August 05 2022, 12.00am
The year 2015 witnessed the launch of the SAP S/4HANA solution. The solution can be equipped with all the advanced technologies you can seek in an ERP solution. Following this launch, SAP announced that support for the legacy SAP ECC solution would end by 2025. However, this deadline is now extended till 2027 for many different reasons.
Nonetheless, SAP customers were quick to get to the point that they soon had to migrate to the SAP S/4HANA solution. But migrating to a new ERP solution is always much easier said than done. This got much thinking about the ideal methodology for SAP S/4HANA migration.
But there is hardly a single methodology that serves everyone. Different businesses and organisations have different requirements. Yet here are some pointers you can leverage to facilitate a successful transformation to SAP S/4HANA.
Migrating to a new ERP solution means organisation-wide disruption impacting every aspect of the business. As a result, it becomes imperative to have a well-defined plan to go through with the transformation. In this plan, you need to describe every ingredient or aspect needed to facilitate a successful transformation to Accely’s SAP S/4HANA.
So, it is better if you start by understanding the perks you can derive from cloud technology. There are many perks, such as enhanced visibility, seamless data utilisation, driving better innovation, and more. Following this, inform stakeholders about the transformation and spark an interest in them. Never undermine the significance of effective communication when it comes to SAP S/4HANA transformation.
Furthermore, you can facilitate a Transformation Excellence Centre to augment your efforts for solution design, reusability, training, and more. Besides that, the centre can also help you facilitate effective group purchasing and risk management.
Finally, you need to establish a practical model for managing the transformation project. There are many different project models people use these days to facilitate a smooth transition to SAP S/4HANA. So, it is recommended you weigh all your alternatives and pick the project model that best serves the distinct requirements of your business. Once you have a model in place, you can choose the agile approach and facilitate effortless transformation.
SAP S/4HANA migration is a complex process that drains a lot of time and effort from the business end. As a result, it becomes very easy to find oneself lost in between where anything does not make sense anymore. Such adversity can have severely detrimental implications for the overall migration process.
Thus, the best way to deal with such challenges is to have effective leadership to guide you and help you navigate through all complexities. Seek assistance from business leaders to get a practical approach for your SAP S/4HANA migration. Besides that, leaders know what is best for the organisation, so it becomes much easier for them to choose the right approach to drive organisation-wide transformation.
The other thing you need to keep in mind is business needs, and not technology alone must drive that transformation. When you focus on addressing your business needs, finding the right tools and practices that serve your business requirements becomes easier. Additionally, this will help you review your business processes and understand how SAP S/4HANA can address them. Focus on key aspects such as outcomes, key roles, processes, experiences, and, most importantly, data.
Every business needs to leverage a different approach toward its SAP S/4HANA transformation. This is important because different businesses have unique requirements based on their industry and the status of the SAP system. Nonetheless, that does not mean all these approaches are always very different from each other.
Instead, there are always some core principles that make SAP S/4HANA transformation a business project for everyone. Thus, you need to keep in mind that your ERP solution is competent enough to serve the future requirements of your business. Apart from that, you need to get a detailed understanding of your existing business processes. This will help ensure you need to carry the previous bottlenecks into new systems.
For instance, you can start with a brand-new implementation model that simplifies SAP S/4HANA implementation for your business. Following this, you need to take a smarter approach to data migration. This means leveraging selective data transition, where you let go of unnecessary data that will clutter your new system. However, you can also choose to keep your historical data and investments in the SAP S/4HANA solution extensions.
The final thing you need to keep in mind is never to undermine the significance of facilitating effective communication with everyone involved in the process. Business leaders have the potential to either make or break a transformation such as this. So, focus your efforts on generating awareness about the solution and providing people with the necessary training opportunities.
When you communicate with your people effectively, it automatically aids in enhancing commitment among people. This also helps keep people around you motivated and inspired enough to go through with the transformation. Also, do not delegate these communications but make sure you are personally involved in the process. This will enhance your reliability, helping you drive effortless transformation.
Effective training and communication will keep everyone informed about the changes they can expect in the coming times. Remember, the people driving or facilitating the transformation are also your people, so you need to focus your efforts on helping them with the transformation. Informing them about ways the transformation will impact their job or tasks can go a long way in facilitating an effective and seamless transformation to the SAP S/4HANA solution.
SAP S/4HANA transformation will always be complex, but that does not mean one cannot go through with it. Be mindful of the aforementioned tactics and tips to simplify tour SAP HANA migration with no hassle. Besides that, you can even seek assistance from SAP experts to help you with the transition.
Energy and carbon neutrality are hot courses of conversation today due to the rapidly escalating costs consumers are paying for gasoline and electricity, and increasing concerns about global warming, climate change, and the future of the planet.
As a technology executive for a leading energy producer, Alejandro Reyes shares those concerns, not only because he also feels the pain at the pump, but also because many people may view energy companies as a source of the problem. This is not the case at Applied Energy Services (AES), which was founded as a consultancy in 1981 and today is a leading independent energy company and a pioneer in sustainability efforts such as carbon offset programs, reforestation, and renewable energy technologies.
Reyes has been with AES since 2007, working his way up the organization ladder from an SAP integration lead in Buenos Aires to application security manager, IT project director, and director of digital transformation today. In his current role, he is responsible for developing innovative solutions to drive revenue and better serve the company’s customer base, and he works closely with other executives to forge new paths toward a more energy efficient and sustainable future.
Reyes accomplishments and success in the IT industry was acknowledged last year in an award-winning CIO.com article profiling Hispanic technology executives who have broken through barriers to rise to the top of the IT industry, paving a path for others to follow.
AES’s digital transformation chief recently took part in a CIO Executive Council Future Forward podcast interview, during which he discussed courses such as sustainability and the use of enabling technologies like AI and machine learning, the importance of investing in predictive analytics and so-called ‘smart grids’ to Boost operations and be more in tune with changing customer demands and requirements. Click on the podcast players below to listen to Parts 1 & 2 of the conversation. Following are excerpts from this conversation with Reyes.
Tim Scannell: Customers today are taking more responsibility in controlling their energy usage. What kind of an impact does that have on the IT organization in terms of objectives and planning, or developing more customer-facing tools?
Alejandro Reyes: The change is widespread on the customer-facing side and impacting our operational side since the use of mobile apps and engagements are becoming more common. There’s an expectation that you have to be available on Facebook, on Twitter, and on Instagram to answer questions. You also have all these different channels that are a constraint to some of the legacy technologies. One of the main priorities of the team is how to partner with the business to create and support all these channels and ways that customers want to engage
There are also commercial and industrial companies trying to fulfill their commitments on sustainability and partner with companies like AES to provide renewable energy services. For this customer segment there are some very specific technology solutions we need to provide that let them see energy produced, consumed, and the need for extra capacity.
From an operational perspective, we also have to make investments in a smart grid, in smart meters, and in the way that we collect and send that information to our customers, so the grid becomes more of a self-healing network.
Data analytics and business intelligence are critical to every business, but especially important in the energy industry, as information is channeled from consumers and commercial clients related to usage that feeds into AES’ sustainability and services planning. What role does AI and machine learning play in this effort, not only for general analysis but for predictive analytics as well?
Reyes: We started a program in 2019 for analytics, AI, and machine learning and began by working heavily with the business to identify areas of potential ML use cases. In the two or three years since then we have models that have significantly helped our business in such areas as predictive maintenance by combining data from different sources.
We have also developed a team of data scientists, with different levels of expertise, who are experts in looking at the data, identifying trends, and making sense of it. We also have others on the business side who are very focused on how we produce energy and how the assets are maintained. What we’re trying to do now is have discussions with, with our businesses to understand what problems they’re seeing, and then try to relate that with the data that we have. We are also combining that with data from different sources as a pilot to see if it makes sense and tests out a hypothesis. If it doesn’t work, and we don’t understand why, then, we pivot to a different model and a hypothesis.
What is the biggest challenge for you in this area right now?
The technologies that we have in place are not up to date. That’s one. The second is the data quality in our legacy systems. It’s not complete enough to make good recommendations or decisions to our business. So, as we implement new solutions, we are looking at the data quality component and really thinking through why it matters to collect certain data in some categories and making sure that solutions are part of that new implementation. So, data quality is definitely one of our biggest challenges that is tied closely to the foundational changes.
Attracting and retaining qualified talent is a priority with most IT organization today. Looking at your entire staff, what are you planning to do in terms of personnel over the next six to eight months?
Reyes: Right now, we want to become a little better in applications management. We want to become more agile and push the boundaries in how we are implementing our solutions, so we are looking to add more in that area. Investments over the last couple of years have been on data analytics and the business relationship sides so that we have better alignment in prioroties and know that we are working on the same things. But agile development and applications development are areas where we want to grow over the next couple of years.
Technology leader and co-founder of Opkey — a continuous testing platform redefining test automation for web, mobile and ERP applications.
Many business and technology leaders realize that their digital transformation initiatives can’t be utilized without modernizing their enterprise resource planning (ERP) software. Incorporating new technologies such as artificial intelligence and machine learning is essential to modernizing ERP solutions.
Through a 2019 study of ERP migration and transformation projects, McKinsey revealed that two-thirds of enterprises did not get the ROI they were looking for from their migration project. The common reasons for this dissatisfaction are delays in ERP implementations and misaligned project goals. Intelligent test automation, which powers a continuous testing approach, will help ERP transformation projects run on time and stay within budget.
Continuous testing for ERP applications: Why do you need it?
Next-gen ERPs and digital operations platforms require innovative software to be released rapidly, with minimal business risk. Leading analysts from Gartner, Forrester (paywall) and IDC (registration required) now recognize that software testing in its current form cannot handle the challenges posed by ERP applications. These analysts have concluded that software testing must be aligned with DevOps and AgileOps practices to handle giant ERP transformation projects.
The Agile/DevOps approach is incomplete, inefficient and ineffective without continuous testing. In ERP migration projects where platforms are extended to incorporate new features, functionalities and technologies, continuous testing helps you transparently validate the performance of critical business processes. This significantly reduces the risks associated with a new implementation, along with scheduled software updates. By catching bugs early in the development cycle, continuous testing ensures minimal time and budget overruns while providing advantages in risk reduction.
What are the testing challenges of ERP transformations?
According to a report by Bloor (registration required), more than 80% of migration projects ran over budget in 2007. While I have seen that statistic Boost over the years, I know migration projects regularly face issues of running over budget and over time. A 2019 ERP report from Panorama Consulting Group (registration required) shows that 45% of respondents had an average budget overrun of 30%.
Here are some specific testing challenges.
• Unclear Testing Scope: Determining what to test remains a major challenge for QA teams. The business risk grows every time too little testing is done. If you test too much, it wastes the time and resources of your business users.
• Inadequate Test Coverage: There are many moving parts in any ERP migration project. Functional and nonfunctional attributes get added, updated or removed with these migrations. Testing needs to pass various stages, from a unit test to a volume test, and eventually a mock go-live cutover.
