Earnings Transcript for AQUA - Q4 Fiscal Year 2020

Operator: Hello and welcome to the Evoqua Water Technologies Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. After the speakers' opening remarks, there will be a question-and-answer session 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: Thank you, Maria, and thanks everyone for joining us for today's call to review our fourth quarter and fiscal 2020 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. This conference call includes forward-looking statements, including our expectations for the first quarter and the full year of fiscal 2021 as well as expectations relating to the impact of the COVID-19 pandemic execution of our digital strategy, 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 via 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 in the periods in which such items may be recognized. Unless otherwise specified, references on this call to full year measures or to a year refer to our fiscal year, which ends on September 30. Means to access this conference call via webcast were disclosed in the press release, which was posted to 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?

Ron Keating: Thank you, Dan. Please turn to Slide 3. As we finish FY '20, our COVID-19 priorities remain constant. We continue to focus 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. Our market conditions have been dynamic with demand varying across a diverse set of end markets that we serve. We expect that trend to continue for some time.

Ben Stas: Thank you, Ron. Please turn to Slide 7. For the fourth quarter, organic revenues, excluding the net impact of the Memcor divestiture and the acquisitions of Frontier and Evoqua Pure were down 1.7% versus the prior year to $384 million. While demand varied by end market, we saw growth in microelectronics, light and general industry and health care. As Ron mentioned, Q4 of FY '19 was a very strong quarter with organic growth of 11.5%.Fourth quarter adjusted EBITDA was $75.6 million for an overall margin of 19.7%. Price cost was approximately $2 million favorable in the quarter. Please note, the fourth quarter of 2019 included Memcor sales of approximately $25 million and adjusted EBITDA was $6.5 million. Please turn to Slide 8. For the full year, revenues were $1.43 billion, with organic sales up 1.5% after adjusting primarily for the Memcor divestiture. The Company continues to realize benefits of the two segment realignment as capital growth was strong throughout the year in both segments. Capital growth negatively impacted mix within the year, which we expect will result in greater pull-through of services and aftermarket in future periods. Looking into 2021, we expect outsourced water orders to outpace capital orders, continuing the trend we saw in the second half of 2020. Adjusted EBITDA increased approximately $240 million for the full year. Adjusted EBITDA margins increased 50 basis points to 16.8% versus the prior year. Profitability benefited from higher gross margins, cost reductions and favorable price costs, while being partly offset by the Memcor divestiture impact. Please turn to Slide 9. Our Integrated Solutions and Services segment had flat fourth quarter organic revenues with capital growth driven mostly in microelectronics. Service revenue was impacted due to slowdowns, primarily in refining, oil and gas, end markets as well as COVID-19 related deferrals and delays. Our digital strategy continues to enhance our profitability and customer interest in our capabilities remains very high, particularly as customers restrict site access due to the pandemic. In addition, to booking our largest outsourced water project this quarter, as Ron mentioned, we're also pleased to have booked earlier this year, our first organic wastewater treatment facility outsourced water order. We expect the wastewater plant to come online in the second half of 2021. Both of these projects have contracts in excess of 10 years, providing stable, recurring and profitable revenues.

