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Hello, and welcome to the Evoqua Water Technologies Fourth Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. After the speakers' opening remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, this conference call is being recorded, and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time. Thank you.
I would now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.
Thank you, Britney. Thanks everyone for joining us for today's call to review our fourth quarter and full year 2021 financial results. Participating on today's call are Ron Keating, President and Chief Executive Officer; Ben Stas, Executive Vice President and Chief Financial Officer; and Snehal Desai, Executive Vice President and Chief Growth and Sustainability Officer. After our prepared remarks, we will open the call to questions.
This conference call includes forward-looking statements, including first quarter and full fiscal year 2022 expectations, statements relating to demand outlook in our end markets, growth opportunities, our order pipeline, our acquisition strategy and pipeline PFOS and infrastructure related legislation, supply chain challenges, inflation, general macroeconomic conditions, our goals relating to our own greenhouse gas emissions and water reuse and statements related to the ongoing impact of the COVID 19 pandemic.
Actual results may differ materially from expectations. For additional information on Evoqua, please refer to the company's SEC filings, including the risk factors described therein.
On this conference call, we'll also have a discussion of certain non-GAAP financial measures. Information with respect to such non-GAAP financial measures is included in the appendix of the presentation, which can be obtained at Evoqua's Investor Relations website. Unless otherwise specified references on this call to full year measures, or to a year will referred to our fiscal year which ends on September 30. Means to access this conference called 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'd now like to turn the call over to Ron. Ron?
Thank you, Dan. And thank you all for joining us. I appreciate your interest in Evoqua and I'm happy to give our overall highlights. As Dan mentioned, I'm joined by Ben Stas our CFO who regularly participates on these calls. And today I'm also pleased to have Snehal Desai, our Chief Growth and Sustainability Officer join me. Snehal will discuss some highlights on the PFAS landscape and our progress on sustainability.
With that we'll get started, please turn to Slide three. We closed a very solid year with a strong fourth quarter performance. Market demand continues to be robust as customers are increasingly turning to Evoqua Solutions to solve their most complex water challenges. On today's call, you'll hear how we're investing in technology, product innovation and sustainability initiatives. We will also talk about the upcoming year and why we're pleased with our position, the long-term growth opportunities and our expectations to create significant shareholder value.
In Q4, we had a very strong broad based organic revenue growth across both segments and our book-to-bill ratio was north of one. Price costs was positive for the quarter, despite ongoing inflationary pressures on materials inflate. Supply chain constraints are impacting visibility and availability. But today we have successfully navigated through a very dynamic period. I would like to thank our supply chain teams for an outstanding performance.
Our working capital performance and cash flow showed additional improvement, as there are overall balance sheet strength. Our net leverage ratio came in at 2.5 times which is at the low end of our targeted range. Our M&A pipeline is quite active and we expect to supplement our organic growth initiatives over the coming year.
Please turn to Slide four. I wanted to take a moment and highlight these six key financial metrics that reflect the progress the team has made over the past four years as a public company. As a customer centric innovation driven company, we're focused on profitable growth and a strong balance sheet allowing us to better serve our end markets. We've seen excellent improvement across our results. Even through the pandemic and we're continuing to invest to serve our strong and growing market more effectively. We're well positioned to tackle complex water challenges, while delivering sustainable solutions that our customers value as evidenced by our growing backlog.
Please turn to Slide five. This chart represents Evoqua's first quarter order expectations by end market relative to the prior year's first quarter. We continue to see growth across most of our end markets. Three end markets, chemical processing, municipal drinking water, and refining marine show neutral to slight declines in expected demand due to challenging for our year comps. Overall, we expect market demand to remain quite strong throughout the 2022 fiscal year. We'll be happy to address questions about specific end market drivers during the Q&A section.
Please start Slide six. During our calls this year, we plan to select an end market and provide insight into the solutions we provide and why it is important. Microelectronics is one of our core vertical markets and it’s an attractive end market with growing demand across many geographies. We support multiple applications in microelectronics that utilize UltraPure process water and increasingly wastewater treatment and printed circuit board and chip manufacturing.
Sustainability continues to take a prominent role for the semiconductor companies and as they look to reuse, reclaimed and recycled water, they're partnering more closely with Evoqua. We provide multiple offerings to the semiconductor manufacturers as well as the upstream suppliers through both ISS and APT. ISS focuses on selling integrated process and wastewater solutions, while APT sales products components and technologies for printed circuit board UltraPure process water requirement.
Our Ionpure brand is a leading edge technology for the industry. And in a few minutes, Dan will provide insight into new innovations with the announcement of Ionpure Ultra.
Please turn to Slide seven. This represents our quarterly revenue and adjusted EBITDA on a rolling 12-month basis since 2017. Highlighting the resiliency of our business. Our overall revenues have grown at a compounded annual rate of 5%, with adjusted EBITDA growth over 8% during this time. Currently, our service business comprises 41% of our trailing 12-month revenues, while service and aftermarket combined make up approximately 60% of our business.
