Earnings Transcript for AQUA - Q1 Fiscal Year 2021

Operator: Hello and welcome to the Evoqua Water Technologies' First 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. 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.

Dan Brailer: Thanks, Lorie, and thanks, everyone, for joining us for today's call to review our First Quarter 2021 Financial Results. Participating on today's call are Ron Keating, President and Chief Executive Officer; and Ben Stas, Executive Vice President and Chief Financial Officer. After our prepared remarks, we will open the call to questions. 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 second quarter and the full year of Fiscal 2021, as well as expectations relating to the impact of the COVID-19 pandemic, order demand and end market drivers, execution of our digital strategy, the Acquisition Program, the market for treatment of emerging contaminants and other potential growth drivers. Actual results may differ materially from expectations. For additional information on Evoqua, please refer to the company's SEC filings, including the risk factors described therein. On this conference call, we'll also have a discussion of certain non-GAAP financial measures. Information required by regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained by Evoqua's Investor Relations website. All historical non-GAAP financial results have been reconciled and included in the appendix section of the presentation slides. With respect to our guidance, we have not presented a quantitative reconciliation of the forward-looking non-GAAP financial measure, adjusted EBITDA to its most directly comparable GAAP financial measure, because it is impractical to forecast certain items without unreasonable efforts due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of and the periods in which such items may be recognized. Unless otherwise specified, references on this call to full-year measures or to a year referred to our fiscal year, which ends on September 30. Means to access this conference call via webcast were disclosed in the Press Release, which was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days. With that, I would now like to turn the call over to Ron.

Ron Keating: Thank you, Dan. Please turn to Slide 3. As stated in prior calls, our priorities remain focused on the health and safety of our employees, ensuring business continuity and customer uptime, and improving our balance sheet and the liquidity of the company. The impact of COVID-19 pandemic has varied across our diverse set of end markets, but we're encouraged as we look into the future with the anticipation of the vaccine rollout. We're investing in growth opportunities, solidifying customer relationships, broadening our portfolio solutions and extending our geographic reach through our M&A program. We believe our future's bright and while we plan for the future, we're focused on navigating the challenges at hand.

Ben Stas: Thank you, Ron. Please turn to Slide 9. For the first quarter, reported revenues were $322 million. Organic revenues excluding the net impact of recent acquisitions, the divestiture of Memcor and the impact of foreign exchange were down 3.5%. Demand vary by end market with growth in healthcare and pharmaceutical services, capital declined in microelectronics and service declines in refining. Regionally we expect experienced solid growth in Asia Pacific. For the first quarter, adjusted EBITDA was $44.8 million for overall margin of 13.9%, up 130 basis points over the prior year. Cost controls, operational efficiencies and realignment benefits contributed to adjusted EBITDA growth. The first quarter of the prior year included Memcor sales of approximately $14 million and adjusted EBITDA of approximately $1.3 million. Price cost was slightly favorable in the quarter. Please turn to Slide 10. Our Integrated Solutions and Services Segment first quarter revenues were down 5.9%. The decline was driven primarily by the timing of large capital projects in the prior year, temporary delays in annual maintenance in the oil and gas end markets and COVID-related impacts to service an aftermarket revenue primarily due to restricted site access and higher service costs and productivity impacts associated with COVID-related safety protocols.