Ron Keating: Thanks, Ben. Please turn to Slide 13. We believe water treatment is one of the most attractive sectors of the water industry having favorable long-term macro growth drivers. Each segment has multiple initiatives supported Evoqua's long-term organic growth. The ISS segment is focused on our outsourced water and digitally enabled capabilities to drive steady, stable and profitable revenues. Outsourced water currently represents approximately one-third of the segment's total revenues. We also have approximately 20% of ISS revenues digitally connected, and we're working to double that percentage over time. PFAS, selenium, micro-plastics and other emerging contaminants will continue to drive complexity in water treatment, which create meaningful growth opportunities. We're focused on several attractive vertical markets where our portfolio of solutions and services are competitively differentiated. As we near completion of the two segment realignment, we've developed a number of organic growth drivers within our APT segment. We're focused on the development and marketing of next-generation products and new product innovations to treat continued challenges with routine and complex water needs. We see attractive international growth markets for our component technologies as we build out our geographic channel coverage. We're also actively leveraging our ISS segment as a meaningful channel partner, particularly for wastewater and disinfection product lines. And additionally, we're developing an e-commerce platform that enhances the user experience and utilizes robust digital capabilities to drive aftermarket sales. This investment should enable the APT team to drive meaningful aftermarket growth over time as we capture rehabilitation and retrofit business from our rich installed base. Please turn to Slide 14. In the second quarter of the call, we provided an expectation on how we thought the second half of FY '20 end market demand may materialize. Looking back, our performance was largely as expected. We did see higher-than-expected demand in light and general industry and in municipal drinking water supported by PFAS treatment. This updated chart represents our current expectation for demand in our primary end markets for Q1, incorporating insights from our sales and operating 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 '19 annual revenue. Overall, we expect to see uneven demand continuing, but based on our order backlog, 6 out of 10 end market segments show to be neutral or growing. We expect a Q1 decline in microelectronics, given very strong sales in the fourth -- in the first quarter of 2020. Our pipeline in microelectronics is strong, and we currently expect to see ramping orders from this market segment as we enter the second half of 2021. The outlook for Evoqua 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, I'm very proud of the team's efforts and the results we generated in a very challenging year, and we entered the new year with a sharp focus on the same three priorities as 2020. Our fourth quarter results were very solid, and we saw year-over-year improvements against most key financial metrics adjusting for the Memcor divestiture. We met the market challenges throughout the year with determination and resilience. Our order book is growing, and we're seeing more customers turn to outsourced water solutions, allowing customers to focus on their core competency, while letting Evoqua handle the increasing challenges and complexities in water treatment. Our digital strategy is a significant enabler to business continuity and our outsourced water growth. Interest in our digital offerings has never been greater. Throughout this past year, we highlighted digital offerings in water SD, municipal services and health care with Vantage SPD. In the new year, we will be introducing the expansion of our connected capabilities and digital solution offerings. We are, at our core, a highly sustainable company. It is what we do every day. Our ability to respond to PFAS, micro-plastics, heavy metals and other emerging contaminants are expected to be very favorable in the coming years, and we are seeing increased demand for our wastewater solutions in the waste-to-energy markets. As Ben mentioned, we had a strong year in generating free cash flow and liquidity. We are deleveraging the business and intend to further strengthen the balance sheet. For our outlook comments, the challenges from COVID-19 continue to limit visibility, and we continue to adapt to changing market conditions. Based on our current view of the business, we expect full year revenues and adjusted EBITDA to be flat to up slightly versus 2020 driven largely by potential order conversion timing and lower year-over-year capital sales. Given our visibility into the first quarter, we're providing a more granular view and expect revenues to be between $310 million to $325 million and adjusted EBITDA to be between $38 million and $42 million. I would like to also note that in the appendix on Slide 17 and 18, we have provided a 2021 framework and key assumptions to provide more insight and transparency and how we're thinking about the puts and takes for the year. We hope you find this information beneficial. I will now open the call up for your questions.

Operator: Thank you. The floor is now open for questions. Our first question comes from the line of Nathan Jones of Stifel.

Nathan Jones: I'd like to just start with good question on the '21 framework. You've got revenue flat up slightly. EBITDA, flat to up slightly, I would have thought with some of the mix shifting to more outsourced water, some of the structural improvements that you've made this year that if you had flat to up slightly revenue, you would have had a little bit better than flat to up slightly EBITDA. So maybe you could just talk about a few of the puts and takes that are in your assumptions in that framework going into '21?