• Change Frequency: In a recent Deloitte CIO survey, almost 45% of respondents reported that managing changes in an ERP project scope is one of the top frustrations in planning their ERP journey (pg. 10).
• Testing Fatigue: ERP projects are long and tedious processes. Using a manual testing methodology for ERP transformations can be inefficient and error-prone. Ask yourself: “Can my business users give their full effort to testing?”
Continuous testing for ERP applications: How can I make it work?
To incorporate continuous testing for a digital transformation, leaders must utilize automation. Teams should now focus on next-generation automation platforms that allow them to quickly build test cases, automate them and build the infrastructure to run them in a continuous fashion. Let’s review the four pillars of a continuous testing strategy.
• Know your ideal coverage: Here are some questions to ask yourself: “What’s my current test coverage? Am I testing all of our critical processes? If something goes seriously wrong, is it because I didn’t test enough?”
If the test cases you are automating only cover 30% of your core business processes, the automation might not be good enough. Emphasize knowing your ideal coverage and leverage a process mining technology to validate your ideal coverage. Test mining techniques surface your existing test cases, business processes and configurations from your system process log to determine your existing testing baseline.
• Apply continuous test development: Test assets require considerable reworks to keep pace with the frequent ERP changes typical in an accelerated release cycle. This speed cannot be achieved with continuous testing.
• Monitor changes continually: Ask yourself: “What has changed in the most recent ERP quarterly update? What business processes or test cases are going to be impacted?”
Emphasize the importance of knowing whether you are testing what is needed. Before the updates are pushed to production, use automation tools that give better change visibility to users by alerting them of processes that will be impacted.
• Test execution at scale: Prepare a scalable infrastructure to run thousands of tests on-demand with every change. Opt for a platform that can run your tests continuously on-premises, in the cloud and on mobile seamlessly.
What do you need from a test automation tool?
Three key capabilities must exist in a test automation tool to support an ERP transformation’s continuous testing paradigm.
• Autonomous Configuration Of Tests: Many changes happen at the configuration level for any ERP transformation. Leaders should leverage an automation tool that can autonomously create relevant data sets for test execution.
• Continual Impact Analysis: In the ERP world, updates are rolled out frequently. QA teams can find it difficult to decide the minimum number of test cases that need to be executed to ensure business continuity in post-application updates. AI-based impact analysis recommends a minimum number of test cases that need to be executed based on highlighted risks, keeping business application disruptions at bay.
• Autonomous Self-Healing Tests: QA teams often struggle to continuously maintain test scripts with each new release. Through leveraging AI-powered self-healing capabilities, changes can be identified automatically and test scripts can be fixed autonomously.
Continuous Test Automation: A Summary
The key to successful AgileOps is releasing updates as early and as often as possible.
With enterprise application vendors like Oracle, Microsoft and SAP rolling out updates on a weekly, monthly or quarterly basis, enterprises need to embrace those updates as early as possible. However, supporting your software testing initiatives will only be achieved with the right continuous testing strategy.
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Next celebrated its 40th birthday in style last month. The retailer’s feted boss, Lord (Simon) Wolfson, mingled with head-office staff and store managers in a carnival atmosphere at Birmingham’s National Exhibition Centre. Guests loaded up at the free bar and danced the night away. Others enjoyed the dodgems and the waltzers. Some just sat back in a deckchair with an ice cream.
A casual observer would never have guessed it, but behind the scenes, the mood among some of Next’s 43,000 workers has, in reality, turned toxic.
The tens of thousands of people working in Next’s stores and warehouses — who were not invited to join last month’s festivities — have borne the brunt of a disastrous implementation of a new Oracle payroll system.
Workers on the minimum wage have been significantly underpaid, while others are being overpaid, causing some to lose access to their benefits amid the worst squeeze on living standards for 60 years.
As serious as the current situation is, though, the issues at Next appear to run much deeper.
In this investigation, we reveal that:
● HM Revenue & Customs is investigating whether Next is paying workers the national minimum wage.
● Next inadvertently over-claimed money from the coronavirus job retention scheme without giving 4,000 members of staff the furlough payments that they were due.
● HMRC has reclassified Next from a low-risk taxpayer to a medium-risk taxpayer.
These revelations appear to stand at odds with the widely held perception of Next as a well-oiled machine. Under Wolfson, the fashion chain has defied gravity on the high street, pumping out record pre-tax profits of £823 million last year. And last week, it raised its profit forecast for this year by £10 million to £860 million after shoppers flocked back to stores.
Meanwhile, workers have been suffering. “More than a dozen people in my store didn’t get paid right last month,” said one shop-floor employee. “One girl was overpaid, so her benefits were stopped and she had to borrow money off her parents to pay her bills and feed her young son. Another girl literally didn’t have the money to pay for her bus fare to work. Morale is awful — I have never known it to be as bad as this.”
The hardships inflicted on staff pose difficult questions for finance director Amanda James and operations director Richard Papp, who oversaw the roll-out of the Oracle software system.
Wolfson, 54, is a master of detail who immerses himself so deeply in the business that he personally signs off requests for additional headcount in shops and warehouses. The Conservative life peer meticulously managed the leases on Next’s portfolio of 477 stores to ensure it had the flexibility to close poor performers as trade drifted online. And he decisively capitalised on Next’s advantages as a one-time catalogue retailer by establishing a service to run other retailers’ online operations. Any investors who bought Next shares 21 years ago, when Wolfson took over, would now be sitting on a near 2,000 per cent return.
Prudence is the watchword at Next. Wolfson prefers to utilise its in-house expertise rather than rely on consultants or third-party software providers. The retailer has largely designed its own systems, developed and supported by a vast IT department of about 1,000 workers. The attempt to integrate those systems with Oracle’s has been at the heart of the operational meltdown.
HMRC requires companies to use a licensed, third-party payroll provider. Next had to find a new one after learning that its previous software would be discontinued this year. In 2018, it is said to have signed a five-year licence with Oracle, and has paid the software giant more than £10 million to date. Oracle did not respond to a request for comment for this article.
The implementation of the payroll system has lasted the best part of four years. As the deadline neared, a team of more than 50 people worked round the clock to try to ensure the system was ready, with some workers putting in dozens of hours of overtime at double pay for several weeks.
Staff have complained of not being paid, being paid too much, or having deductions taken for paid-off student loans
Next even dished out an “implementation bonus” — a reward for failure that irritated some head-office staff.
The retailer blamed the botched implementation on the pandemic, which led Next to divert key team members to establishing its furlough payments system. It also acknowledged that it had tried to replicate too much of the functionality from its original payroll system in too tight a timeframe, meaning that Next went live with an untested system.
One source close to the failings, though, said that the company’s insularity and the attitude that “Next knows best” was at the root of the problems — a characterisation the company rejected.
Either way, the consequences have been dire. The company had expected that the switchover would prevent it from being able to hire staff for its retail business for two weeks — but it was actually unable to hire anybody for six weeks. Some employees who had paid off student loans years before noticed deductions suddenly restarting. Meanwhile, pension contributions were deducted from staff pay packets without being invested — although Next said it was confident that no workers would ultimately lose out from these mistakes.
The disruption, cruelly, has been most severe for Next’s shop-floor workers, who are paid the minimum wage of £9.50 an hour. The switchover to the Oracle system in February resulted in thousands of staff being paid incorrectly. One member of the retail workforce said that despite not being paid what they were owed, staff were having to work harder because they had been told to re-label thousands of garments with higher prices.
“Some people just weren’t being paid for months. Affected staff have been calling up crying and, in the worst cases, they have even been suicidal,” said one head-office insider. Another source said that workers in the payroll department “just looked broken”.
Next said this was not a fair reflection of the general interactions. “We acknowledge the frustration many colleagues have felt and reiterate our sincere apologies. We have made huge progress and continue to work very hard to resolve the situation,” a spokesman said.
The retailer’s response was to write another system to catch and correct errors produced by the payroll software before money is paid to staff. Despite that, 219 retail workers were underpaid in Next’s latest weekly payroll cycle and a greater number are thought to be getting overpaid, with the risk of benefits being withdrawn. The company said all underpayments were now being rectified within five working days and that improvements in the process were dramatically reducing error rates.
Lord (Simon) Wolfson, the chief executive of Next
CHRIS RATCLIFFE/GETTY IMAGES
Like many retailers, there is a chasm between the earnings of workers and Next’s top brass. Last year, Wolfson was paid £4.4 million, equivalent to 245 times the average Next employee. Papp and James earned £2.2 million each.
“I was underpaid by more than £500 … I have just given that up,” one warehouse worker said. “Now the system is telling universal credit I have not been to work, so I received almost £800 [in benefits] that I wasn’t due. I have been told that I have to go and look for a job with the job centre, but I am working damned hard because we are that short-staffed. It is demoralising.”
Next said it believed there were no outstanding underpayment queries among warehouse workers that were more than two weeks old.
Jo Mackie, leader of the employment practice at law firm Slater and Gordon, said that, theoretically, HMRC can punish companies if software issues lead to staff being underpaid — although the liability would be subject to the terms of the contract between the employer and the software provider. In 2013, National Grid agreed to pay £4 million to compensate more than 8,000 American workers after the botched implementation of a SAP payroll system meant it failed to pay overtime to workers repairing damage caused by Hurricane Sandy.
Wolfson, though, has other problems to worry about. In May, HMRC wrote to the directors of Next advising them that it had opened an investigation into whether the retailer was paying its workers the “correct rate” of national minimum wage.
The inquiry is understood to have been triggered by a complaint from a member of Next’s retail workforce. HMRC has informed Next that the investigation will encompass its entire corporate structure, including any subsidiary companies. HMRC declined to comment.
“In general terms, it is not uncommon for HMRC to audit large employers and their adherence to national minimum wage regulations,” a Next spokesman said.
If the taxman finds companies guilty of underpaying staff, it can force them to make good the underpayment and levy penalties of up to 200 per cent of the arrears.
HMRC also reclassified Next from a low-risk taxpayer to a medium-risk taxpayer. The change came after the company admitted that it had over-claimed £4.3 million of furlough cash, which it repaid in January. After making what was intended to be a final disclosure, Next is said to have realised it had over-claimed an additional £3 million, which has since been repaid.
Additionally, the retailer discovered it had underpaid roughly £2 million of furlough cash to about 4,000 employees. It has repaid all current employees who were out of pocket, but admitted that about 900 former employees, who have been contacted, have yet to be repaid. Next attributed the mistakes to the regular amendments of the Covid scheme, adding that they were a challenge for all companies to deal with. The company said it had a “clear path” to return to a low risk rating with HMRC.
Still, the litany of recent mis-steps will shock Wolfson’s acolytes in the City. Just like Next’s staff, they will be hoping these are no more than a blip.
Security at the speed of cyber: What is CISA’s Binding Operational Directive (BOD) 22-01?