Ron Keating: Thanks, Ben. Please turn to Slide 14. This updated chart represents our current expectations for order demand and our primary end markets for Q2, incorporating insights from our sales and operations teams. We serve a broad and diverse set of end markets as represented on this slide. Our smallest end markets are on the bottom of the page, each representing low to mid-single digits rising in size to the top accounting for approximately 20% of our FY 2019 annual revenue. Looking back, our first quarter performance was largely as expected. We noted solid demand in healthcare, pharma, municipal drinking water and food and beverage. PFAS treatment opportunities continue to drive municipal drinking water opportunities. Overall, we expect to see varying order demand in the second quarter was 7 out of 10 of our primary and market segments expected to be neutral or growing. The outlook for aquatics and refining is a little more negative, but both of those market segments are not large drivers in the overall revenue for the company. We'll be happy to address detailed questions about specific end market drivers during the Q&A session. Please turn to Slide 15. In summary, the pandemic continues to present challenges to the global markets and we're maintaining our priorities to protect our employees, service our customers and preserve our financial strength. We will continue to show our resiliency, operating through the pandemic as a stronger company. Our order book is growing and we're actively engaged with customers in helping them solve complex water problems across multiple markets. Our large installed base, market leading service footprint and our world-class portfolio of component technologies and solutions positions as well for ongoing growth. Our first quarter results were solid and largely as expected. We were pleased to drive profit margins higher through execution and operating efficiencies. Our digital capabilities continue to expand enhancing our outsource water offering and the market interest has grown. We've been pleased to see double digit growth in our Water One digitally-enabled service offerings. We're a highly sustainable company by the nature of our business. Every day, we're helping our customers meet their sustainability goals. The demand to treat emerging contaminants is expanding. We have applications treating PFAS, microplastics, heavy metals and other complex contaminants and we expect these markets to grow for the foreseeable future. We're seeing increased demands for wastewater solutions across in municipal, industrial and waste to energy markets. Recycling and reusing water is a trend that will continue to fuel growth and our front-to-back treatment solutions. The first quarter free cash flow, liquidity and overall balance sheet strength were solid. We welcome the Ultrapure and Industrial Service team to Evoqua and our M&A pipeline is robust with tuck-in opportunities and we expect to remain active while continuing to improve our net financial leverage. I will now close by commenting on our outlook. The challenges from COVID-19 continue to limit visibility and we're not navigating dynamic market conditions. Based on our current view and consistent with last quarter, we're maintaining our outlook of full year revenues and adjusted EBITDA to be flat, to up slightly versus 2020. In the appendix on Slide 17, we provided the 2021 guidance trademark, noting potential drivers of upside and downside. Given our visibility into the second quarter, we anticipate revenues to be between $325 million to $340 million and adjusted EBITDA to be between $48 million and 52 million. Also consistent with prior fiscal years, we anticipate the first half adjusted EBITDA to deliver approximately 40% of our full year's EBITDA. I will now open the call for your questions.

Operator: Thank you. Our first question comes from the line of Mike Halloran of Baird.

Michael Halloran : Hey, good morning, everyone. Just want to get some thoughts on how you're thinking about cadence through the year?

Ron Keating: I'll start and let Ben add in, Mike. But, just as we talked about, we typically see 40% of the EBITDA come in the first half of the year, 60% in the second half. If you remember, the first quarter of this year was impacted by COVID, where the first quarter of last year was not. And then, as we looked at the second quarter, we actually had January and February that really weren't impacted by COVID in 2020, it really hit us in March. And so, we're starting to actually lap the COVID years and we feel good about the back half given what it looks like in our order activity. Ben, do you want to comment?

Ben Stas : Yes, sure. Hey, Mike. So again, we're thinking about a 40-60, approximately 40-60, split EBITDA first half-the second half, which is very much aligned with traditionally what we see. But again, that's subject to COVID uncertainty and variability, right? I mean, the business normally is very stable and steady on an LTM basis. But quarters do fluctuate from time to time. And COVID has the potential to cause those fluctuations to be a little more significant. But certainly, each half of the year is more stable than any quarter and a full-year is much more stable. So, right now we're thinking about 40-60, first half-the second half.

Michael Halloran : And maybe an update, Ben, how are you thinking about what the order trends mean today? How that impacts the next couple years of orders? In other words, what are ones success build-on operate in a lot of these outsourced water initiatives that are starting to gain some traction, book-to-bill is really favorable, it has positive implications for out years . Maybe just an update on how that's tracking and how you're thinking about those? And what kind of information you can do to help us understand what that cadence can look like, as you start moving beyond the short term?