Ron Keating: Sure, Nathan. I'll talk about a few, and then I'll hand it to Ben. As we go into '21, I think a little of the cautious outlook that we're giving is based upon just the unknowns in the COVID. It's based on unknowns and what we're going to have to do with service tax continuing to disinfect, continuing to take additional time to be able to get into customer sites. We've had some delays in that over the past few weeks as we're watching the case load start to increase again, but we do see the outsourced water giving us benefits long term. We see good opportunities there. We had a great pipeline and great order activity across that that will yield tremendous results for years to come. But those are a little longer cycle projects. And also, as we look into the year, the shift to outsourced water versus capital takes a little longer to get the outsourced water projects installed, up and running. And then actually executing to hit the flow-through, that's -- and that's kind of what we talk about a bit on the slide, given the puts and takes on the back end.

Ben Stas: Yes, Nathan, as you recall, last year, Q1, and even the first half, we had some pretty strong growth rates pre-COVID. So our fiscal year ending in September, we you really have six months of tough comps within our numbers as well. And as Ron mentioned, as you convert from capital to outsourced water, which we had a lot of capital in microelectronics last year at nice margins, when you convert to those outsourced water programs, you take a little bit of a temporary dip because you're moving -- you recorded a capital sell and the following year, you're recording an outside water sell that's over a longer period of time. So that's a little bit of short-term pain in the first half of this year due to tough comps as well as the conversion outsourced water for long-term gain for that steady, stable recurring revenue. A little bit of a replay of what we saw in '18, which we benefited in '19 and '20 in terms of the cash generation of the business.

Ron Keating: Yes. And just one more point in the first year of the outsourced water projects, you have a little higher cost going into the installation that carries out over time.

Ben Stas: Right.

Nathan Jones: Yes, those things make sense.

Ben Stas: This will be longer term. This will accrue to stronger margins and free cash flow.

Nathan Jones: Yes. I under certainly understand the delayed revenue recognition from outsourced water and being that, that's very high-margin and high return investment. We're pretty happy about that. But just my follow-up question on price cost. You said you were positive a couple of million dollars in 4Q. You've seen steel prices starting to rise here oil prices starting to rise here, which are a couple of your bigger input costs. You talk about how you're thinking about first quarter price cost and full year price/cost for 2021.

Ben Stas: Yes. We'll see some benefits, a little bit of benefits still in Q1. But as the year goes on, it's going to be tougher. We're basically assuming neutron price cost brunch for '21.

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

Deane Dray: Maybe we'll start with Ben and the upside free cash flow this quarter and frankly, for the year. Just take us through the -- if there's any one-timers in there like tax payments? And did I hear you say in the prepared remarks about this working capital to sales? Because that's at 12.5%, that's exceptionally, it's exceptional work here and exceptional improvement. But I think you said you're going to go back to mid-teens. Just clarify that. Is that additional inventory?

Ben Stas: Yes. We want to make sure that working capital can change depending on growth and his sales flat and you tend to liquidate some working capital, right? So that certainly happened as sales as growth has tapered some but the other thing, too, is we had a great year in terms of collections, in terms of our overdue collections, and we're sitting right now at record levels of current in terms of our receivables and record low levels of over dues. We also had the benefits of our supply chain financing program as well that happened this year is those benefits will stay, but you're not going to get the onetime benefits come through. In addition to that, we also -- while we accrued for the 401(k), we did get a cash benefit associated with suspension of the 401(k) in the second half of the year, that's about $6.5 million. So those are the things that in terms of this year that gave us some very strong free cash flow. We'll see how it goes. It all depends on what happens with growth, right? If growth accelerates beyond our expectations, that could push working capital a little higher into that mid teens. If it stays where it's at today and stable to the low single digits decline in the downside case, we expect we'll be in the lower end of that working capital percentage as we are today.

Deane Dray: Just sticking with free cash flow and the type of CapEx that you're looking at for 2021, when you see these outsourced water contracts, what sort of CapEx growth CapEx obligation would there be for the year if you were to estimate it now?