The Biden Administration is continuing efforts to adopt new cybersecurity protocols in the face of ongoing attacks that threaten to disrupt critical public services, infringe on citizen data privacy and compromise national security.
On November 3, 2021, the Cybersecurity and Infrastructure Security Agency (CISA) issued a directive for federal agencies and contractors who manage hardware or software on an agency’s behalf to fix nearly 300 known cyber vulnerabilities that malicious actors can use to infiltrate and damage federal information systems. These known exploited vulnerabilities fall into two categories, each with a deadline for remediation:
90 vulnerabilities that were discovered in 2021 must be remediated by November 17
About 200 security vulnerabilities that were first identified between 2017 and 2020 must be remediated by May 3, 2022
As part of the directive, CISA also created a catalog of known exploited vulnerabilities that carry “significant risk” and outlined requirements for agencies to fix them. The catalog includes software and configurations supplied by software providers like SolarWinds and Kaseya, and large tech companies like Apple, Cisco, Google, Microsoft, Oracle and SAP.
Improving the nation’s cybersecurity defenses continues to be a top priority as the country has experienced an unprecedented year of cyberattacks. Malicious actors are continuing to target remote systems and prey on known vulnerabilities as the pandemic continues, leading to public service disruptions in telecommunications and utilities.
This directive comes just shy of six months since President Biden issued his Executive Order on Improving the Nation’s Cybersecurity, which aims to modernize cybersecurity defenses by protecting federal networks, strengthen information-sharing on cyber issues, and strengthen the United States’ ability to quickly respond to incidents when they occur.
While the Biden Administration and many federal agency heads agree that these actions are necessary to Boost cybersecurity protocols — they can be extraordinarily difficult to implement without the right tools.
In the next section, we will explore how federal agencies and their security teams can gain visibility across distributed environments to remediate vulnerabilities outlined in the directive.
Gaining visibility into federated IT environments
While most federal agencies are headquartered in Washington, D.C., field offices and agency staff are spread across the country, using many different endpoints (laptops, desktops, and servers) to access federal networks. This distributed IT environment can make it difficult for CISOs and their security teams to gain visibility into their agency’s environment in real time.
To comply with CISA’s BOD 22-01, security teams first need to gain visibility across federated IT environments and be able to answer a few basic questions, including:
How many endpoints are on the network?
Are these endpoints managed or unmanaged?
Do any known exploited vulnerabilities cataloged in the
directive exist in our environment? If so, do we currently have
the tools to patch them quickly and at scale?
Do we have the capability to confirm whether deployed
patches were applied correctly?
While these questions may seem straightforward, they often take agencies weeks or months to answer due to a highly federated
IT environment and the nature of IT management, which often includes tool sprawl and conflicting data sets — which is at odds with the aggressive timelines outlined in the directive.
With Tanium, CISOs and their security teams can discover previously unseen or unmanaged endpoints connected to federal networks, and then search for all applicable Common Vulnerabilities and Exposures (CVEs) listed in the directive in minutes. With Tanium, it only takes a single agent on the endpoint to obtain compliance information, push patches and update software. Tanium provides a “single pane of glass” view to help align teams and prevent them from spending time gathering outdated endpoint data from various sources.
As CISA has committed to maintaining the catalog and alerting agencies of updates for awareness and action, having a unified endpoint management platform that provides visibility across an organization gives CISOs and their teams the tools they need to scan and patch future vulnerabilities at scale.
In the next section, we will explore how federal agencies and their security teams can prioritize actions and deploy patches to meet deadlines outlined in the directive.
Prioritizing actions and patching known vulnerabilities quickly
Once agency heads and their security teams have a clear picture of the state of their endpoints, the next step is to pinpoint known vulnerabilities and fix them fast based on associated deadlines in the directive.
With Tanium, federal agencies can search for the specific vulnerabilities listed in the directive and then patch those vulnerabilities in minutes, while having the confidence that patches were applied correctly. As a single lightweight agent, Tanium doesn’t weigh down the network. Remediation typically takes less than a day if an agency is already using Tanium. Existing customers should reference this step-by-step technical guidance on how to address the vulnerabilities laid out in the directive.
In addition to fixing known vulnerabilities, the directive also outlines other actions federal agencies must take, including:
Reviewing and updating internal vulnerability management procedures within 60 days.
At a minimum, agency policies must:
• Pave the way for automation around a single source of truth with high-fidelity data and remediate vulnerabilities that CISA identifies within a set timeline
• Assign roles and responsibilities for executing agency actions to align teams around a single source of truth
• Define necessary actions required to enable prompt responses • Establish internal validation and enforcement procedures to ensure adherence to the directive
• Set internal tracking and reporting requirements to evaluate adherence to the directive and provide reporting to
CISA, as needed
Reporting on the status of vulnerabilities listed in the catalog.
• Agencies are expected to automate data exchanges and report their respective directive implementation status through the CDM Federal Dashboard
As new threats and vulnerabilities are discovered, CISA will update the catalog of known vulnerabilities and alert agencies of updates for awareness and action.
Many federal agencies already use Tanium to provide visibility and maintain compliance across their distributed IT environment. Federal agencies can count on Tanium to be a valuable tool in discovering, patching and remediating future known critical vulnerabilities.
Tanium in action: scanning distributed networks and remediating at scale
While CISA has previously imposed cybersecurity mandates on federal agencies to immediately fix a critical software problem, this new directive is notable for its sheer scope and respective deadlines. Leveraging Tanium, federal agencies and contractors who manage hardware or software on an agency’s behalf can patch known critical vulnerabilities and comply with the deadlines in a fraction of the time.
The Tanium platform unifies security and IT operations teams using a “single pane of glass” approach of critical endpoint data, so that federal agencies can make informed decisions and act with lightning speed to minimize disruptions to mission-critical operations.
With Tanium, you can get rapid answers, real-time visibility and quickly take action when addressing current vulnerabilities in BOD 22-01. As CISA adds more vulnerabilities to the catalog, you can have confidence that Tanium is constantly checking for compliance and patching your endpoints quickly across your environment.
To learn more about how Tanium can help your agency remediate known vulnerabilities outlined in the CISA directive, visit Tanium.com/cisa
Evoqua Water Technologies Corp. (NYSE:AQUA) Q3 2022 Earnings Conference Call August 2, 2022 10:00 AM ET
Dan Brailer - Vice President, Investor Relations
Ron Keating - President and Chief Executive Officer
Ben Stas - Executive Vice President and Chief Financial Officer
Conference Call Participants
Deane Dray - RBC Capital Markets
Nathan Jones - Stifel
Andrew Buscaglia - Berenberg
Saree Boroditsky - Jefferies
Bryan Blair - Oppenheimer
Joe Giordano - Cowen
Andy Kaplowitz - Citigroup
Pavel Molchanov - Raymond James
John Walsh - Credit Suisse
Brian Lee - Goldman Sachs
Hello and welcome to the Evoqua Water Technologies Third Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, this conference call is being recorded and your participation implies consent to our recording of this call. If you do not agree with these terms, please disconnect at this time.
I would now like to turn the call over to Dan Brailer, Vice President of Investor Relations. Please go ahead.
Thanks, everyone for joining us for today’s call to review our third quarter 2022 financial results. Participating on today’s call are; Ron Keating, President and Chief Executive Officer; and Ben Stas, Executive Vice President and Chief Financial Officer. After our prepared remarks, we’ll open the call to questions.
This conference call includes forward-looking statements, including our fourth quarter and full fiscal year 2022 expectations, long-term financial targets, statements relating to our demand outlook in end-markets, growth opportunities, our order pipeline, order conversion, cash generation, our acquisition strategy and pipeline, integration and future performance of our recent acquisitions, supply chain challenges, inflation, labor shortages and general macroeconomic conditions. actual results may differ materially from our expectations.
For additional information on Evoqua, please refer to the company’s SEC filings, including the risk factors described therein. On this conference call, we’ll also discuss certain non-GAAP financial measures. Information with respect to such non-GAAP financial measures is included in the appendix of the presentation slides for this call, which can be obtained at Evoqua’s Investor Relations website.
Unless otherwise specified, references on this call to full year measures or to a year referred to our fiscal year, which ends on September 30th. Means to access this conference call via webcast were disclosed in the press release, which was posted on our Investor Relations website. Replays of this conference call will be archived and available for the next 14 days.
With that, I would now like to turn the call over to Ron. Ron?
Thank you, Dan and thank you for joining us. I appreciate your interest Evoqua and I’m pleased to provide insights and our results and outlook. We had a strong third quarter, and I’m pleased with the overall results. Market demand remains robust, despite inflationary pressures and supply chain challenges. We’re tightly managing our lead times and any potential disruptions that may impact our order conversion time. We continue to experience a robust pipeline, and this quarter’s order growth was again very strong.
Please turn to Slide 3. Overall organic revenue growth in the third quarter was approximately 9% year-over-year. We’re particularly pleased to see broad-based diverse – diversification of organic growth across all regions, most product lines as well as growth across aftermarket, capital and service. As mentioned, demand remained solid and order growth is robust with our book to bill ratio continuing to be greater than 1.0.
Organic revenue growth on a trailing 12-month basis is about 10% and we’ve made three acquisitions since January 1st. The team has done a great job of pushing price and we remain price-cost positive for the quarter and the year-to-date. Adjusted EBITDA on margin was down 40 basis points for the quarter, but expanded 30 basis points year-to-date. We were pleased to see APT’s Q3 year-over-year adjusted EBITDA margin expand by 1.3%. ISS margin declined by 1.9% based on various items that Ben will discuss in later slides.
We completed our second quarter with Mar Cor and continue to be pleased with the progress. The integration is on track and we’re working to complete our SAP system conversion by the end of Q2 in 2023. Our balance sheet and liquidity strengthened, and we continue to focus on cash flow generation. Our operating cash flow and adjusted free cash flow on an LTM basis improved sequentially versus Q2. Our liquidity increased to $267 million and our net leverage ratio improved to 2.9 times. Cash flow continues to be a priority to fund investments in organic growth, tuck-in acquisitions, and to further Boost the balance sheet through debt reduction.
Please turn to Slide 4. Water is an essential element for daily life, whether for human consumption, industrial production or commercial purposes. Manufacturers are requiring more stringent levels of ultrapure water, while wastewater reuse has become vital in protecting diminishing water supplies and reducing the strain on municipalities. As water becomes more complex, Evoqua’s essential treatment technologies make clean water more accessible. Because of this, the long-term market trends are very favorable, and we expect our business to remain resilient through normal market cycles.
This slide highlights key financial metrics that we expect to be annually resistant – resilient over the long-term. Organic sales growth, adjusted EBITDA margin and cash generation. Each of these graphs highlight our resiliency through the FY ‘20 and ‘21 COVID pandemic with growing and strong free cash flow in a demand-constrained market. This is due in part to our recurring revenue streams with service and aftermarket making up approximately 60% of our revenue. Digitally connected outsourced water, strong and growing end-markets and our industry-leading service are just a few drivers for organic growth in favorable and unfavorable market conditions.
