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Good morning and welcome to the Evoqua Water Technologies' Second Quarter 2019 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor fill be opened for your questions following the presentation. After the speakers' opening remarks, there will be a question-and-answer period.
[Operator Instructions] As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.
I would now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. Thank you for joining us for Evoqua Water Technologies conference call to review our second quarter 2019 financial results. Joining me on today's call are Ron Keating, President and Chief Executive Officer; and Ben Stas, Executive Vice President and Chief Financial Officer.
After our prepared remarks, we will open the call to questions. We ask that you please keep to one question and a follow-up to accommodate as many questions as possible. This conference call includes forward-looking statements, including our expectations for the quarter ending June 30, 2019, the remainder of fiscal 2019 and fiscal 2020 as well as expected costs and benefits associated with our two-segment realignment.
Actual results may differ materially from expectations. For additional information on Evoqua, please refer to the company's SEC filings, including the risk factors described therein and our 10-K for the fiscal year ended September 30, 2018.
On this conference call, we will also have a discussion of certain non-GAAP financial measures. Information required by Regulation G of the exchange act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained via Evoqua's Investor Relations Web site.
All historical non-GAAP financial results have been reconciled and included in the appendix section of the presentation slides. Unless otherwise specified, references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30. Means to access this conference call via webcast were disclosed in the press release, which was posted on our corporate Web site. Replay for this conference call will be archived and available for the next seven days.
With that, I would now like to turn the call over to Ron.
Thank you, Dan. Good morning.
We appreciate your interest in Evoqua and thank you for joining us for today's call to review our second quarter results.
At the mid-point of our fiscal year our overall results have materialized largely as expected. Demand continues to be solid. Our order book is growing and we expect that to continue through the second half of the year. Operational execution continues to be a priority and we're focusing the organization on expanding our customer relationships, driving profitable growth and meeting financial expectations. We have enhanced our leadership team particularly in our applied product technology segment with the recent addition of Hervé Fages as the new segment President.
Hervé brings extensive commercial, product and digital experience from previous roles at Honeywell, Schneider Electric and Tyco. We expect his experience to serve the organization well and we welcome him to the team.
We start on Slide 3. Overall, we're pleased with our second quarter results delivering revenue growth of almost 5% with approximately half of that being organic. ISS revenues grew double digits in the quarter following solid double-digit year--year revenue growth in last year's second quarter as well. APT revenues were down mid-single digits primarily due to lighter capital revenues and foreign exchange, but showed good aftermarket product growth.
Both segments reported strong order growth through the quarter delivering low double-digit year-over-year growth on a year-to-date basis. We expect our strong half orders to provide attractive growth opportunities in the latter part of this year and into 2020. We are pleased to see our progress in our pricing actions across the organization and we expect to see continued improvement throughout the year. The management team has been actively engaged in executing the two segment realignment which is predominantly focused in the APT segment. We are on track and making solid progress as evidenced by our strong order growth.
Free cash flow continues to be a major focus. During the quarter, we invested $20 million in ISS capital expenditures. These investments were in support of high return growth opportunities particularly for mobile service assets and outsourced water projects. We've working capital initiatives underway to improve cash flow, which will be important in achieving our 80% or greater free cash flow conversion objectives. Then, we'll speak in more detail about our guidance. But in short, we are reaffirming our full year 2019 outlook as provided.
Please turn to Slide 4. As a business overall, we continue to benefit from stable and recurring revenue growth. This graph represents our revenue and adjusted EBITDA on a rolling 12-month basis from quarter-to-quarter since 2016. Approximately 44% of our last 12 months revenue is currently derived from services with overall contract renewal rates in the high 90% range.
Over the last three years, our revenues have grown at a compounded rate of 8.5% with adjusted EBITDA growth of approximately 20%. The nature of our business is subject to quarterly variability that may result from shifts and product mix and cost impacts driven by changing customer demand. However, we continue to have high visibility into our revenues on an annualized basis.
