Evoqua Water Technologies Corp. (AQUA)
Q3 2022 Earnings Call
Aug 02, 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 third quarter 2022 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions].
As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. 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
Thanks, everyone for joining us for today's call to review our third 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 our fourth quarter and full fiscal year 2022 expectations, long-term financial targets, statements relating to our demand outlook in end-markets, growth opportunities, our order pipeline, order conversion, cash generation, our acquisition strategy and pipeline, integration, and future performance of our recent acquisitions, supply chain challenges, inflation, labor shortages and general macroeconomic conditions.
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.
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Unless otherwise specified, references on this call to full year measures or to a year referred to our fiscal year, which ends on September 30th. 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 Evoqua and I'm pleased to provide insights and our results and outlook. We had a strong third quarter, and I'm pleased with the overall results. Market demand remains robust, despite inflationary pressures and supply chain challenges.
We're tightly managing our lead times and any potential disruptions that may impact our order conversion time. We continue to experience a robust pipeline, and this quarter's order growth was again very strong. Please turn to Slide 3. Overall organic revenue growth in the third quarter was approximately 9% year over year.
We're particularly pleased to see broad-based diverse --diversification of organic growth across all regions, most product lines as well as growth across aftermarket, capital, and service. As mentioned, demand remained solid and order growth is robust with our book to bill ratio continuing to be greater than 1.0. Organic revenue growth on a trailing 12-month basis is about 10% and we've made three acquisitions since January 1st. The team has done a great job of pushing price and we remain price-cost positive for the quarter and the year-to-date.
Adjusted EBITDA on margin was down 40 basis points for the quarter, but expanded 30 basis points year-to-date. We were pleased to see APT's Q3 year-over-year adjusted EBITDA margin expand by 1.3%. ISS margin declined by 1.9% based on various items that Ben will discuss in later slides. We completed our second quarter with Mar Cor and continue to be pleased with the progress.
The integration is on track and we're working to complete our SAP system conversion by the end of Q2 in 2023. Our balance sheet and liquidity strengthened, and we continue to focus on cash flow generation. Our operating cash flow and adjusted free cash flow on an LTM basis improved sequentially versus Q2. Our liquidity increased to $267 million and our net leverage ratio improved to 2.9 times.
Cash flow continues to be a priority to fund investments in organic growth, tuck-in acquisitions, and to further improve the balance sheet through debt reduction. Please turn to Slide 4. Water is an essential element for daily life, whether for human consumption, industrial production, or commercial purposes. Manufacturers are requiring more stringent levels of ultrapure water, while wastewater reuse has become vital in protecting diminishing water supplies and reducing the strain on municipalities.
As water becomes more complex, Evoqua's essential treatment technologies make clean water more accessible. Because of this, the long-term market trends are very favorable, and we expect our business to remain resilient through normal market cycles. This slide highlights key financial metrics that we expect to be annually resilient over the long-term. Organic sales growth, adjusted EBITDA margin and cash generation.
Each of these graphs highlight our resiliency through the FY '20 and '21 COVID pandemic with growing and strong free cash flow in a demand-constrained market. This is due in part to our recurring revenue streams with service and aftermarket making up approximately 60% of our revenue. Digitally connected outsourced water, strong, and growing end-markets and our industry-leading service are just a few drivers for organic growth in favorable and unfavorable market conditions. As stated previously, we remain price-cost positive on an absolute dollar basis.
Intense inflationary costs have been dilutive to margins in FY '22. For the quarter, inflationary costs impacted adjusted EBITDA margin by approximately 40 basis points, which improved from a 70 basis point impact in the second quarter. We continue with robust pricing processes and we expect to remain price-cost positive in the fourth quarter. Despite these headwinds, we maintain our long-term target of 20% adjusted EBITDA margin.
Our management team is focused on driving strong and consistent cash generation. Our strong base of stable, profitable and recurring revenue provides an attractive foundation for cash generation. We have managed working capital well and see additional opportunities for improvement over time. We continued to target adjusted free cash flow conversion of over 100% or higher and we've achieved that on an LTM basis for several years.
Please turn to Slide 5. This chart represents our fourth quarter expected order activity by end-market compared to the prior year's fourth quarter. As shown, we expect to see strong orders in the fourth quarter across most end-markets, particularly life sciences, food & beverage, light & general industries. Power and refining are improving from prior quarters' outlet with favorable market dynamics across both end-markets.
Expected fourth quarter orders in microelectronics are showing a decline from last year's fourth quarter due to very strong Q4 orders last year. We're well positioned in the microelectronics market, which has undergone a strong cyclical upturn that we expect to remain. Overall, we expect to see strong order demand across most of our end-markets for the remainder of fiscal 2022. We do anticipate supply chain and labor challenges creating the potential for order conversion delays on behalf of our customers.
At Evoqua, we're proud of our diverse team of employees executing on fulfilling this demand every day. As we continue to expand our company with skilled team members, we are pleased to be partnering with five HBCUs for talent recruitment in the fall and in the spring. Please turn to Slide 6. Over past quarters, we've highlighted high priority end-markets including microelectronics, life sciences, renewable energy, in this quarter, we highlight food & beverage.
