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Evoqua Water Technologies Corp. (NYSE:AQUA)
Q2 2021 Earnings Call
May 5, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Evoqua Water Technologies Second Quarter 2021 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.

Daniel Brailer -- VP of IR

Thanks, Maria, and thanks, everyone, for joining us for today's call to review our second quarter 2021 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 third quarter and the full year fiscal 2021 as well as expectations relating to the impact of COVID-19 pandemic, order demand and end market drivers, execution of our digital strategy and our acquisition strategy, the market for treatment of emerging contaminants the impact of the proposed infrastructure legislation, 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 the 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 Keating -- President and Chief Executive Officer

Thank you, Dan. Please turn to Slide 3. Our priorities remain focused on the health and safety of our employees, ensuring business continuity, customer uptime, and improving our balance sheet and the liquidity of the company. The impact of the COVID-19 pandemic has varied across our diverse set of end markets, and customers continue to be prudent in their spending levels. We as a team continue to invest in growth opportunities, foster customer relationships, broaden our portfolio of solutions, strengthen our balance sheet, and execute on M&A expanding our geographic reach. We're encouraged as we look forward to the growing backlog, a robust opportunity pipeline, strong customer engagement and global economies in various phases of reopening. Please turn to Slide 4. We are well pleased with our second quarter results as the overall business performed well. Our book-to-bill ratio was north of 1. And our opportunity pipeline, comprised of outsourced water, capital and aftermarket, is strong across a diverse set of end markets. As we'll discuss shortly, we've seen our ISS service and aftermarket backlog grow at a compounded average growth rate in excess of 20% since 2018.

Second quarter organic revenues were down slightly driven by lower service and aftermarket revenues, primarily due to site closures and delays from COVID-19. Capital revenues grew slightly due to solid performance in APT across the APAC region, but was largely offset by ISS with strong prior year comps in microelectronics. Throughout COVID, we've been pleased with our supply chain resilience, and we're maintaining price discipline in the recovery to combat rising costs. Price/cost was slightly favorable for the quarter and on a year-to-date basis. We are pleased to report adjusted EBITDA of approximately $58 million, improving by 60 basis points over the prior year with a margin of 16.7%, driven largely by operational execution and price/cost management. Inventory levels have risen over the past six months due to customer order requirements and to mitigate extended supply chain challenges. Overall net working capital as a percentage of revenue improved by 100 basis points to 12.9%, supporting strong cash flow conversion well above our 100% target. Our focus on strengthening our balance sheet continues as solid results were recorded across most key metrics.

Operating cash flow improved on a year-to-date basis. Liquidity increased sequentially to $336 million, and net leverage improved to 2.9 times. We expect to make continued improvements to the balance sheet as we invest in organic growth opportunities and continue to pursue tuck-in acquisitions. Please turn to Slide 5. As shown in prior calls, this chart represents our expectations for Evoqua's order demand in our primary end markets for Q3. 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 more than 20% of our FY '19 annual revenue. Looking back, our second quarter performance was largely as expected. We noted solid demand in healthcare, pharmaceuticals, municipal drinking water and food and beverage.

PFAS treatment opportunities continue to drive municipal drinking water opportunities as well. Overall, we expect to see varying order demand in the third quarter, with eight of the 10 primary end markets that we serve expected to be neutral or growing. The outlook for aquatics and refining has improved as economies are also beginning to reopen. We'll be happy to address questions about specific end market drivers during the Q&A section. Please turn to Slide 6. Our business has been resilient and sustainable and continues to benefit from stable and recurring revenue growth. This graph presents our revenue and adjusted EBITDA on a rolling 12-month basis from quarter to quarter since 2017. Our overall revenues have grown at a compound annual rate over 4% with adjusted EBITDA growth of more than 8% during this time.

The business continues to operate on a steady and profitable growth trajectory after adjusting for the divestiture of MEMCOR. We primarily pursue capital projects to ultimately drive stable, recurring and profitable services aftermarket growth. Currently, our service business comprises 41% of our trailing 12-month 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 into our revenues from products and services on an annualized basis and believe our model will continue to serve us well during this uncertain period. I would now like to turn the call over to Ben.

Benedict Stas -- Executive VP, CFO & Treasurer

Thank you, Ron. Please turn to Slide 7. For the second quarter, reported revenues were approximately $347 million. Organic revenues excluding the net impact of recent acquisitions, divestitures and the impact of foreign exchange were down 3.5%. Demand varied by end market with growth in healthcare, food, power and declines in refining and aquatics. Regionally, we continued to experience solid growth in Asia Pacific. Second quarter adjusted EBITDA was $58 million for an overall margin of 16.7%, up 60 basis points over the prior year period. Cost controls, operational efficiencies and footprint consolidation benefits contributed to adjusted EBITDA growth. Please turn to Slide 8. Applied Product Technologies second quarter revenues were $122 million, up 7.6%. Organic revenues increased $3.9 million or 3.5% driven by strong growth across multiple product lines, especially in Asia. The ongoing impact from the pandemic was evident across several product lines in the Americas and EMEA regions as we experienced customer site access challenges. Foreign currency positively impacted sales by 4%. Adjusted EBITDA for the second quarter increased almost 17% to $25 million.