As stated previously, we remain price-cost positive on an absolute dollar basis. Intense inflationary costs have been dilutive to margins in FY ‘22. For the quarter, inflationary costs impacted adjusted EBITDA margin by approximately 40 basis points, which improved from a 70 basis point impact in the second quarter. We continue with robust pricing processes and we expect to remain price-cost positive in the fourth quarter. Despite these headwinds, we maintain our long-term target of 20% adjusted EBITDA margin.
Our management team is focused on driving strong and consistent cash generation. Our strong base of stable, profitable and recurring revenue provides an attractive foundation for cash generation. We have managed working capital well and see additional opportunities for improvement over time. We continued to target adjusted free cash flow conversion of over 100% or higher and we’ve achieved that on an LTM basis for several years.
Please turn to Slide 5. This chart represents our fourth quarter expected order activity by end-market compared to the prior year’s fourth quarter. As shown, we expect to see strong orders in the fourth quarter across most end-markets, particularly Life Sciences, Food & Beverage, Light & General industries. Power and Refining are improving from prior quarters’ outlet with favorable market dynamics across both end-markets.
Expected fourth quarter orders in Microelectronics are showing a decline from last year’s fourth quarter due to very strong Q4 orders last year. We’re well positioned in the Microelectronics market, which has undergone a strong cyclical upturn that we expect to remain. Overall, we expect to see strong order demand across most of our end-markets for the remainder of fiscal 2022.
We do anticipate supply chain and labor challenges creating the potential for order conversion delays on behalf of our customers. At Evoqua, we’re proud of our diverse team of employees executing on fulfilling this demand every day. As we continue to expand our company with skilled team members, we are pleased to be partnering with five HBCUs for talent recruitment in the fall and in the spring.
Please turn to Slide 6. Over past quarters, we’ve highlighted high priority end-markets including Microelectronics, Life Sciences, Renewable Energy, in this quarter, we highlight Food & Beverage. Food, particularly for wastewater treatment has been a key end-market for us since the ADI acquisition in 2017. We have been historically strong in Beverage with processed water and are pleased to see gaining traction for wastewater treatment.
With today’s strict regulatory environment, manufacturing and processing requires high purity water for multiple applications, such as sanitizing equipment. High strength organic contaminants have also driven the need for improved wastewater treatment. And our ADI product line has best-in-class Anaerobic Digestion for these applications. Our portfolio of wastewater technologies allow customers to treat the most difficult organic waste streams, while also helping them to achieve their carbon intensity goals by producing biogas, a source of renewable energy. Our core processed water portfolio also plays a vital role in providing production processed water and utility makeup water into these markets.
Please turn to Slide 7. We look at our environmental impact through our own footprint on the environment, but also through the products and services we provide to our customers. We’re pleased to highlight two recent Handprint wins, which are expected to positively impact our customers’ water conservation and – while generating an attractive ROI.
Bakersfield Renewable Fuels selected Evoqua to design, source and assemble a wastewater system that combined Granular Activated Carbon, Ultra Filtration and Reverse Osmosis technologies to treat up to 375 gallons of water per minute. The system was designed to allow for 75% recovery, with an estimated annual savings of approximately – 140 million gallons of water.
We also helped a dairy processing plant, which experienced significant demand increases by replacing an aging wastewater system. Our Anaerobic Digester was selected to treat up to 2,100 cubic meters of wastewater per day. Through this treatment, we will produce an expected 5,000 cubic meters of biogas per day, which is approximately the average daily usage of 550 US homes.
Please turn to Slide 8. While we continue to invest in long-term organic growth, we see momentum in our – programmatic tuck-in, M&A process as well. We have now closed three acquisitions since January 1st, and we welcome our new colleagues from Smith Engineering and Epicor. Smith Engineering strengthens our service capabilities across key vertical markets, including Life Sciences, Data Centers, Food & Beverage and Microelectronics.
Epicor was an opportunity to vertically integrate the key supplier of specialty resins for the Power market. These acquisitions support our ISS segment. As I mentioned previously, the integration of the Mar Cor business continues to be on track. And we reiterate our expectation for it to achieve 25% adjusted EBITDA margins in the next 12 to 18 months.
I would now like to turn the call over to Ben.
Thank you, Ron. Please turn to Slide 9. For the third quarter, reported revenues were up approximately 19% to $439 million. Organic revenues grew approximately 9% driven by broad-based price realization and volume growth. We saw organic revenues increase in aftermarket, capital and service categories as well as growth across all regions and most product lines versus the prior year.
Third quarter adjusted EBITDA increased 16.3% over the prior year to $77 million for an overall margin of 17.5% Strong volume, favorable price and mix were primary drivers of improved profitability. As Ron mentioned earlier, inflationary impacts drove a year-over-year margin decline of approximately 40 basis points for the quarter.
Please turn to Slide 10. Our Integrated Solutions and Services segment third quarter revenues were approximately 24% to $297 million. Organic revenues grew more than 7% driven by price realization and volume. Service and aftermarket revenues were strong across most end-markets. Organic capital sales were down slightly due to strong prior year sales in Chemical Processing, but largely offset by strength in Microelectronics and Life Sciences. The opportunity pipeline for capital projects and outsourced water is strong and growing. Our digital strategy continues to be an important strategic driver for long-term growth and profitability.
For the quarter and year-to-date, digitally enabled revenues were up 11%. Adjusted EBIT increased 13.9% to $64.1 million due to higher volume, favorable price and the consolidation of Mar Cor’s operations. Adjusted EBITDA margin for the quarter was 21.6%, down 190 basis points from the prior year. Approximately 90 basis points of the decline was the result of prior year one-time benefits from COVID subsidies and favorable settlements of insurance claims as well as return to more normalized travel cost. Approximately 60 basis points of the margin declined was from the dilutive impact of inflation. However, as we discussed, we had favorable price-cost benefits on adjusted EBITDA dollars.
Please turn to Slide 11. We continue to see strong year-over-year growth in ISS backlog. Third quarter backlog was up $81 million or 19% over the prior year. And up 10% versus Q2 of this year. We saw strong year-over-year sequential growth in capital, primarily driven by Microelectronics and Food & Beverage. Our ISS pipeline continues to be robust with opportunities across multiple end-markets. We expect to see our book to bill ratio remain above 1 in Q4. As Ron mentioned, we’re closely monitoring our pipeline and order book as supply chain visibility creates the potential for shipment delays in Q4.
Please turn to Slide 12. Applied Product Technologies’ third quarter revenues were approximately $142 million, up more than 9%. Organic revenues increased $16.6 million or 12.8% driven by strong volume, growth and price realization as well as growth across all regions and most product lines. Adjusted EBITDA for the third quarter increased 15.5% to approximately $33 million.
Adjusted EBITDA margins increased 130 basis points to 23.1% driven by volume, favorable mix, but partly offset by inflationary impacts. Over the last several years, we’ve undertaken significant footprint consolidation actions in APT, going from 16 manufacturing centers in 2018 to 10 locations. This – consolidation has provided for better fixed cost absorption, which has driven improved margin performance from higher organic revenue growth.
Please turn to Slide 13. One of APT’s long-term organic revenue growth initiatives is to develop new and innovative technologies that expands our product portfolio and pursues market share gains in core markets. We’re pleased to highlight two newly opened APT global manufacturing facilities in the United Kingdom and Singapore. The UK facility will serve as a global center of excellence in developing leading edge ATV, UV disinfection solutions, and the – manufacturer of our Wallace & Tiernan product lines. Our Singapore core facility will manufacture Ionpure, a leading product in the Microelectronics market and is expected to support Evoqua’s growth and market development plans for the Asia-Pacific market.
Please turn to Slide 14. Capital spending, primarily for outsourced water orders was approximately $22 million for the quarter or approximately 5% of revenues. Third quarter net working capital was 16% of LTM sales. This includes net working capital acquired in the Mar Cor acquisition, which was $48 million as of the business’s opening balance sheet. Net working capital also increased to support strong organic order rates supported by higher inventory levels. As we have indicated in the past, over the long-term, we anticipate net working capital to sales could be in the low-teens range, given some projects may have varying amounts of working capital requirements.
Please turn to Slide 15. Year-to-date operating cash flow was approximately $87 million in Q3 versus $103 million in the prior year. Adjusted free cash flow as a percentage of adjusted net income was 104% on a year-to-date basis. We were pleased to see our adjusted cash flow conversion returned to over 100% as we continue to support strong organic growth and capital expenditure investments, primarily for outsourced water orders.
Our reported net leverage ratio finished at 2.9 times and is now within our targeted range of 2.5 to 3 times, maintaining a strong and flexible balance sheet remains a key priority for Evoqua. Our weighted average cost of debt for the third quarter is approximately 3.3%, up approximately 60 basis points over the prior year. Approximately 65% of our $975 million total debt has a fixed rate or is fixed through an interest rate swap, which is in place into 2026.
I would now like to turn the call back over to Ron. Ron?
Thank you, Ben. Please turn to Slide 16. We had a strong quarter with outstanding results across most key financial metrics. Market demand remained strong, and we’re pleased delivering broad-based organic growth across both segments, all regions and most product lines. Our pipeline remains robust and backlog continues to grow to record levels. We’re managing through a dynamic market where rising costs and supply chain uncertainties. We are pleased with the positive price-cost in Q3, and we’re working to maintain that for the year, but margin expansion remains challenging.
Outsourced water continues to make excellent progress and is contributing to the ISS segment’s recurring revenue model. Digitally connected sales were up again double-digits. Heading into the final quarter of our fiscal year, we’re focused on sales and operational execution to convert our strong backlog. Price utilization is expected to be positive despite higher inflationary costs, and overall labor and material availability. We continue to closely monitor the timing of customer purchase orders and shipments as supply chain uncertainties could create challenges. Closing on our prepared remarks, we are maintaining our previously provided outlook for the fiscal year.
I will now open the call to questions.
[Operator Instructions] And we’ll take our first question from Deane Dray with RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Deane.
Good morning, Deane.
Hey. I think I should start with the impressive free cash flow in the quarter, and I appreciate the details you’ve given on working capital to sales, even at 16%, you’re in the top tier of the sector. But take us through the – the kind of net impact on Mar Cor. You gave the working capital for Mar Cor, but is there anything on their cash conversion? How does that compare to the total company? And was there anything else you know, good guys or bad guys in the free cash flow number this quarter?
Yeah, Deane, great question. Mar Cor’s cash conversion is – is markedly higher than Evoqua’s. We have some work to do there and some opportunity. Most of that will occur after we implement them on SAP. Both their payables and their receivables, they collect slower than we do and they pay faster. So these are opportunities for us. Inventory, they – they do have a robust level of inventory on hand. And with the benefits of the business integration into shared services, we feel like we can unlock quite a bit of that at working capital.