Food, particularly for wastewater treatment has been a key end-market for us since the ADI acquisition in 2017. We have been historically strong in beverage with processed water and are pleased to see gaining traction for wastewater treatment. With today's strict regulatory environment, manufacturing and processing requires high purity water for multiple applications, such as sanitizing equipment. High strength organic contaminants have also driven the need for improved wastewater treatment.
And our ADI product line has best-in-class anaerobic digestion for these applications. Our portfolio of wastewater technologies allow customers to treat the most difficult organic waste streams, while also helping them to achieve their carbon intensity goals by producing biogas, a source of renewable energy. Our core processed water portfolio also plays a vital role in providing production processed water and utility makeup water into these markets. Please turn to Slide 7.
We look at our environmental impact through our own footprint on the environment, but also through the products and services we provide to our customers. We're pleased to highlight two recent Handprint wins, which are expected to positively impact our customers' water conservation and -- while generating an attractive ROI. Bakersfield Renewable Fuels selected Evoqua to design, source and assemble a wastewater system that combined granular activated carbon, ultra filtration, and reverse osmosis technologies to treat up to 375 gallons of water per minute. The system was designed to allow for 75% recovery, with an estimated annual savings of approximately 140 million gallons of water.
We also helped a dairy processing plant, which experienced significant demand increases by replacing an aging wastewater system. Our anaerobic digester was selected to treat up to 2,100 cubic meters of wastewater per day. Through this treatment, we will produce an expected 5,000 cubic meters of biogas per day, which is approximately the average daily usage of 550 U.S. homes.
Please turn to Slide 8. While we continue to invest in long-term organic growth, we see momentum in our programmatic tuck-in, M&A process as well. We have now closed three acquisitions since January 1st, and we welcome our new colleagues from Smith Engineering and Epicor. Smith Engineering strengthens our service capabilities across key vertical markets, including life sciences, data centers, food & beverage, and microelectronics.
Epicor was an opportunity to vertically integrate the key supplier of specialty resins for the Power market. These acquisitions support our ISS segment. As I mentioned previously, the integration of the Mar Cor business continues to be on track. And we reiterate our expectation for it to achieve 25% adjusted EBITDA margins in the next 12 to 18 months.
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 9. For the third quarter, reported revenues were up approximately 19% to $439 million. Organic revenues grew approximately 9% driven by broad-based price realization and volume growth.
We saw organic revenues increase in aftermarket, capital and service categories as well as growth across all regions and most product lines versus the prior year. Third quarter adjusted EBITDA increased 16.3% over the prior year to $77 million for an overall margin of 17.5% Strong volume, favorable price and mix were primary drivers of improved profitability. As Ron mentioned earlier, inflationary impacts drove a year-over-year margin decline of approximately 40 basis points for the quarter. Please turn to Slide 10.
Our integrated solutions and services segment third quarter revenues were approximately 24% to $297 million. Organic revenues grew more than 7% driven by price realization and volume. Service and aftermarket revenues were strong across most end-markets. Organic capital sales were down slightly due to strong prior year sales in chemical processing, but largely offset by strength in microelectronics and life sciences.
The opportunity pipeline for capital projects and outsourced water is strong and growing. Our digital strategy continues to be an important strategic driver for long-term growth and profitability. For the quarter and year-to-date, digitally enabled revenues were up 11%. Adjusted EBIT increased 13.9% to $64.1 million due to higher volume, favorable price and the consolidation of Mar Cor's operations.
Adjusted EBITDA margin for the quarter was 21.6%, down 190 basis points from the prior year. Approximately 90 basis points of the decline was the result of prior year one-time benefits from COVID subsidies and favorable settlements of insurance claims as well as return to more normalized travel cost. Approximately 60 basis points of the margin declined was from the dilutive impact of inflation. However, as we discussed, we had favorable price-cost benefits on adjusted EBITDA dollars.
Please turn to Slide 11. We continue to see strong year-over-year growth in ISS backlog. Third quarter backlog was up $81 million or 19% over the prior year. And up 10% versus Q2 of this year.
We saw strong year-over-year sequential growth in capital, primarily driven by microelectronics and food & beverage. Our ISS pipeline continues to be robust with opportunities across multiple end-markets. We expect to see our book to bill ratio remain above one in Q4. As Ron mentioned, we're closely monitoring our pipeline and order book as supply chain visibility creates the potential for shipment delays in Q4.
Please turn to Slide 12. Applied product technologies' third quarter revenues were approximately $142 million, up more than 9%. Organic revenues increased $16.6 million or 12.8% driven by strong volume, growth and price realization as well as growth across all regions and most product lines. Adjusted EBITDA for the third quarter increased 15.5% to approximately $33 million.
Adjusted EBITDA margins increased 130 basis points to 23.1% driven by volume, favorable mix, but partly offset by inflationary impacts. Over the last several years, we've undertaken significant footprint consolidation actions in APT, going from 16 manufacturing centers in 2018 to 10 locations. This consolidation has provided for better fixed cost absorption, which has driven improved margin performance from higher organic revenue growth. Please turn to Slide 13.
One of APT's long-term organic revenue growth initiatives is to develop new and innovative technologies that expands our product portfolio and pursues market share gains in core markets. We're pleased to highlight two newly opened APT global manufacturing facilities in the United Kingdom and Singapore. The UK facility will serve as a global center of excellence in developing leading edge ATV, UV disinfection solutions, and the manufacturer of our Wallace & Tiernan product lines. Our Singapore core facility will manufacture Ionpure, a leading product in the microelectronics market and is expected to support Evoqua's growth and market development plans for the Asia-Pacific market.