Ben Stas : Yes, so the long-term outsource water contract business is expanding in this environment and continues to be strong. And, I think the pandemic has the potential to have expanded that some, at the expense of a bit of short-term capital. Capital is an area where we're seeing companies be very cautious in that regard, which potentially accelerates their interest in the long-term outsource water-type contracts. So when you look at our order book, it is certainly shifted more towards services in outsource water. So that bodes well for the business long term. But, again, the timing of capital projects and the pandemic has certainly put some short term pressure on capital. The other area that we also highlighted is there's been some pressure particularly in the refining areas of business on the customer turnaround, which is on demand services, for those types of turnarounds. Now, they can't delay those forever, and they will have to accelerate. So it's a timing impact. But, as we work through the pandemic, that's another area that had created some short term softness in Q1.

Ron Keating: Mike, if you review Slide 14, with what we shown on the end market outlook, the end market outlook is related to our order activity that we typically are seeing in the second quarter, given the feedback from our sales and operations team. So we always try to give guidance against this. And to Ben's point, the refining and marine businesses have been a little less, and then microelectronics is really tied to higher comps the prior year.

Michael Halloran : Appreciate it, gentlemen. Thank you.

Operator: Our next question comes from the line of Nathan Jones of Stifel.

Nathan Jones: Good morning. I would like to start off just talking a little bit about the inflation, oil prices and steel prices have both come up pretty considerably from the bottom, oil is still down year-over-year, but steel is up quite a lot year-over-year. If I think back for 2018, there were some timing mismatches between when we had that steep rise in input costs and your ability to pass that through. I know you said first quarter of 2021 had some slight positive price cost dynamics. Can you talk about what you're expecting here over the next few quarters? And maybe how your pricing model is different now than it was in 2018?

Ron Keating: Nathan, that's a great question. And we are watching the commodities very closely. Steel prices have, as you related, jumped quite heavily over the past few months. What we've done versus 2018, we've got very good models that we are staying in tune with the indexes, we get good visibility from our suppliers, we have limited the amount of time that our quotes live. And so, we have a much shorter cycle on the amount of time that the quote is actually good. And then, once we are locking in projects, we are hedging the old fashioned way, we're buying the commodities as soon as we lock it in. So we know what a fixed price is, and fixed cost is. As we looked at the year, first quarter we said was slightly favorable, we anticipate the full-year to be slightly favorable, looking at what projects we have in the pipeline, what we're working against, and also where we see the commodities moving. There'll be a little bit of pressure in various quarters, but we think the overall year will turn out to be neutral to slightly up.

Nathan Jones: That's very good news. Maybe just a couple of questions on the order rates. You said they were positive in the quarter, book-to-bill is above one. Any color you can give us on what the actual order rates were of growth year-over-year, and how you're expecting that to progress as we move through the year?

Ron Keating: Yes, I mean, the book-to-bill stayed above one, we were pleased to see that in the first quarter, even with some of the year-over-year revenue changes given COVID and order rate changes. We expect and we typically -- we don't give really the numbers over that, we just know the backlog is growing. As you look at the full year, we expect it to be in line with our guidance that we've already given, flat, slightly up. And that is -- again, we're coming into five months of non-COVID in the first half of the year, that we didn't have last year. So there's always some challenges as you look at the COVID and COVID visibility. But we're seeing, as we showed on Slide 14, the end markets performing as we expected, and we're, again, given a little color on that with that slide.

Nathan Jones: Great. Thanks for the color. I'll pass it on.

Operator: Our next question comes from the line of Deane Dray of RBC Capital Markets.

Deane Dray : Good morning, everyone. Hey, can we start with the comment in ISS? You were impacted by the timing of some large projects. Just give us some context there with these outsource projects, what was the reason for the push out, was it COVID-related and then, when do you think they actually start to be in effect?

Ben Stas: Yes. So just to be clear on that, Deane, that was prior year, strong capital demand in microelectronics. And again, the end market still remains robust. There's a lot going on in microelectronics, the end market is experiencing some supply chain disruptions, as you're aware of. And, so that's in -- but it tends to be lumpy for us when we get these orders, just like all capital wins . But overall, we had a very strong first half last year in microelectronics. So we're facing these tough comps this year.