Adjusted EBITDA margin increased 160 basis points to 20.7%. Organic revenue growth, favorable product mix, price and operational efficiencies favorably benefited APT profitability. Please turn to Slide 9. APT is focused on driving organic growth through new product development and international market expansion. Each quarter this year, we are highlighting product innovations that are expanding our addressable markets and providing customers with enhanced solutions across the globe. Last quarter, we highlighted Neptune Benson's FP Series regenerative media filter for the aquatics market. This quarter, we highlight our latest UV technology developed from our May 2019 acquisition of ATG. The system is designed to disinfect process and product water using UV light rather than chemicals. The product is designed to be highly configurable for end users across beverage, microelectronics, pharmaceutical, aquaculture and other end markets.

The new ATG VX low-pressure UV system is a robust nonintrusive reliable disinfection solution. Please turn to Slide 10. Our Integrated Solutions and Services segment second quarter revenues were down 5.8%. Results were driven by a net decline in capital revenue related to the timing of microelectronics projects in the prior year, which was somewhat offset by new products -- projects across a variety of end markets. Aftermarket and service revenues, while impacted by COVID-19 constraints, were stable; while price realization was positive. We continue to monitor customer spending activity, which has been constrained due to COVID-19. We expect the economic reopening to be a catalyst for increased capital investment activity. Our digital strategy continues to enhance our overall profitability, with digitally enabled revenues growing double digits.

And customer interest in our capabilities remains very high, particularly as customers restricted site access due to the pandemic. Adjusted EBITDA declined to $49 million due to higher absorption costs from lower volume and unfavorable mix, driven primarily by reductions in delays in capital spending by customers and lower service productivity. Ongoing cost controls and favorable price realization partly offset the decline. Adjusted EBITDA margin for the quarter was 22%, down 70 basis points from the prior year period. Please turn to Slide 11. Our sales team typically leads with an outsourced water solution to demonstrate our comprehensive capabilities to meet our customers' water treatment solution needs. Whether the customer chooses to use an Evoqua-owned asset or purchase the asset, we focus on earning our customers' service and aftermarket business over the long term. Currently, over 60% of ISS revenues are comprised from service, of which approximately 1/2 comes from outsourced water and 1/2 from service contracts on customer-owned equipment. Service revenues are growing, recurring and profitable, and we believe we are positioned for continued profitable growth.

Over the past two years, we have seen strong interest in outsourced water solutions as customers are increasingly looking to utilize our assets to solve their water treatment needs. The graph shows the magnitude by which ISS service and aftermarket backlog has grown relative to capital backlog over the past 2.5 years. The service backlog is comprised of outsourced water contracts, which include our mobile fleet; service deionization; and build own operate assets as well as service contracts on customer-owned equipment, municipal services and carbon services. This slide also outlines the average revenue conversion range for outsourced water asset by category. As our service backlog increases faster than our capital backlog, we expect to see some short-term pressure on revenue, particularly for backlog related to build-own-operate assets, which have the longest conversion cycle. Currently, our opportunity pipeline is very strong, and we are working with customers on service aftermarket and capital projects. Please turn to Slide 12. Capital spending, primarily for outsourced water orders, was slightly over $19 million for the quarter.

As we previously mentioned, our pipeline remains robust with a combination of outsourced water and capital opportunities. We're closely monitoring the pipeline, given the uncertainties of the pandemic. Second quarter net working capital was 12.9% of LTM Q2 sales, an improvement of 100 basis points over the prior year quarter. Over the long term, we anticipate mid-teens net working capital to sales range, given some projects may have varying amounts of working capital requirements. We were pleased with accounts receivables and accounts payable performance, while as Ron mentioned, inventory levels are higher year-over-year as we respond to customers' order requirements and are preparing for the reopening. Please turn to Slide 13. Overall, our performance through the pandemic has highlighted the resiliency of our business model. We are very pleased with our cash generation performance as operating cash flow was $63 million for the year-to-date period versus $39 million in the prior period.

You can see over the past four years we have significantly improved operating cash flow. Adjusted free cash flow continues to be well above our 100% conversion goal. Our net leverage ratio finished at 2.9 times adjusted EBITDA, which is down almost 0.5 turn from the prior year and down almost a full turn over the past 18 months. We continue to target a leverage ratio in the mid- 2 times range. Our weighted average cost of debt as of Q2 is approximately 3.2%, an improvement of 150 basis points over the prior year. The reduction is driven by lower market rates, reduced debt levels and a lower credit spread. Please turn to Slide 14. On April 1, we completed a refinancing of our capital structure, which produced extended maturities, lowered our weighted average cost of debt by approximately 58 -- 50 basis points, increased our liquidity, and carried over most of our flexible COVID-19 structure from the previous credit facilities. Having a strong liquidity position and confidence on our cash flow generation, we applied $100 million of cash to reduce the term loan B balance. Since the end of FY '19, we have reduced the outstanding balance of our term loan by almost $200 million using cash on hand. We have indicated we are highly focused on strengthening our balance sheet, and we are pleased with the results of our refinancing.