I think the last call we talked about you know as a percentage of sales, they’re in the mid-20s, and we would like to bring them down to our mid-teens level. On – overall on Evoqua, if you look at our working capital and our DSO and DPO, very consistent with the prior quarter, we did see two days more of inventory and you’ll note that when you review our results. And that inventory, it was put in place to support very strong order rates as well as safety stock in this current period of time.
Yeah, that makes sense. We’re – we’re seeing additional buffer inventory. In fact, two days is really tiny compared to what we’ve seen some of your competitors carrying. All right, so second question and follow-up for Ron, the digital revenues up 11%. You know what’s interesting that you’re not talking about is, you’re not talking about being impacted by chip supplies, because there’s – these products and services do require semiconductors. So where does that stand? And kind of you know what growth rate are you expecting from the digital businesses going forward?
Thanks, Deane. Actually, we – we have not been overly impacted by chip supply on our own connected systems that we’re putting in. We had been impacted by chip supply on the APT side where we’re supplying products into our customers on a global basis. But that’s – you know we’re – we’re managing that. It’s actually we’re – we’re seeing a trend that it’s stabilizing a little more and – and we’re able to at least have good lead times you know, good price expectations, where things are going to be. And – and we’re able to build that into the product line.
We’re pleased with the digital – with the connected solutions, digital water growth, and I anticipate that will continue to go at double-digits. You know the opportunities there, as you know, we invested a lot of money in deploying connected systems. And even though we had deployed the connected systems until a customer signed up for water by the gallon, we weren’t charging against that or billing them in that way we’re billing them by event. So that’s where you see – and you’ll see continued ongoing growth of digital and connected water, because we already have the systems in place. We’re converting customers to that. And we anticipate that’ll – that’ll bode well as – as the tailwinds of the market are very positive.
And just to clarify, how much of the total revenue mix would you characterize as digitally enabled today? And where do you expect it in a couple of years?
Yeah, so Deane, we’re – we’re somewhere in the neighborhood of 20%, that we are connected around our full revenue that we have you know on site 24/7 with connectivity, we – we have said that we feel like over time that could get up to 40%.
Terrific, thank you.
Then we’ll take our next question from Nathan Jones with Stifel. Please go ahead. Your line is open.
Good morning, everyone.
Good morning, Nathan.
I want to talk a little bit more about the ISS margins and – and some of the pressures that you’re seeing there. I mean I would think that you know still labor on the – on the service side and potentially some – some contract terms that are maybe more fixed in nature on that side of the business or that reset more slowly, that – that maybe are a little more difficult to pass pricing through. Could you give us a little bit more color on – on where you stand on those kinds of issues? You know if you’ve changed the contract terms over the last few years to enable pricing to get through more easily there?
Yeah, Nathan, I’ll speak to the contract terms. I’ll let Ben talk to the details on what the – what we’ve seen. We have been able to pass on price escalators in the contracts. We have the ability to go out with surcharges inside of the contracts. And we’ve negotiated a much shorter time period into what our different indexes enable us to do as far as the contracts go.
And then, even on our – our quote time, lead times now, I mean, we have somewhere between a 10-day validity on a quote and 30-day validity on a quote, just depending on what the raw materials going into the processor. So we’ve – we’ve taken the right actions around being able to move price on – certainly on the ISS side, as far as you know commodity moves and labor and material cost and you know fuel cost. Ben, you want to talk about the percentages?
Yeah. So I highlighted on the – on the call earlier, we had some one-times that is the majority of the reason for the ISS margin declined, but there was about 60 basis points that were inflationary-related. And – and that does include labor inflation as well as some productivity impacts associated with onboarding new service techs to fill positions. And in that period of time, you have two techs going to one job as they’re being – becoming trained. So there’s a little bit of a pressure there, but that should abate once these techs are up to speed.
And the last thing is just continuing fuel cost increases, but a lot of that we’re able to pass on as a part of way of our contracts work. So it’s dollar neutral to dollar positive. However, it does put pressure on EBITDA margin percentage. And so for ISS, we had about 60 basis points of headwinds associated with price-cost on margin, even though the price-cost were dollar or price-cost dollars were positive and favorable. So those are the key things, Nathan.
Yeah, thanks very much for that. I had another question on chips and more of an opportunity you know, the chips that finally got passed through Congress which enabled. There probably some fairly significant Microelectronics capacity to go into the US, where you guys can get some very large projects. Can you talk about the opportunities here? I know you had relationships with some, if not all of the – the folks that are likely to put in some large capacity. Just any context you can give us there you know how big these opportunities could be for Evoqua and what the timeframe for realizing revenue out of them might be?
Yeah, Nathan, we see this as very positive. We think the opportunities are tremendous and this again, you know continues with the – the strong tailwinds that we have in the marketplace. The one thing we pointed out on Slide 5 is, our Q4 expected orders coming in, in Microelectronics, it shows red, that is simply due to prior year, very strong Q4 orders. So it’s order activity versus order activity.
We see a long-term opportunity for this, for us being very strong, the onshoring has helped quite a lot. This chips that is going to help fight a lot. And you know companies are – are getting benefit or you know investing in the proper technologies. And – and in a lot of cases where these – these Microelectronics fabs or they are water starved regions or water challenged regions even inside of the United States. So it’s a huge benefit to Evoqua, fits us very well on the wastewater side as well as the processed water side. So we’re – we’re positive on it.
Great, thanks very much for taking the questions. I’ll pass it on.
And we’ll take our next question from Andrew Buscaglia with Berenberg. Please go ahead. Your line is open.
Hey, good morning, guys.
Good morning, Andrew.
Just a clarification on the Mar Cor contribution. It came in – it came in a little bit below my expectation, it was around $40 million, $41 million, down sequentially. What you know what’s going on there? And what – and then going forward, do we you know is below 40 sort of where you’d expect that deal to come in?
No that – we just had a little bit of supply chain disruption in the quarter associated with the concentrates business that should rebound this quarter. But we expect that to be you know in that mid-40s range in terms of – of sales as ongoing basis. A lot going on there, including an SAP implementation, the integration of the business, but – but the demand looks very stable and – and certainly strong in this concentrate area as well as other our other key product lines.
And Andrew one – one piece that you’ll see in that, Mar Cor’s growth that’s coming in, part will – will also show in as organic growth, because we’re aligned on those customers, we’re selling to a more broad customer base through ISS. And that’s going to be reported as organic growth, because it’s – it’s growth and our revenue going into those key accounts that Mar Cor is servicing.
Okay. Okay and then just looking at the guidance, so you held the guidance, it – that makes sense, just given what’s going on the world. But your guidance would imply organic growth would probably go negative in one segment, I would think ISS given the comp. Is that the way to think about that is – and is that really edges tough comp, that kind of optically looking like that like it’s going to decline?
Last year was a very strong Q4, if you look. So ISS had some very, very robust sales in Q4 the prior year. And you know that was a sort of the opening up of – of COVID as well. But you know, we’ll see, we’ll see how it all – all shakes out. That’s why we put a range out there and still wide, to reflect various possibilities. But as I highlighted in the script, there is the chance for customer delays. We do have very strong comps. And we wanted to take – head it into you know, the potential uncertain economic conditions, we want to take a balanced approach.
I think that’s the key. You know as we talked about our backlogs are terrific, order activity is – is fantastic. Even as I highlighted on the – on the end-market charts, where we see order conversions, delays, it’s really only behalf of our customers being ready to accept the products that we’re delivering, not – not necessarily on our behalf, being able to deliver a lot of times, we’re – we’re waiting for them to say go. And so we were – we were balanced in the fourth quarter [technical difficulty].
Okay, fair enough. Thank you.
And we’ll take our next question from Saree Boroditsky with Jefferies. Please go ahead.
Hi, good morning. You know the EPA issued a health advisory that basically said there was no safe level of PFAS. How do you expect this to influence the upcoming limit proposal and ultimately the revenue opportunity turn to you for you guys?
We – I mean we see this continuing to be a positive just as we’ve highlighted. And – and the EPA still has to do is, is come out and put you know what the regulatory requirements are going to be. And – and you know define that specifically so that we’ll see the – the local water districts and states and municipalities starting to adopt it.
But – but Saree, it’s – it’s a little like we’ve highlighted in the past, I mean, we have a pipeline that’s north of $100 million, we’re winning about a third of the projects that are left – it’s the projects we really choose to go after. And – and we think the opportunity is going to be you know very strong as we go forward. But I think it is something that’s going to be you know more – more like a dimmer switch turning on rather than a light switch on and off. And – and I think it’ll – it’ll start ramping up and it’ll continue to ramp and it’s going to be here as a – as a market tailwind for quite some time.
Thank you. And then staying a little deeper into your order outlook to more positive for Power you know what are you seeing in this market? And can this growth continue?
Yeah, I mean, we continue to see opportunities around Power and Power distribution, some of the coal-fired power plants are continuing to operate. So you know they’re treating their wastewater, they’re treating the water coming off of the stacks. And then, as far as the – the ones that have shut down, we have you know very positive outlook with what we do around dewatering of the ash ponds.
And it – it speaks to the value prop that Evoqua brings with all of our technologies being able to be mobilized. So we’ve built you know mobile applications for each tech – technology where we can treat you know very tough emerging – contaminants as well as contaminants that have been in the – in the market for a while, and – and Power is a great place to apply those – those products in those assets.
Great, thanks for taking my question.
And we’ll take our next question from Bryan Blair with Oppenheimer. Please go ahead. Your line is open.
Thank you. Good morning, everyone.
Good morning, Bryan.
Circling back to Mar Cor for a second, you’ve noted the integration is on track, the – you know key points that you’re – you’re pacing toward the 25% margin target over the next 12 to 18 months you’re very positive in that sense. You did say you know SAP implementation, you’ve discussed that for a while. Are there any other callouts in terms of you know heavy lifting for the time being in terms of integration? And are you willing to speak to synergies realized to-date?
I’ll – I’ll talk about some of the key drivers, Ben could talk about synergies. But, really the – the key drivers we’ve got SAP implementation, we’ve got – you know we’ve aligned all the back office on our benefits, all the plants that are there, medical, et cetera. The opportunities that are coming ahead of us are – are really around facilities and facility consolidations.
If you’ll recall, when we did the acquisition, we highlighted 27 service locations and Mar Cor, 25 of those are in a market area that we also have an ISS branch. So whether we move into the Mar Cor facility, they move into ours or we find a combined facility that fits for both of – you know for both businesses to be in, because we need more space. That – that’s really what the heavy lifting going forward is. And, we’re making great progress on that. We feel pretty pleased with what’s happening. And again, you know being able to reiterate to 25% EBITDA is certainly right within you know the center of the bell curve. Ben?
Yeah, Bryan, margins are strong and they are growing. But the best is yet to come as we get into footprint consolidations and more heavy lifting, those have been mapped out, we’re in the process of approving and running those through our – our internal processes to gain approval. But so far, the – the early synergies are – are starting to come through, but we still really haven’t seen the lion’s share of those synergies, and – and that’ll come when we – we finished the SAP implementation, and we get to the footprint consolidation [technical difficulty].