Please turn to Slide 8. Evoqua celebrates the passage of the Infrastructure Investment and Jobs Act and the 55 billion in funding that it makes available for clean water. This legislation is historic in size, marking the single largest investment in water infrastructure that the federal government has ever made. This funding will be used for modernizing water infrastructure, replacing lead service lines and addressing emerging contaminants namely PFOS and our water system. In addition, the final bill requires the EPA to set maximum contaminant levels for PFOA and PFOS in drinking water within two years of enactment. I would now like to turn the call over to Snehal, to discuss the PFAS roadmap and Evoqua's progress related to sustainability.
Thanks, Ron. Please turn to Slide nine. The US EPA recently announced its PFOS strategic roadmap, which presents the Biden Administration's all of agency plan for regulating and progressing PFOS related actions over the next three years. This roadmap includes some important timelines around plan regulations, namely the establishment of a national primary drinking water regulation for PFOA and PFOS and the designation of certain PFOS as circular hazardous substances by 2023. The full roadmap is available on the EPAs website.
As Ron previously noted, the infrastructure bill requires the EPA to regulate PFOA and PFOS and drinking water within two years. This requirement matches and further solidifies the timelines included in this recently announced roadmap,
Please turn to Slide 10. In lieu of a federal regulation for PFOS the patchwork of state based standards has formed nationwide. As you can see on the right hand side of this slide, these standards and regulations vary widely state-to-state based on numerous variables, including the number of regulated PFOS chemicals as well as the enforceable concentration level.
Despite the federal regulations pending for an expected effective date of 2023. Many states continue to develop state based regulation. For example, following the federal EPAs announcement of the PFOS strategic roadmap. Washington State's Department of Ecology announced their decision to list PFOSS compounds its hazardous substances under the State Cleanup law, the Mono Toxic Control Act. This follows the Washington Department of Health August 2021 proposed rule to set state action levels for five PFAS compounds in drinking water.
Evoqua's emerging contaminant program continues to support our core sustainability value by helping our customers with their sustainability goals related clean water. In addition, Evoqua continues to invest in treatability assessments and technology pilot testing for our customers, which I will discuss in more detail.
Please turn to Slide 11. We're pleased to announce environmental footprint goals on climate action and water reuse. In an effort to reduce our greenhouse gas emissions, we plan to set science based targets by 2023. This is an important step on our journey towards reaching our goal of net zero greenhouse gas emissions by 2050. We will set science based reduction targets in line with the Paris agreements 1.5 degrees C-pathway to prevent the worst effects of climate change.
As a water technology company that plays a key role in helping our customers build sustainable water systems. We're also committed to driving water reuse internally. By 2035, we aim to reuse more water than we withdraw from source. To do this, we will create water management plans for our facilities to increase efficiency in their water usage and implement additional water recycling and reuse initiatives. Water is our business, so we will use many of our own solutions and expertise in our effort to achieve this goal.
In line with our commitment to sustainability, we have also implemented a few changes to our compensation structure to further integrate sustainability into our strategy. Our fiscal year 2022 annual incentive program will include safety performance and water reuse targets, each way did it 5%, in order to align our incentives with our sustainability objectives. Evoqua is committed to driving a technology driven customer centric culture along with a broad portfolio of sustainable water treatment products and solutions.
We're investing in our commercial organizations and leveraging business development strategies across customer vertical markets to drive profitable revenue growth. Digital optimization of these solutions will be a central component of the strategy.
In October, we opened our sustainability and innovation hub in Pittsburgh that will help us accelerate our ability to develop innovative and sustainable water treatment technologies. We have the capability to perform pilot testing, training and demonstrations of real world applications in collaboration with strategic partners. We're very pleased to have this state of the art facility now.
Please turn to Slide 12. Our business model is to transform water and enrich life each and every day. We have highlighted two customer handprint winds featuring APT and ISF solution. In Singapore, we're providing APT component technology for an agriculture farm to filter and disinfect rocky water to improve water conditions in support of fish health.
APT is providing the equipment, remote monitoring, and preventative maintenance over the life of the contract. The customer avoids additional CapEx costs and solution, and this allows them to focus on their core business. Our water purification system will help the customers fish farm produce unexpected 350 tons of sea bass and red snapper in.
For the second win, Evoqua had a significant experience in wastewater technology. And we are responding to a broad and growing number of treatments system opportunities. Renewable natural gas demand is growing and we believe we are positioned to respond with our ADI, Anaerobic Digestion technology. Evoqua with technical expertise and core competencies were key components in delivering a solution that allowed the customer to reach their requirement of minimum liquid discharge. This facility will generate an attractive ROI for the customer, saving them approximately $1 million annually.
I would like to turn it over to Ben.