I would now like to turn the call back over to Ron.

Ron Keating -- President and Chief Executive Officer

Thank you, Ben. The Biden administration has outlined its America Jobs Plan with a $2.25 trillion infrastructure proposal that includes provisions on climate change, renewable energy and clean water. This slide outlines the current proposals, requirements and support for clean water. We are strong advocates of the proposed investment to provide upgraded drinking water and wastewater to the infrastructure. We believe we are well positioned to benefit from this increased spending, particularly related to the remediation of PFAS and the modernization of the water treatment systems. Evoqua is an active member in the U.S. Water Alliance and is aligned with their value of water campaigns important messaging to close the water infrastructure funding gap. Please turn to Slide 16. Continuing our strategy, acquisitions have been an important growth driver over the past five years and should continue to be so into the future. We utilize acquisitions as a proxy for R&D activity and capital growth investments.

Our targets have been and will continue to be focused on filling product portfolio gaps, penetrating vertical markets and expanding our geographic footprint. Our M&A pipeline remains robust, and we've indicated our current intent is to focus on tuck-in targets, expanding our service footprint, while also working to improve our leverage ratio. Since 2016, we've acquired 17 companies, 10 of them supporting the development of our product and technology portfolio, and seven expanding our geographic and vertical market service reach. In April, we acquired our third service footprint over the last eight months, Water Consulting Specialists. The WCS team is a great fit into our business and in the northeast region with solid positions across many target vertical markets, including pharmaceuticals and healthcare. Our previous two acquisitions, Pure technologies and Ultra-pure and Industrial Services, have also been excellent fits into our ISS service model and growing markets located in Ohio and Texas, respectively.

Please turn to Slide 17. Sustainability is core to what we do, and our global reach is expanding daily. We're proud to have published our fifth sustainability report on Earth Day of this year, where we highlighted our impact as we treat approximately 100 billion gallons of water every day, the equivalent of more than 4.5 times the amount of water flowing over Niagara Falls. During the quarter, our APT segment sold products into more than 100 countries, and our geographic market penetration has grown. 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. To highlight a recent emerging contaminants win, we deployed our mobile assets to a construction site in Michigan.

The site had a high water table which was contaminated with PFAS and needed to be dewatered to the established PFAS treatment goal of non-detect. A third-party lab verified the treatment specification was met by Evoqua with mobile technologies as we treated approximately 21 million gallons of water and safely returned it to the municipal system. Recycling and reuse is a growing trend and an important macro trend, and we are putting our best practices in place in our own facilities. We're currently reusing 50% of the water drawn at our facilities and are working for that number to expand. Please turn to Slide 18. In summary, while countries and companies across the world are in various stages of reopening their economies, the pandemic continues to present challenges. We are maintaining our priorities to protect our employees, service our customers and preserve our financial strength. Our business is demonstrating its resiliency as evidenced by our strong Q2 results.

Our order book is growing, and our opportunity pipeline is robust as we are seeing material signs of economies and markets beginning to reopen. We're very pleased to have published our 2020 sustainability report. And while we're early in our journey, we're committed to making a positive impact on the availability of clean water. As water treatment becomes more complex, particularly due to the rising risk from emerging contaminants Evoqua's technologies and services become increasingly important. We're here to answer that call. Having a strong and flexible balance sheet is a priority, and our recent refinancing solidified capital structure. We welcome the employees of Water Consulting Specialists to Evoqua, and we will continue our pursuit of tuck-in M&A opportunities to supplement our organic growth. Beginning FY '21, we had a full year outlook for revenue and adjusted EBITDA to be flat to slightly positive from -- versus FY '20. With the first half behind us and visibility for the second half getting better, we're making a revision.

This upward movement to our outlook reflects our strong backlog, robust opportunity pipeline and increased optimism as markets begin to reopen. We have updated our full year outlook by quantifying the revenue and adjusted EBITDA ranges to $1.43 billion to $1.47 billion and $240 million to $255 million, respectively. We've maintained the low end of the range and increased the high end. The timing of notable pipeline opportunities should be obtained and order conversion are two important factors in expected performance relative to the ranges provided. We've also provided our outlook for Q3 with revenues to be between $350 million and $365 million and adjusted EBITDA expected to be in the range of $60 million to $64 million.

I will now open the call up for your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Nathan Jones of Stifel.

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

Good morning, everyone. I wonder if we could just start on Slide 11 with that ISS backlog composition chart, and I appreciate the additional disclosure here. Maybe you guys could just spend some time walking through this a bit more. I think it's important for investors to understand how this impacts current revenue recognition, future revenue recognition, the duration of this backlog. Maybe you can just talk a little bit about when you expect that growth in backlog to start to flatten out a little bit, and for the revenue recognition and the order growth to start to converge?