Please turn to Slide 14. Capital spending, primarily for outsourced water orders was approximately $22 million for the quarter or approximately 5% of revenues. Third quarter net working capital was 16% of LTM sales. This includes net working capital acquired in the Mar Cor acquisition, which was $48 million as of the business's opening balance sheet.
Net working capital also increased to support strong organic order rates supported by higher inventory levels. As 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. Please turn to Slide 15. Year-to-date operating cash flow was approximately $87 million in Q3 versus $103 million in the prior year.
Adjusted free cash flow as a percentage of adjusted net income was 104% on a year-to-date basis. We were pleased to see our adjusted cash flow conversion returned to over 100% as we continue to support strong organic growth and capital expenditure investments, primarily for outsourced water orders. Our reported net leverage ratio finished at 2.9 times and is now within our targeted range of two and a half to three times, maintaining a strong and flexible balance sheet remains a key priority for Evoqua. Our weighted average cost of debt for the third quarter is approximately 3.3%, up approximately 60 basis points over the prior year.
Approximately 65% of our $975 million total debt has a fixed rate or is fixed through an interest rate swap, which is in place into 2026. I would now like to turn the call back over to Ron. Ron?
Ron Keating -- President and Chief Executive Officer
Thank you, Ben. Please turn to Slide 16. We had a strong quarter with outstanding results across most key financial metrics. Market demand remained strong, and we're pleased delivering broad-based organic growth across both segments, all regions and most product lines.
Our pipeline remains robust and backlog continues to grow to record levels. We're managing through a dynamic market where rising costs and supply chain uncertainties. We are pleased with the positive price-cost in Q3, and we're working to maintain that for the year, but margin expansion remains challenging. Outsourced water continues to make excellent progress and is contributing to the ISS segment's recurring revenue model.
Digitally connected sales were up again double-digits. Heading into the final quarter of our fiscal year, we're focused on sales and operational execution to convert our strong backlog. Price utilization is expected to be positive despite higher inflationary costs, and overall labor and material availability. We continue to closely monitor the timing of customer purchase orders and shipments as supply chain uncertainties could create challenges.
Closing on our prepared remarks, we are maintaining our previously provided outlook for the fiscal year. I will now open the call to questions.
Questions & Answers:
Operator
[Operator instructions]. And we'll take our first question from Deane Dray with RBC Capital Markets. Please go ahead.
Deane Dray -- RBC Capital Markets -- Analyst
Thank you. Good morning, everyone.
Ron Keating -- President and Chief Executive Officer
Good morning, Deane.
Ben Stas -- Executive Vice President and Chief Financial Officer
Good morning, Deane.
Deane Dray -- RBC Capital Markets -- Analyst
Hey. I think I should start with the impressive free cash flow in the quarter, and I appreciate the details you've given on working capital to sales, even at 16%, you're in the top tier of the sector. But take us through the kind of net impact on Mar Cor. You gave the working capital for Mar Cor, but is there anything on their cash conversion? How does that compare to the total company? And was there anything else, good guys or bad guys in the free cash flow number this quarter?
Ben Stas -- Executive Vice President and Chief Financial Officer
Yes, Deane, great question. Mar Cor's cash conversion is markedly higher than Evoqua's. We have some work to do there and some opportunity. Most of that will occur after we implement them on SAP.
Both their payables and their receivables, they collect slower than we do and they pay faster. So these are opportunities for us. Inventory, they do have a robust level of inventory on hand. And with the benefits of the business integration into shared services, we feel like we can unlock quite a bit of that at working capital.
I think the last call we talked about as a percentage of sales, they're in the mid-20s, and we would like to bring them down to our mid-teens level. On -- overall on Evoqua, if you look at our working capital and our DSO and DPO, very consistent with the prior quarter, we did see two days more of inventory and you'll note that when you review our results. And that inventory, it was put in place to support very strong order rates as well as safety stock in this current period of time.
Deane Dray -- RBC Capital Markets -- Analyst
Yes, that makes sense. We're seeing additional buffer inventory. In fact, two days is really tiny compared to what we've seen some of your competitors carrying. All right, so second question and follow-up for Ron, the digital revenues up 11%.
What's interesting that you're not talking about is, you're not talking about being impacted by chip supplies, because there's these products and services do require semiconductors. So where does that stand? And kind of what growth rate are you expecting from the digital businesses going forward?
Ron Keating -- President and Chief Executive Officer
Thanks, Deane. Actually, we have not been overly impacted by chip supply on our own connected systems that we're putting in. We had been impacted by chip supply on the APT side where we're supplying products into our customers on a global basis. But that's -- we're managing that.
It's actually we're seeing a trend that it's stabilizing a little more and we're able to at least have good lead times, good price expectations, where things are going to be. And we're able to build that into the product line. We're pleased with the digital -- with the connected solutions, digital water growth, and I anticipate that will continue to go at double-digits. The opportunities there, as we invested a lot of money in deploying connected systems.
And even though we had deployed the connected systems until a customer signed up for water by the gallon, we weren't charging against that or billing them in that way we're billing them by event. So that's where you see -- and you'll see continued ongoing growth of digital and connected water, because we already have the systems in place. We're converting customers to that. And we anticipate that'll bode well as the tailwinds of the market are very positive.