Thanks, Snehal. Please turn to Slide 13. For the fourth quarter reported revenues were up 11% to approximately $426 million. Organic revenues grew 9.5%, with both segments contributing to growth. Service capital and aftermarket revenues grew supported by pricing initiatives across all offerings. We also saw all regions growing revenues versus the prior year.
Fourth quarter adjusted EBITDA increased 8.3% to $81.9 million for an overall margin of 19.2%. Price costs and product mix improved profitability. Price costs was favorable for the quarter by approximately 2 million. Increased service volume benefited margin expansion, but was offset by higher material cost freight and operational variances and higher operating expenses from labor inflation and travel,
Please turn to Slide 14. For the full year reported revenues were up 2.4% to $1.4 6 billion. Organic revenues were up 1.6% driven by higher capital sales in the APAC and EMEA regions, higher service volume and favorable price realization. Capital revenues were lower primarily due the timing of prior year projects in the microelectronics end market and sales in the Americas due to customer site access challenges. Foreign exchange contributed 1.3% to revenue growth.
Full year adjusted EBITDA increased 4.7% to $250.9 million, favorable price cost and cost reductions contributed to the increase while partly offset by higher labor inflation and travel.
Please turn to Slide 15. Our integrated solutions and services segment fourth quarter revenues were up 12.8% to approximately $281 million. Organic revenues grew 11.5% over the prior year. Favorable price realization and higher volumes across capital service and aftermarket drove the improvement over the prior year.
Our digital strategy continues to make solid progress. Revenues were up approximately 15% in the quarter, and for full year. Adjusted EBITA increased 16.9% to $71 million due to higher volume, favorable price costs mix and productivity improvement. Adjusted EBITDA margin for the quarter was 25% of 80 basis points from the prior year.
Please turn to Slide 16. We continue to see strong year-over-year growth in ISS backlog. Overall backlog was up $107 million or 17% over FY '20 with a significant percentage of that growth coming from both capital and outsource water orders across multiple markets including microelectronics, power, marine and pharma. Our pipeline continues to be robust with both service and capital projects. We expect to see our book-to-bill ratio remain above one throughout fiscal 2022.
We did an outstanding job of increasing backlog in light of booking our largest ever order in the fourth quarter of FY '20. In late September, we placed a presentation on our Investor Relations website and titled Deep Dive into outsource water and digital enablement transformation. I encourage you to take a look at this instructional presentation that will help you understand important drivers to ISS backlog.
Please turn to Slide 17. Applied Product Technologies fourth quarter revenues were $145 million up 7.6%. Organic revenues increased $7.8 million or 5.8% driven by favorable pricing and mix. Revenues grew across all regions. Foreign currency positively impacted revenues, approximately 1.8%.
Adjusted EBITDA for the quarter increased 1.2% to approximately $33 million. Adjusted EBITDA margin decreased 140 basis points to 22.9%. Operational variances resulting from supply chain challenges, including warranty reserves and production variances impacted adjusted EBITDA margins in addition to higher labor inflation. Our price costs and strong revenue volume favorably impacted profitability.
Please turn to Slide 18. One of APTs long-term organic growth initiatives is to develop new offerings that further our portfolio of sustainable products and to pursue market share gains in core markets. Each quarter, we've been featuring a new APT product innovation and we're pleased to highlight the VNX Ultra. The VNX Ultra builds on of our well established Ionpure product line to deliver a more efficient solution to supply UltraPure water specifically targeted for the growing microelectronics market.
The VNX Ultra reduces complexity by achieving a higher quality water in a single pass versus a traditional double pass process. The module reduces the need for mixed media ion exchange resins simplifying operations while ensuring over 99.9% removal of constituents such as boron, which reduces semiconductor yields.
Please turn to Slide 19. Capital spending primarily for outsource water orders was approximately $21 million for the quarter and $75 million for the full year or approximately 5.1% of revenues. Fourth quarter net working capital was 10.3% of LTM sales, an improvement of 220 basis points over the prior year and a 200 basis points sequential improvement from Q3.
Since 2019 we've improved net working capital to LTM sales by approximately 600 basis points. I'd like to thank our Evoqua team for the outstanding performance in managing working capital. Over the long term, we anticipate net working capital to sales could now be in the low teens versus the previous mid-teens expectation, given some projects may have varying amounts of working capital requirements.
Please turn the Slide 20. Operating cash flow was $179 million in FY '21 versus $177 million in the prior year. We continue to maintain a strong focus on cash generation. Adjusted free cash flow as a percentage of adjusted net income continues to be well above our 100% conversion goal at 181% for FY '21. This is the third consecutive year of cash flow conversion above 100% and the fourth consecutive year of increasing annual operating cash flows.
We have significantly strengthened our balance sheet throughout the pandemic. We now have $449 million of liquidity and improvement of $144 million over the prior year. Our net leverage ratio finished at 2.5 times adjusted EBITDA. We have reduced net leverage by 1.3 turns and reduced our net debt by approximately $260 million over the past two fiscal years.