Benedict Stas -- Executive VP, CFO & Treasurer

Well, Nathan, we are continuing to expect to see, based on the pipeline, more conversion to outsourced water. We do think that capital, as the reopening occurs, will start to become more robust as we enter second half of this year. But the trends associated with more customers choosing outsourced water is likely to continue well into the future based on what we're seeing in the pipeline.

That value proposition seems to be well received by our customers. So... However, capital during the pandemic has been a bit muted for many reasons that we've discussed in the past. And as we look to the future, our capital pipeline and the activity is increasing. So we do expect that part of the line to start to increase as we head into the future. The converging, we're expecting ISS to return to growth in the second half. And that will be driven by the convergence, in the service orders converting into revenue, as well as improvement in the capital end of the business as well.

Ron Keating -- President and Chief Executive Officer

We anticipate, Nathan, that the trend will continue. As Ben talked about, the outsourced water selections that customers are going after is becoming more and more prevalent as water treatment challenges are increasing, certainly with emerging contaminants. And customers frankly just wanting to do what they do, which is their core competency of producing a product or service, and let us do what we do, which is provide them ultrapure water. And I think that trend will continue to flow.

Benedict Stas -- Executive VP, CFO & Treasurer

Just one other key fact that might be of interest, Nathan, we look at our backlog internally. And as we've outlined on this page, which is really backlog that's under contract, our ISS backlog today is now larger than the total company backlog was in 2018. And so you can see that the business has really, really grown, and a lot of that is in that service area.

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

Thanks for that. My second question is on the margin guidance. Your margins in the first half of fiscal '21 were up 100 basis points, despite having revenue down 3.5% organically. You're looking for revenue to flip to growth in the second half of the year. Yet the midpoint of the guidance actually implies, I think, about a 50 basis point decline year-over-year. Maybe you can talk about what goes into that? Is there price, cost or mix or something else, conservatism, that would suggest that you maybe see a little bit of margin compression in the second half despite returning to growth?

Benedict Stas -- Executive VP, CFO & Treasurer

Well, mix is always a key variable that we want to take in account, especially as the capital part of the business turns back on. So we wanted to be a little cautious. We also are not putting our head in the sand with regards to inflationary impacts. We do expect to stay positive on price/cost as we head through the year. So all these factors, with the uncertainty of the reopening, we tried to be measured in terms of our expectations. I think the upper end of the guide shows the more optimistic view as well, but we'll see how things occur as we open -- as the economy reopens. But we did provide for uncertainty as we get through the reopening of the economy.

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

Okay. That's helpful. I'll pass it on.

Operator

Our next question comes from Deane Dray of RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you Good morning, everyone. Hey, this is a bit of a follow-up to Nathan's line of question. The other side of this growth in outsourced water contracts is on the free cash flow side. And I think everyone's been bracing for a bit of a give up in the free cash flow as you use some of your growth capex to fund these projects, but we haven't seen that yet. Instead, we've seen really strong free cash flow performance, up over 200% year-to-date conversion. So just put that in context. If we're expecting a bit of a tempering in free cash flow growth, but we haven't seen that yet, are you able to balance this and still show above 100% for the year? Just kind of take us through those dynamics, if you could please. It's a high -- I know, it's a high quality problem, a high-quality question to be asked.

Benedict Stas -- Executive VP, CFO & Treasurer

Thanks, Deane. Yes, we are very much committed to our 100% in maintaining that. Indeed, as we've talked in the past, the conversion to outsourced water long term helps free cash flow and shortens the cycle. There is a bit of a trade-off between the capex and working capital if a customer chooses outsourced water versus a capital project or purchasing it. So when they purchase it, that shows up in more in working capital versus outsourced water shows up in capex. So there's a little bit of a trade-off there.

We'll have to see. It all depend -- a lot of it depends on the capital business. But overall, we expect to continue to see very positive free cash flow long term. And we do think we can put some more points on the board as we head into the future. We have also done a lot in shared services to improve both our payables as well as our receivables. And we're set a record this quarter in terms of current collections and keeping our receivables current. So we're getting paid faster by our customers as well. So when you add this all up, overall we still feel optimistic we can continue to improve our free cash flow.

Ron Keating -- President and Chief Executive Officer

And Dean, one of the things you'll note on this slide as well is we still talk about 5% to 6% of revenue as capex. Typically, only 2% of that is maintenance. The other is forecasted and focused on growth. And we continue to deliver this kind of cash flow returns with that kind of investment going into outsourced water.

Deane Dray -- RBC Capital Markets -- Analyst

That's really helpful. And a quick clarification, when you talk about site access and site closures, when we think about water one where you're monitoring these customer sites digitally, you're not -- I would presume you're not having any difficulty getting access to water one customers? Because that's the whole appeal, is that you only come in when you absolutely need to upgrade and recharge the system.

