Evoqua Water Technologies Corp. (AQUA) Q2 2022 Earnings Call Transcript

Evoqua Water Technologies Corp. (AQUA)
Q2 2022 Earnings Call
May 03, 2022, 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 2022 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Dan Brailer, vice president of investor relations. Please go ahead.

Dan Brailer -- Vice President, Investor Relations

Thank you, Britney. Thanks, everyone, for joining us for today's call to review our second quarter 2022 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'll open the call to questions.

This conference call includes forward-looking statements including third quarter and full fiscal year 2022 expectations, statements relating to demand outlook in our end markets, growth opportunities, our order pipeline, our acquisition strategy and pipeline, integration and future performance of the Mar Cor business, supply chain challenges, inflation, labor shortages and general macroeconomic conditions, as well as statements related to the ongoing impact of the COVID-19 pandemic. Actual results may differ materially from our 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 discuss certain non-GAAP financial measures.

Information with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at Evoqua's investor relations website. Unless otherwise specified, references on this call to full year measures or to a year referred 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 Investor Relations website. Replays of this conference call will be archived and available for the next 14 days.

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

Ron Keating -- President and Chief Executive Officer

Thank you, Dan, and thank you for joining us. I appreciate your interest in Evoqua, and I'm pleased to provide insight into our results and outlook. Please turn to Slide 3. We had another strong quarter of organic growth and margin expansion.

Overall organic growth was up approximately 11% and adjusted EBITDA margin expanded 50 basis points year over year. We are pleased to see broad diversification of organic growth across most regions and product lines, as well as double-digit year-over-year growth across aftermarket capital and service. Market demand is strong, and our book-to-bill ratio remains above one. We see demand strength across multiple end markets, including microelectronics, life sciences and food and beverage.

ISS backlog continues to grow, up 13% year over year and up 6% sequentially. Digitally enabled revenues grew by almost 13%, and we continue to see solid capital and outsourced water demand. Supply chain visibility, material and labor availability and inflationary pressures are challenges that we are managing well today. Navigating this dynamic time will make Evoqua a stronger and more resilient organization.

I will speak more about this on a later slide. We have completed our first quarter with Mar Cor, and we're pleased with the initial progress. The integration is on track, and the teams are working very well together. We did see a jump in net working capital this quarter in support of our strong organic order and revenue growth.

Excluding Mar Cor, our net working capital sales ratio would have been 12.6%. Mar Cor brought significant working capital assets to Evoqua and provides nice opportunities for future cash generation. Our balance sheet and liquidity remains strong, and we are focused on cash flow generation. Please turn to Slide 4.

Evoqua is a performance-driven water technology company focused on delivering strong financial results. As you can see, we've delivered outstanding results across these six key metrics over the past several years. We have a talented and dedicated team focused on solving some of the world's most complex water problems, and our results demonstrate the strength of our business model and focused execution. We're proud of the progress we have made, and we remain focused on the daily actions that lead to executing our strategy.

Please turn to Slide 5. The macro environment remains challenging on several levels, but we're taking actions to seamlessly serve our customers while driving profitable growth. This slide highlights four notable macroeconomic challenges: supply chain visibility; material availability; labor availability; and the war in Ukraine. We are also providing insight into market demand and order backlog, as well as price cost performance.

Supply chain and material availability challenges are no -- have no simple fixes, and we expect them to remain for some time. Our team has been nimble in responding to daily issues and focused on mitigating actions as well as over-communicating customer delivery schedules against expectations. Additionally, we're closely monitoring COVID-19 lockdowns in China and the impacts they may have on our supply chain and the China market. Our China business grew in the single digits this quarter, which is a decline from the double-digit growth we've experienced over the last several quarters.

Labor availability and talent retention challenges are confronting almost every organization. We are actively engaged in recruiting, retaining and developing our team. We have implemented several initiatives such as trade school partnerships, university partnerships, internal development programs and skills training, and we are seeing positive results. We've been pleased to see our digitally enabled sales grow double digits over the past several quarters, providing productivity and margin benefits.

Digital connectivity and virtually being on site with customers, provides tremendous benefits that pay back quickly in tight labor markets. While we hope for a quick end to the Ukraine conflict, the implications on the broader markets may be long lasting. There has been minimal direct impact to Evoqua sales and operations. However, we are impacted by the resulting supply chain disruptions and the rise in energy cost and steel prices.