We are now at the low end of our targeted leverage range of 2.5 to 3 times. As Ron mentioned, we have an active M&A pipeline and the financial strength and flexibility to fund organic and inorganic growth strategies. Our weighted average cost of debt for the fourth quarter is approximately 2.7% an improvement of approximately 70 basis points over the prior year. Year-over-year reduction is driven by a combination of reduced debt levels, lower rates and a shift of debt to lower cost facilities. We've reduced our annual cash interest expense to $26.5 million in FY '21, a reduction of $12 million from the prior year and a reduction of $26 million from FY '19.
Please turn to Slide 21. Two key long-term financial targets are 3% to 5% organic revenue growth, as well as 20% adjusted EBITDA margin. This graph shows our performance since 2018 for both metrics. As you can see our annual organic revenues and adjusted EBITDA margin have grown throughout the pandemic. We have a business model that has proven its resilience in a very turbulent period, and we believe we have significant opportunities for long-term growth.
We have highlighted some of the revenue growth opportunities, as well as levers we expect will help us achieve our adjusted EBITDA margin target. We have high expectations as we look to the future, the world is facing acute challenges related to clean and available water. These problems are expected to intensify as climate change undoubtedly compelled the water industry to accelerate innovation and create additional treatment capacity.
The investments we've made in our people, technology, footprint and operating capabilities of physician Evoqua to help make the world a more green, healthier and safer place to live.
I would now like to turn the call back over to Ron. Ron?
Thank you, Ben. Please turn to Slide 22. As we look to our new fiscal year, we're working to align our outlook across many favorable tailwinds while managing the market uncertainties. As previously mentioned, we expect to see continued broad based demand and building momentum across the majority of our end markets. Our ESG journey is accelerating, which is important driving our pipeline of capital and outsource water opportunities. Regulatory changes at the federal, state, and local level and the recent passage of the infrastructure bill should also provide a favorable backdrop.
Supply chain disruptions and labor availability are expected to limit visibility for the year and may cause some order conversion timing delays. Increased material and trade inflation pressures are expected to remain. We have provided key assumptions for our full year outlook on Slide 26 in the appendix.
Please turn to Slide 23. In closing, we’re very pleased with the performance of the business in the quarter and for the full year. Our pipeline remains robust as demand is strong across most of our end markets. Supply chain constraints and inflationary pressures remain as we look to the New Year and beyond. We have navigated these choppy waters to-date, and we have become a stronger and more resilient organization as we respond to and manage these challenges.
The management team is focused on driving profitable growth and our balance sheet has never been stronger. We're investing in an organic revenue drivers margin expansion initiatives and also expect to execute on identified accretive acquisition opportunities. For the full year, we're giving balanced expectations for revenue and adjusted EBITDA to be in the range of $1.50 to $1.58 billion and $255 million to $275 million respectively.
For the first quarter, we expect revenues and adjusted EBITDA to be aligned with traditionally seasonal experiences over the past two years. We have provided a summary of quarterly revenues and adjusted EBITDA from 2018 to 2021 on slide 27, in the appendix.
I will now open the call for questions.
[Operator Instructions] And we will take our first question from Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone. And nice, strong finish to the year.
Good morning. Thanks, Deane.
Since we have Snehal on the line today as well, first question on PFOS and I and I appreciate coming in the past couple of years, we've seen all kinds of opportunity for Evoqua to address your customer PFOS issues. You've always kept commentary quite measured. And so now with the passage of the infrastructure bill with money, earmarked specifically for PFOS, how do you see this translating into your sales line?
It will be a state-by-state basis, what might the timing be? Are there projects that still need to be scoped? Because it really, this is all now coming together nicely. You're already positioned here. You said you have enough capacity, but now there's funding. So how does this translate into the P&L opportunity? Thanks.
Thanks for the question, Deane. And actually, as I was stating inside of the commentary, it's been very positive to see that the new infrastructure bill actually called out specifically in funding for PFOS. But, we've seen state-by-state progress going on over the last couple of years. And given the three-year timeline that the EPA has for setting these limits, I think that really where we're getting to right now as we continue to see some work at the state level. But frankly, they're going to be still waiting to see what those limits are.
So where there are elite and acute challenges, we continue to see opportunity in our pipeline. And actually this signal now that money will start to flow will start to give everybody the encouragement to start their engineering work and really start to focus on deployments. And we're still looking at minimum two years out, obviously, with those MCLs that more of the action in the three to five-year period.
Great. And then just as a follow-up for Snehal, are there any technology gaps? Right now, from our perspective, you have all the core technologies to address remediation of PFOS, but it's an active area, a lot of innovation, do you have all the right technologies? And then I've got a follow-up for Ben, just on free cash flow, just outstanding year at 100 -- over 180% conversion? Any commentary about 2022 guidance on a free cash flow basis? Especially on the work you've done in working capital sales?