Ron Keating -- President and Chief Executive Officer

The water one is not an issue when we go in. And in fact we're going into water one customers pre-emptively and making sure that they're continuing to operate and stay up and running and maintained. But it does go back to what we talked about with the deployment of water one and a bit of a pent-up demand where we need site access to go on-site and actually install the systems. And if you'll kind of recall, based on last year, we only had really March in North America that we were hit by COVID with the shutdown. So this year, we've finally lapped it and we're starting to get more access to sites coming up, but this same quarter last year was really impacted by COVID by only one quarter -- I'm sorry, one month out of the quarter. So it's opening up, but it has been -- it was restrictive a little bit through the quarter as we saw.

Deane Dray -- RBC Capital Markets -- Analyst

All right. That's really helpful. Just last question for me, just to help, Ron, put us in the thought in context here with the Biden plan earmarking $10 billion in PFAS monitoring and remediation. And from our perspective, just putting it into the plan and spotlighting it just puts PFAS in the national spotlight and the debate. And if there's anyone that can give some insight into what that $10 billion means, you can. So I was hoping you just kind of give us your perspective how meaningful is that number? Is it more just of a start to be able to put the spotlight on it? And how do you think it develops from here?

Ron Keating -- President and Chief Executive Officer

I would say it is very much a start to put a spotlight on it. I mean it is something that the Biden administration is trying to bring awareness around this, along with the EPA setting limits as we get focused on more action and more cleanup happening. I mean you saw the one example that we actually called out even on the slide talking about sustainability with removal of PFAS from a construction site. These opportunities are continuing to grow. Our win rate actually is increasing, because we're becoming more selective on the ones that we want to go after, to make sure that our assets are being deployed effectively. But we are at the tip of the iceberg on this. And the Biden administration putting an emphasis on it is going to help drive at least action inside of the different market areas that we're focused on.

Deane Dray -- RBC Capital Markets -- Analyst

That's really helpful. Thank you. I'll pass it on.

Operator

Our next question comes from the line of Mike Halloran of Baird.

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

Hey, good morning, everyone. Just want to follow up on Nathan's first question, agreed, really happy you guys put Slide 11 in there. Maybe just talk about as that normalization happens. Obviously, you're expecting the outsourced water trend to continue, and you're expecting that service piece to continue to grow. But at some point, you're going to see some normalization between how that grows and the revenue grows. As that materializes, what does that mean for profitability? What does that mean for returns? And how should we be thinking about that?

Benedict Stas -- Executive VP, CFO & Treasurer

So Mike, as we've talked in the past, our outsourced water margins are higher than our capital margin. And our outsourced water margins are higher than our typical service margin. So overall, that is part of the story on how we're going to drive the 20% EBITDA. So there's no question that's going to improve the recurring revenue nature of our business, improve our free cash flow and our margin profile.

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

Makes sense. And then obviously you had some slides in there on the capital deployment side. You've done a couple of nice regional tuck-ins here. What does the pipeline look like currently? And is there opportunity on the technology side beyond some of these regional expansions? And how does that kind of funnel look at this point?

Ron Keating -- President and Chief Executive Officer

Yes, Mike, the M&A pipeline continues to be very robust. I mean we typically, at any time, have approximately 100 small acquisitions that we're reviewing. Majority of those are service tuck-ins, but there are technology plays that we look at as well. And as we highlighted, we've acquired 17 companies. 10 of those were in the technology space, building out our portfolio. And frankly, you're seeing that in the APT growth and some of the APT margins that we're seeing once we've integrated those businesses in. And we anticipate that to continue. So it's not one size fits all where we're going after strictly service tuck-ins on ISS. We continue to be very focused on technology expansion. And we view M&A as a proxy for R&D around our technology portfolio that we go after in the APT segment.

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

Makes sense. Appreciate it.

Operator

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

Eitan Buchbinder -- Citigroup Inc. -- Analyst

This is Eitan Buchbinder on Randy. Good morning. About 60% of your sales are service and aftermarket. You tend to have good visibility to about 80% of revenue on a rolling 12-month basis. Given what appears to be an improving mix service and the ISS backlog and potentially ongoing delays in customer capital spending, where would you say visibility is for the upcoming 12 months?

Ron Keating -- President and Chief Executive Officer

I would say visibility, it continues to be in the same space that we've been in. We're getting better visibility with the reopening of economies, seeing what our customers are doing, our customers coming back online. And so we're rounding the corner back to getting into that 80% to 85% very good visibility on a 12-month outlook. And it's pipeline that we're seeing around capital projects that customers are actually starting to cut POs again.

But there's still -- we're entering into this with some degree of measured outlook, just because the delays in customer capital expenditures sometimes, and certainly through COVID, have been a little longer cycle than they historically were. But I would say our visibility is pretty much standard, which it's coming back, where it might have been much more muted as we entered into COVID last year.