Overall market demand remains strong, and our order book is growing. We're seeing multiple markets with attractive growth opportunities, and we believe we're well positioned to grow. Our pricing actions have been effective as price-cost has been positive year-to-date. Freight, fleet and steel costs have been challenging, but our team has done a terrific job managing this very dynamic market.

We continue to take actions and have an expectation of delivering a positive price-cost ratio for the full year. Please turn to Slide 6. Two key long-term financial targets are 3% to 5% organic revenue growth and a 20% adjusted EBITDA margin. This graph shows our performance since 2018 for both metrics.

We're pleased with our performance, especially when considering the constraints placed on the business, as discussed in the previous slide. Organic LTM revenues have grown by 9%, while EBITDA margin has increased 20 basis points since the end of 2021. On the right-hand side of the slide, we've highlighted multiple organic growth levers to help us achieve our adjusted EBITDA margin target. We're focused on profitably growing our organic business while continuing to pursue strategic tuck-in M&A targets.

We expect to announce additional acquisitions in the second half of this fiscal year. Please turn to Slide 7. This chart represents our third quarter expected order demand by end market compared to the prior year's third quarter order rate. We anticipate strong order demand in the third quarter across most end markets, including microelectronics, life sciences, food and beverage and light and general industries.

Municipal wastewater and aquatics are improving from the prior quarter outlook, with seasonal demand driving growth across both end markets. Expected third quarter orders in the power end markets are showing a slight decline due to very strong order growth from Frontier in last year's third quarter. The refining markets orders are flat to last year based on strong comps and a deferral of turnaround services due to refining -- refinery capacity demand. The underlying demand from the power and refining sectors are both solid.

Overall, we expect to see strong order demand across most of our end markets in the second half of 2022. We also anticipate supply chain challenges limiting our order conversion visibility and potentially creating order conversion delays. Please turn to Slide 8. There is a global energy transition underway as the market moves to cleaner and renewable energy sources focused on CO2 reductions.

There are multiple sources of energy generation, and water treatment is involved in all of them to varying extents, particularly in biofuels. Evoqua supports many developing applications where investments are being made in renewable fuels, renewable natural gas and blue and green hydrogen. Evoqua's legacy process and wastewater experience in traditional downstream refining and the food vertical markets are a natural fit for alternative feedstock processing and renewable fuels. Our portfolio of wastewater technologies allow our customers to treat the most difficult organic wastewater streams while also helping them to achieve their carbon intensity goals, and produce a source of renewable energy.

Our core process water portfolio also plays a vital role in providing utility makeup water for new greenfield refinery investments. Additionally, our Magneto specialty anodes and our IONPURE brands within the APT segment, are leading technologies within hydrogen investments today, and will also play a notable role in the build-out of the future hydrogen economy. Please turn to Slide 9. We are very pleased to have released our 2022 sustainability report on Earth Day, April 22.

This year's sustainability report highlights the accomplishments of our team in the past fiscal year and details our path ahead. The report matured from last year to utilize GRI core standards and SASB, both known in sustainability reporting. Creating this report was a thoughtful reflection on what we have done to date and where we want to go in the future. We look forward to further enhancing our customer handprint impact and to reducing the impact of our footprint.

The slide also highlights the PFAS handprint win within our ISS segment. The Orange County Water District selected Evoqua to provide ongoing service to remove PFAS from their drinking water systems on a two-year service contract. We will treat the drinking water for a majority of the district's 2.5 million residents. Samsung Austin Semiconductor was recognized as this year Evoqua's Sustainability Award winner for their commitment to water conservation and a reuse of their Austin, Texas plant.

Our sustainability team honored Samsung and passed Evoqua's Sustainability award winners with a celebration at the NYSE's opening bell ceremony on Earth Day. I would now like to turn the call over to Ben.

Ben Stas -- Executive Vice President and Chief Financial Officer

Thank you, Ron. Please turn to Slide 10. For the second quarter, reported revenues were up approximately 23% to $427 million. Organic revenues grew approximately 11%, driven by broad-based volume growth and price realization.

We saw revenues increase in aftermarket capital and services, as well as growth across most regions and product lines versus the prior year. Second quarter adjusted EBITDA increased 26% to $73 million for an overall margin of 17.2%, an increase of 50 basis points. Strong volume, favorable price cost and mix contributed to improved profitability. Please turn to Slide 11, our integrated solutions & services segment.

Second quarter revenues were up approximately 31% to $295 million. Organic revenues grew more than 11%, driven by volume and price realization. Services, aftermarket and capital revenues all grew double-digit rates versus the prior year. Capital sales were driven by microelectronics, life sciences and food and beverage end markets.