Yes, let me start Deane off there. And just to your question on, how do we sit with solutions, where we are and continue to be well positioned with the solution set here, both with our absorbance and carbon technologies, but frankly, all the solutions that we are seeing deployed in the market.
I think the other thing to point out is number one with the moving landscape, we've had more customers talk to us about mobile solutions, solutions that can actually be transitioned as the limits change. So that's actually emerging. And then just as I pointed out in the commentary, the opening of our sustainability innovation hub allows us to continue to keep a finger on the pulse of some new and emerging technologies, because as you can imagine, with our suite of solutions and our proximity to customers, many of these new types of treatment technology companies are coming our way. So we're working and checking those out as well. So I think we're well positioned as we are today. But we are more than capable to expand our solutions that as they come forward. So I think we're in good shape.
And Deane, this was Ron just one comment to that as Snehal highlighted. We've invested heavily in our mobile fleet over the last couple of years. So being able to respond and react very quickly to individual application challenges that customers are having we can do. And then as MCs are set over the next two years, and the treatment standard is well known, we can then define the permanent solution to go in.
And on cash Deane, we feel very strong about being able to stay into the 100 plus percent range on conversion, we've lowered our working capital expectations from mid to low teens as a result of the work we've done. So we feel good about being able to potentially exceed that 100% goal in '22, I think that the thing we have to keep our eye on is inflationary pressures, and how that impacts inventory in addition to various types of supply chain constraints, and which will be holding some safety stock, but expect another strong year and free cash flow conversion point going to.
Appreciate all the color. Thank you.
And we will take our next question from Nathan Jones with Stifel.
Good morning, everyone. I just wanted to start off on some of the commentary around APT that you had in this slide. Talking about operational variances, supply chain challenges, project variances that hurt AAPT margins. And I think we can see that in the decline we've seen in the incremental margin tear over the last couple quarters. So just hoping that you can talk a little bit more about what's going on there, what the strategies are to get around it. And it looks like from the incremental in 2022, that you're kind of assuming that some of those challenges are going to persist, at least for part of the year?
Yes, so Nathan, I'll start and then I'll give it to Ben for a little more color. On the APT side, you'll if you'll remember, that's our most global business. So in that we're dealing with supply chain challenges around shipping around logistics, just being able to move the materials as efficiently. As we've highlighted, labor and freight challenges and constraints, as we dealt with, the team has done an outstanding job of being able to manage through making sure they have the right inventory at the right locations, and they're able to meet customer demands.
So we're continuing to meet our customer demand, make sure that we are satisfying the needs of the market there just as you do that, in the kind of environment we're dealing with now, there's a little bit of cost pressure that we're dealing with, but the margins in APT as you know, over the past couple of years has really improved significantly and we anticipate that to get back on track and inside of '22. Ben do you have comments.
Yes, no question about it, where we are experienced and transitory supply chain challenges, particularly with some of our suppliers and alternative suppliers that the team has been effectively dealing with. This segment is hyper focused on quality, and making sure that we are always have pristine quality to our customers. And as our some of our suppliers have been reopening, we have experienced some challenges in those areas. Again, we expect it to be transitory, and we've put a lot of programs in place to review and inspect them supplier quality to make sure that we transition out of these challenges quickly and efficiently.
And that they are embedded in the guides is assisting for at least a few quarters here?
Yes.
We may build on that and do better. But at this point in time we have factored in, that into the guide.
Understood and the responsible way to go about it. I wanted to talk about strategic pricing a little bit, you guys have been talking about strategic value based pricing as a lever to improve margins. Maybe you can just talk a little bit about what progress that you've made on that initiative, your price cost positive in 2021. And should we expect to see value pricing start to have a positive impact on the margin profile once we get through all of this noise from COVID induced supply chain challenges?
Nathan, thanks for the question on that. We made great progress on this. In fact, we've put a lot of effort, a lot of initiatives around the pricing and price realization getting to market those pricing versus cost loss. And it's proving out very well. I would say that if we weren't experiencing a little bit of the hyperinflation that we're dealing with around not only component cost, but labor and trade inflation.
We would see that falling through already but we're trying to be very balanced in the guidance that we're giving for fiscal '22. I do absolutely believe that we're making great progress on this. We've got the right programs in place and the right investment in the Tools for the team to be able to execute on this as a long term strategy for margin enhancement going forward.
Thanks for taking my questions.
And we will take our next question from Mike Halloran with Baird.
Good morning, everyone. So first question, just I think kind of a follow-up to Dean's comment on the free cash flow side, obviously strong free cash flow towards the 2.5 times leverage, which is at the low end of your target range. Any thoughts to change the philosophy and capital employment? Or how are you thinking about what the M&A opportunities looks like out there today, and how actionable?