Deane Dray : All right, that's helpful. And then, that leads me to the next question, we are seeing the impact of the mix shift to getting more water outsource contracts. And this is exactly what we want to see you doing. It increases recurring revenues, but the mix shift is happening where you're going to have fewer capital sales. Can you quantify for us how much we're seeing in the first half of this mix shift? Is there any way that you can pinpoint some of that for us?

Ron Keating: Yes, Deane, I'll talk just briefly to the trends we're seeing. I'll let Ben talk about quantification. But, the trends are very positive. And this really speaks to the strategy we rolled out around water one , the digitally-enabled recurring revenue and service. And we've seen that become more robust as we've gone through repeat quarters on COVID. And customers are dealing with that, they are just coming back to doing what are, and they are letting us do our core competency, which is provide them quantity and quality of ultra-pure water. So the good news about it is, we're seeing that mix shift, as you spoke about, that we've been discussing for several quarters. And the value that's going to come in that long term was steady, recurring repeatable revenue is very good. Ben, do you want to talk?

Ben Stas: Yes, so we don't really disclose orders. But what I can tell you, Deane, is the order growth we're seeing is in services. The capital area, obviously, is the challenge and the services is offsetting that. So we are seeing that transition happen just as you articulate. But again, as you know, capital books out over a much shorter period of time than these long-term service contracts. So, as we go through this, this is great long-term for the business, but it does create some short-term pain.

Deane Dray : That's exactly the way we're looking at it. And on the capital outlay for these outsourcing projects, that's all reflected in your current pre-cash flow performance this quarter, is that correct?

Ben Stas: That's correct.

Deane Dray : Right. Good. So you're still doing well in excess of 100%, even with that growth CapEx?

Ben Stas : Yes, that is correct.

Deane Dray : All right. And then, last question for me. Any update on your share in PFAS remediation project? When it first came up a couple quarters ago, you said you had a lead position? We know with the administration change that is likely to be more emphasis on PFAS remediation by the utilities, and any update here in terms of how your position would be helpful?

Ron Keating: Yes, Deane, that's a great question. With the new administration, there is a highlight and an emphasis on this, our share remains consistent with what we've reported in prior quarters where we're coming in around a third of the opportunities. We watched that pipeline very closely. And we actually highlighted another win that we got in a California Water District around resin, that's a contracted to 2024. So what you're going to see is, those will be contracts that are going to come over the next five to seven years, they'll grow. The good news about them is -- it's capital contracts that have follow on service and aftermarket revenue that's very good, because you have to make sure you're maintaining that system. And what we've seen in a pipeline that's expanded, it's somewhere in the neighborhood of $100 million over the coming year. But those are longer-term projects that will be service-driven, as well.

Deane Dray : Just to be clear, you have the capacity to be able to go after all of these projects as they become available, are you capacity-constrained in any way?

Ron Keating: We are not, we have the capacity. And that's one of the benefits of dealing with ; you have a multiple technology solution approach that we go after. So it's not one-size-fits-all-around, just try to stick one solution in, and we have a broad range and a very complete solution portfolio that we can make sure we have the right technologies applied to the right challenge in the PFAS.

Deane Dray : Terrific. Thank you.

Operator: Our next question comes in a Patrick Baumann of JPMorgan.

Patrick Baumann : Hi, good morning. I've got a quick question on the end markets. It looks like you're guiding power to be up in the second quarter and you're guiding for the first quarter power to be down a little bit; what's the change there? Is there an improvement in the market? Is it something specific to your order profile? Just curious about it.

Ron Keating: I think -- again, this is speaking to what we have in expectation against our order activity in the quarter and the power market for us has been some of the increases in the LG guidelines. So we've been very focused on that, looking at a lot of the sustainability actions that the power companies are doing and they're coming to us as a solution for the increasing challenged micro-contaminants that they're dealing with.

