picking up in a gradual recovery?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, there's a lot of moving parts there. On one hand, you have the benefits of outsourced water, right, as you've noted. On the other hand, you have the challenges due to COVID and higher costs associated with servicing customers in this environment that's likely to continue, particularly if lockdowns become more prominent. So overall, hopefully, for the year, we can achieve a slight increase in margins and continue to do that. But a lot of it depends on what happens with regards to COVID and how things unfold this year. As Ron mentioned, between first half and second half, we have tough comps in the first half, as we talked about earlier. In the second half, in theory, we should have easier comps should cove debate and the vaccine benefits get out there, and we return to more of a normal situation. So it's a bit tough to call at this point in time Eitan, but overall we want to continue our journey toward 20%. We'd like to put some points on the board this year.
Eitan Buchbinder -- Citigroup Global Markets -- Analyst
Thanks, that's helpful. And then as a follow-up, within organic growth drivers for APT, you list channels and end market expansion, including an international focus. With the understanding that your China business is about $50 million to $60 million in sales, what do you see as your potential growth trajectory in China where the economy is experiencing a faster recovery relative to other geographies?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yes, that hopefully will return into that double-digit growth area this year. Again, a lot of it depends on uncertainties of COVID. But certainly, the fourth quarter was extremely encouraging. We saw a large snapback. We did record a single digits growth this year in total for China, and most of that occurred in the fourth quarter after some tough quarters early on because they were hit the hardest. But we feel good about where China is at. And assuming that the COVID abates and we don't get into more shutdowns, we fully expect to return to that double-digit growth rate that we've experienced in the past.
Eitan Buchbinder -- Citigroup Global Markets -- Analyst
That's great. Thank you. I will pass it along.
Operator
Our next question comes from the line of Brian Lee of Goldman Sachs.
Brian Lee -- Goldman Sachs & Co. -- Analyst
Hey guys, good morning. Thanks for taking the questions.
Ron C. Keating -- President and Chief Executive Officer
Hey Brian.
Brian Lee -- Goldman Sachs & Co. -- Analyst
Hey, so I know you touched upon this a couple of times throughout the call, but given the moving pieces here that seem to be muting the fiscal '21 outlook versus order trends you're seeing real time. Can you help maybe quantify a bit what the assumptions or expectations are around a couple of these pieces. I guess the -- you're calling out the typical order conversion, maybe potentially having some delays there. So what is that? If you can quantify it in any terms. And then on the mix, the outsourced versus capital, sort of how much of a shift year-on-year are you expecting? And then just kind of giving us a sense for what to benchmark to see, if things sort of either normalize or potentially pull in as we move through the year?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, so on the outsourced the capital shift, our outsourced service backlog has significantly increased and our capital backlog has decreased and our outsourced service backlog has increased more than the capital backlog has decreased, obviously. Now again, part of that is the microelectronics where we had a very strong first half of the year last year, now we're expecting that orders will come in, that will impact more in the second half of this year, but those are in the pipeline, but have not actually [Indecipherable] at this point in time. Regarding -- again, a lot of it comes down to what happens with COVID, the uncertainties related to COVID. That impacts the ability to do a lot of things, and it also potentially impacts costs. Should we -- should COVID not be as bad as perhaps as feared? We don't get the cost, the revenue starts to flow. And maybe we hit the upside case that we have on the chart. If COVID happens a little worse than we thought, maybe you're more in the downside scenario. In both scenarios, we still expect to be relatively stable year-over-year, maybe a slight decline, maybe a slight increase. But again, if you think about it more in a standpoint, pre-COVID to post-COVID, but you don't have a full year of post-COVID in the results. You have a half a year of pre-COVID and a half year post-COVID, which makes a more of a muted FY '21, considering those comps.
Brian Lee -- Goldman Sachs & Co. -- Analyst
Fair enough. That makes sense. And then just second question, and I'll pass it on. Just any initial thoughts maybe on the election implications for the water sector, I guess, particularly in the case of legislation or funding for addressing water contaminants like PFAS. I know the -- I think the Biden environmental justice plan had some enforceable limits that they were pledging. But are you seeing anything in terms of development, either at the federal level or state level or expectations, maybe as you think about 2021 in general? Thanks.
Ron C. Keating -- President and Chief Executive Officer
Yeah, we're seeing a fair amount of opportunity come, Brian, just due to the election and getting some certainty around it. I think that's going to be the big key. You do have the Biden/Harris administration that has already put out the environmental justice and equitable economic opportunity. And in that, what they have defined as they're going to tackle PFAS pollution by designating it as a hazardous substance and setting enforceable limits for PFAS. And now I think that's important on enteral level, but we still -- it will take some time for that actually to take hold, and it will take some time and a fair amount of negotiation on the hill to get that wrapped up and complete, I would anticipate. However, states are still moving forward. So we're seeing nice order activity and nice pipeline activity on the PFAS side with individual water districts and states wanting to make sure that they are taking the correct action against that.