Ben Stas: Yes. So again, a lot of it depends on the COVID uncertainties and how that unfolds and our ability to get these projects up in line, but it's going to be higher this year. We're expecting to be in that growth CapEx range in that 8% range versus in total. So we should see a little higher due to that large project that Ron talked about. We booked our largest ever outsourced water program, which is we're very, very excited about. So that's going to drive our CapEx to a little higher level this year. So it's good news. It's a very high-return project, very stable, steady recurring revenues for the next 10 years, but it will push CapEx up some.

Deane Dray: That's perfectly fine with us. And then for Ron, and we really do like that slide, Page 14, with the end markets. And if I had to pick two that I would love to get some more clarification on. Health care, pharma, biotech neutral, I've just given all the demand for ultra-pure water, I would expect that would have been higher. And for municipal growth, I'm happy to see growth there. Is -- how much might PFAS be contributing because it sounds like you're including that PFAS contribution there as well?

Ron Keating: Yes, certainly, Dean. On the health care pharma biotech, again, we're lapping a pretty good first quarter that we had in the prior fiscal year, and we do see very good growth on the pharma and biotech side. And some of the hospital systems as, certainly, you've heard about have had mixed volumes going up and down given the restriction on elective surgeries and other things that are happening due to the requirement to keep COVID beds open. So we've seen a little bit of mix across the hospital systems with pharma and biotech being up very nicely. We also highlighted a couple of new products that we rolled out on the digital side in the middle of last year with the Vantage SPD that I mentioned earlier. That's got great growth trajectories that we're excited about, and we're expanding that into that business. So overall, I think on the year, that will be turn to green as we get to the latter half of the year, but we're entering Q1, just giving a Q1 expected outlook against demand and our ability to get in and actually install products as neutral. Then on the municipal side, again, it is Q1 that we're highlighting. This is against our quarter activity, our backlog, what we're going to be executing across. Municipal does have PFAS inside of that, the green. And then on the municipal wastewater, it's really recycled or it's retrofit and rehab that we've got some nice order activity around as municipal systems are wanting to make sure that they can operate to their full efficiency. They may not be spending a lot of money on large capital expansions, but they are spending money on retrofit and rehab to make sure that the operating assets that they have in place are delivering. And then with municipal drinking water basically is the same thing, but obviously protecting around the PFAS applications we see. On Slide 14, just to give some context for this. As we talk about growth, the green for everyone's knowledge on the call, green is mid- to -high single-digit growth. Neutral is basically going to be up or down 2% to 3% organically. Slight decline is going to be mid- to -high single-digit decline and then a red decline is going to be where we'll see double digits. Again, what I highlight on this is this is our Q1 outlook, strictly based on year-over-year comps and also what we see in our order backlog.

Operator: Our next question comes from the line of John Walsh of Crédit Suisse.

John Walsh: Maybe first, you obviously have been able to do some small tuck-ins here. You did make a comment about kind of strengthening the balance sheet. Could you just give us a little bit more color on how you're thinking about the M&A pipeline, it is still a very fragmented market. Just any color you can share there?

Ron Keating: Sure, John. Thanks for the question. We actually put a bit of a pause, as you would expect, on our M&A activity as we entered into the COVID phase of the last fiscal year. We saw September come through, and we had relationships with the acquisition we made in September. We've been discussing it with them for quite some time, and we were able to do it at a very accretive and nice number. There's a tremendous opportunity for us in a fragmented business, as you highlight, to do complete tuck-in M&A activity. We have a very long list in a large pipeline. Our expectation as we go forward would be doing somewhere around five to six tuck-in acquisitions a year, which was the activity level we were on pre-COVID. And typically, those tuck-in acquisitions range somewhere between $5 million to $10 million in acquisition cost, typically around the same level as their sales revenue is to slightly below that. And then we're buying them pre-synergy 7x to 8x post-synergy somewhere around 5x or below.