Deane Dray -- RBC Capital Markets -- Analyst
And just to clarify, how much of the total revenue mix would you characterize as digitally enabled today? And where do you expect it in a couple of years?
Ron Keating -- President and Chief Executive Officer
Yes, so, Deane, we're somewhere in the neighborhood of 20%, that we are connected around our full revenue that we have on site 24/7 with connectivity, we have said that we feel like over time that could get up to 40%.
Deane Dray -- RBC Capital Markets -- Analyst
Terrific, thank you.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
Then we'll take our next question from Nathan Jones with Stifel. Please go ahead. Your line is open.
Nathan Jones -- Stifel Financial Corp. -- Analyst
Good morning, everyone.
Ron Keating -- President and Chief Executive Officer
Good morning, Nathan.
Nathan Jones -- Stifel Financial Corp. -- Analyst
I want to talk a little bit more about the ISS margins and some of the pressures that you're seeing there. I mean I would think that still labor on the service side and potentially some contract terms that are maybe more fixed in nature on that side of the business or that reset more slowly, that maybe are a little more difficult to pass pricing through. Could you give us a little bit more color on where you stand on those kinds of issues? If you've changed the contract terms over the last few years to enable pricing to get through more easily there?
Ron Keating -- President and Chief Executive Officer
Yes, Nathan, I'll speak to the contract terms. I'll let Ben talk to the details on what the -- what we've seen. We have been able to pass on price escalators in the contracts. We have the ability to go out with surcharges inside of the contracts.
And we've negotiated a much shorter time period into what our different indexes enable us to do as far as the contracts go. And then, even on our quote time, lead times now, we have somewhere between a 10-day validity on a quote and 30-day validity on a quote, just depending on what the raw materials going into the processor. So we've taken the right actions around being able to move price on -- certainly on the ISS side, as far as commodity moves and labor and material cost and fuel cost. Ben, you want to talk about the percentages?
Ben Stas -- Executive Vice President and Chief Financial Officer
Yes. So I highlighted on the call earlier, we had some one-times that is the majority of the reason for the ISS margin declined, but there was about 60 basis points that were inflationary-related. And that does include labor inflation as well as some productivity impacts associated with onboarding new service techs to fill positions. And in that period of time, you have two techs going to one job as they're being -- becoming trained.
So there's a little bit of a pressure there, but that should abate once these techs are up to speed. And the last thing is just continuing fuel cost increases, but a lot of that we're able to pass on as a part of way of our contracts work. So it's dollar neutral to dollar positive. However, it does put pressure on EBITDA margin percentage.
And so for ISS, we had about 60 basis points of headwinds associated with price-cost on margin, even though the price-cost were dollar or price-cost dollars were positive and favorable. So those are the key things, Nathan.
Nathan Jones -- Stifel Financial Corp. -- Analyst
Yes, thanks very much for that. I had another question on chips and more of an opportunity, the chips that finally got passed through Congress which enabled. There probably some fairly significant microelectronics capacity to go into the US, where you guys can get some very large projects. Can you talk about the opportunities here? I know you had relationships with some, if not all of the folks that are likely to put in some large capacity.
Just any context you can give us there how big these opportunities could be for Evoqua and what the timeframe for realizing revenue out of them might be?
Ron Keating -- President and Chief Executive Officer
Yes, Nathan, we see this as very positive. We think the opportunities are tremendous and this again, continues with the strong tailwinds that we have in the marketplace. The one thing we pointed out on Slide 5 is, our Q4 expected orders coming in, in microelectronics, it shows red, that is simply due to prior year, very strong Q4 orders. So it's order activity versus order activity.
We see a long-term opportunity for this, for us being very strong, the onshoring has helped quite a lot. This chips that is going to help fight a lot. And companies are getting benefit or investing in the proper technologies. And in a lot of cases where these microelectronics fabs or they are water starved regions or water challenged regions even inside of the United States.
So it's a huge benefit to Evoqua, fits us very well on the wastewater side as well as the processed water side. So we're positive on it.
Nathan Jones -- Stifel Financial Corp. -- Analyst
Great. Thanks very much for taking the questions. I'll pass it on.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
And we'll take our next question from Andrew Buscaglia with Berenberg. Please go ahead. Your line is open.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Hey, good morning, guys.
Ron Keating -- President and Chief Executive Officer
Good morning.
Ben Stas -- Executive Vice President and Chief Financial Officer
Good morning, Andrew.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Just a clarification on the Mar Cor contribution. It came in a little bit below my expectation, it was around $40 million, $41 million, down sequentially. What's going on there? And what -- and then going forward, do we -- is below 40 sort of where you'd expect that deal to come in?
Ben Stas -- Executive Vice President and Chief Financial Officer
No, we just had a little bit of supply chain disruption in the quarter associated with the concentrates business that should rebound this quarter. But we expect that to be in that mid-40s range in terms of sales as ongoing basis. A lot going on there, including an SAP implementation, the integration of the business, but the demand looks very stable and certainly strong in this concentrate area as well as other our other key product lines.