Patrick Baumann : Okay, and on the acquisition pipeline, do you see anything -- I assume the recent deals you did were more small bolt-ons and tuck-ins. You correct me if I'm wrong, anything bigger than bolt-ons that you're looking at in the pipeline?

Ron Keating: Yes, not at the moment, we're very comfortable with the tuck-in strategy that we've been executing on. The two that we just did, as I highlighted in my opening remarks, we're expanding our service footprint in Texas and Ohio. That where we're putting a pretty strong emphasis this year, as we continue to drive steady, recurring, repeatable revenue, we want to make sure that we have the proper footprint there to execute on the opportunities. And it is either we go in with Greenfield cap back startup, or we find the right opportunity in a tuck-in acquisition that's a bolt-on. And as we highlighted, we've done 16 acquisitions since 2016, 10 have been in product portfolio, six in the service acquisitions. And so, we've shifted a bit of the focus to service tuck-ins over the next year.

Patrick Baumann : It makes sense. And then maybe quick one for Ben, I think I got the numbers right on the near-term guidance, it seems like it implies margins are down year-over-year, what's the driver of the margin decline? If I'm right about that in the second quarter in terms of the guide?

Ben Stas: Again, it's project timing. Last year was a very strong -- first half of last year was very strong microelectronics that were very profitable.

Patrick Baumann : Got it. It's just the base which had a good margin mix in it, basically, last year.

Ben Stas: Yes. And again, it's the typical quarterly lumpiness that we have from time to time, that normalizes over the year.

Patrick Baumann : Yes, of course. Thanks a lot, appreciate the time.

Operator: Next question comes from the line of Saree Boroditsky of Jefferies.

Saree Boroditsky : Thanks. Good morning. Microelectronic is facing some tough comps in the first half of the year, with the end market remains favorable. So do you expect this market to improve in the second half? And how should we be thinking about that?

Ron Keating: We do. We expect it to improve in the second half. I mean, again, what Ben referred to earlier was just year-over-year comps, with the prior year with large installations in orders that we had. But the microelectronics market, overall, is very favorable for us on both the outlook for projects that are going to come, as well as the services offered.

Saree Boroditsky : And then, I believe you saw demand in China bounce back starting last quarter, and you noted strength in APAC for APT in this quarter. So could you just talk about what you're currently seeing in China? And if there are any lessons there that we can apply to the other regions, as hopefully the vaccine allows facilities to start opening up?

Ron Keating: Yes, our team in China is fully operational and executing, it's been very good. In fact, we saw, as you referred to, a very nice bounce back in the second half of last year that's continuing to show strength, we see that strength along the pharmaceutical side, as well as highlighted in microelectronics and other business areas that we supply technologies and modules. Were also very pleased to, as I highlighted in the comments, open up our operation in India that is going to provide us some opportunity going forward. Things that we brought back to other markets that we should follow in the operations is -- and we've done that from the very beginning, was make sure that our supply chain was very robust, very sustainable. And we didn't run into component technology challenges. The other thing that we've done is just ensure that we have the right protocols in place, that our team is able to continue to operate, and through this entire challenge in the pandemic, our teams and our major operations and facilities have continued to run very effectively and very efficiently. And, we thank the team members that are part of Evoqua, they've been delivering on that.

Saree Boroditsky : Great, thanks for the color.

Operator: Our next question comes from a line of Andy Kaplowitz of Citi Group.

Andy Kaplowitz: Good morning. So obviously, you've had significant tailwind from the segment alignment that you've done focused on APT, but you did record in this quarter higher APT margin on lower sales. I know some of that is likely Memcor. But could you give us any more color on how to think about the tailwind from a cost out perspective at APT going forward?

Ben Stas: Yes, sure. So Memcor was certainly a part of that. But also, the post-Memcor footprint actions that we've taken and optimization actions also contributed to that. And then, we mentioned that those footprint actions -- but that also sets us up well for the future. The APT team has done a great job of really improving its overall operational effectiveness post-Memcor and streamlining a lot of the aspects of their business. So the majority of it was really related to the actions taken by APT and better execution. They also -- that business also has a lot of mix, right, and that can impact it quarter-to-quarter. But, long term, these actions should bode well for the continued improved profitability of APT.