Unidentified Speaker

Yes. Eitan, we provide quantified guidance, so I think that is in line with that improved visibility. That's the reason we did that quantified guidance. I think the range reflects reopening uncertainties. And we haven't been through a reopening of a pandemic. So what's that look like? And so we tried to make the range a little wider than you would normally see to reflect these potential uncertainties. But I think the optimism is reflected in the fact that we provide a quantified guidance and return to that.

Eitan Buchbinder -- Citigroup Inc. -- Analyst

Thank you. That's helpful. And as a follow-up, you highlighted that capital-related revenue was down in ISS due to prior year microelectronics project. Given the strength that we're seeing in global semiconductor end markets, how are microelectronic orders in the quarter? And has your outlook for fiscal '22 improve for that end market?

Ron Keating -- President and Chief Executive Officer

Yes, it absolutely has. I mean if you reflect upon Slide five that we showed this time, I believe microelectronics, we have been neutral. Last quarter we had it being red, because year-over-year order comps were what was happening in the quarter. And so now I think we see neutral coming out, which is a return to some of the investment in spending that are more normalized looking forward into the third quarter and through the back half of the year.

Eitan Buchbinder -- Citigroup Inc. -- Analyst

Thank you. I'll pass it along.

Operator

Our next question comes from the line of Andrew Buscaglia of Berenberg.

Andrew Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Hey, guys. Thanks for taking my questions. So I just want to follow up on the Biden infrastructure and PFAS commentary. Your sense that this sort of the proposal for funding is sort of the precursor to potential regulations. Are you hearing anything on the regulation front? And then secondly, are you seeing customers -- what are your conversations like with customers around regulation, considering there is proposal for funding now, and secondly that it poses greater risk to companies to comply?

Ron Keating -- President and Chief Executive Officer

Yes, it's a great question, Andrew. I would say that we do feel like this is a precursor to regulation. And frankly, I think we're all a little bit ready for some limits to be set, so everybody is not trying to set their own limits and guests across different water systems and different states. I think our customers are prepared for it where they feel like they need to be. And frankly, everyone feels the need to treat this if you actually see it inside of your systems or operating inside of the operations of the company. So I think the Biden administration is highlighting it. They are getting it inside of the bill, so people are aware of it. They're starting to drive that drumbeat around the regulatory trend that's coming forward. And I believe, again as I mentioned when Dan asked the question, I think this is the tip of the iceberg on what's going to happen.

Andrew Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Okay. That's helpful. And I wanted to ask another one on the microelectronics question. You're facing tough comps on that one. It's my understanding you'll lap those starting in Q3, I believe? And then also, it's interesting you're somewhat positive on microelectronics. I guess how is the chips shortage affecting that business or you guys indirectly?

Ron Keating -- President and Chief Executive Officer

Yes. So we are lapping that. That's why we went to blue. I think you'll see us go to green as we get toward the latter half of the year in the fourth quarter and the beginning of next year. We see real opportunities there, and we are seeing a larger pipeline of projects on increased appetite for spending and investment.

Andrew Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Yes. Thank you.

Operator

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

Saree Boroditsky -- Jefferies LLC -- Analyst

Hi. Good morning. Could you just talk a little bit about the impact from the adverse weather in Texas and any demand you saw in the quarter related to that?

Ron Keating -- President and Chief Executive Officer

Yes. So we actually did have an impact in Texas, certainly through the latter half of February. We had customers that had shut down, that had not shut down in 50 years of operations. But our team was deployed. We sent assets down. So we had a very soft part of February, where basically, the Gulf Coast region was frozen and not operating and then came back and started rebounding into March, and certainly will rebound through this quarter where they're investing, bringing their systems back up and running.

And we deployed a lot of mobile assets there. So we had team members there that we'd sent from around the country. In fact, I want to thank our service team broad and wide for answering the call, and a lot of people who lived in the north and southeast moving over to Texas to help us operate and support our customer base. And frankly, the value proposition of Evoqua and the investments in our mobile assets and our emergency response absolutely shone brightly through that difficult time.

Saree Boroditsky -- Jefferies LLC -- Analyst

And then just another follow-up on the infrastructure slide, if the Biden plan is implemented as is, how would you think about the investments? When would it turn to actual revenue opportunity for you? What would be the delay on that?

Ron Keating -- President and Chief Executive Officer

It's going to happen over time. Obviously, the Biden administration plan is over numerous years. And so we would anticipate, as projects start, seeing meaningful flow that would happen 12 months post the plan being announced.

Saree Boroditsky -- Jefferies LLC -- Analyst

Okay. Thanks for taking my questions today.

Ron Keating -- President and Chief Executive Officer

Thank you.

Operator

Our Next question comes from the line of Pavel Molchanov of Raymond James.

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Thanks for taking my questions. You talked a lot about the infrastructure proposal in Washington, and I'd like to talk about the other side of the Atlantic. Can you just give an overview of your exposure to the European market, and what your conversations in Europe have been pointing to PFAS cleanup in the EU as part of their infrastructure plans?