John Walsh: Great. And then I don't know if it's possible to dissect kind of some of the site access comments between what might be impacting the install business versus maybe what might be more on the MRO side? Your business actually held up very well during COVID from a site access perspective. So maybe just some more color around that and then I guess if it is MRO, is there -- do you see pent-up demand in parts of the portfolio where there's been site access restriction? Or is it kind of elongation of demand when that site access comes back?

Ron Keating: Yes. So it's a great question. Primarily where our delays have occurred is around new installations, and it's an expansion of the offering that we have inside of a customer's facility. What happens around side access on the service and the maintenance and operation side is strictly an additional delay or a slowdown of what we see inside of our service ability to execute and ultimately to gain density of route. So it takes a little longer, a little less calls, it takes a lot more time through the protocol of disinfecting going in and coming out of a customer because we're ensuring that our customers have continuity of operations, and we have to ensure the safety of our team members going in and out and the safety of their team members. So as you think about what we saw when I actually highlighted in my comments, light and general industry were higher than we expected in the second half of the year. A fair amount of that was due to some of the pent-up demand you talked about. They shut off and when the shutdown occurred in kind of early late March, and so we had a delay in the access we had when they came back online, it had a bit of a pent-up demand ofa bow wave that we go and flush systems and get them started up. And so we saw a bit of a higher demand in the second half of the year than we had initially given as our outlook. So we're pleased by that. We anticipate you don't see the customer shutting down as much in this next wave that they're expecting. We're just seeing a reduction in application. They're still utilizing water. Our steel team still goes on. We still do operational access. We just feel like it may be a bit of a delay. As their demand levels may drop due to lockdowns or additional restrictions on business activity occur.

Operator: Our next question comes from Saree Boroditsky of Jefferies.

Saree Boroditsky: Similar to your comments on the healthcare market. As you look at the end market chart, could you just highlight areas that are one color for the first quarter, but you think will turn for the full year. Just to give us a better sense of what you're seeing in the markets for?

Ron Keating: Yes, Saree. So we really didn't give this as a full outlook on the year. And the reason we didn't is because we -- it's a little uncertain as we go into the COVID shutdown to knowhow each one of these markets are going to react. I would say that we anticipate possibly, as we've highlighted here Q1, I do believe in the latter half of the year, we'll see microelectronics and some other markets rebounding and hitting a bit of a better order activity coming in, whether the execution activity is there not, just depending on access and ability to get to sites. But I mean, I think this is a good outlook for the first order as we go through, and it truly is based on what our order backlog and our activity is expected to be in the first quarter order. So we'll give better outlook as we go through the first quarter, we hit that, we'll continue to update this chart and put it into future presentations as we get more visibility.

Saree Boroditsky: Great. And then you talked about developing an e-commerce site for ABT. Could you just talk about the cost of this investment and when you expect this initiative to go fully online?

Ben Stas: Yes. The investment is already behind us. So we've largely made the investment. You'll see that in our refreshed website, and you'll see that disclose and we disclosed the K.

Operator: Our next question comes from the line of Andrew Kapplets of Citi.

Eitan Buchbinder: This is Eitan Bookbinder on for Andy. So your framework for fiscal '21 in revenue and adjusted EBITDA flat to slightly up. How should we think about incremental margins between the two segments during fiscal '21 in light of outsourced water backlog potentially driving mix headwinds in ISS versus APT where volume could be picking up in a gradual recovery?

Ben Stas: Yes. There's a lot of moving parts there. On one hand, you have the benefits of outsourced water, right, as you've noted. On the other hand, you have the challenges due to COVID and higher costs associated with servicing customers in this environment that's likely to continue, particularly if lockdowns become more prominent. So overall, hopefully, for the year, we can achieve a slight increase in margins and continue to do that. But a lot of it depends on what happens with regards to COVID and how things unfold this year. As Ron mentioned, between first half and second half, we have tough comps in the first half, as we talked about earlier. In the second half, in theory, we should have easier comps should cove debate and the vaccine benefits get out there, and we return to more of a normal situation. So it's a bit tough to call at this point in time, Eitan. But overall, we want to continue our journey towards 20%. We'd like to put some points on the Board this year.