Andy Kaplowitz: And you mentioned the transition to wastewater continues to fuel growth. Maybe you could give us a little more color into what you're seeing with industrial customers, given COVID, and maybe the difficulty that customers can have staffing their business, do you see maybe a faster evolution to more outsourcing now, what are you doing about that transition?

Ron Keating: Yes, we actually are seeing an improvement in the adoption rate around outsource water. And that's something Ben actually spoke to earlier in the call. And it's having an impact, as we see, and you see a little bit on capital sales that are taking more time, they're stretched out over longer term contracts that are coming in, because customers as a part of COVID -- and I mentioned earlier, they want to focus on their core competency, which is producing a product or providing service, not providing ultra-pure water to their own applications, they're relying on us to do that. So it's been very positive for us, it's quite favorable. Even in my opening remarks, speaking about recycling, recycle and reuse of wastewater in the industrial space, we're seeing that continue to gain momentum and gain growth. I think that's going to be a growth market for the foreseeable future. Companies are doing what they need to do to provide sustainability into the marketplace and to be a more sustainable company themselves. We are very focused on ESG, we actually enable sustainability inside of our customers thinking about our handprint and that is ultimately going to drive very long term, very steady, repeatable revenue. When companies are saying, recycle and reuse, let's minimize our liquid discharge, and let's make sure that we're doing what's right for the environment, and frankly, Evoqua, you're the right partner to bring in, with solutions that are treatment, from the front-end to the back-end. So it's an exciting time in the marketplace. And I think we'll see that continue to grow.

Andy Kaplowitz: Just one more quick one for me, municipal budgets, I mean, you're pretty bullish on municipal, looks like, going forward. Anything you're seeing there as we start the new calendar year, seems like customers are spending when they need to spend, but you tell me, any more color that you'd give?

Ron Keating: Yes, I think what you're seeing, Andy, and this is one of the reasons that we stay pretty bullish on it. And you see that being highlighted as green and our market's one around municipal drinking water, which we spoke around, it's emerging contaminant treatment. So PFAS, microplastics, etc. On the wastewater side, we have such a long history of installations inside of the North American wastewater systems, customers are doing retrofit and rehab on their wastewater systems because they're not going in with massive projects to do very large expansions. They're making sure what they have is actually operating at spec. And in doing that, that brings us in for retrofit and rehab work. We've had a little bit of difficulty getting on site through COVID with some of those, but our team has done some pretty remarkable things, we're actually taking out electronic glasses so people can look at it, point at it, our engineers can be on the phone, and they can highlight, take a look at this area, this may be where we need to be -- replacement or rehab on some of the systems. So we're getting creative around how to operate in the new norm. And that's a little bit of what you see about some of the bullishness on retrofit and rehab and the municipal wastewater stuff.

Andy Kaplowitz: Appreciate it. Thank you.

Operator: Our next question comes from a line of Brian Lee of Goldman Sachs.

Brian Lee : Hey,, thanks for taking the questions. Maybe just a couple real quickly on the guidance here for Q2. That is representing the first quarter where you're fully lapping Memcor, is that correct? There's no . And then, are there any other divestiture impacts that you would be willing to call out there?

Ben Stas: No, it's only Memcor.

Brian Lee : Okay, great. And then, you made a comment earlier, I think in response to another question about the margin guidance and mix for Q2 microelectronics, and be project-heavy in that way, that that being a mix which is driving down margins for Q2 on a year-on-year basis. Is it fair to assume that that's mostly coming out of ISS, so we may see a similar trend where ISS is weaker into Q2 versus APT holding up a bit better here?

Ben Stas: Yes.

Brian Lee : Okay. And then, earlier question, Ben, I think in relation to commodities and cost inflation, can you level set us again as to where you have the most exposure, commodity-wise. If you can quantify it, that'd be great. And then, are you starting to see that impact already? Or just what's embedded in the outlook as you think about navigating the current in go-forward cost environment?