M&A continues to be an important part of our growth strategy. We are pleased to report good initial progress on the Marco integration. The integration and synergies are on track after one quarter. Our capital project in outsourced water pipeline is strong and growing.

Digital-enabled revenues grew approximately 13% for the quarter versus the prior year. Adjusted EBITDA increased 29% to $64 million due to higher volume, favorable price cost and the acquisition of Mar Cor. Adjusted EBITDA margins for the quarter was 21.6%, down 40 basis points from the prior year, impacted primarily by inflationary cost increases and the acquisition of Mar Cor. Please turn to Slide 12.

We continue to see strong year-over-year growth in ISS backlog. Second quarter backlog was up $92 million or 13% over the prior quarter with growth coming from both capital and services. Mar Cor added approximately $31 million of backlog as of March 31 with approximately $20 million being capital. Our pipeline continues to be robust with opportunities across multiple end markets.

We expect to see our book-to-bill ratio remain above one throughout fiscal 2022. As Ron mentioned, we are closely monitoring our pipeline, order book, supplier lead time. Supply chain visibility constraints create the potential for shipment delays in the second half of the year. Please turn to Slide 13.

Applied product technologies second quarter revenues were $132 million, up nearly 8%. Organic revenues increased $11 million or 9%, driven by strong volume growth. Revenues grew in North America and APAC, while EMEA declined slightly. Adjusted EBITDA for the second quarter increased 8% to approximately $27 million, benefiting from volume and favorable mix.

Adjusted EBITDA margin was flat year over year at 20.7% due to operational variances and higher inflationary costs. Please turn to Slide 14. One of APT's long-term organic growth initiatives is to develop new and innovative technology that expands our product portfolio, and to pursue market share gains in core end markets. We are pleased to highlight the BT range UV, low-pressure total organic carbon reduction system or TOC.

Based off our VX line of UVs, this next-generation system has a smaller footprint and combines efficiency and power to reduce the number of UV lands required in the equipment and the processes to reduce TOC. One application of UV TOC reduction is for ultrapure water use as part of the manufacturing process in the microchip industry. The lower the TOC, the less defects in the production processes, producing improved manufacturing efficiency. We are seeing strong opportunities across the market, especially in microelectronics, wastewater treatment and reuse.

The global offering is also included in our North America ISS build systems, as well as in systems abroad, and has a recurring aftermarket sales. Please turn to Slide 15. Capital spending, primarily for outsourced water was approximately $21 million for the quarter or approximately 4.9% of revenues, was 15.3% of LTM sales. As Ron mentioned, our net working capital to sales was approximately 12.6% for Mar Cor.

As a result of our strong organic revenue, we have seen increases in accounts receivable, contract assets in inventory. We have been -- we have indicated in the past, over the long term, we anticipate net working capital to sales could be in the low teens range given some projects may have varying amounts of working capital requirements. Also, we expect to see improvements over time to Mar Cor's net working capital as we integrate the business and leverage focused capabilities. Please turn to Slide 16.

Year-to-date, operating cash flow was $29 million in Q2 versus $63 million in the prior year. Adjusted free cash flow as a percentage of adjusted net income was 47% on a year-to-date basis. Operating cash flow was impacted by investments in working capital, as I previously mentioned, to support conversion of strong backlog, growing order rates and higher inventory, to help mitigate supply chain uncertainties. Our net leverage ratio finished at 3.1 times of adjusted EBITDA.

As Ron mentioned earlier, our leverage as of the end of Q2 on a pro forma basis, with the expected annualized impact of Mar Cor results is approximately 2.8 times well within our targeted range. Maintaining a strong balance sheet with net leverage within our targeted range over the long run remains a key priority. Our weighted average cost of debt for the second quarter is approximately 2.8%, an improvement of approximately 35 basis points over the prior year. I would now like to turn the call back over to Ron.

Ron?

Ron Keating -- President and Chief Executive Officer

Thanks, Ben. Please turn to Slide 17. We had a strong quarter with outstanding results across most key metrics of the business. Market demand remains strong, and we are pleased with the broad-based organic revenue growth across those segments, most regions and product lines.

Our pipeline remains robust and our backlog continues to grow. We are closely monitoring macroeconomic and supply chain challenges and the potential impacts to order and backlog conversion. We're managing through a dynamic market with rising cost and material and labor availability constraints. We are pleased to have positive price cost again in the second quarter, and we're working to achieve a positive price-cost ratio for the full year.