And then while we have a little bit of a supply chain shift still back to the United States from other areas. We've had industrial customers that have been investing very nicely and that spoke to our capital sales that we saw in FY '20 in some of the light general industry and other areas, and we anticipate that will deliver longer-term service and aftermarket pull-through just as we focus on all of our capital sales as we go forward. Though the great thing about water is it really doesn't matter who's in office, everybody has to focus on it and make sure that we all have reliable, clean, safe, healthy water ultimately for us as human beings, but also for industry to operate.
Brian Lee -- Goldman Sachs & Co. -- Analyst
Yup, that's great. Thanks guys. I will pass it on.
Operator
Our next question comes from the line of Andrew Buscaglia of Berenberg.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Good morning guys.
Ron C. Keating -- President and Chief Executive Officer
Good morning.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
I wanted to ask on into Q1, the kind of the framework that you laid out on Slide 17. How much -- seems conservative to me, but how much of that assumes some -- maybe some risk from lockdowns, just given the headlines more recently?
Ron C. Keating -- President and Chief Executive Officer
I would say that we do have concerns about lockdown. And it's not necessarily lockdown, but more slowdown. So what we've built into our outlook is more slowdown, a little more challenge of getting into locations. This does not have a -- what has potentially been discussed as a four week to six week lockdown built into it.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Okay. And then for the full year, is there any color you can give us on the guidance as it relates to both of your segments, do you expect similar growth in each segment? I know there's a lot of puts and takes in either, but any other additional help in modeling that out would be appreciated.
Ron C. Keating -- President and Chief Executive Officer
I would say right now, we want to stick to the annual color that we're giving around flat to slightly up. I think you could apply those across each of the segments fairly consistently.
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
And we expect that ISS in this environment due to their large service revenue base and recurring revenue base, they're a bit better positioned than APT, but APT will typically move a little more with the market. And they also have a larger international footprint than APT. So in this environment, ISS should fare slightly better than APT.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Okay. That's helpful, thank you guys.
Operator
Our next question comes from the line of Joseph Giordano of Cowen.
Francisco -- Cowen and Company -- Analyst
Thank you. Hi guys, this is Francisco [Phonetic] on for Joe. Could you expand on your municipal expectations over the next year, given some of the uncertainty, specifically on the capex budget side? And any color for the full year would be appreciated.
Ron C. Keating -- President and Chief Executive Officer
Yeah, I think if you go back to Slide 14, I'll just walk through again what I gave as the colors. So the colors that we have on the first quarter of '21 is green is up mid to high single digits. So that's what we have as wastewater municipal drinking water. This is tied to our pipeline. It's tied to our service footprint. And what we have and what we do as well as the backlog that we're sitting on. A lot of that is around retrofit and rehab, not necessarily the expansion and extension of large capital projects. And then the drinking water side is tied to some PFAS activity that we're already servicing. And we anticipate servicing based on some of the orders that we've highlighted on prior conference calls. And again, so green, mid-to-high single digits, blue, up or down 2% to 3% around zero. And then yellow is mid-to-low single-digit decline, and then red is a double-digit decline. And you can use some -- those kind of expectations against modeling with these numbers.
Francisco -- Cowen and Company -- Analyst
Great. Thanks. That's helpful. And then turning to the aquatics market. Given some of the strength we've seen in other pool exposed companies, can you expand a little bit on -- in terms of what your mix is there? I'm guessing you guys have also let commercial and maybe like theme parks exposure, but what does it look like in that part of the business?
Ron C. Keating -- President and Chief Executive Officer
Absolutely. 100% of our aquatics business is large. It is large applications around water parks, theme parks, large use facilities with multi-bathers. This is not single home, single-family or even small hotel type. So that's the difference in what you see on the aquatics. And again, this aquatics highlight is for the first quarter and it's based on backlog, it's based on what we have currently in our pipeline, looking at year-over-year against first quarter of last year, that was pre-COVID.
Francisco -- Cowen and Company -- Analyst
Great. That's helpful. Thank you for taking my questions.
Operator
Our next question comes from the line of Patrick Baumann of J.P. Morgan.
Patrick Baumann -- J.P. Morgan -- Analyst
Good morning Ron and good morning Ben. First off, congrats on a strong year in a tough environment, definitely helping improve the recession resiliency in the business model here.
Ron C. Keating -- President and Chief Executive Officer
Thanks Pat.
Patrick Baumann -- J.P. Morgan -- Analyst
My question is, in the context of the lower year-over-year capital sales you expect for 2021 and the comment that outsourced water is now one-third of ISS sales, which implies it's maybe 22% of the total company, but the my math right. Is this a profile we should expect beyond this year as the business transitions to more outsourced? Maybe you could opine on how that 20 sales of the total company outsourced water -- how that looks five years from now, maybe?