Ben Stas: Yes, sure. So chemicals, plastics, steel, these are the larger commodities that we have in terms of impact.

Brian Lee : Any quantification and also commentary around what you're seeing real-time versus what do you think the outlook is embedding for you for cost ?

Ron Keating: I'll let Ben speak to quantification on this. But I will say that we have been very focused on watching what's happening with these commodity movements. And in fact, as we go through them, we get real-time prices, real-time quotes from our team, as we're getting close to customers, we're making sure that our supply chain organization is connected with our suppliers, we've got a lot closer loop than we had back in 2018, to an earlier question we had. And so, as we're doing that, we're locking in, quoting against longer term quotes, but we're also limiting the amount of time the quotes are. So we felt pretty good through the first quarter. And feel like price cost, as we looked at the year, will be neutral, slightly favorable.

Ben Stas: I think based on what we see at this point in time, again, I think it's neutral, slightly favorable, commodities can move, it's a market that can move fast, one way or the other. But at this point in time, we're monitoring it very closely. We are also staying very disciplined in our pricing actions, and are prepared to respond accordingly. But I think, based on what we see at this moment, neutral to slightly favorable price cost for the year would make sense for us.

Brian Lee : Okay, maybe just last one, with respect to price actions, are there any price actions that you've taken already, I know it's early in the year, or any contemplated here in the next month or so?

Ron Keating: We have, we've already taken price actions and actually, we will continue to do that through the year. One thing you may remember is that our contracts, typically, our annual contracts around services. So where we see commodity movements, it's one year renewals that gives us an opportunity to take the right price actions as we see commodities move, because we aren't setting long-term contracts typically on our live industry services.

Operator: Your next question comes from the line of Joseph Giordano of Cowen.

Unidentified Analyst: Good morning. This is Fransisco on for Joe. I wanted to get your outlook on ISS, basically, when you think is going to begin to ramp up again, is there may be a margin tipping point where the service revenue starts to push that materially higher from here?

Ben Stas: Yes, I think, again, we have tough comps in the first half, we have a lot of COVID challenges, site access, and we also have, as we mentioned earlier, some of the challenges in some end markets, like refining, where they've delayed some of their annual maintenance. So, a lot of it depends on vaccine, rollout, effectiveness, hopefully the second half of this year we don't have COVID. We have COVID-neutral comps, if you will, for the second half of this year. And hopefully some of the access issues, etc. abate the viruses successful, and we should see a better second half for ISS.

Ron Keating: And Francisco, I think one thing I would point to is Slide 14, it gives the outlet for the end markets that we play in. And typically, you can glean from that what the North American markets that ISS is typically serving, and refining and marine has been pretty big pullback. What Ben talked about earlier with micro with year-over-year has been tough, but we think that in the back half of the year, in the beginning of next year, we're going to see side access open up a little more in the service opportunities flow better.

Unidentified Analyst: Great, that's very helpful. And then, just a quick follow up on the muni expectations. You have seen some pretty good growth there. Do you expect the strong demand to hold through the rest of the year? And do you have any comments maybe on budget expectations?

Ben Stas: Yes, we do. We feel good about muni . That's the reason that both of those are green, as you're looking at Slide 14, we showed and it speaks to an earlier comment I made about the installed base that we have in the wastewater systems inside of North America that we've been providing products since for more than a century now. So, it started late 1800s on one of our product lines. So, we're going back and we're doing retrofit and rehab to an installed base, which is fantastic for us. And that's where we see the municipal operator still investing money, where they don't have huge budgets to go out and expand capacity. They certainly have the budgets for retrofit and rehab to make sure that they are operating at the specification of the plant.

Unidentified Analyst: That's helpful. Thank you.

Operator: Your next question comes from the line of Andrew Buscaglia of Berenberg.