And also –
Just wanted to remind you also on working capital, post-SAP implementation, there’s a – there’s a healthy opportunity to really sizably reduce their working capital as a percentage of sales.
Understood, that makes sense. And you quickly highlighted the – the deals closed in July. I realized they’re smaller, but can you speak to expected financial contribution from Smith and Epicor. And – and then I’m – I’m curious if economic uncertainty has impacted your M&A pipeline, you know if at all for the kind of strategic tuck-ins that – that drive your strategy?
See I’ll – I’ll speak to both of them. I mean, we’re thrilled to have the Smith and Epicor teams as a part of Evoqua now. Epicor is one that we’ve done business with for quite some time – for quite some time with – with resin processing for the specialty power markets that we go after.
So that is really more of a vertical integration play, we already had the – the sales and the opportunities that we were executing on. And – and it was a vertical integration that – that will support us with you know, EBITDA but not necessarily a lot of – a lot of top line growth. But then, Smith gives us a great potential for top line growth in very key markets as I highlighted in the script, Life Sciences, Data Centers, Microelectronics, but it’s – it’s bigger in – in the Minneapolis areas where they’re located.
So, we now have a very large footprint in that market between Mar Cor and Smith that we’ve tied together, and it fits with the strategy we’ve talked about around you know geographic penetration that we highlighted and wanted to go after once we were able to close on the Mar Cor transaction, which is very heavily focused on the Minneapolis market, Smith became a great opportunity for us as well. The pipeline for M&A, tuck-in M&A, still very robust. And – and I think we’ll see you know that continue just as we highlighted you know on Slide 8 in the – in the deck.
Okay. Appreciate all the detail. Thanks again.
And we’ll go next to Joe Giordano with Cowen. Please go ahead. Your line is open.
Hey, good morning guys.
Good morning, Joe.
Good morning, Joe.
You mentioned book to bill in 4Q for ISS is expected to be above 1. But you also mentioned some stuff about shipping delays like just want to kind of circle – circle back to that. And is that book to bill more because orders are accelerating or more because shipments are delayed like do you have many maybe any color on some sort of like average daily order metric that you would look at for fourth quarter relative to third quarter something like that?
Yeah, Joe. I would say the book to bill is – is not a – it’s – it’s orders coming in at a very high, very positive rate. It’s not as a result of us not being able to show up. I mean, if you look at ISS specifically for the quarter, I mean, they had revenue growth, organic revenue growth of 7.3%, APT had organic revenue growth of almost 13%. So you know between those two, we’re really pleased with the growth that we’re delivering. And having a book to bill ratio that continues well above 1 means that we’re building backlog. And it’s – it’s really you know the tailwinds in the market and just the strategy being executed on by the team.
And there’s maybe one just high level thing, and maybe additional comment, but just been practicing a lot more lately about what’s going on in areas like you know, Lake Mead and Salt Lake City and those areas seem you know for better words, screwed. I’m just curious if you’re hearing like more incremental action plans from – like from the leaders in those areas about how, whether it’s residents or businesses their need to do things fundamentally different? And like, is it something that your – you guys are looking at and involved with and any commentary there?
Yeah, absolutely great question. It is – it’s a very difficult situation that the western half of United States is in or around the droughts that have been continued there. And it’s something we’ve paid attention to for quite some time. And – and we do see businesses operating differently. I mean, they are so focused on wastewater capture, recycle, reuse, making sure that if they are at expanding capacity, they’re doing it by being more efficient with their water chain, rather than you know go more broadly. So – so we’re pleased with you know, our - our impact that we can have on that situation. And frankly, we – we’re partnering with our industrial customers in those market areas every single day to be more efficient with what they do.
It’s one of the things that we – we’d like to highlight on our sustainability. And what Evoqua does as a company is the handprint opportunity that we have to preserve very precious natural resource of water is – is what we’re focused on and industrial customers are aligning with us to make sure they’re investing in that.
And we’ll take our next question from Andy Kaplowitz with Citigroup. Please go ahead.
Good morning, guys.
Good morning, Andy.
I know you mentioned labor availability and hiring cost impacting ISS. Is that issue for you would you say stable within your service business? Is it getting better or worse? Then you mentioned fuel costs. You know, shouldn’t those costs be starting to come down now? Any more color on sort of the costs in that service business would be helpful.
Yeah, so I’ll – I’ll highlight and talk about the service business specifically. It has stabilized. We – we certainly went through a period of having to make sure that you know we were addressing wage compression in certain market areas with – with what’s happening you know just in labor rates in the overall market and certainly in skilled labor markets.
So, but it has – it has stabilized now, Andy and I feel like we are in a good place, we’ve – you know some of the turnover that happened right at the end of COVID, that seemed to be you know pretty strong across the industry has stabilized. And – and we’ve been able to fill positions, and filling more quickly and actually filling with you know very skilled team members with – with some good experience behind them. So, I – I think that we’re at a pretty good spot as far as labor goes. Ben can talk about you know fuel and – and challenges there.
I think fuel is still uncertain. Certainly, we saw higher fuel costs at the beginning of the quarter, then it started having some abatement towards the end of the quarter. I think some of the outlooks suggest maybe more stability for Q4. But the question mark for what happens next year at this point in time. But most of our fuel costs, we are able to push to our customers, we have a fuel surcharge in place. So we pass that through. However, the higher it goes, it also puts pressure on margins because of the fact that the – you’re pushing it through as a surcharge and not necessarily at your traditional margins. So that does give a bit of a margin – margin drag for ISS.
It’s helpful, guys. And then I know it’s a small part of your business, but you highlighted municipal drinking water as blue for Q4 and maybe you could talk about that market? And then, just leave a commentary in around municipal wastewater, obviously, that’s much bigger, stable governments seem relatively flush with cash, and then you’ve got eventually [ATG] [ph] contribution. So what you know do those businesses look like moving forward?
Yeah, so I’ll talk about municipal drinking water. First of all, we see – we see being stable you know it is a smaller portion of our business, as you can see you know where it’s represented on Page 5. But we are continuing to work with municipal systems around retrofit and rehab, their upgrades to their systems and what they’re doing. And so that fits the municipal drinking water side as well as – municipal wastewater.
I would tell you across wastewater, it is green, it’ll continue to be green, we see for the foreseeable future, certainly with you know what’s – what’s being addressed on the infrastructure spending bill, as well as what’s happening we’re trying to recycle and reuse water. So they’re trying to make sure the wastewater plants are operating efficiently. They’re up to capacity.
And so very good retrofit and rehab, their book to bill ratio there is well above 1, should continue to go that way. And we anticipate the infrastructure bill actually, a lot of the projects are being designed and engineered now. We would expect to see orders from that come early ‘23 with revenues starting toward the latter half at ‘23.
Appreciate it, guys.
And we’ll take our next question from Pavel – Molchanov with Raymond James. Please go ahead.
Thanks for taking the question. As you build capacity or expand capacity, I should say, outside of North America, I recall last fiscal year, International was maybe 12% of revenue. Do you have a target for how big you want the International footprint to be or maybe a prediction for what that slice of the pie will be this year or next year?
Yeah, Pavel I think – if you look at our International revenue, it’s closer to 20%. Now, some of that is reported in North America, because it’s North America selling into some of the International operations. But we – we’d like where it is. We’d like you know 20% is a pretty good number. We want to continue to grow overall at Evoqua. But we think that the International markets are going to grow at a much faster pace for us, meaning the emerging markets and – and we’re seeing that.
I mean, we – little bit of challenge I mean, you know that was experienced certainly through the COVID lockdowns, but our team in China has continued to operate very efficiently. Our team in Singapore, we’re branching more deeply into India. So there’s – there’s some good opportunities for us as we grow. And then our team in Europe has you know done an excellent job continuing to you know to deliver in – in some tough market environments. So we were happy to be able to open the two new facilities we highlighted in the deck and it’s really you know a continuation of our build out on centers of excellence that are going to serve the various markets that we participate in.
In that context, are you looking at non-North American M&A opportunities as part of your consolidation roadmap?
We do. We continue to look at those around product portfolio extensions more than service level extensions. And you know as evident of that you know would be the ATG acquisition that we just did back in ‘19, where we consolidated that into – that was out of the UK, it was out of the facility called Wigan, we just moved it to a much larger facility, because that – that business has grown tremendously. So you know a lot of our historic acquisitions in the product space have been internationally-based acquisitions. And we continue to focus on those as we go forward as well. We’re really looking more around technologies there.
Thank you very much.
And we’ll go next to Andy Kaplowitz with Citi – I’m sorry, we’ll go next to John Walsh with Credit Suisse. Please go ahead.
Yeah. Good morning. And Ben, I liked your Sinatra quote earlier in the Q&A.
I got to – I got to be nice, because I was going to ask a not nice question or I guess maybe that – that’s not the right way to frame it. But I wanted to go back to the guidance. I understand that the year-over-year bridges you’re kind of talking about, but I’m kind of confused by the quarter-over-quarter, Q3 into Q4. It looks like it’s kind of below your normal seasonal sale and kind of margin lift that you get. I was just wondering if you could kind of unpack that a little more what’s happening on the quarter-to-quarter walk?
Yeah, sure. I think if you look at history which suggests we have upside. And that’s why we have the top end of the range. But then you look at the current circumstances that we face, the potential for recession, macro uncertainty, supply chain challenges, potential for customer delays, that’s really why we left the guidance the way we did, because there are the potential for those uncertainties. Q4, as you can see is traditionally our strongest quarter. So, if certain delays were to occur or things that are outside of our control, we wanted to make sure we are measured and accounted for that. But so again, I – I just feel like in this environment, it’s important to stay balanced.
Okay, that – that’s fair. And then, you got the PFAS question earlier as it relates to the United States. But just curious as we’re starting to hear more and more coming out of Europe, whether it be Belgium, Germany, there’s a lot more activity now. Would there be any kind of difference in technology that you would maybe offer into those markets? Or maybe it’s more of a channel you know thing, you just have to have the right channel in those markets? But we’d love to hear how you think about that opportunity as PFAS broadens?
Yeah, I’ll – I’ll actually tag that on to the prior question around International opportunities for acquisitions, which I talked about product technologies. One of the areas that we’re very focused on is – is disrupt infield on PFAS. So there’s a lot of different types of technologies that are throughout Europe that they’re working on you know on site destruction of PFAS, and there are a lot of trials that are happening. That’s very interesting to us.
So we’re – we’re engaged in those, we’re paying attention to what is there and what is available. And – and that’s the – the technology evolution that we would hope to see in PFAS. So it’s not just capture it, concentrate it, landfill it or incinerate it, it is you know disrupt on site so you’re not actually having to move the PFAS of the location, it is.
Great. That – that’s very helpful. Appreciate you taking the questions and thank you.
And we’ll go next to Brian Lee with Goldman Sachs. Please go ahead. Your line is open.