Eitan Buchbinder: That's helpful. And then as a follow-up, within organic growth drivers for APT, you list channels and end market expansion, including an international focus. With the understanding that your China business is about $50 million to $60 million in sales, what do you see as your potential growth trajectory in China where the economy is experiencing a faster recovery relative to other geographies?

Ben Stas: Yes. That, hopefully, will return into that double-digit growth area this year. Again, a lot of it depends on uncertainties of COVID. But certainly, the fourth quarter was extremely encouraging. We saw a large snapback. We did record a single digits growth this year in total for China, and most of that occurred in the fourth quarter after some tough quarters early on because they were hit the hardest. But we feel good about where China is at. And assuming that the COVID abates and we don't get into more shutdowns, we fully expect to return to that double-digit growth rate that we've experienced in the past.

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

Brian Lee: So I know you touched upon this a couple of times throughout the call. But given the moving pieces here that seem to be muting the fiscal '21 outlook versus order trends you're seeing real time. Can you help maybe quantify a bit what the assumptions or expectations are around a couple of these pieces? I guess, the you're calling out the typical order conversion, maybe potentially having some delays there. So what is that? If you can quantify it in any terms, and then on the mix, the outsourced versus capital, sort of how much of a shift year-on-year are you expecting? And then just kind of giving us a sense for what to benchmark to see, if things sort of either normalize or potentially pull in as we move through the year?

Ben Stas: Yes. So on the outsourced the capital shift, our outsourced service backlog has significantly increased, and our capital backlog has decreased and our outsourced service backlog has increased more than the capital backlog has decreased, obviously. Now again, part of that is the microelectronics where we had a very strong first half of the year last year, now we're expecting that orders will come in, that will impact more in the second half of this year, but those are in the pipeline but have not actually before at this point in time. Regarding -- again, a lot of it comes down to what happens with COVID, the uncertainties related to COVID. That impacts the ability to do a lot of things, and it also potentially impacts costs. Should we -- should COVID not be as bad as perhaps per? We don't get the cost, the revenue starts to flow. And maybe we hit the upside case that we have on the chart. If COVID happens a little worse than we thought, maybe you're more in the downside scenario. In both scenarios, we still expect to be relatively stable year-over-year, maybe a slight decline, maybe a slight increase. But again, if you think about it more in a standpoint, pre-COVID to post-COVID, but you don't have a full year of post-COVID in the results. You have a half a year of pre-COVID and a year post-COVID, which makes a more of a muted FY '21, considering those comps.

Brian Lee: Fair enough. That makes sense. And then just second question, and I'll pass it on. Just any initial thoughts maybe on the election implications for the water sector, I guess, particularly in the case of legislation or funding for addressing water contaminants like PFAS. I know the I think the Biden environmental justice plan had some enforceable limits that they were pledging. But seeing anything in terms of development, either at the federal level or state level or expectations, maybe as you think about 2021 in general?

Ron Keating: Yes. We're seeing a fair amount of opportunity come, Brian, just due to the election in a round. I think that's going to be the big key. You do have the Biden/Harris administration that has already put out the environmental justice and equitable economic opportunity. And in that, what they have defined as they're going to tackle PFAS pollution by designating it as a hazardous substance and setting enforceable limits for PFAS. And now I think that's important on enteral level, but we still -- it will take some time for that actually to take hold, and it will take some time and a fair amount of negotiation on the hill to get that wrapped up and complete, I would anticipate. However, states are still moving forward. So we're seeing nice order activity and nice pipeline activity on the PFAS side with individual water districts and states wanting to make sure that they are taking the correct action against that. And then while we have a little bit of a supply chain shift still back to the United States from other areas. We've had industrial customers that have been investing very nicely, and that spoke to our capital sales that we saw in FY '20 in some of the light general industry and other areas, and we anticipate that will deliver longer-term service and aftermarket pull-through just as we focus on all of our capital sales as we go forward. So the great thing about water is it really doesn't matter who's in office. Everybody has to focus on it and make sure that we all have reliable, clean, safe, healthy water ultimately for us as human beings, but also for industry to operate.