I don't think we're going to change our priorities, they'll remain the same, but we're probably going to -- we will potentially accelerate the growth element of that priority, both organic as well as inorganic. And we have, obviously a great opportunity pipeline on both fronts. And so the cash deployment will be very much focused on the growth sides, we hit in the 2022.
Yes, Mike, we're going to continue to focus on the M&A pipeline that we have around duck ends that makes the most sense. Service duck ends, product line portfolio expansion, where we have gaps and we've got a robust pipeline that we expect to utilize some of the capital deployment.
And then at a high level, you've talked for a while here about the jump off point in the next year with some of the model conversion that's happening with other backlogs translating repeatable service revenue. Just taking a step back, do you still feel the same about we're at that inflection point. And if you think about it a little bit on a longer horizon, how do you see this cadence thing playing out to get some level of normalization, or maybe a better way to put it.
Can you just put how this backlog conversion is incontinent -- put the backlog conversion concepts into context, and kind of layout how that looks as we start a new year here?
So as I mentioned, on the call, we have a teaching available on our website that really highlights a lot of that for investors. So encourage you might to take a look at that. But you're still going to see as we book these large outsource water orders, that backlog will convert over time, that will improve our cash flow that will improve our mix and our profitability. And we'll continue to see more of a conversion into the outsourced water model over time. But it's not going to be a rapid conversion, it's going to our sales mix will convert over a longer period of time.
And Mike on the outflows on Page 16, as we've highlighted where the revenue conversion timing, we still see that model holding.
Great. Well, thanks. I have seen the presentations good deck. Appreciate it.
And we will take our next question from Bryan Blair.
Thanks. Good morning, everyone.
Good morning Brian.
To follow up on Mike's question, I guess to ask a little more directly. What's factored in, or contemplated in your guides, in terms of the net impacts of your increasing service base from prior installations versus the somewhat muted economics of year one of new wins and outsource water, understanding that the ladder factors into the former and then future economics?
We've factored in what you see on page 16, that trajectory, and assume that trajectory would continue. And again, we provided more detailed in the teaching. But basically, we've looked at the past, looked at the trajectory, put slight accelerations in there to outsource water and factor that into our guide.
Okay, understood. Maybe offer a little more color on order progression into the fiscal '22 and the key considerations for the year. We have said your end market slides and provided some good commentary, all of which was appreciated. Just wondering how your team's thinking about the end markets and applications where you're most confidence and continued strength throughout the year versus some watch areas as fiscal '22 progresses.
Yes, so Brian, again, that is what we highlight on page five. And generally what we do is we highlight one quarter out, but you can look in the appendix we've got the history that it shows by end market for what's happened. What we would anticipate is the markets that I’ve highlighted in my comments around chemical processing, municipal drinking, refining marine.
Turning to green as we go through the year. Our expectation is we're going to have nice growth across all of the end markets but one that still is a question costs and continues to be a bit of a challenge market is the large scale aquatics business, that's water parks that steam parks etc. So the investment in that still in a COVID environment has been a little slower than we would see historically. But we do anticipate that normalizes over time.
Okay, appreciate for all the color.
And we'll take our next question from Andy Kaplowitz with Citi Group, your line is now open.
Hey, good morning, guys. So Ron you mentioned to expect normal seasonality in Q1, which I guess I'm a little surprised by as most industrial companies are expecting some supply chain easing over the course of the year, it was implicit in that assumption of normal Q1 seasonality you are expecting to see supply chain challenges last basically the entire year and as we sit here today, are you seeing supply chain challenges still get worse for you? Or have they started to level off at this point?
Yes, we've kind of seen them level up, Andy. That's why we're forecasting and giving kind of the normal ratios that we've historically seen. They leveled off, we've been able to manage it, as I highlighted, even on the chart around, us really managing the uncertainties in the market, around components supply, also around freight.
And we factored most of that into, we certainly factored it all into the guidance, but we've also factored it into the pricing actions that we've taken in the market. So we feel like we're in a good position, as this year goes even with the challenge supply chain markets to be able to deliver against our normal curve.
And so the way to think about it is the upper end of our guide assumes we're conservative in our supply chain assumptions. If things are better, I think the upper end of the guide becomes more realistic. But we also did not want to put our heads in the sand with regards to the challenges that we see out there and the uncertainty. And so we tried to factor that into the midpoint of our guide.
Very helpful guys. And then I know you've given us sort of the market bubbles, but maybe we could just look at the look at your capital backlog growth and really accelerated in the second half of the year. I think you talked last quarter about seeing a big uptick in microelectronic orders. So did that continue? Is that a big reason for Q4 backlog growth? Or are you really just seeing it across the board now, customer starting to feel better about getting to the pandemic industrial companies are pretty strong in their outlooks for '22. I mean, what do you see?
Yes, so we did see, as we highlighted in the last call, good response from microelectronics. But what we're seeing is much more across the board at this point. And we're seeing some robust capital demand come in, across that ISS slide, as you can see on there in the growth, and it's pretty well split across the end market that are showing is green.