Ron Keating -- President and Chief Executive Officer

Yes. Pavel, thank you. On the other side of the Atlantic, what we historically and typically do is we are selling products through other integrators and OEMs. So we're selling our product technologies through third parties that are selling into people and companies that do what we do. We do see a tremendous opportunity around different technologies there to actually address the PFAS issue.

It's one of the things that we're working on, on product development with regularity around different types of AOP systems. I think I've even highlighted on a couple of calls that we've had -- we have testing out with a system that actually breaks the molecules using diamond that we're working in trial on. So our excitement around the opportunities there are developing and deploying advanced technologies for treatment capability across the pond as well.

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

That's helpful. And then one more on M&A., I suppose the flip side of economic improvement is that asset valuations, corporate valuations tend to go up as well. Have you noticed any meaningful change in the multiples that potential sellers in water tech are demanding maybe over the last six months?

Ron Keating -- President and Chief Executive Officer

Yes. Actually, I think where you see larger assets that are being -- that are actually being auctioned, you're seeing multiple accretions. So the multiples are going up pretty significantly. What we are historically focused on as we've kind of highlighted on the call, Pavel, and certainly discussed is we are focused on the one-to-one negotiations, generally bilateral, where it's a tuck-in acquisition around a technology or a geography or a vertical market that we're going after.

We're viewing this very much as either R&D spending or M&A, capital spending for expansion or M&A. And so we're able to keep the multiples in the historic range that we've been buying at. We've historically highlighted that we are acquiring pre-synergy six to 8 times. And post synergy, it's even down in the five to -- four to 6 times. And we're seeing that continue on with our most recent acquisitions.

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Got it. Thank you very much.

Ron Keating -- President and Chief Executive Officer

Thank you.

Operator

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

Joe Giordano -- Cowen and Company, LLC -- Analyst

Hey, guys. Good morning. I just want to clarify the question on Texas. I mean you were talking about sending teams and mobile assets down there. Was Texas a net benefit to you guys, or a net headwind because of cyclones? I would have thought maybe an APT could be selling product down there to replace stuff that got lost from this. I just wanted to clarify what the actual impact was for you guys.

Benedict Stas -- Executive VP, CFO & Treasurer

Slightly positive, Joe. Overall you get hurt by something like that, but you also pick up business, particularly in the mobile DI fleet. So -- but net-net for the quarter, it was slightly positive.

Joe Giordano -- Cowen and Company, LLC -- Analyst

Okay. And then more broadly as a follow-up, are you seeing maybe again on the product side, customers placing orders ahead and maybe pulling forward some orders that maybe would have be in second half of calendar year, just now because of years of stock-outs and things like that?

Ron Keating -- President and Chief Executive Officer

Very, very small amount. So I would say we see a little bit of that where we've got precious metal exposure in some product lines. But it's very small, and those typically would be some of our international operations. We're not seeing that heavily inside of North America, which is the lion's share of our revenue.

Benedict Stas -- Executive VP, CFO & Treasurer

Yes, we took a stab at that in looking at that in APT. There were some of it, as Ron mentioned. It could have been about $1 million, Joe, of EBITDA that we got a benefit from in the quarter, OK?

Joe Giordano -- Cowen and Company, LLC -- Analyst

Thanks, guys.

Benedict Stas -- Executive VP, CFO & Treasurer

Thank you.

Operator

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

Brian Lee -- Goldman Sachs Group, Inc. -- Analyst

Good morning. Thanks for taking my questions. Most of mine have been answered, but maybe if I could just follow up on the price/cost topic. I know Ben, you said earlier on you're expecting it to be -- it sounds like slightly positive for the balance of the year. That's consistent with what you said last quarter as well. So just wondering general thoughts around your own supply chain, whether you're seeing any tightness? And then any greater-than-expected inflationary pressures? And if you've gone out to the market with any sort of normal cycle pricing increases or expecting to do that as part of your price/cost positive here for the year?

Benedict Stas -- Executive VP, CFO & Treasurer

Yes. So Brian, first quarter, as we talked before, we're basically flat. We're slightly positive this quarter. Just under $1 million of price/cost favorability, like $700,000 to be exact. Right now, our modeling suggests it will get better as we go through the year, but it's very uncertain. I mean there's a lot of moving parts out there. But we think that our pricing is in really good shape, and we're ahead of this, and we plan on doing that.

But there's a lot of news out there that suggests that it's going to be a volatile situation as we go through the second half. So we're optimistic that we can stay ahead of it, but it's one of those areas that we are cautious in monitoring very, very closely. Some of the areas that you're seeing, the cost increases, as Ron already mentioned, in precious metals, particularly iridium, that impacts our APT business. Steel is another key area that we're seeing a lot of activity. And certain types of plastics and chemicals, but not a lot in that area at this point but there is the potential for that as well.