Operator: Our next question comes from the line of Andrew Buscaglia of Bamberg.

Andrew Buscaglia: I wanted to ask on into Q1, the kind of the framework that you laid out on Slide 17. How much it seems conservative to me, but how much of that assumes some -- maybe some risk from lockdowns, just given the headlines more recently?

Ron Keating: I would say that we do have concerns about lockdown. And it's not necessarily locked down but more slowdown. So what we've built into our outlook is more slowdown, a little more challenge of getting into locations. This does not have a -- what has potentially been discussed as a four to six-week lockdown built into it.

Andrew Buscaglia: Okay. And then for the full year, is there any color you can give us on the guidance as it relates to both of your segments, do you expect similar growth in each segment? I know there's a lot of puts and takes in either, but any other additional help in modeling that out would be appreciated.

Ron Keating: I would say right now, we want to stick to the annual color that we're giving around flat to slightly up. I think you could apply those across each of the segments fairly consistently.

Ben Stas: And we expect that ISS in this environment due to their large service revenue base and recurring revenue base, they're a bit better positioned than but APT but APT will typically move a little more with the market. And they also have a larger international footprint in APT. So in this environment, ISS should fare slightly better than APT.

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

Unidentified Analyst: This is Francisco on for Joe. Could you expand on your municipal expectations over the next year, given some of the uncertainty, specifically on the CapEx budget side? And any color for the full year would be appreciated.

Ron Keating: Yes. I think if you go back to Slide 14, I'll just walk through again what I gave as the colors. So the colors that we have on the first quarter of '21 is green is up mid- to -high single digits. So that's what we have as municipal wastewater munis breaking water. This is tied to our pipeline. It's tied to our service footprint. And what we have and what we do as well as the backlog that we're sitting on. A lot of that is around retrofit and rehab, not necessarily the expansion and extension of large capital projects. And then the drinking water side is tied to some PFAS activity that we're already servicing. And we anticipate servicing based on some of the orders that we've highlighted on prior conference calls. And again, so green, mid- to -high single digits, blue, up or down 2% to 3% around 0. And then yellow is mid- to -low single-digit decline, and then red is a double-digit decline. And you can use some -- those kind of expectations against modeling with these numbers.

Unidentified Analyst: Great. That's helpful. And then turning to the Evoqua market. Given some of the strength we've seen in other pool exposed companies, can you expand a little bit on -- in terms of what your mix is there? I'm guessing you guys have also let commercial and maybe like theme parks exposure, but what does it look like in that part of the business?

Ron Keating: Absolutely, 100% of our Aquatics business is large. It is large applications around water parks, theme parks, large use facilities with multi-bathers. This is not single home, single-family or even small hotel type. So that's the difference in what you see on the aquatics. And again, this aquatics highlight is for the first quarter, and it's based on backlog, it's based on what we have currently in our pipeline, looking at year-over-year against first quarter of last year, that was pre-COVID.

Operator: Our next question comes from the line of Patrick Baumann of JP Morgan.

Patrick Baumann: Ron and Ben, first off, congrats on a strong year in a tough environment, definitely helping improve the recession resiliency in the business model here. My question is, in the context of the lower year-over-year capital sales you expect for 2021 and the comment that outsourced water is now one-third of ISS sales, which implies it's maybe 22% of the total company, but the my math right. Is this a profile we should expect beyond this year as the business transitions to more outsourced? Maybe you could opine on how that 20 sales of the total company outsourced water -- how that looks five years from now, maybe?