Ron Keating -- President and Chief Executive Officer
And Andrew one piece that you'll see in that, Mar Cor's growth that's coming in, part will also show in as organic growth, because we're aligned on those customers, we're selling to a more broad customer base through ISS. And that's going to be reported as organic growth, because it's growth and our revenue going into those key accounts that Mar Cor is servicing.
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
OK. OK and then just looking at the guidance, so you held the guidance, that makes sense, just given what's going on the world. But your guidance would imply organic growth would probably go negative in one segment, I would think ISS given the comp. Is that the way to think about that is -- and is that really edges tough comp, that kind of optically looking like that like it's going to decline?
Ben Stas -- Executive Vice President and Chief Financial Officer
Last year was a very strong Q4, if you look. So ISS had some very, very robust sales in Q4 the prior year. And that was a sort of the opening up of COVID as well. But we'll see, we'll see how it all shakes out.
That's why we put a range out there and still wide, to reflect various possibilities. But as I highlighted in the script, there is the chance for customer delays. We do have very strong comps. And we wanted to take --head it into the potential uncertain economic conditions, we want to take a balanced approach.
Ron Keating -- President and Chief Executive Officer
I think that's the key. As we talked about our backlogs are terrific, order activity is fantastic. Even as I highlighted on the end-market charts, where we see order conversions, delays, it's really only behalf of our customers being ready to accept the products that we're delivering, not necessarily on our behalf, being able to deliver a lot of times, we're waiting for them to say go. And so we were balanced in the fourth quarter [Inaudible].
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
OK. Fair enough. Thank you.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
And we'll take our next question from Saree Boroditsky with Jefferies. Please go ahead.
Saree Boroditsky -- Jefferies -- Analyst
Hi, good morning. The EPA issued a health advisory that basically said there was no safe level of PFAS. How do you expect this to influence the upcoming limit proposal and ultimately the revenue opportunity turn to you for you guys?
Ron Keating -- President and Chief Executive Officer
We -- I mean we see this continuing to be a positive just as we've highlighted. And the EPA still has to do is, is come out and put what the regulatory requirements are going to be. And define that specifically so that we'll see the local water districts and states and municipalities starting to adopt it. But, Saree, it's a little like we've highlighted in the past, I mean, we have a pipeline that's north of $100 million, we're winning about a third of the projects that are left, it's the projects we really choose to go after.
And we think the opportunity is going to be very strong as we go forward. But I think it is something that's going to be more like a dimmer switch turning on rather than a light switch on and off. And I think it'll start ramping up and it'll continue to ramp and it's going to be here as a market tailwind for quite some time.
Saree Boroditsky -- Jefferies -- Analyst
Thank you. And then staying a little deeper into your order outlook to more positive for power what are you seeing in this market? And can this growth continue?
Ron Keating -- President and Chief Executive Officer
Yes, I mean, we continue to see opportunities around power and power distribution, some of the coal-fired power plants are continuing to operate. So they're treating their wastewater, they're treating the water coming off of the stacks. And then, as far as the ones that have shut down, we have very positive outlook with what we do around dewatering of the ash ponds. And it speaks to the value prop that Evoqua brings with all of our technologies being able to be mobilized.
So we've built mobile applications for each technology where we can treat very tough emerging contaminants as well as contaminants that have been in the market for a while, and power is a great place to apply those products in those assets.
Saree Boroditsky -- Jefferies -- Analyst
Great. Thanks for taking my question.
Operator
And we'll take our next question from Bryan Blair with Oppenheimer. Please go ahead. Your line is open.
Bryan Blair -- Oppenheimer and Company -- Analyst
Thank you. Good morning, everyone.
Ron Keating -- President and Chief Executive Officer
Good morning.
Ben Stas -- Executive Vice President and Chief Financial Officer
Good morning, Bryan.
Bryan Blair -- Oppenheimer and Company -- Analyst
Circling back to Mar Cor for a second, you've noted the integration is on track, the key points that you're pacing toward the 25% margin target over the next 12 to 18 months you're very positive in that sense. You did say SAP implementation, you've discussed that for a while. Are there any other callouts in terms of heavy lifting for the time being in terms of integration? And are you willing to speak to synergies realized to-date?
Ron Keating -- President and Chief Executive Officer
I'll talk about some of the key drivers, Ben could talk about synergies. But, really the key drivers we've got SAP implementation, we've got -- we've aligned all the back office on our benefits, all the plants that are there, medical, etc. The opportunities that are coming ahead of us are really around facilities and facility consolidations. If you'll recall, when we did the acquisition, we highlighted 27 service locations and Mar Cor, 25 of those are in a market area that we also have an ISS branch.
So whether we move into the Mar Cor facility, they move into ours or we find a combined facility that fits for both of -- for both businesses to be in, because we need more space. That's really what the heavy lifting going forward is. And, we're making great progress on that. We feel pretty pleased with what's happening.
And again, being able to reiterate to 25% EBITDA is certainly right within the center of the bell curve. Ben?
Ben Stas -- Executive Vice President and Chief Financial Officer
Yes, Bryan, margins are strong and they are growing. But the best is yet to come as we get into footprint consolidations and more heavy lifting, those have been mapped out, we're in the process of approving and running those through our internal processes to gain approval. But so far, the early synergies are starting to come through, but we still really haven't seen the lion's share of those synergies, and that'll come when we finished the SAP implementation, and we get to the footprint consolidation [Inaudible]. And also just wanted to remind you also on working capital, post-SAP implementation, there's a healthy opportunity to really sizably reduce their working capital as a percentage of sales.