Please turn to Slide 5. When Evoqua has established, we began with three segments. Two focused on the industrial and municipal markets and a products business to sell our technologies globally. Our new organizational realignment is refined that initial structure with the goal to improve technology deployment and provide more comprehensive customer solutions while lowering our cost structure. Fundamental to the success of our strategy is aligning around our customers and how they want their problems to be solved. We now have two distinct segments with clear go-to-market strategies to accomplish that shift.
The Integrated Solutions and Services team is focused on serving the North American market through our direct sales and best in class service channel. This opens up opportunities to move from a pay by service model to subscription based revenue using programs like WaterOne. With WaterOne we deploy complete solutions and optimize customer performance by guaranteeing quality and quantity with process guarantees.
We're also moving away from regional in-house selling to a more national account focus allowing us to better leverage our national footprint and technical talent. The applied product technology segment will move from individual product sales to offering customers a suite of technologies that best fit their needs. The APT team continues to go-to-market through our established third-party channels across the globe and we'll sell products through our integrated solutions and services segment allowing us to expand our reach and impact underserved markets.
As previously mentioned Hervé Fages is leading the APT realignment efforts and we are pleased with the progress to-date. Much more work is required and the organization is focused on serving our customers, while executing the realignment actions. Across the company, early benefits are materializing for our customers and for the company as evidenced by our strong and growing order book.
Our digital strategy is an important component of our business model allowing us to better serve customers, grab profitable growth and enhance operational efficiencies. We were very pleased to be recently named digital water company of the year by Global Water Intelligence and the 2019 Global Water Summit in London.
Please turn to Slide 6. Our two segment realignment has been underway for six months and is expected to be completed no later than September 2020. We have taken a number of cost reduction actions to help us achieve the targeted efficiencies and anticipated benefits of the realignment. Actions we have taken have been focused on streamlining our operating structure and optimizing our product offering and our footprint.
Today, we have incurred approximately $12 million of cash cost. We have also taken a $5 million non-cash charge related to product rationalization and facility consolidation. We expect cash costs to be $17 million to $22 million yielding future annualized cash benefits of approximately $16 million.
I would now like to turn the presentation over to Ben to review the financial results and the outlook.
Thank you, Ron.
Please turn to Slide 7. For the second quarter, revenues grew $15 million or 4.5% over the prior year to $349 million. Organic revenues grew 2.3%. Integrated Solutions and Services revenues grew approximately 11% and Applied Product Technology's revenues grew or declined almost 6%. Foreign exchange negatively impacted overall revenues by 1.3%.
As Ron commented earlier we have seen strong order book growth in both segments in the first half of the year. However, converging timing is an inherent key variable in our business. During the quarter, we estimate price cost was positive by approximately $2 million as compared to flat in Q1. Adjusted EBITDA was $56.7 million down $1 million versus the prior year. ISS grew over 11% driven by organic growth and acquisitions. APT adjusted EBITDA was down approximately 25%; approximately half of this decline was due to lower volumes and product mix primarily from large prior year high margin shipments.
The other half of the decline was from the impact of last year's second quarter benefit of $3.6 million primarily from reduced warranty obligations resulting from improved product performance. Overall mix and timing impacts on Q2 results were largely as expected.
Please turn to Slide 8, for the second quarter, Integrated Solutions and Services segment revenues were up approximately 11% to $227 million driven by service capital aftermarket and multiple vertical markets particularly in the micro electronics and food and beverage markets. Organic revenue growth was strong at approximately 6% in the quarter. Acquisitions contributed approximately 5% to growth. The order book includes a variety of large service opportunities including attractive outsource water orders or conversion cycles for these types of projects, [indiscernible] revenue over an extended period of time.
Overall, demand trends across our key vertical markets remain positive. Adjusted EBITDA increased over 11% to $51 million versus the prior year primarily due to volume and favorable price actions. Adjusted EBITDA margin was up 20 basis points over the prior year. We are pleased with our WaterOne initiative and installation rates. The benefits of WaterOne continue to be well received by our customers and our installation rate is on track with our expectations.