Ron Keating: I'll talk a little bit about the demand curve we're seeing and let Ben discuss the percentages specifically. But what we've seen and I would say that the strategy we've deployed in the broad industrial markets that we serve, driving them to outsourced water and leading with outsourced water is playing out extremely well. Companies are more and more focusing on what their core competency is and how they execute and improve their operational effectiveness. In doing this, the value proposition that Evoqua and our sales teams have been out delivering against let us provide you worry free, clean, pure water for your application, take it on the backside, help treat the wastewater recycle and reuse it back into your facility is resonating extremely well. So our customers are starting to rely more and more on us for outsourced water activities and to treat the full cycle of the water. In fact, what we highlighted even during the call was our largest outsourced water booking that we've had to date is actually a wastewater booking. Historically, that was all focused on process water. So we're seeing that actually shift into the wastewater side of the business where customers typically did not do that, but the cost of treating their concentrated industrial waste is continuing to be more challenging for them. So they're enabling us and bringing us to come in to help them manage their operations so they can bring it around full circle, minimize their liquid discharge and drive sustainability into their operations. So I would say the trends are going to be very positive going forward as you did the math on 20% of the Company's revenue approximately, we would anticipate that will continue to grow. And then you want to highlight some of the growth rates we've seen and what you expect we'll see for going forward on that.

Ben Stas: Yes. I think, Ron nailed it, and we're seeing that in our backlog. And I think the whole COVID situation has the potential to accelerate some things that maybe would have taken a longer period of time. And certainly, outsourced water is one of those things that we could see acceleration in addition to digital. Those two things, we should expect will continue and more and more customers have an increased appetite for outsourced water. I think time will tell. But certainly, what we're seeing in this year's backlog and in our pipeline, is more of that conversion and more opportunities in the outsourced water area.

Patrick Baumann: That's helpful. But is the function is the is the slight growth you expect for this year, more a function of kind of the fact that capital demand was diminished versus the shift to outsourced water such that when returns you could still put up the kind of low to mid single-digit type organic growth you talked about?

Ron Keating: Yes. Yes. So what we're highlighting in the outlook for this year is a larger shift to outsourced water that is less revenue in year 1, but carries out longer-term at a higher revenue level and a higher profit level. So if we're comparing it year-over-year, we had higher capital sales in '20, then we're giving the outlook for '21 on because a fair amount of the projects are shifting now source water.

Patrick Baumann: Helpful. Helpful. And then my follow-up is on the first quarter revenue guide, if I did -- I think you've the Memcor divestiture out, it looks like the guide is like down 5% to 8% year-over-year organically. And it just looks a little bit lower than what the end market slide would imply. I don't know, maybe I'm just miscalculating. But maybe if you could highlight anything in the comps that would -- is there a large project last year? Or is this just conservatism? Just trying to understand kind of a little bit of disconnect there in revenue versus end markets?

Ben Stas: A little both in both, but remember last year, we still had Memcor. So it's about $14 million that won't occur this year. So when you do that, you're more like that mid-single digits decline year-over-year with -- if you take the midpoint of that guide. And in addition to that, last year, again, pre-COVID had tough comps and a lot of capital, particularly in the microelectronics area.

Operator:

Ron Keating: So is that all the questions, operator?

Operator: At this time, I'm showing no further questions, sir.

Ron Keating: Thank you. So in summary, I would like to again thank the team members of Evoqua for terrific FY '20 for delivering on the fourth quarter, making sure that we continue to stay safe and healthy and insured continuity of operations to our customers and our communities and the markets that we serve. We are pleased to be able to increase the liquidity and come out of a very unprecedented and challenged year as a stronger company. We entered into '21 and very focused on how we're going to execute, ensuring that we will continue to deliver to our customers, continue to maintain the health and safety of our team members, and continue to manage our balance sheet and the capital of the business very effectively while investing in our strategy going forward. So thank you all for joining us for the call. I appreciate the questions and the interest in the Company and look forward to speaking with you again in the future.

Operator: And thank you, this concludes today's Evoqua Water Technologies fourth quarter 2020 Earnings Conference Call. You may now disconnect your lines at this time, and have a wonderful day.