Bryan Blair -- Oppenheimer and Company -- Analyst
Understood, that makes sense. And you quickly highlighted the deals closed in July. I realized they're smaller, but can you speak to expected financial contribution from Smith and Epicor. And then I'm curious if economic uncertainty has impacted your M&A pipeline, if at all for the kind of strategic tuck-ins that drive your strategy?
Ron Keating -- President and Chief Executive Officer
See, I'll speak to both of them. I mean, we're thrilled to have the Smith and Epicor teams as a part of Evoqua now. Epicor is one that we've done business with for quite some time with resin processing for the specialty power markets that we go after. So that is really more of a vertical integration play, we already had – the sales and the opportunities that we were executing on.
And it was a vertical integration that will support us with great potential for top line growth in very key markets as I highlighted in the script, life sciences, data centers, microelectronics, but it's bigger in the Minneapolis areas where they're located. So, we now have a very large footprint in that market between Mar Cor and Smith that we've tied together, and it fits with the strategy we've talked about around geographic penetration that we highlighted and wanted to go after once we were able to close on the Mar Cor transaction, which is very heavily focused on the Minneapolis market, Smith became a great opportunity for us as well. The pipeline for M&A, tuck-in M&A, still very robust. And I think we'll see that continue just as we highlighted on Slide 8 in the deck.
Bryan Blair -- Oppenheimer and Company -- Analyst
OK. Appreciate all the detail. Thanks again.
Ron Keating -- President and Chief Executive Officer
Yes, thanks.
Operator
And we'll go next to Joe Giordano with Cowen. Please go ahead. Your line is open.
Joe Giordano -- Cowen and Company -- Analyst
Hey, good morning guys.
Ron Keating -- President and Chief Executive Officer
Good morning, Joe.
Ben Stas -- Executive Vice President and Chief Financial Officer
Good morning, Joe.
Joe Giordano -- Cowen and Company -- Analyst
You mentioned book to bill in 4Q for ISS is expected to be above one. But you also mentioned some stuff about shipping delays like just want to kind of circle back to that. And is that book to bill more because orders are accelerating or more because shipments are delayed like do you have many maybe any color on some sort of like average daily order metric that you would look at for fourth quarter relative to third quarter something like that?
Ron Keating -- President and Chief Executive Officer
Yes, Joe. I would say the book to bill is not a -- it's orders coming in at a very high, very positive rate. It's not as a result of us not being able to show up. If you look at ISS specifically for the quarter, they had revenue growth, organic revenue growth of 7.3%, APT had organic revenue growth of almost 13%.
So between those two, we're really pleased with the growth that we're delivering. And having a book to bill ratio that continues well above one means that we're building backlog. And it's really the tailwinds in the market and just the strategy being executed on by the team.
Joe Giordano -- Cowen and Company -- Analyst
And there's maybe one just high level thing, and maybe additional comment, but just been reading a lot more lately about what's going on in areas like Lake Mead and Salt Lake City and those areas seem for better words, screwed. I'm just curious if you're hearing like more incremental action plans from the leaders in those areas about how, whether it's residents or businesses their need to do things fundamentally different? And is it something that your -- you guys are looking at and involved with and any commentary there?
Ron Keating -- President and Chief Executive Officer
Yes, absolutely great question. It is a very difficult situation that the western half of United States is in or around the droughts that have been continued there. And it's something we've paid attention to for quite some time. And we do see businesses operating differently.
I mean, they are so focused on wastewater capture, recycle, reuse, making sure that if they are at expanding capacity, they're doing it by being more efficient with their water chain, rather than go more broadly. So we're pleased with our impact that we can have on that situation. And frankly, we're partnering with our industrial customers in those market areas every single day to be more efficient with what they do. It's one of the things that we'd like to highlight on our sustainability.
And what Evoqua does as a company is the handprint opportunity that we have to preserve very precious natural resource of water is what we're focused on and industrial customers are aligning with us to make sure they're investing in that.
Joe Giordano -- Cowen and Company -- Analyst
Thanks, guys.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
And we'll take our next question from Andy Kaplowitz with Citigroup. Please go ahead.
Andy Kaplowitz -- Citi -- Analyst
Good morning, guys.
Ron Keating -- President and Chief Executive Officer
Hey, Andy.
Ben Stas -- Executive Vice President and Chief Financial Officer
Good morning, Andy.
Andy Kaplowitz -- Citi -- Analyst
I know you mentioned labor availability and hiring cost impacting ISS. Is that issue for you would you say stable within your service business? Is it getting better or worse? Then you mentioned fuel costs. Shouldn't those costs be starting to come down now? Any more color on sort of the costs in that service business would be helpful.
Ron Keating -- President and Chief Executive Officer
Yes, so I'll highlight and talk about the service business specifically. It has stabilized. We certainly went through a period of having to make sure that we were addressing wage compression in certain market areas with what's happening just in labor rates in the overall market and certainly in skilled labor markets. So -- but it has stabilized now, Andy, and I feel like we are in a good place, we've -- some of the turnover that happened right at the end of COVID, that seemed to be pretty strong across the industry has stabilized.