Please turn to Slide 9, for the second quarter acquired product technology revenues decreased almost 6% to $122 million driven primarily by lower capital product revenues down approximately $15 million while aftermarket service revenues grew by approximately $10 million. The acquisition of Pacific Ozone contributed approximately $1 million to revenue growth. Foreign exchange negatively impacted revenues by approximately $4 million or 3%. The APT segment remains highly focused on execution of the realignment and we are pleased with the strong order book growth.
Adjusted EBITDA decreased $7 million or approximately 25% to $21 million a margin of 17.4%. As previously mentioned approximately half of this decline was due to lower volumes and product mix and the other half of this decline was primarily due to the benefit of last year's second quarter reduced warranty obligations.
Please turn to Slide 10. Free cash flow for the quarter was $16 million or 95% of adjusted net income. Year-to-date free cash flow is 19 million or 113% of adjusted net income. Year-to-date CapEx increased $9 million over the prior period approximately $11 million of year-to-date CapEx was finance. We continue to expect free cash flow to adjusted net income to be at least 80% for the full year.
Leverage picked up slightly to 4.3x in the quarter. Our current weighted average cost of debt is approximately 5.6%. As of the end of the second quarter, we also have approximately 119 million diluted shares outstanding as of three months ended March 31.
Please turn to Slide eleven. Capital expenditures in the second quarter were approximate $23 million or approximately $17 million net of growth CapEx financing. On a year-to-date basis capital expenditures were $41 million or approximately $30 million net of growth CapEx financing. Approximately 80% of the overall CapEx spend this quarter was in the ISS segment which includes spending for mobile service assets, outsourced water projects and muni service equipment. Working capital in the second quarter sequentially declined $3 million. Overall, working capital was impacted by revenue growth and capital net.
Please turn to Slide 12. As Ron indicated earlier, we are reaffirming our full year outlook for revenues in the range of 1.38 billion to 1.44 billion and adjusted EBITDA in the range of $220 million to $240 million. While we have visibility on an annual basis, given the recurring nature of much of the business, the company is subject to quarterly variability that may result in product mix and customer schedules changing between periods as such we expect third quarter adjusted EBITDA to be approximately flat to up 8% sequentially over second quarter 2019 adjusted EBITDA.
I would now like to turn the call back over to Ron for closing comments.
Thank you, Ben.
Please turn to Slide 13. We are pleased with our second quarter and year-to-date results which were in line with our expectations and we're positioned for an improved second half. As discussed we have made substantial progress in our realignment efforts in the first six months including important actions within the APT segment that should position the segment for a long-term success. We have more to give and while the organization is focused on operational execution, we are also seeing customer benefits begin to materialize.
The order book is growing and our pipeline remains solid. The outlook for demand is stable and customers continue to view water treatment as an integral part of their operations. As Ben mentioned, water conversion timing will be a factor for the second half performance. We continue to hold a first mover advantage with our WaterOne program and our overall digital strategy is a cornerstone of our corporate strategy. While still early days we continue to see 20% of our WaterOne adoption as competitive conversions.
Free cash flow is an important priority and working capital improvement initiatives are well underway to help achieve our targeted conversion rate. We will continue to make high return, growth capital investments [indiscernible] organic revenues and profitability. We also expect to pursue strategic tuck-in acquisitions to supplement our organic growth strategy.
We will now open the call to your questions.
Thank you. [Operator Instructions] And your first question comes from the line of Deane Dray with RBC Capital Markets.
Thank you. Good morning everyone.
Good morning, Deane.
Good morning Deane.
When I first look this morning at the Applied Product Technologies top line a little bit below our expectations, I was half expecting to hear some commentary like your peers were talking about distributor destocking and weather issues and it didn't sound like that was a factor here. But maybe just take us through some of the puts and takes? And what was the impact on distributor channel? And was there an impact on weather?