Ron C. Keating -- President and Chief Executive Officer
I'll talk a little bit about the demand curve we're seeing and let Ben discuss the percentages specifically. But what we've seen and I would say that the strategy we've deployed in the broad industrial markets that we serve, driving them to outsourced water and leading with outsourced water is playing out extremely well. Companies are more and more focusing on what their core competency is and how they execute and improve their operational effectiveness. In doing this, the value proposition that Evoqua and our sales teams have been out delivering against let us provide you worry free, clean, pure water for your application, take it on the backside, help treat the wastewater recycle and reuse it back into your facility is resonating extremely well. So our customers are starting to rely more and more on us for outsourced water activities and to treat the full cycle of the water.
In fact, what we highlighted even during the call was our largest outsourced water booking that we've had to date is actually a wastewater booking. Historically, that was all focused on process water. So we're seeing that actually shift into the wastewater side of the business where customers typically did not do that, but the cost of treating their concentrated industrial waste is continuing to be more challenging for them. So they're enabling us and bringing us to come in to help them manage their operations so they can bring it around full circle, minimize their liquid discharge and drive sustainability into their operations. So I would say the trends are going to be very positive going forward as you did the math on 20% of the company's revenue approximately, we would anticipate that will continue to grow. And then you want to highlight some of the growth rates we've seen and what you expect we'll see for going forward on that.
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah, I think Ron nailed it, and we're seeing that in our backlog. And I think the whole COVID situation has the potential to accelerate some things that maybe would have taken a longer period of time. And certainly, outsourced water is one of those things that we could see acceleration in addition to digital. Those two things, we should expect will continue and more and more customers have an increased appetite for outsourced water. I think time will tell. But certainly, what we're seeing in this year's backlog and in our pipeline, is more of that conversion and more opportunities in the outsourced water area.
Patrick Baumann -- J.P. Morgan -- Analyst
That's helpful. But is the function is the is the slight growth you expect for this year, more a function of kind of the fact that capital demand was diminished versus the shift to outsourced water such that when returns you could still put up the kind of low to mid-single-digit type organic growth you talked about?
Ron C. Keating -- President and Chief Executive Officer
Yes. So what we're highlighting in the outlook for this year is a larger shift to outsourced water that is less revenue in year one, but carries out longer-term at a higher revenue level and a higher profit level. So if we're comparing it year-over-year, we had higher capital sales in '20, then we're giving the outlook for '21 on because a fair amount of the projects are shifting to outsourced water.
Patrick Baumann -- J.P. Morgan -- Analyst
Helpful. Helpful. And then my follow-up is on the first quarter revenue guide, if I did -- I think you've the Memcor divestiture out, it looks like the guide is like down 5% to 8% year-over-year organically. And it just looks a little bit lower than what the end market slide would imply. I don't know, maybe I'm just miscalculating. But maybe if you could highlight anything in the comps that would -- is there a large project last year? Or is this just conservatism? Just trying to understand kind of a little bit of disconnect there in revenue versus end markets?
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
A little both in both, but remember last year, we still had Memcor in Q1. So it's about $14 million that won't occur this year. So when you do that, you're more like that mid-single digits decline year-over-year with -- if you take the midpoint of that guide. And in addition to that, last year, again, pre-COVID had tough comps and a lot of capital, particularly in the microelectronics area.
Patrick Baumann -- J.P. Morgan -- Analyst
Got it. Yup, that's helpful color. Appreciate it. Best of luck guys, thanks for taking the time.
Operator
[Operator Instructions]
Ron C. Keating -- President and Chief Executive Officer
So is that all the questions, operator?
Operator
At this time, I'm showing no further questions, sir.
Ron C. Keating -- President and Chief Executive Officer
Thank you. So in summary, I would like to again thank the team members of Evoqua for terrific FY '20 for delivering on the fourth quarter, making sure that we continue to stay safe and healthy and insured continuity of operations to our customers and our communities and the markets that we serve. We are pleased to be able to increase the liquidity and come out of a very unprecedented and challenged year as a stronger company. We entered into '21 and very focused on how we're going to execute, ensuring that we will continue to deliver to our customers, continue to maintain the health and safety of our team members, and continue to manage our balance sheet and the capital of the business very effectively, while investing in our strategy going forward.
So thank you all for joining us for the call. I appreciate the questions and the interest in the company and look forward to speaking with you again in the future.
Operator
[Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Dan Brailer -- Vice President, Investor Relations
Ron C. Keating -- President and Chief Executive Officer
Benedict J. Stas -- Executive Vice President, Chief Financial Officer and Treasurer
Nathan Jones -- Stifel, Nicolaus & Company Inc. -- Analyst
Deane Dray -- RBC Capital Markets -- Analyst
John Walsh -- Credit-Suisse -- Analyst
Saree Boroditsky -- Jefferies -- Analyst
Eitan Buchbinder -- Citigroup Global Markets -- Analyst
Brian Lee -- Goldman Sachs & Co. -- Analyst
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Francisco -- Cowen and Company -- Analyst
Patrick Baumann -- J.P. Morgan -- Analyst