We continue to grow through our outsourced water business and to benefit from this contribution to the ISS segment's highly recurring revenue model. We are pleased to have the Mar Cor business as a part of Evoqua, and we're off to a great start and a successful integration. In closing, we are raising our full-year outlook by increasing the low end of the revenue and adjusted EBITDA ranges by $20 million and $5 million, respectively. We expect full-year revenues and adjusted EBITDA to be in the range of $1.64 million to $1.70 million, and $285 million to $300 million, respectively.

For the third quarter, we expect adjusted EBITDA to be consistent with past third quarters as a percentage of the full year outlook, which is approximately 26%, as shown on Slide 20 in the appendix. I will now open the call for questions.

Questions & Answers:

Operator

[Operator instructions] And we will take our first question from Deane Dray with RBC Capital Markets. Your line is now open.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Ron Keating -- President and Chief Executive Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Good morning. Hey, maybe we can start with sales and earnings visibility for the second half on a lot of like directional positive momentums here, price-cost positive in a tough market, book-to-bill staying above one. But you did highlight some potential shipment delays. And I know that in fact your capital sales, less on services, but just kind of take us through visibility and these potential shipment delays, where are the weakest links and how you're working through them? Thanks.

Ron Keating -- President and Chief Executive Officer

Thanks, Deane. I appreciate the question. First of all, what I'd like to say is I've never felt better about the business. I mean, what we've seen in the end markets, the momentum, the backlog that continues to grow, gives us just great confidence in what the future holds.

We're being balanced in the guide we're giving around the back half of the year, obviously, Deane. And as you highlighted, it does only affect primarily our capital and some of our product shipments with the supply chain issues. But still, even with some of the service opportunities we have, we need installations to happen for those service expansions to grow in the outsourced water areas and other areas. And so, we got a lot of confidence on what's coming.

But we're being balanced with China shutdown, the impacts on just supply chain challenges and microelectronic availability, chip availability as well. So we're being cautious about that.

Deane Dray -- RBC Capital Markets -- Analyst

That's helpful. And can we -- I wanted to go back to Page 6, the multiple organic sales growth opportunities on the upper right-hand side. They all look real familiar and these have been growth initiatives for a while. It's interesting that you list the first water conservation initiatives.

That's showing up first, implies that's got a lot of emphasis right here. Can you just expand on that? And I have to think it relates to the sustainability efforts we're seeing broadly across all companies in each report, what their water use and how that's being lowered and managed. But just take us through this and talk about the timing, how are these initiatives reading into the P&L? Thanks.

Ron Keating -- President and Chief Executive Officer

Yes. It's a great question. It is absolutely being front center in every company's mind, thinking about water conservation, recycle, reuse, doing what's right for the environment, with the whole focus on ESG and sustainability. And ultimately, Deane, I mean, what we see in the water conservation initiatives slides into Slide 7, and it highlights around the end market and the order rate activity we're having.

So if you reflect back on where you see companies investing and being very focused on recycle and reuse, it fits very well with microelectronics, life sciences, a lot of what's happening in the more core industrial markets that we operate in. So that highlights what the order activity that we anticipate to see in Q3 will lead to, and that's actually on top of very robust order activity in Q3 of '21. Though we're feeling very strong about all of the end markets as we look forward in water conservation, it's one of the things that's helping drive that.

Deane Dray -- RBC Capital Markets -- Analyst

All right. That's really good to hear. And just a quick one for Ben on Mar Cor. Just take us -- where do they stand on the working capital to sales? And how soon can you get them to Evoqua's benchmark?

Ben Stas -- Executive Vice President and Chief Financial Officer

So they're high. It's not atypical of what I saw when I first came to Evoqua. So they're in that 20% range. And so we would like to -- once we get them on our systems and integrate it into our processes that allows end-to-end inventory management, receivables management, etc., and so we believe that we'd like to get them down closer to what we are traditionally at Evoqua over time.

And obviously, that's a lot of cash we can pull out of working capital. It just effectively reduces what we paid for Mar Cor. But the first step is to finish the integration, get them on our systems, make sure that we're taking care of customers during this very difficult time on the supply chain, but then we will certainly be working that working capital down. There's some low-hanging fruit that we'll take advantage of immediately, but it's going to take a little bit of time to get through the integration before we see the real benefits and get them down to our level.

Deane Dray -- RBC Capital Markets -- Analyst

Yes, that sounds like a great opportunity. Thank you.