Yes. Deane, on applied products we sell through third-party channels that are primarily reps not necessarily distributors. So it's not as a distributor loading up on stock and we really didn't see that much of a challenge in weather. It really is tied more to the specific mix of projects year-over-year. What we had last year versus what we had this year, but the backlog is growing as we highlighted our order activity is very strong and we anticipate a very good back half in APT.
That's real helpful. And then, can you expand on your comment on pricing and more traction there and where does that stand today and an expectation of pricing contribution to your top line this year?
Sure. We made continued progress on pricing in fact our price cost in the first quarter of the fiscal year was roughly neutral. Price got on top of cost in the second quarter of the fiscal year; we were pleased to see that. And we expect that to continue ramping as we go into the back half as well.
Great. And just last question, it's a bit more forward looking if I could. Lots of focus in the water industry on remediation efforts really nationally on PFOS. And the way we look at all the treatment technologies and who would potentially benefit or have a solution. It looks like Evoqua is nicely positioned both with your ultra filtration capabilities Memcore, but also deionization is not going to be one treatment technology that looks like you've got a number of the ones that would look to be most effective. Where and how do you think a Evoqua would be positioned and getting any early traction on this. And what do you think the opportunities are?
It's a great question. This is a growing challenge as you know in the industry and the market as a whole. The very nice position that we sit in is, we have a full suite of technologies to address this. And we've got a growing pipeline because we look at it whether it's activated carbon of which we're reactivating it and in most cases, you destroy the PFOS and the reactivation with heat all the way through to resin ion exchange concentrating it up with RO or U.S. We've got a full suite and we're positioned very well not only in providing the treatment technology, but providing the vessels and the capability to do it in both a fixed or a mobile application.
Great. We'll pay attention to that. And then I've got to congrats you guys on that digital award that's a big deal.
Thank you, Dave. I really appreciate it.
Thank you. Your next question is from Nathan Jones of Stifel.
Good morning everyone.
Good morning, Nathan.
Good morning, Nathan.
Just starting with guidance here, 3Q guidance is a bit below where we're expecting and know where consensus numbers were. Can you talk about the inputs there, timing, mix, how that impacts the 3Q guide. Would you say you're currently tracking towards the low-end of the full year guide or do you have enough visibility into 4Q that you think you can get into the top off of that guidance range?
So we reaffirmed our guidance. And so we're within the range and we feel confident about our reaffirmed at this point based on what we see. The business inherently always has quarterly variability as Ron discussed and we discussed on, in our opening remarks.
In terms of the 3Q guide we're looking at the roll forward of our backlog and when do we expect that to convert as we noted on the earlier comments, our order book is very strong. But we also look at that and say once the timing of that based on customer demand schedules and when do we expect that to convert that is all factored into our guidance.
Okay. Then, I was interested Ron, you said that 20% of WaterOne installations are still competitive takeaways. Can you talk about how that's progressing, where do you think that number should increase as we go forward by a more competitive takeaways? And any interest you've had from outside of those targeted ultra pure water markets that you were going off to begin with that might be starting to increase that your view of what the addressable market is for that product and service?
Yes, Nathan. Thank you. That's a great question. We anticipate that the ramp up will continue in the competitive takeaways. We see a real unique value proposition that we're bringing into the market by going to a subscription based model where our customers are actually playing for quantity of water used or quantity of water treated. We've been primarily focused on process water to-date. And we continue to focus on the process water area because that's ultimately where the customers are most concerned about quantity and quality on a steady flow rate.
We are seeing an opening in some of the wastewater side of the business in industrial wastewater primarily where they have an interest in seeing recycle reuse brought back into the process water side. And ultimately is driving growth in the sustainability efforts that a lot of our customers are going after as well. So, we're focused for the next two to three years as we anticipated early on and we've articulated around converting the business that we have on service DI and process water. But ultimately we'll see this continue to deploy much more broadly across the full spectrum of the water applications in the industrial space we've built.
I mean you guys I think started with an idea that this was $1 billion addressable market somewhere in that range. Do you have any indication of what you think that could grow to other time?