And we've been able to fill positions, and filling more quickly and actually filling with very skilled team members with some good experience behind them. So I think that we're at a pretty good spot as far as labor goes. Ben can talk about fuel and challenges there.
Ben Stas -- Executive Vice President and Chief Financial Officer
I think fuel is still uncertain. Certainly, we saw higher fuel costs at the beginning of the quarter, then it started having some abatement toward the end of the quarter. I think some of the outlooks suggest maybe more stability for Q4. But the question mark for what happens next year at this point in time.
But most of our fuel costs, we are able to push to our customers, we have a fuel surcharge in place. So we pass that through. However, the higher it goes, it also puts pressure on margins because of the fact that the -- you're pushing it through as a surcharge and not necessarily at your traditional margins. So that does give a bit of a margin drag for ISS.
Andy Kaplowitz -- Citi -- Analyst
It's helpful, guys. And then I know it's a small part of your business, but you highlighted municipal drinking water as blue for Q4 and maybe you could talk about that market? And then, just leave a commentary in around municipal wastewater, obviously, that's much bigger, stable governments seem relatively flush with cash, and then you've got eventual IAJ contribution forward, those businesses look like moving forward?
Ron Keating -- President and Chief Executive Officer
Yes, so I'll talk about municipal drinking water. First of all, we see being stable it is a smaller portion of our business, as you can see where it's represented on Page 5. But we are continuing to work with municipal systems around retrofit and rehab, their upgrades to their systems and what they're doing. And so that fits the municipal drinking water side as well as municipal wastewater.
I would tell you across wastewater, it is green, it'll continue to be green, we see for the foreseeable future, certainly with what's being addressed on the infrastructure spending bill, as well as what's happening we're trying to recycle and reuse water. So they're trying to make sure the wastewater plants are operating efficiently. They're up to capacity. And so very good retrofit and rehab, their book to bill ratio there is well above one, should continue to go that way.
And we anticipate the infrastructure bill actually, a lot of the projects are being designed and engineered now. We would expect to see orders from that come early '23 with revenues starting toward the latter half at '23.
Andy Kaplowitz -- Citi -- Analyst
Appreciate it, guys.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
And we'll take our next question from Pavel Molchanov with Raymond James. Please go ahead.
Pavel Molchanov -- Raymond James -- Analyst
Thanks for taking the question. As you build capacity or expand capacity, I should say, outside of North America, I recall last fiscal year, International was maybe 12% of revenue. Do you have a target for how big you want the international footprint to be or maybe a prediction for what that slice of the pie will be this year or next year?
Ron Keating -- President and Chief Executive Officer
Yes, Pavel I think if you look at our international revenue, it's closer to 20%. Now, some of that is reported in North America, because it's North America selling into some of the international operations. But we'd like where it is. We'd like 20% is a pretty good number.
We want to continue to grow overall at Evoqua. But we think that the International markets are going to grow at a much faster pace for us, meaning the emerging markets and we're seeing that. I mean, we -- little bit of challenge I mean, that was experienced certainly through the COVID lockdowns, but our team in China has continued to operate very efficiently. Our team in Singapore, we're branching more deeply into India.
So there's some good opportunities for us as we grow. And then our team in Europe has done an excellent job continuing to deliver in some tough market environments. So we were happy to be able to open the two new facilities we highlighted in the deck and it's really a continuation of our build out on centers of excellence that are going to serve the various markets that we participate in.
Pavel Molchanov -- Raymond James -- Analyst
In that context, are you looking at non-North American M&A opportunities as part of your consolidation roadmap?
Ron Keating -- President and Chief Executive Officer
We do. We continue to look at those around product portfolio extensions more than service level extensions. And as evident of that would be the ATG acquisition that we just did back in '19, where we consolidated that into -- that was out of the UK, it was out of the facility called Wigan, we just moved it to a much larger facility, because that business has grown tremendously. So a lot of our historic acquisitions in the product space have been internationally based acquisitions.
And we continue to focus on those as we go forward as well. We're really looking more around technologies there.
Pavel Molchanov -- Raymond James -- Analyst
Thank you very much.
Ron Keating -- President and Chief Executive Officer
Thanks, Pavel.
Operator
And we'll go next to Andy Kaplowitz with Citi -- I'm sorry, we'll go next to John Walsh with Credit Suisse. Please go ahead.
John Walsh -- Credit Suisse -- Analyst
Yes. Good morning. And, Ben, I liked your Sinatra quote earlier in the Q&A.
Ben Stas -- Executive Vice President and Chief Financial Officer
Thanks.
John Walsh -- Credit Suisse -- Analyst
I got to be nice, because I was going to ask a not nice question or I guess maybe that's not the right way to frame it. But I wanted to go back to the guidance. I understand that the year-over-year bridges you're kind of talking about, but I'm kind of confused by the quarter over quarter, Q3 into Q4. It looks like it's kind of below your normal seasonal sale and kind of margin lift that you get.
I was just wondering if you could kind of unpack that a little more what's happening on the quarter-to-quarter walk?
Ben Stas -- Executive Vice President and Chief Financial Officer
Yes, sure. I think if you look at history which suggests we have upside. And that's why we have the top end of the range. But then you look at the current circumstances that we face, the potential for recession, macro uncertainty, supply chain challenges, potential for customer delays, that's really why we left the guidance the way we did, because there are the potential for those uncertainties.