Operator

We will take our next question from Nathan Jones with Stifel. Your line is open.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning, everyone.

Ben Stas -- Executive Vice President and Chief Financial Officer

Good morning, everyone.

Ron Keating -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Jones -- Stifel Financial Corp. -- Analyst

I'm going to ask another one about the guidance range. I did a little bit of math and over the last several years, your second half revenue has averaged 14% higher than your first half revenue. The guidance is for second half revenue to be 7% to 14% higher than the first half, and you've got some extra revenue with that for Mar Cor. Is this really just caution around the capital shipments and potentially delays in those -- in the fourth...

Ron Keating -- President and Chief Executive Officer

It is, Nathan. I mean, basically we want to make sure we're balanced in what we're giving as a guidance going forward. A lot of it's tied to availability of some of the components that are needed for capital shipments for installs. And it's not even our availability to be able to ship.

It's a customer site being ready for us to be able to ship. So that's where you run into a little more challenges with clarity on what the conversion rate is going to be, is, it's not because when we were managing -- and our team is doing a remarkable job â€"- managing having the components that we need to complete our projects. It's the customers being ready with site approval, with things that they're getting done, and actually just the rest of the infrastructure they need for us to be able to install.

Operator

And we will take our next question from Michael Halloran from Baird. Your line is open.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Good morning, everyone. So on the digital conversion strategy, a lot of what we've talked about here is just not understanding backlog, delays, timing in the environment, et cetera. Do you think customers are going to be -- are more engaged on that strategy today than they would have been a year ago because of the complications you're seeing and labor challenges out there? Or do you think this is just still an iterative progression that just continues to be a positive one?

Ron Keating -- President and Chief Executive Officer

Yes. Mike, honestly, customers are much more engaged with us. And I would -- even in my opening remarks, I made the comment that being digitally connected and on-site virtually in a tight labor market creates a pretty quick payback. So the value prop of what we've rolled out with our strategy over the past three to four years with our digital deployment is absolutely coming through.

And I think what you'll wind up having now is just the challenge of making sure that what we're delivering to customers, they're actually able to take. And so the value prop there is just then being ready with their transition or at least with their site that they're preparing for us to be able to put it on site.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Thanks for that. And then just on the capital priority side. Obviously, some nice moves you've made recently here. How are you thinking about what pipeline looks like, external ability to be aggressive if the right transactions come and kind of balancing that with your targeted leverage range and all the initiatives you have internally?

Ron Keating -- President and Chief Executive Officer

Yes. We still have a very robust funnel of tuck-in acquisitions and acquisition opportunities. And so we're executing on that. We feel good about the balance sheet where it is, our capital deployment availability and capability to do it, and we're continuing to execute on that.

Mike Halloran -- Robert W. Baird and Company -- Analyst

Appreciate it. Thanks for the time.

Ron Keating -- President and Chief Executive Officer

Thanks.

Operator

We will take our next question from Andrew Buscaglia with Berenberg. Your line is open.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Morning, guys. Just hoping you could talk a little bit more about some of the bigger drivers, specifically -- I know in some other quarters about key path. Where we then with that in terms of data points you're tracking and is there anything on that horizon you got your eyes on or in terms of potential catalyst increase in that area?

Ron Keating -- President and Chief Executive Officer

Yes. I mean that was one of the things we actually highlighted on the sustainability slide with the PFAS, one that we've received. I would say, Andrew, it continues to track as it has in prior quarters where certain water districts that are moving faster than others, still waiting on the final MCLs to be set and what level they're going to be treating to. But we anticipate that will be coming in the next 12 months.

And I think that the pipelines continuing to stay fairly consistent at what we've seen where it's north of $100 million, and we typically are winning about one-thirds of the applications that we're going after.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

OK. Got it. And then secondly, I think at that backlog, you got a lot of questions on that, given your level of conservatism in your guidance. But at this point, what -- is the conservatism just reiterated around I guess trying to manage what you expect in terms of supply chain issues and being able to deliver products relative to like any other sort of delays around COVID or-yes, I guess the question is why wouldn't that be converting in the back half or do you not finally -- I guess [inaudible] the way.

Ron Keating -- President and Chief Executive Officer

Yes, [inaudible] to the comment I made earlier on Nathan's question I think, and it's around customers being ready for us to actually deliver. So we've historically had a little bit of COVID delays because it was site access and getting on site. And now that we have site access capabilities, we can get on site, is customers having their operation ready for us to actually deliver. And it's a lot more than that it is us actually having the components to develop our own -- or to complete our own products.