Appreciated guys.
Thank you.
And we will take our next question from Andrew Buscaglia with Berenberg.
Hey, good morning, guys.
Good morning, Andrew.
I was wondering, so ISS, you're going to see, presumably that business is going to get a little bit more service intensive as the backlog converts. I am wondering how much with labor being a challenge probably how much that affects you. Is this something you need to get ahead of and hire ahead of this anticipation of, I guess being at having to service more customers more intensively over the next couple years?
Yes, Andrew, there's a few things that we're doing, we are kind of constantly watching the labor pool, watching our service tech pool, and making sure that we have a good pipeline of team members and talent coming through. But we're also changing our business models we've highlighted, we're investing much more in digital solutions and being able to be on site 24/7, with customers without actually having to be there.
So when we're able to deploy or redeploy our service techs and our service team, they're going in to fix exactly what needs to be repaired or needs to be adjusted. And so in doing that, we're gaining great efficiencies out of that labor pool and out of our service techs, we're going to continue to invest in that and continue to drive that and that's one of the things we talked about on that teaching is how much is going to digital and what the opportunities look like.
So, it's a little bit of a change in the model, as well as it is making sure that we're constantly keeping a good pipeline of service teams and members and service techs coming through.
Okay. And can you help us out on free cash flow a bit? I mean, obviously very strong in 2021. Your mind going through the puts and takes I can't imagine that would repeat again in 2022. Are there anything? -- Is there anything going away that will be a net headwind or anything that the thing about the puts and takes in the next year?
Yes, I think, we’ve focused in a lot of areas, particular shared services, and much more efficient cash conversion cycle. So those things will stick. And we will continue to get benefits from all the work in that area. On the headwind side, again, higher inflation cost, supply chain availability, puts pressure on inventory. The other key area is mix that is a bit of an uncertainty. As capital business comes in, we've been doing a really good job on getting cash up front on capital projects. But some projects have different levels of working capital requirement. And so that puts a potential for some unknowns with regards to the types of mix, they're going to come in capital.
But overall, we still feel very good about free cash flow in 2022. But we've got to keep our eye on inflationary pressures that could impact free cash flow.
All right, thank you.
And we will take our next question from John Walsh with Credit Suisse. Your line is now open.
Good morning. I just wanted to circle back to Andy's question around supply chain. So I think the six to 12 months you highlighted that's, I'll say a little bit more cautious. Maybe you'd use the term conservative. But I just want to make sure that that's macro driven, and that there isn't something specific to your business or water markets as it relates to labor availability, or a certain type of component or material that we might be missing?
John, that is purely macro driven. I mean, we're just looking at the overall labor markets, we're looking at the components supply around different geographies, and frankly, just sprayed inflation. So we're being very balanced in the guidance we're giving around macro challenges.
Great. And then maybe just a question for Ben here. So you obviously talked about that Q1 seasonality. But is there any finer point you'd like to give or provide just thinking about H1 versus H2 or anything as we should think about orders ramping through the years or costs or anything, just as we're doing our model to highlight?
Yes, so on page 27 a webcast in the appendix, we did provide our historic quarterly seasonality for FY '22 to '21 at this point, feels about right and use that as a model for as you think about 2022. That's subject to change. The business has quarterly variability, as we've discussed in the past, but cutting order max I think that works out. Okay.
I think the second half, who knows at this point time with supply chain, could it be better? Could it be worse? We'll get to that when we get to that. But for now, I would use that as a model.
Great, appreciate it. Thank you for taking the questions.
And we will take our next question from Saree Boroditsky with Jefferies. Your line is now open
Thanks for fitting me in. So you talk about the potential for order conversion see pushed out as part of your guidance. Is this being pushed from 1Q to 2Q? What do you think the revenue is actually get pushed out into 2023? And is this a supply chain issue? Are you actually seeing customers delaying deliveries?
Yes, sorry, I think it really is talking to the quarterly variability that we see inside of our typical fiscal year. And that's one thing we highlight is we have variability in quarters, but on an annual basis, it generally becomes fairly steady, fairly repeatable. And we can, absolutely be pretty confident of what we're giving around annuals. And that's one reason we don't give quarterly guidance, we have quarterly color.
The other thing I would say is, as you've seen the backlog in ISS shift and grow in the capital side, that is when you sometimes have variability and it's not whether or not we're able to get the components and deliver, it's whether a customer site is ready for us to be on and to be able to install the capital system. So we're, again we're being balanced in the guidance we're giving and talking about what could happen with order conversion.
Thanks for that color, and then just one follow-up to touch a little about the end market, I have orders that you load the municipal drinking water. Can you just provide any color and what you saw in that market today and know what's driving the lower outlook for orders?