We're kind of staying with our initial thesis around this, until we continue to deploy it and evolve it more deeply. We're still early days in this Nathan. But I do believe it's got a vast expansion opportunity across a more broad market. Ultimately you can get customers data, but if it's not something that they can act on, it's just a nice to have. So being able to provide them with quantity and quality against a defined influence is where they get value out of it. So as we can continue to drive that the opportunities for the market to expand and obviously we are there.
Great. Thanks very much for taking my questions.
Thank you.
Thank you. Your next question comes from Pavel Molchanov of Raymond James.
Thanks for taking the question. At the very end of your comment, you mentioned that you're still on the lookout for bolt-on M&A opportunities. I guess at this point, it's been almost a year since you last made an acquisition and obviously you've been in restructuring mode for a lot of that time. I'm curious, if you're now getting kind of back into the comfort zone of where you could realistically begin to pursue M&A after that transition in the past year?
Pavel, we are. And I appreciate the question. We wanted to complete the realignment. The realignment is well under way as we defined in the opening comments. Once that has been completed and we're starting to see the synergies of the organization come together and the integration of the more than the 12 acquisitions we've made over the past two years which we've seen. And we're yielding the benefits from those we are in the position to identify additional tuck-ins. We have a very long list of them as we have historically. Then, we're mostly focused around product portfolio expansion.
So that's the area that we're focused on and I would say we're back in the mode that we anticipated to be in at this time.
Okay. That's clear. And given that this entire week market's been thinking about little else other than tariffs. I thought I would raise that issue as well. Last year you blamed tariffs as one of the causes for margin compression. Now that curbs on a lot of Chinese products have increased from 10% to 25%. I realize it's kind of breaking news here, but any thoughts dive right off the bat on what this means for your business?
The majority of our products that we are acquiring from China were already at the 25% range. So we don't see this being a first line challenge for us. The more difficult challenge will be components suppliers that we purchase from that purchase from China that may see movements. It's early days to know what that's going to look like, but we don't see it being a strong impact on the back half of the year.
All right. Appreciate it.
Thank you. Your next question is from Andrew Buscaglia of Berenberg.
Hi, guys. Just to go back to the guidance, you're applying Q3 a little bit muted, but then ramp in Q4, can you go into maybe some detail on the orders that you got that gives you confidence that they're going to roll-off what kind of types of things are in there? And how at risk would it be that that doesn't transpire/
So three factors, if we break this down, price actions, cost realignment benefits and line of sight opportunities that are typical within our backlog, there's nothing in there that's atypical of historical periods. These are typical types of projects both in terms of outsource water projects services as well as capital projects rolling through the backlog.
Okay. And with regards to the --
I think and if you go back and look at 2017, if you look at the years, we put the quarters out there. And you can see that it changes depending on the year, the quarters vary as we talked earlier. However, if you look over several years, you can see that this year's going to be a little bit like 2017 in terms of the quarterly rollout.
Okay. Yes. That's helpful. Okay. And with the expected benefits, are you able to weight those, I feel like when those are going to flow through and also into 2020, what of the remaining benefits will flow through then there's any kind of help that we can piece that together?.
So, yes, it will be most significant in Q4 in terms of the benefits. But effectively in line with what we previously communicated.
Okay. Communicated. Okay.
We contemplated that in our guidance.
Okay. Great. Okay. That's it for me. Thanks.
Thank you. Your next question comes from John Walsh of Credit Suisse.
Hi. Good morning.
Good morning, John.
Hey. So just a question around EBITDA margin expectations, so appreciate the guide on Q3 adjusted EBITDA, but just trying to level said everybody here, if we were to think about what the Page 4 chart looks like next quarter and Q4 should we anticipate that there's maybe one more step -- modest step down on the 12-month roll, or do you think the 15.5 on the 12-month roll is the bottom here for the year? I'm sorry the 15.5, I misspoke.