We're able to manage that much better than the larger systems that a customer is putting in, that our water system goes into. Ben, do you want to comment on the backlog?

Ben Stas -- Executive Vice President and Chief Financial Officer

Yes, Andrew, as you can see in our working capital, we've prepared ourselves to be able to deliver. So there's obviously potential for upside, but we wanted to take a measured approach for the very reasons that Ron talked about, is there certain things that are not in our control. And also on the macro front. There are certain things on the macro front that aren't in our control, such as the potential for China lockdowns et cetera, that we just have to keep our eye on.

And so we try to make sure we're very balanced but also very ready to take potential advantage of the upside.

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

Got it. OK. Thank you, guys.

Operator

We will take our next question from John Walsh with Credit Suisse. Your line is open.

John Walsh -- Credit Suisse -- Analyst

Hi. Good morning and thanks for taking the questions.

Ron Keating -- President and Chief Executive Officer

Hey, John.

John Walsh -- Credit Suisse -- Analyst

Hey. I guess maybe first, just following up on the PFAS line of questioning. You've obviously highlighted a lot of demand at different water districts. We've seen some food chains and packaging manufacturers say they're going to remove it from their products.

Are you having conversations with manufacturers that they want to actually start installing systems as well as the water districts to treat for PFAS as a contaminant?

Ron Keating -- President and Chief Executive Officer

Yes, John. We have actually had conversations with that -- with various manufacturers of different types, where they feel like they're going to have an issue or they have an issue that's coming off-site. So they want to do some pre-treatment. It's still -- on that, though, I would say it's still pretty early days.

The water districts have moved much more quickly on this because, frankly, they're testing for PFAS. They see it in their aquifers and in their wells, and they want to make sure that they treat it before it gets to the drinking water plant. And -- but I do think you'll see that emerge more with actually industrial operators paying attention to what's happened in their water system because they're going to wind up cleaning some oil as well.

John Walsh -- Credit Suisse -- Analyst

And then maybe just looking at Slide 5, obviously, you highlighted being positive price/cost in Q1 and Q2. It looks like the language here is working to achieve positive price/cost for the full year. Do you need more price? Or just can you unpackage that a little bit, just the confidence you have in getting the price cost positive for the full year?

Ron Keating -- President and Chief Executive Officer

So we have confidence that we will deliver a price cost ratio that is positive for the full year. We watch commodities with regularity, and we've got a very disciplined pricing approach that we've had for the last several years that's paying off now. So again, it's the operating execution that the team has delivered on that they're able to drive price. Some of the challenges we still have, though, is making sure that we're getting the price high enough to see the margins fall through.

And we've had a little margin impact on that as well.

Ben Stas -- Executive Vice President and Chief Financial Officer

Yes, Ron. So just to add there is -- if you really look at our margin, we're very proud that we've been able to continue to expand EBITDA margins during these unprecedented inflationary times. So great job by the team as well as the strategy in terms of mix that has helped that, including outsourced water. But if you adjust for the net impact of price cost, year-to-date and for both quarters, that's been about a 70 basis points drag on our EBITDA margin.

And so that's pretty impactful. It just shows the overall impact of the strategy when you take that out. But -- so we're proud to be able to expand our price/cost, but we're also cognizant as there is a drag associated with price/cost on margin, even if we stay ahead on price versus cost.

Ron Keating -- President and Chief Executive Officer

Yes. And that led to the comment I made, John, on our EBITDA target of 20% adjusted EBITDA and being a little delayed in the progress there, but still making progress, which is great during these times.

Ben Stas -- Executive Vice President and Chief Financial Officer

Yeah. No, that's that's great. Really appreciate you taking the questions. Thank you.

Operator

We will take our next question from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Thanks for taking the questions. Maybe just to stay on that margin topic for a moment.

Speaking of the margin progression. If I look at the guidance, EBITDA margins, I think you're implying are up roughly 20 or 30 basis points versus second half EBITDA margins from fiscal 2021. This quarter, I guess this was down a bit, APT was flat. So how should we kind of think about where you get that year-on-year margin expansion in the second half across the two segments? Can they both sort of get to year-on-year margin expansion exiting the year?

Ben Stas -- Executive Vice President and Chief Financial Officer

Well, it's going to be tougher in the second half as price and cost continue -- prices continue to rise, when the costs continue to go up, as I mentioned earlier. But on the other side, we do have some healthy programs in place, particularly in the area of outsourced water as well as a good mix with microelectronics and some of the capital as well. That should provide some relief. It's too tough to call at this point.