Again, on this slide, it is our Q1 Order activity against Q1 of '21. So, if you want to '22 against Q1 of '21, and talking about the municipal drinking water bubbles specifically, we had a very large prior year order come in Q1 of '21 that we don't see that same size, single order come in Q1 of 22, although the market is robust and looks strong as the year goes on. Certainly with the passing of the infrastructure bill, this is specifically talking quarter 122 local quarter, 121.
Okay, perfect. So you're saying it's more company specific? And that kind of a comment on any end market outlook?
Yes, correct.
Perfect. Thanks for taking my question.
And we will take our next question from Steve Tusa with JP Morgan.
Hey, guys, good morning. Can you just talk about the opportunities you guys see in power, and then Muni wastewater going forward? What's going on there?
Sure. so a lot of the change in power, we continue to see investment that's being made as companies were moving to alternative energies or moving to different types of power generation moving away from coal fired power plants. Our opportunity there is on recycle, reuse, I mean, ultimately, it is doing what Evoqua does around sustainability. It's taking water that has contaminants in it, cleaning it up, putting it back into the environment, and making sure that we are enabling the power companies to close sites effectively and efficiently around that.
So as the conversion happens, from coal into natural gas into renewables, that a lot of the coal fired power plants are being taken offline. And we help you solve that. Our municipal wastewater, there's going to be investment that's going to come and we're seeing it already around plant specific action, where they're bringing it back up to the designed capacity, and back up to the design specifications. So we've got a very nice pipeline of opportunities, executing with plant direct applications around retrofit and rehab. And that really speaks to the history of Evoqua. With the more than a 100 years that we've been servicing municipal wastewater plants
Got it? Okay. Thanks a lot. Appreciate it.
And we will take our next question from Brian Lee with Goldman Sachs.
Hi, guys, thanks for taking the question. This is Grace [ph] on for Brian, I guess first one questions on your revenue guidance. So your revenue guidance range for 2022? It's a bit wider than what you have given in prior annual targets? Just a little bit? What is the implied organic versus inorganic growth? And is it all simply supply chain uncertainties? Or are there any other nuances to the guy heading into the year than in the years pass? Is it just any sense there? Thanks. And I have a follow up.
So the guide implies, uncertainty around inflation. And as inflation occurs, we feel confident we'll stay positive on price cost. But as you price the cost, that has the potential to create higher revenue, but you're not necessarily going to get the EBITDA fall through you'll get some, but not at your traditional margins. That's what that's what's implied in there in terms of the wider guide on revenue, but at the same time, there's, if commodity costs have stabilized, and there's the potential for the other direction. So that's how we thought about that revenue guide.
Okay, got it. And what's the implied organic and inorganic growth there?
We have not put an implied organic growth out there at this point in time. Again, when you think about organic growth, part of that is how do you think about price as a part of organic growth and we don't differentiate between price and volume in our guide.
And I would say the other thing is, as we look at our M&A pipeline, and we've highlighted this in the past, doing tuck-in acquisitions around service locations, either we're going to put in, capital expenditure and build a site and develop or we're going to find something that we acquire and tuck-in They're very small. So we call that organic, like an organic growth because it's either deploy capital, install a facility or find someone that you can bring in as a tuck-in opportunity.
Long-term, we expect the same through our goals of 3% to 5% organic growth.
Okay, understood. I guess, one more question for me, appreciate all the PFOS color on the call and realize that this is not a near term. But can you guys give us a sense for what you are hearing from your customers and any more activities or engagements and then also maybe any updates on the 100 million PFOS water contaminants pipeline you have referenced in the past as you head into 2022?
Sure, yes, I can follow up on that. So first of all, we see the opportunity in the market, similar to how we talked about it the past in the near term, the pipeline still has continued to be quite robust in that range. And then as the limits are starting to unfold, that'll start to give our customers much more confidence around engaging engineering studies and doing the work that they do. I mean, the revenues don't the order don't flow until the engineering work is done.
And of course, the revenues don't flow until after that. So we kind of still see it playing out over the next three to five years. But this new passage of the bill really starts movement in a more positive direction. But remember, it's the money and the limits together that are going to set the stage for exactly the timing and the type of solutions that our customers will deploy?
On the pipeline that we have our pipelines continued to be robust with the specific state led efforts that Snehal actually highlighted on one of his slides. And but we do anticipate that that will increase as time goes on, certainly with the passing of the bill I want to focus that’s been placed on PFAS?
Thanks for the color. I’ll pass it on. Thanks.
This concludes our question and answer period. I would now like to turn the call back over to Ron Keating for his closing remarks.
Thank you very much for joining us today and thank you for your interest in Evoqua. I want to again highlight the appreciation we have for our team managing through the supply chain challenges and making sure that we are continuing to deliver new innovations and new solutions to the marketplace. I look forward to speaking with you all again next quarter. Have a great day. Thanks.
That concludes today's Evoqua water technologies fourth quarter and fiscal year 2021 earnings conference call. You may now disconnect your lines and thank you for your interest and Evoqua's.