Hey, guys, good morning and thanks for squeezing me in here. You know may – maybe sort of a follow-on to the prior question here, just as you think about year end and – and we try to sort of true-up the model you know, Ben, the – the nice margin expansion in APT is the highest we’ve seen since early fiscal ‘21. Are we expecting further improvement in the 4Q and kind of any thoughts into ’23? Is this sort of kind of the new normal on the APT side?
And then, I guess secondly I’ll just fill in the second question here. You know you guys have talked about customer availability. I think you just talked about customer delays and – and potentially wanting to be prudent around that as well as you think about the forward outlook. Have you seen any shifts you know either for the better or for the worse around you know customer availability and that you know how that’s been impacting your capital sales either deployment or visibility? Thanks.
Yeah, I’ll – I’ll talk to you about – about the customer availability, and leave Ben to cover the others. You know what we – it’s been – it’s been very spotty, and it totally depends on the end-market. It is not availability with us being able to get on site, which it historically has been through the COVID shutdown. And – and we dealt with a lot of challenges around that. What the availability difficulties that we faced you know throughout this fiscal year has been primarily measured by has been whether or not they’re ready to take you know our – our product or our application or they turn on their system for our service to occur. So that’s where we see the challenges.
I mean as we’ve highlighted, our backlog is tremendous, our order activity is great. We’re managing supply chain, our team has done a remarkable job managing supply chain. And so now, what we’re balanced again is – against is the supply chain of our customers, when they’re getting their site ready or they’re ready to turn on their production line. And that – that’s created the delays. It you know kind of varies by end-market, what we’re seeing, but – but I think it’s versus the larger installations versus the smaller that tend to have more delays and a big challenge for us.
Yeah, on the margin side you know, APT has done an excellent job of their structural cost that we talked a little bit about earlier as well as portfolio. And, these benefits that we expect will stick and a lot of hard work has been done in that area. On the – on the downside, they still face price-cost headwinds like, there’ll be positive on the dollar amount, but the pressure associated with inflationary impacts, and also supply chain disruptions impacting productivity in – in the business of particularly, our manufacturing facilities under APT, the majority of them.
So they continue to face situations where a part does not show up. An item does not show up, a person is out sick with COVID and have to battle through those types of challenges as well. But yeah, very – very proud of the margins that they’ve been able to deliver. And again, that’s been majority of their structure in their portfolio decisions.
Great, thanks. And I’ll pass it on.
And at this time, we – I will now turn the call back over to Ron Keating for any closing remarks.
Thank you. Thank you, again for your interest in Evoqua. We greatly appreciate the time that you – you’ve given us today. I would like to just close with a – a sincere thank you to all of our team members around the globe, have been incredibly impressive the way that they’ve operated, the way they’ve delivered. And we continue to focus on meeting customer demand every day, and – and really staying true to our cause and the purpose of what Evoqua does which is transforming water and enriching life. So, thank you for your time. We look toward – forward to speaking with you again next quarter.
Thank you. And that concludes today’s Evoqua Water Technologies third quarter 2022 earnings conference call. You may now disconnect your lines and thank you for your interest in Evoqua.
With the automotive sector delivering experiences previously more familiar in consumer tech, the Experiences Per Mile Advisory Council has developed the ‘EPM Index’. This metric evaluates the in-vehicle experience and aims to assist consumer purchase decisions while also making it easier for automotive players to understand changing consumer demands. EPM Advisory Council member Tom Rivers, vice president of global automotive marketing at Harman International, explains.
Just Auto (JA): What is the Experiences Per Mile (EPM) Index? Why does the EPM Advisory Council see it as necessary?
Tom Rivers (TR): The automotive industry is evolving from valuing the traditional criteria of horsepower and RPM to one where the experience in the vehicle is more highly prized. Previously, a consumer would ask ‘how fast can I go from 0 to 60?’ when looking to purchase a vehicle, but such questions have now become ‘how can this vehicle Boost my commute?’, or ‘can I access my important content on the go?’. Electrification and the progress of autonomy are compounding this shift.
While consumers can source a list of individual features and functions offered in a vehicle, with the Experiences Per Mile Index – or EPM Index – the aim is to provide a holistic evaluation of how effectively a vehicle provides users with a positive and fulfilling experience. The metric scores the vehicle from 0-100 based on its ability to achieve a users’ experience goals for different journey types, which might be commuting, running errands, giving others lifts, or excursions and road trips. This is a first-of-its-kind rating that views the in-cabin experience as a true value-add, and we believe can become a valuable tool to support consumers’ buying decisions, as well as help OEMs to tailor their in-cabin offerings to user requirements.
JA: How is the metric calculated?
TR: The formula for the EPM Index was developed following an exploratory research study by IPSOS, commissioned by the EPM Advisory Council, whereby SUV owners evaluated how well their experiential goals were accomplished for a certain journey type. The experiential goals comprise connecting, being productive, feeling good, de-stressing/relaxing, entertaining and finding privacy, while the journey types, as mentioned, focus on commuting, running errands, giving others lifts, and road trips. This experiential net score is multiplied by the importance, or weighting, that goal has for a particular trip type. The sum of the weighted scores calculates the EPM Index.
For example, the journey type of ‘commuting’ prioritises the experience goals of feeling good, finding privacy, and connecting and communicating with others. A vehicle may be very good at delivering across all these experiences, resulting in a high EPM Index out of the maximum 100 score. However, if a consumer uses their vehicle to give others lifts most regularly, they may put a greater value on de-stressing and entertainment while on the move. They need a vehicle that has a high EPM Index focused on these goals instead. Each vehicle model will have an EPM Index score for each journey type.
JA: What is the aim for this? Will it apply to each vehicle or piece of technology?
TR: The concept is that each new vehicle model coming to market is given a EPM Index rating to enable consumers to make like-for-like comparisons before purchasing a vehicle. It provides a score at the overall trip or journey type level, rather than rating different functions or technologies. A consumer can focus in on their most common trip types and look for vehicles that score highly for those journeys and goals. Someone that clocks up lots of business miles would seek a high-scoring vehicle for commuting journeys, while those wanting a suitable family car might seek out a vehicle that has Good Score for both giving others lifts and for road trips.
JA: How do you see this being used in a retail setting?
TR: The vision of the EPM Advisory Council is that each new vehicle model will receive an EPM Index rating that can be merchandised by the OEM or by retailers, making it incredibly easy for consumers to access and cross-reference during the purchase process.
JA: How are OEMs reacting to this?
TR: Several OEMs, including significant global players, are represented in the EPM Advisory Council, such as Ford, GM, Hyundai, Nissan, Polaris and Stellantis. From what we are seeing, they, like Harman, are recognising the shifting emphasis from individual features and functions to the importance of the overall experience for users, how it integrates within their daily lives and works seamlessly with their other devices. These OEMs find great value in the measurement and see how it has the potential to build a better understanding and stronger brand connections with the younger and upcoming generations of motorists.
It will also be a helpful tool for OEMs to assess where they are today with their current offerings, see that benchmarked against consumer demand and get insight into how they can develop future vehicles and their offering to meet those consumer experiential requirements.
JA: BMW has recently been criticised for putting features behind a paywall. Would subscription-based features be assessed within the EPM Index rating? What is Harman’s outlook on OEMs taking this approach to functions?
TR: The first study conducted by the EPM Advisory Council was exploratory in nature. It included features that were important to consumers based on other research studies analysing EPM, both qualitatively and quantitatively. Future features, such as those features behind a paywall, would be evaluated for future studies as we see changes in the experience provided by various OEMs.
JA: What’s the next step to implementing such an initiative industry-wide? What are the challenges?
TR: An industry-wide implementation of an EPM score is being evaluated now. It is being decided in consultation with the members of the EPM Advisory Council from various companies across the industry. As it is ready for the market, it will be announced. Many of the challenges have been tackled with the exploratory study. The EPM Advisory Council is evaluating interest by the OEMs and making sure it is targeted enough to aid the product planning process. We foresee it being helpful for various industry contributors, as mentioned.
The EPM Index report is available to get from EPM Advisory Council | Automotive Solutions | Experiences Per Mile Experiences Per Mile
Paragon 28, Inc. (NYSE:FNA) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET
Matt Bacso - Gilmartin Group
Albert DaCosta - Co Founder, President and Chief Executive Officer
Stephen Deitsch - Chief Financial Officer
Conference Call Participants
Craig Bijou - Bank of America
Kyle Rose - Canaccord
Mike Mattson - Needham
David Turkaly - JMP Securities
Good afternoon and welcome to the Paragon 28’s Second Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.
Joining me from Paragon 28 are Alberta DaCosta, Chairman and CEO and Steve Deitsch, CFO. Earlier today Paragon 28 released financial results for the quarter ended June 30, 2022. Before we begin, I'd like to remind you that management will make statements during this call and include forward- looking statements within the meeting of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.
All forward-looking statements, including but not limited to those relating to the macroeconomic our operating trends and future financial performance, including our revenue guidance, the impact of COVID-19 on our business, supply chain disruption, expense management, expectations for hiring growth in our organization, market opportunity, commercial expansion, and product pipeline development are based upon our current estimates and various assumptions. These statements involve material risks, uncertainties that could cause actual results or events to materially differ from those implied by these forward looking statements. All forward looking statements are based upon current available information and Paragon 28 assumes no obligation to update these statements.
Accordingly, you should not place undue reliance on these statements. For a list in description of the risks and uncertainties associated with our business please refer to the risk factors section of our public filings with the Securities and Exchange Commission including our quarterly report on form 10-Q filed earlier today with the SEC. This conference call contains time sensitive information, and it's accurate only as of the live broadcast on August 3, 2022. Paragon 28 disclaims any intention or obligation except as required by law to update or revise any financial projections or forward looking statements or the because of new information, future events or otherwise. During this presentation, we will refer to the non-GAAP financial measures of adjusted EBITDA a reconciliation of the most comparable GAAP financial measure net income is contained in our press release issued earlier today.
And with that, I'll turn the call over to Albert.
Thank you, Matt. Good afternoon. And thank you for joining Paragon 28 second quarter 2022 earnings call. I will provide an overview of our second quarter and give a business update. Steve will then provide additional detail regarding our quarterly results and provide an overview of our updated 2022 revenue guidance. We will then open the call for Q&A.
Beginning with our second quarter 2022 revenue performance. Total revenue for the
second quarter was $42.5 million, representing growth of 19% compared to the second quarter of 2021. Strengthening of the U.S. dollar reduced our second quarter net revenue growth by 140 basis points as compared to the prior year period. Second quarter U.S. revenue was $36.8 million, representing growth of 19% compared to the second quarter of 2021. U.S. growth was the result of increased revenue contribution from new product launches and benefits from recent medical education and training, resulting in strong salesforce productivity gains offset partially by modest COVID disruptions. Later in my prepared remarks, I will provide more detail on the quarter's revenue growth drivers.