So we should start seeing for the next two quarters, I want to go into the quarters. As you can do the math based on our guide we start seeing our EBITDA margins improved sequentially, okay? And versus the prior years if you do the math on that as well, you'll see that we'll see a modest very slight tick up to flat in Q3, but then Q4, you'll see that we should start to see a flattening and we won't see continued decline, we'll start seeing a flattening based on the guide.
Okay. Thank you. That's helpful. And then, maybe just a conversation around the leverage, it's been I think very topical this morning. You have that kind of go longer term out there, I think that the 2.5, but how should we think about the progress and we're kind of maybe leverage ends this year in your model maybe on a net basis as well…
Because it's certainly higher than first. So, we should start seeing leverage improve based on second half EBITDA improvement.
And I guess I understand the math on that because you give the guide, but just how do we think about it coming down from here kind of the piece of progression, any color around that?
We have a three-year goal -- three to five year goal bringing our leverage to the 2.5x range within the next three to five years. And again, that'll probably depend on acquisitions but that's our long-term stated goal.
Okay. Thank you.
Thank you. Your next question is from Andrew Kaplowitz of Citi.
Hey, good morning, guys.
Good morning, Andrew.
Good morning, Andrew.
Ron, you've mentioned before that your higher margin service revenue will improve in the second half of '19 following some of your larger capital inflation. Can you give us some more color on what that ramp up might look like at this point? I think look at the [LPM] [ph] service revenue, it grew about 5% for you in Q2, but most of that was probably a higher mix of service from coaxial. What was organic service go through in the quarter, and could it be mid single digits in the second half of your fiscal year?
Yes. So typically what we see is a lot of our historic growth rates in the service business Andy, so kind of that 4% annual growth rate around the service revenue as a whole. The benefits we have is, we have some of the larger capital installations that have gone through and they will have a follow on service on the backside of that. The installations obviously are bigger volume hits when they come. And then, as they level out the growth rate on the services are quite as high because it's carrying out over a year and you're charging over the month. So it takes a while for it to the lap itself.
But, a lot of the service applications we've gone into has been around some of the power industry with ash pond dewatering some of the opportunities with wastewater services that are there that follow on with mobile applications that come behind that typically our longer term service contracts that in some cases can stay in between a year to up to 10 years.
Okay. That's helpful. And then, Ron you've been talking about this move to industrial wastewater now office for a while mentioned it today. How much is it helping your organic bookings and values as in, is it possible maybe for Ben to give us some more color on the backlog coverage that you have in the second half of the year what's the backlog up year-over-year as we sit here today?
Yes. I'll say briefly on just what we're seeing in order as far as where it's coming from and let them talk a little bit about the backlog and work overages. But, we have -- the order rate has been very strong as we discussed in the opening remarks and they continue on. There are some very nice sized projects around wastewater, wastewater recycling a lot of that is coming from the food and beverage industry that we highlighted earlier. We're actually seeing some of that bleed over into areas like microelectronics where companies are very interested in minimizing their liquid discharge and we are in a very unique position to have a full product portfolio to be able to do that. So not only are we seeing the process water start to build, but on the back-end when you need to recycle and reuse the water, you're adding variability under the process water side by bringing a recycled wastewater in. So it gives us a benefit where a customer come to us as a full service solution provider and it's showing actually in our order rates that we're very pleased to see. I will Ben comment a little bit on the backlog.
Yes. So, we don't disclose order rates specifically, we provide some color so, obviously by not doing that it's difficult to get into backlog. I will say this is that we're in line with traditional norms.
And if I could ask you to clarify one other thing then you've had a write-off from products that you talked about this quarter. We've got in association with realignment or something else?
It was the realignment that we're looking at our footprint and as we now have Evoqua's business on SAP that gives us opportunities to truly integrate them into the business and also the visibility we have into the business is far greater than we had in the past. And so, as we looked at all that we have to be able to scale this business going into the future. And so we took the opportunity to address some of the inefficiencies where we had in the business particularly with regards to a consolidation of the warehouse.
Okay. And as we did that we obviously looked at product rationalization and simplification for the key products that we make money on versus the ones that we don't want to participate in the future.
Thanks for that.