Q4, as you can see is traditionally our strongest quarter. So if certain delays were to occur or things that are outside of our control, we wanted to make sure we are measured and accounted for that. But so again, I just feel like in this environment, it's important to stay balanced.
John Walsh -- Credit Suisse -- Analyst
OK, that's fair. And then, you got the PFAS question earlier as it relates to the United States. But just curious as we're starting to hear more and more coming out of Europe, whether it be Belgium, Germany, there's a lot more activity now. Would there be any kind of difference in technology that you would maybe offer into those markets? Or maybe it's more of a channel thing, you just have to have the right channel in those markets? But we'd love to hear how you think about that opportunity as PFAS broadens?
Ron Keating -- President and Chief Executive Officer
Yes, I'll actually tag that on to the prior question around international opportunities for acquisitions, which I talked about product technologies. One of the areas that we're very focused on is disrupt infield on PFAS. So there's a lot of different types of technologies that are throughout Europe that they're working on site destruction of PFAS, and there are a lot of trials that are happening. That's very interesting to us.
So we're engaged in those, we're paying attention to what is there and what is available. And that's the technology evolution that we would hope to see in PFAS. So it's not just capture it, concentrate it, landfill it or incinerate it, it is disrupt on site so you're not actually having to move the PFAS of the location, it is.
John Walsh -- Credit Suisse -- Analyst
Great. That's very helpful. Appreciate you taking the questions and thank you.
Ron Keating -- President and Chief Executive Officer
Thanks, John.
Ben Stas -- Executive Vice President and Chief Financial Officer
Thanks, John.
Operator
And we'll go next to Brian Lee with Goldman Sachs. Please go ahead. Your line is open.
Brian Lee -- Goldman Sachs -- Analyst
Hey, guys, good morning. And thanks for squeezing me in here. Maybe sort of a follow-on to the prior question here, just as you think about year end and we try to sort of true-up the model, Ben, the nice margin expansion in APT is the highest we've seen since early fiscal '21. Are we expecting further improvement in the 4Q and kind of any thoughts into '23? Is this sort of kind of the new normal on the APT side? And then, I guess secondly I'll just fill in the second question here.
You guys have talked about customer availability. I think you just talked about customer delays and potentially wanting to be prudent around that as well as you think about the forward outlook. Have you seen any shifts either for the better or for the worse around customer availability and that how that's been impacting your capital sales either deployment or visibility? Thanks.
Ron Keating -- President and Chief Executive Officer
Yes, I'll talk to you about the customer availability, and leave Ben to cover the others. What we -- it's been very spotty, and it totally depends on the end-market. It is not availability with us being able to get on site, which it historically has been through the COVID shutdown. And we dealt with a lot of challenges around that.
What the availability difficulties that we faced throughout this fiscal year has been primarily measured by has been whether or not they're ready to take our product or our application or they turn on their system for our service to occur. So that's where we see the challenges. I mean as we've highlighted, our backlog is tremendous, our order activity is great. We're managing supply chain, our team has done a remarkable job managing supply chain.
And so now, what we're balanced against is the supply chain of our customers, when they're getting their site ready or they're ready to turn on their production line. And that's created the delays. It kind of varies by end-market, what we're seeing, but I think it's versus the larger installations versus the smaller that tend to have more delays and a big challenge for us.
Ben Stas -- Executive Vice President and Chief Financial Officer
Yes, on the margin side, APT has done an excellent job of their structural cost that we talked a little bit about earlier as well as portfolio. And, these benefits that we expect will stick and a lot of hard work has been done in that area. On the downside, they still face price-cost headwinds like, there'll be positive on the dollar amount, but the pressure associated with inflationary impacts, and also supply chain disruptions impacting productivity in the business of particularly, our manufacturing facilities under APT, the majority of them. So they continue to face situations where a part does not show up.
An item does not show up, a person is out sick with COVID and have to battle through those types of challenges as well. But yes, very proud of the margins that they've been able to deliver. And again, that's been majority of their structure in their portfolio decisions.
Brian Lee -- Goldman Sachs -- Analyst
Great. Thanks. And I'll pass it on.
Ron Keating -- President and Chief Executive Officer
Thank you.
Operator
And at this time, I will now turn the call back over to Ron Keating for any closing remarks.
Ron Keating -- President and Chief Executive Officer
Thank you. Thank you, again for your interest in Evoqua. We greatly appreciate the time that you've given us today. I would like to just close with a sincere thank you to all of our team members around the globe, have been incredibly impressive the way that they've operated, the way they've delivered.
And we continue to focus on meeting customer demand every day, and really staying true to our cause and the purpose of what Evoqua does which is transforming water and enriching life. So thank you for your time. We look forward to speaking with you again next quarter.
Operator
[Operator signoff]
Duration: 0 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
Andrew Buscaglia -- Berenberg Capital Markets -- Analyst
Saree Boroditsky -- Jefferies -- Analyst
Bryan Blair -- Oppenheimer and Company -- Analyst
Joe Giordano -- Cowen and Company -- Analyst
Andy Kaplowitz -- Citi -- Analyst
Pavel Molchanov -- Raymond James -- Analyst
John Walsh -- Credit Suisse -- Analyst
Brian Lee -- Goldman Sachs -- Analyst