We certainly want to continue to provide margin expansion, but it will be more difficult as we work through the second half of the year for the reasons we just talked about. The guide that we talked about, you can do the count on that. That does reflect a measured approach in margins as well. And certainly, we will hopefully work to be able to do better on that if the macroeconomic supply chain constraints, including our customers, provide that opportunity.

Ron Keating -- President and Chief Executive Officer

And Brian, we anticipate bigger benefit from the Mar Cor integration, which Mar Cor was a bit of a drag in the second quarter. That really comes in the first half of next year as we're integrating facilities through the latter half of this year.

Ben Stas -- Executive Vice President and Chief Financial Officer

That's a good point, Mar Cor, we will improve their margins as we integrate those facilities, and that should help as well.

Brian Lee -- Goldman Sachs -- Analyst

That's super helpful. And then I know you guys talked about this a bit earlier in the call, but the -- sort of the conservatism around and the commentary around order conversion, are you actually seeing any trends or shifts in that as of today? Or what are sort of the areas where you're kind of seeing some reason to be a bit more prudent and maybe signal a pause, if you will, just kind of thinking about your commentary here into the second half? And then any way to sort of quantify, are we talking weeks or months? Or what's sort of the discussions that are being had in terms of the potential for delays on some of that?

Ron Keating -- President and Chief Executive Officer

I'll just echo the comment I made at the very beginning of the call. We've never felt better about the business. We feel great about the backlog where it is. Backlog will deliver.

It's a great backlog. It continues to grow, and we're -- it's in the right mix and the right portfolio of what we want to execute on, which we've rolled out in the strategy. So we feel very strong about that. And the other comment I made is this, is really much more tied to customer availability for us to deliver than ourselves.

And so that's where we have a little bit less visibility. And we're marching down a path and thinking we're hitting the timelines that are requested. We're getting a lot of requests for delays on our side to hold up because the customer is just not ready. So that's one reason we've been very balanced in this back half guidance that we're giving.

But the confidence that you can have is know that it's very strong. It's a robust backlog, and it will deliver whether it's a quarter or two quarters later.

Brian Lee -- Goldman Sachs -- Analyst

OK. Thanks a lot, guys. I'll pass it on.

Ron Keating -- President and Chief Executive Officer

Thanks, Brian.

Operator

We'll take our next question from Pavel Molchanov with Raymond James. Your line is open.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. A few weeks ago, you acquired the remaining interest in Frontier Water that you did not previously own already. Are there any other historical M&A situations where you own the controlling stake but not 100%?

Ron Keating -- President and Chief Executive Officer

No, Pavel. That was the only one that really we have had a JV with that we needed to clean up.

Ben Stas -- Executive Vice President and Chief Financial Officer

And we also -- the TWO JV, we also cleaned that up this quarter, I should say, in Q2 and Q3. So Frontier and both TWO on the minority interest are now effectively going forward Q3 on are fully owned by Evoqua.

Pavel Molchanov -- Raymond James -- Analyst

And then more broadly about M&A. So obviously, Mar Cor, your second large acquisition ever, kind of back on tuck-ins, bolt-on size opportunities, what's that pipeline looking like compared to the two years of COVID?

Ron Keating -- President and Chief Executive Officer

I would say that the pipeline is actually expanding, that we're seeing -- it's continuing to grow. And actually, even more than the pipeline it's the actionability that's expanding. I even highlighted, I think, in one of my comments on a slide that we anticipate announcing additional tuck-in acquisitions in the back half of the year, and we absolutely do expect that to happen.

Ben Stas -- Executive Vice President and Chief Financial Officer

Pavel, just to add, the supply chain initiatives or supply chain issues are hurting these smaller players as well. So Evoqua's strong supply chain and our ability to really manage well through this is attractive to a lot of these smaller players in this very difficult environment.

Operator

We will take our next question from Joe Gregario with Cowen. Your line is open.

Joe Gregario -- Cowen and Company -- Analyst

Hey, guys. Morning.

Ben Stas -- Executive Vice President and Chief Financial Officer

Hey, Joe.

Joe Gregario -- Cowen and Company -- Analyst

Good morning. So I think the last couple of quarters, there were slides on there about like the infrastructure deal and things like that. This is more front of mind as I was going through. Just curious what you're seeing there.

Are you starting to see funds kind of unlock from that package so far?