Andrew Buscaglia: Hey, guys. Everything's kind of picked over at this point. But I had a clarification on Slide 14, there you're talking about some of the comps from your accounts, microelectronics? I get that that's difficult in refining and kind of taking a step back. But can you just clarify, I would think that you're seeing some easy comps in light in general industrial and maybe even similar healthcare areas where we're entering that kind of year-over-year COVID comp?

Ron Keating: Yes. Andrew, again -- I'll hit that real quickly. What we're calling out on this is our Q2 expected demand and if you look back at last year's Q2 -- and I made a comment earlier -- the COVID impact did not really happen until March for us. January and February were pretty robust. So, we're now coming through in January and February, COVID-impacted months. This is the quarter when we'll actually lap it. Compared to last year, March was really the only quarter or the only month of the second quarter impacted by that.

Andrew Buscaglia: Okay, so it's just a one-month impact. Okay.

Ron Keating: Yes.

Andrew Buscaglia: All right, that's it. Thank you.

Ron Keating: Thanks.

Operator: Your next question comes from a line of Graham Price of Raymond James.

Graham Price: Hey, good morning. This is Graham Price, on for Pavel Molchanov. Just following up on a prior question. You mentioned in the slides that municipal drinking water and wastewater are both growth areas. But there's been some concern that because of the recession, munis with seen shortfall in tax revenues to invest these days. Just kind of wondering how to think about that and sort of how to reconcile those two things.

Ron Keating: Yes. Graham, once again, on Slide 14, this is our outlook based on what we expect our demand in the second quarter in order activity to be. So municipal drinking water, we're seeing driven by PFAS and emerging contaminant challenges that that they're having to invest in, even to the point of the municipal order, I called out on one slide that we got in California, that's a contracted 2024. So, we're seeing some of that happen around drinking water. On the wastewater side, it is retrofit and rehab against the install base that we have in the municipal wastewater systems that have been there for quite some time. So, us going back and replacing chain scrapers, replacing different types of filtration, et cetera, that are there gives us a good opportunity and because of the rich install base that Evoqua has had over many, many years, we're able to make sure that we're connected to those municipalities and they're spending not on expansion because that's where budget constraint strengths come, but really just on making sure that they're operating at the design capacity. And that's aftermarket generally is something that does well when capital declines.

Graham Price: Got it. Thank you. And then quickly for my follow up. There's clearly a lot of appetite in the Congress for infrastructure to at least provide a portion of the next COVID stimulus package. Just wondering your thoughts on what role water will play? And then maybe, especially as it relates to PFAS cleanup.

Ron Keating: Yes. So, we've been pretty involved in that around what the water role is going to be. We feel like where they're spending a fair amount of effort on energy is going to be more on the transmission system of water. So, actually getting water from the municipalities and the municipal treatment system, to the homes into the homeowners into industry in general. So, we think a fair amount of the spending is going to be occurring in transmission, not necessarily in treatment with the exception of what I referred to in treatment being retrofit in rehab and us making sure that the system is operating at the design capacity of what it was. We do believe PFAS will be something that they continue to focus on, but we still think that's a five to seven-year timeframe before it becomes really meaningful because they haven't even defined what the MCLs are yet and what the limits are going to be at CPA , even though they did call PFAS as a hazardous substance.

Graham Price: Great, thank you. That's it for me.

Ron Keating: Certainly.

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

Ron Keating: So, I'd like to say thank you to you, all, for joining us today. It's a pleasure to be able to present the close of the first quarter. We continue to be very mindful on what's happening with the pandemic in the second quarter. We continue to focus on the three priorities I called out earlier and that's the health and safety of our team members, making sure that we're providing continuity of supply to our customer base and satisfying, asserting their needs. And then ultimately ensuring that we have balance sheet flexibility and the company's capabilities to execute are continuing to improve. I would like to thank you for your interest. I would like to thank our team members for operating safely and providing the just fantastic service that our customer base into the marketplace we serve. I hope you all stay safe and I look forward to speaking with you again next quarter. Thank you, Operator.

Operator: Thank you for participating in the Evoqua Water Technologies first quarter 2021 earnings conference call. You may now disconnect.