Thank you. Next question is from Brian Lee of Goldman Sachs.
Hey, guys. Thanks for taking the questions. Just maybe going back to APT for a second just based on some of the earlier commentary, is it fair to characterize it as really being all or mostly tough comps in APT that led to some of the weaker top line optics here? And then, is it fair to expect that APT gets back to positive growth starting in fiscal 3Q, and then, just related to that in terms of the end markets or product categories? Can you give us a little bit more color on where specifically the APT order book is seeing the most strength here?
Sure. So I would say it's yes on both of those. Brian that you said, so it is fair to say it was tough comp last year. And it's fair to say that in the back half of the year we're going to see a pickup because our order rates actually are demonstrating that as well. Some areas across APT that we're seeing nice quarter bookings come in, our disinfection business anodes business, the wastewater business we have very good year-over-year order increases and water opportunities for the back half this should be executing on.
Okay. Great. That's helpful. And then, just on the price cost side, I know you guys have been sounding more positive on that over the past few quarters and it's back to being in positive territory, so it sounds like you've budgeted for the increase in tariff up to 25%, but just as we think about price cost and some of those trends off the levels you're at here in that new environment, does it hold here, or do you see that trail-off as we kind of move into the back half of the year for you guys? Thanks.
We see it holding even with the announcements that have come out today. We see this holding into the fourth quarter as we forecasted and have built it into the models coming forward. And we think that as we talked about first quarter was a parody, second quarter we got momentum on it. We see that ramping up through third and fourth quarter.
Okay, great. That's helpful. Thanks.
Thank you. Your next question comes from Joe Giordano of Cowen.
Good morning, guys.
Good morning, Joe.
On the guidance here on the EBITDA, so just curious as to how that third quarter or fourth quarter split is compares to how you would have thought that cadence looked three months ago? And if there was a shift, when did it start happening and just how do you and you get to the rest of spillage and further push out into 2020 and some of that stuff?
We don't provide quarterly guidance at the beginning of the year. Obviously, we look at things on an annual basis and we have pretty good visibility each quarter as we go into that, we look at that backlog and say how is that materializing? So it's -- I don't know that's materially different than the way we saw it at the last quarter and the beginning of the year, models are models from the analysts that we always take a look at them. But we also look at our internal forecast. But things do shift based on customer demand and timing as we've already highlighted. If you think about -- I don't know Joe, you're asking about what do you see revenue in third quarter.
No, I'm just curious like when I know you have your own internal like how you thought the year is going to play out. I'm curious when did that, if end, when it started to like see you guys that it is probably going to be a little bit more fourth quarter weighted. When did that start to become clear to you guys?
Joe, I think we had anticipated it being fourth quarter weighted already because of what we saw in the order activity the backlog and also the benefit of the two segment realignment [constant four] [ph]. We rolled out the year, we communicated early on that we anticipated seeing the benefits from the realignment actually beginning in late in the last half of the year and certainly that was toward the fourth quarter.
Fair enough. And then, just curious on the free cash flow bridge and your guide obviously has upside to 80%, but given you're at 113 year-to-date, what kind of changes in the back half to bring that year-to-date down?
We're not looking to bring it down, but we're sticking with a 80% plus guide.
Okay. Thanks.
Thank you. That concludes our question-and-answer period. I'll now like to turn the call back over to Ron Keating for his closing remarks.
So, thank you for joining us today. It's always a pleasure to get together and discuss our quarter performance. Again as we highlighted, we're pleased with the progress we're making on behalf of certainly the management team and the Board of Directors. I want to thank all the employees of the Evoqua for the hard work and delivery in the first half of the year and we look forward to a very strong back half.
We were awfully proud to be able to become the digital water company of the year and we see that ramping up and the success continuing as we deploy that strategy more broadly across the marketplace. So thank you all for joining us and we'll speak again next quarter.
Thank you. That concludes today's Evoqua Water Technologies second quarter 2019 earnings conference call. You may now disconnect your lines at this time and have a wonderful day.