Ron Keating -- President and Chief Executive Officer

Good morning. We actually -- we are actually -- and that's one of the reasons on Slide 7. You have municipal wastewater that turned to green this quarter. We've got a really nice pipeline that we're starting to see, Joe, go across there, and a lot of it tied to the Infrastructure Act.

But I think on actual funds flow, we'll see order activity in the latter half of this year, we'll see order activity in the first half of next year. And the more dollar flows will start toward the back half of '23 calendar.

Joe Gregario -- Cowen and Company -- Analyst

That makes sense. And on -- you're ready to deliver a lot of things, but customers are not ready to take them. What's the ability to reprice things that are in your backlog? Like what's the inherent like cost structure that that stuff is booked at? And like when you have the -- when do the service agreements that you have in place, when are they available to kind of reprice to market?

Ron Keating -- President and Chief Executive Officer

Yes. So, we actually do have built into the majority of our contracts that if we don't have back-to-back commitments from our suppliers then we can move the pricing based on the commodity moves and based on what our supply chain costs are. So that's there. We are also looking at having customer sign delays as change orders.

So we're actually able to get little bit of benefit out of the cost that we're incurring, by still holding on to the asset and not delivering to customers and making sure that's offset. That's one of the things we built into our price cost analysis as we go forward. And in most cases, the service contracts are tied to a flexible pricing model around different key indicators and different indexes that we build in. And then in a majority of the cases, in our daily service and kind of normal service contracts, I think you'll remember, we typically -- those are annual contracts, not multiyear, and in annual contracts you can reprice obviously, on a rolling basis.

Joe Gregario -- Cowen and Company -- Analyst

But just to be clear, most of this stuff is like mechanical, not like you're having to go back to the customer and like renegotiate price, right? Like this is stuff that's contractual and prices went up. So we're charging more and you accept that that's kind of not much conversation around it?

Ron Keating -- President and Chief Executive Officer

That is correct.

Joe Gregario -- Cowen and Company -- Analyst

Thank you.

Operator

And we will take a follow-up question from Nathan Jones with Stifel. Your line is open.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning, everyone. A question first on labor. You talked about labor shortages. Are they more in manufacturing, in the service from the service guy, corporate? Where are you seeing the biggest issues around labor availability and inflation on labor?

Ron Keating -- President and Chief Executive Officer

Yes. Our biggest is, Nathan, primarily on the service guys and in the manufacturing plants. And I would rank them in that order. The service teams, it's difficult to find drivers, difficult to find service, but our team has done a really nice job managing against that, but it certainly is a strength that we built just like everybody else.

Nathan Jones -- Stifel Financial Corp. -- Analyst

I had one -- I guess this is probably more of an R&D question. I went to a conference in April that had a lot of discussion about recycling and reuse of water. And one of the big push back from people who would be your customers is on greenfield sites where space is an issue. Is there initiatives underway for you to be able to reduce that or shrink the amount of size that it takes to put it in there in order to increase that penetration?

Ron Keating -- President and Chief Executive Officer

Yes, we work on that with regularity. That's something that our technology and innovation team is constantly looking at. One of the benefits that we have, that a lot of other water treatment companies don't have is we have a full suite of technologies, so all the way from bringing in the wastewater to recycle, reuse, being able to process in fact, to go in and be fed in as processed water on the front end. That footprint availability is pretty unique to what we're able to create.

And we're also looking at technologies at all times. One of the most compact talinium treatment technologies as Frontier system -- that's one reason that we acquired Frontier business. But we think there's additional opportunities and we continue to look at them.

Operator

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

Ron Keating -- President and Chief Executive Officer

So I'd like to say thank you again, for your interest in Evoqua and thanks to the team that we have here for executing every day. Obviously what we do is impactful and important, and we are focused on continuing to execute on the strategy and deliver the kind of results that we would expect over the long term. So thank you for your interest, and everyone, be safe. We'll talk to you next quarter.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Dan Brailer -- Vice President, Investor Relations

Ron Keating -- President and Chief Executive Officer

Ben Stas -- Executive Vice President and Chief Financial Officer

Deane Dray -- RBC Capital Markets -- Analyst

Nathan Jones -- Stifel Financial Corp. -- Analyst

Mike Halloran -- Robert W. Baird and Company -- Analyst

Andrew Buscaglia -- Berenberg Capital Markets -- Analyst

John Walsh -- Credit Suisse -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

Joe Gregario -- Cowen and Company -- Analyst

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