Brian Lee -- Goldman Sachs Group, Inc. -- Analyst

Okay. Fair enough. That's helpful. And then just a quick one on PFAS I might have missed it, but I think last quarter you talked about the $100 million-plus PFAS pipeline. Have you seen any incremental PFAS orders in the quarter now that you're halfway through or close halfway through '21? Just wondering if you have any for visibility into maybe the 2022 pipeline build on the PFAS side as well? Thank you.

Ron Keating -- President and Chief Executive Officer

Yes, Brian, thank you. That's a great question. I would say that it is ramping up. So the $100 million pipeline that we've highlighted continues to stay very consistent, but we do see projects that are going to be ramping up into 2022, certainly as the Biden administration is highlighting PFAS and PFAS cleanup as an initiative that they're going after. We do think with the regulation that will come, that will continue to expand.

And it's one of the reasons that we highlighted the win that we had in the high water table PFAS removal down to non-detect level. The mobile assets that Evoqua is able to deploy for rapid response, while we determine what the proper solution is going to be, is exactly what's needed for the marketplace. And we're very positive on this, and we're making sure that we're deploying these in the proper locations and that we can do it very rapidly.

Brian Lee -- Goldman Sachs Group, Inc. -- Analyst

Alright. Thanks a lot. I'll pass it on.

Operator

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

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Hi. Good morning. Thanks for taking my questions. First one, I don't know if you talked about this at the beginning of the call. I may have missed it. The guidance for the year seems to imply a pickup in the fourth quarter revenue growth into kind of the double-digit type growth range. Can you talk about the visibility to that? Or are there specific projects driving that? Or anything maybe you've mentioned that I might have missed earlier. I'm not sure if I missed it, something.

Ron Keating -- President and Chief Executive Officer

Sure, Pat. I'll comment, and I'll let Ben add some color as well. But we do have better visibility into the next two quarters. Just as we talked about, with 60% of our revenue approximately being service and aftermarket, that's generally very steady. Outside of that, we look at our build and operate projects that are going to come online as well as capital projects that are in the pipeline.

And we give an outlook against that because that's where we get pretty strong visibility as we go into the fourth quarter. So the implication that we've given on guidance certainly doesn't take -- isn't guiding toward guarantees. Or even as Ben noted, the range would have been tighter. It goes toward what we see in customers with the communications we've had around their pipeline and their projects and when we anticipate for them to cut POs.

Benedict Stas -- Executive VP, CFO & Treasurer

Yes, Ron, exactly. So Pat, it's really about the rollout of ISS projects and the expected timing and when we see those converting to revenue; as well as, as we talked earlier, some of the service conversion to revenue as well. And so based on our current look in the visibility and when we expect that to convert to revenue, that would suggest a strong Q4.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Got it. That's helpful color. And then I thought the free cash flow was really strong in the quarter. Did you walk through kind of whether there was anything timing related that supported that? Or how to think about that relative to the year? Just seemed like a pretty good result for the second quarter, at least versus our expectations.

Benedict Stas -- Executive VP, CFO & Treasurer

Yes. So again, we talked earlier about the fact that you're seeing the benefit of outsourced water, you're seeing the benefit of the conversion cycle of outsourced water; all-time record current receivables, the benefits of those as well. As far as one time, there's nothing in there that's out of the normal of typical collections that we have.

Just as a reminder, as the capital business turns on, there's a little bit of an offset between capex potentially and working capital. Because as the capital customers choose that, that shows up in our CIB balances. So there is the potential for a little bit higher working capital as a percentage of sales throughout the reopening. But we still expect to continue to generate strong free operating cash flow, and we expect to continue to delever as we go through the year.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Great. Thanks a lot for the color. Appreciate the time. Good luck.

Operator

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.

Ron Keating -- President and Chief Executive Officer

Thank you, Maria. And thank you for your interest in Evoqua today. I would be remiss if I didn't take the time now to thank our team that we have operating around the globe for operating safely, executing on our strategies, and delivering on the sustainable solutions that our customers in the marketplace require and look for. I thank you again for your interest in Evoqua. I look forward to chatting with you throughout the quarter. And we look forward to following up on next quarter's conference call. Thank you very much.

Operator

[Operator closing remarks]

Duration: 55 minutes

Call participants:

Daniel Brailer -- VP of IR

Ron Keating -- President and Chief Executive Officer

Benedict Stas -- Executive VP, CFO & Treasurer

Unidentified Speaker

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

Deane Dray -- RBC Capital Markets -- Analyst

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

Eitan Buchbinder -- Citigroup Inc. -- Analyst

Andrew Buscaglia -- Joh. Berenberg, Gossler & Co. KG -- Analyst

Saree Boroditsky -- Jefferies LLC -- Analyst

Pavel Molchanov -- Raymond James & Associates, Inc. -- Analyst

Joe Giordano -- Cowen and Company, LLC -- Analyst

Brian Lee -- Goldman Sachs Group, Inc. -- Analyst

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

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