Second quarter international revenue was a record $5.7 million representing growth of 20% compared to the second quarter of 2021. Strengthening of the U.S. dollar reduced our second quarter international net revenue by 10 percentage points as compared to the prior year period. Growth in the quarter was once again driven primarily by our three largest international markets of Australia, South Africa and the United Kingdom.
Moving to our foot and ankle sub segment revenue trends during the second quarter Paragon 28 experienced double digit revenue growth in each of the foot and ankle sub segments including fracture, ankle, flatfoot hallux valgus, including hammer toe and Charco. Ankle and fracture product lines, which both benefited from recent new product launches led our growth in the second quarter. Paragons comprehensive product portfolio, which addresses each of the foot and ankle sub segments continues to be a key driver of our success.
I will now provide an update on U.S. revenue growth drivers including salesforce expansion, salesforce productivity, new product contributions and medical education. Starting with the salesforce. We ended the second quarter of 2022 with 198 producing sales reps compared to 197 in the first quarter of 2022. The number of producing reps can fluctuate quarter to quarter due to various factors including, among other things, the seasonality of the foot and ankle market, and the timing of hiring and onboarding new sales reps.
P28 continues to be the destination of choice for sales reps who are foot and ankle specialist, as well as reps new to the industry. I am excited about both the quantity and quality of reps that have joined P28 in the last year, we expect the number of producing reps to increase over time and in the second half of 2022. Moving to salesforce productivity, which we define as average revenue dollars per producing sales rep increased by an impressive 17% as compared to the prior year period. Fueling this growth was new product launches, including nine new products so far this year and 90 new product launches since 2020.
New product launches, complemented by our medical education and salesforce expansion initiatives have increased our revenue with existing and new surge in customers. Specifically during the second quarter, we did business with 1829 U.S. surgeon customers, including 582 U.S. producing surgeons, both records for P28 and an increase compared to the prior year period of 11% and 18% respectively. With approximately 15,000 surgeons that treat foot and ankle in the United States we have only scratched the surface and have a long runway of growth in front of us.
Our broad and innovative product portfolio in the hands of our best in class and growing salesforce, combined with leading medical education and training is driving sustainable high quality revenue growth. Speaking of medical education and surgeon training, almost 700 surgeons attended in person FNA medical education events in the second quarter of 2022 bringing the total number of surgeons trained in person at FNA medical education events to almost 2200 in the last 12 months. We are very pleased with our ability to meet the very strong surge in demand for these training events, leveraging our best in class surgeon training facility at our headquarters in Denver, Colorado.
Thank you to all our medical education team for their commitment and passion to Boost patient outcomes, including many, many weekends worked over the last year. Building on this momentum in July, we announced the launch of our new mobile surgeon training lab housed in a 43 by 30 foot tractor trailer, which includes a state of the art six station categoric training facility. The mobile lab is currently on the road, and we'll be hosting over 50 training sessions in approximately 50 U.S. cities during the second half of 2022.
The mobile lab will highlight our broad and innovative product portfolio, including the nine new products and surgical systems launched so far this year.
Speaking of new product launches, in mid May, we expanded our soft tissue portfolio with the launch of our grappler suture anchor system. The grappler suture anchor system is offered in peak titanium, and an all suture option and a variety of sizes and configurations to address soft tissue repair in all the foot and ankle sub-segments. In May, we also launched TinoTac 2.0 for minimally invasive soft tissue repair for hammer toe and other complicated deformities, redesigned with an angulated washer to allow for greater capture of soft tissue TinoTac 2.0 streamlines tensioning and improves fit to the bony surface.
The addition of the grappler and TinoTac 2.0 bolsters P28 soft tissue product offering which includes the recently launched paratrooper plantar plate system, and react stabilization system, grappler interference screw system and release stabilization system. With this comprehensive portfolio, Paragon 28 provides its customers a broad array of innovative solutions for soft tissue stabilization and repair.
Lastly, in June, we launched our monkey rings circular external fixation system for trauma, deformity correction and limb salvage. Monkey rings is an external fixation device designed to maintain anatomic position while providing stability, preservation and soft tissue and allow for adjustability and functionality. The monkey ring system allows hospitals and surgeons to collaborate with a single vendor for internal fixation, external fixation, wound care and biologics. Combined with the launch of monkey bars pinned to bar external fixation system earlier this year, we are building out a strong external fixation portfolio and complementing our wide ranging internal fixation biologics and soft tissue options.
As we head into the back half of 2022 our product pipeline remains strong and is expected to continue to drive future growth. In summary, we continue to have success on all key strategic initiatives. And we will continue to invest in the business to drive sustainable and profitable revenue growth. We are grateful for the trust our physicians and patients have for Paragon 28. I would also like to thank our sales representatives and employees around the world for their diligent efforts and dedication to fulfilling our mission to continuously Boost outcomes and experiences of patients suffering from foot and ankle conditions.
I will now turn it over to Steve. Steve?
Thank you, Albert. Moving to our second quarter 2022 financial results. Paragon's revenue for the second quarter of 2022 was $42.5 million, representing 19% growth compared to the second quarter of 2021. Strengthening of the U.S. dollar reduced our second quarter net revenue growth by 140 basis points as compared to the prior year period. Second quarter revenue increased by $1.1 million, or 2.7%, compared to the first quarter of 2022. Gross profit margin for the second quarter of 2022 was 82% compared to 81.3% in the second quarter of 2021. The improvement was primarily due to lower excess and obsolete inventory expense in the second quarter of 2022 as compared to the prior year period.
Total operating expenses during the second quarter were $43.9 million, compared to $43 million in the first quarter of 2022. The sequential increase in operating expenses in the second quarter was the result of $1.2 million of onetime costs related to the successful second quarter launch of our new SAP system.
Opportunistic investments to drive long term durable growth were enabled by and began after our October 2021 IPO, resulting in a 45% increase in second quarter operating expenses compared to the pre-IPO prior year period. The return on these investments has been significant. Revenue growth for the first half of 2022 was 22% and was fueled by a 13% expansion of our U.S. surgeon customer base and 18% increase in U.S. salesforce productivity and record international revenue. This growth was driven largely by incremental investments in R&D to bolster our product offering an incremental investments in sales and marketing to expand our global medical education programs and salesforce.
Paragon 28 exclusive focus on foot and ankle, and passion for improving patient outcomes strongly resonates with foot and ankle surgeons and sales reps. During the second quarter, the opportunistic investments we made in medical education and salesforce expansion initiatives exceeded our expectations, further validating that our strategy is working and has momentum. Several factors drove these opportunistic investments and included that were not limited to increased visibility of Paragon 28 after our IPO last year, the resurgence of in person medical education activities in the last 12 months, and continued foot and ankle market consolidation. As we head into the back half of 2022, we expect to continue making opportunistic investments and we also expect second half 2022 operating expenses to be consistent with the first half of the year.
Moving to further details on the P&L. Research and development expense were $6 million, or 14% of revenue for the second quarter of 2022 compared to $3.6 million, or 10% of revenue in the second quarter of 2021 and $5.8 million, or 14% of revenue in the first quarter of 2022. The increase in research and development as compared to the prior year was primarily due to further investments in product development, clinical studies, quality, and the acquisitions of additive orthopedics in May 2021, and busier in January 2022.
Selling general and administrative expense was $38 million for the second quarter of 2022 compared to $26.6 million in the second quarter of 2021 and $37.2 million in the first quarter of 2022. The increase in SG&A expense as compared to the prior year was driven primarily by investments in sales and marketing including in person U.S. marketing and medical education events, commercial team expansion both in the U.S. and in our international markets, increased variable sales representative commission expense related to revenue growth, increased G&A expenses due to the cost of becoming a publicly traded company in the fourth quarter of 2021 and one time SAP implementation costs.
The $800,000 increase in second quarter SG&A expense, as compared to the first quarter of 2022 was primarily due to the $1.2 million onetime costs related to our successful second quarter SAP launch. Second quarter adjusted EBITDA was a $3.2 million loss compared to the $3.3 million loss in the first quarter of 2022. When excluding the second quarter, one time SAP expenses of $1.2 million adjusted EBITDA improved nicely as compared to the first quarter, despite continued strong investments in key growth drivers during the quarter.
Turning to liquidity. Total liquidity was $113 million at June 30, 2022 including $73 million of cash and $40 million of cash available via our senior credit facility. Additionally, in the second half of 2022, we expect to recoup $5 million of cash flow from accounts receivable balances which increased temporarily in the second quarter during the launch of SAP.
Our strong liquidity position, combined with our increased operating leverage moving into the second half of 2022 and beyond is expected to enable P28 to operate without future financings to fund operations.
Before turning to our updated 2022 revenue guidance, a few comments on macroeconomic and other external factors and their impact on P28. Notwithstanding the strong momentum in our business, we remain cognizant of the current macroeconomic environment, including the potential for reduced elective foot and ankle procedures. Our company and team are resilient and have delivered strong results in past difficult business environments.
Our comprehensive product suite addresses both the elective and the non-elective foot and ankle market sub segments of fracture in Charco which together account for over 1/3rd of the global foot and ankle market. With respect to inflation, we are not currently experiencing a material impact on our business. Also, the global supply chain remains challenging, but we are confident that our team and vendors will continue to effectively manage these risks. Consistent with remarks from our past earnings calls we have and may continue to opportunistically increased inventory and instrument purchases to ensure that we have product on hand to meet demand.
And finally COVID in hospital staffing, shortage headwinds on elective procedures remain but currently are not significant.
Now turning to our increased 2022 revenue guidance. Our 2022 revenue guidance assumes currency translation rates for our international business remain consistent with current translation rates. We have increased our 2022 annual net revenue guidance to $176 million representing growth compared to the prior year of 19%. The strength in U.S. Dollar as compared to the prior year is expected to reduce our 2022 net revenue growth by approximately 100 basis points.
We expect our third and fourth quarter net revenue to be $42.5 million and $49.6 million respectively representing growth compared to the prior year periods of approximately 19% and 16%, respectively. The strength in U.S. dollar as compared to the prior year periods is expected to reduce both third and fourth quarter net revenue growth by approximately 100 basis points. While we will not be providing specific adjusted EBITDA or cash flow guidance for 2022 we expect to continue to see sequential improvement and increased operating leverage moving into the third and fourth quarters of this year.
That is the end of our prepared remarks. Operator, please open up the lines for questions and answers.
Thank you. [Operator Instructions] The first question today comes from the line of Craig Bijou from Bank of America. Please go ahead. Your line is now open.
Good afternoon, guys. Thanks. Thanks for taking the questions. Maybe just to start wanted to touch on guidance. And I think you had 20 plus percent growth in the first half. You're looking for 20% growth in constant currency for the entire year, suggesting a little bit of a pullback on from a growth perspective in the second half. So we'd love to just hear kind of how you guys are thinking about the quarters. What's assumed in that guidance? It seems conservative to us, but we just love to hear some of the assumptions that you're making it.
Hey, Craig it's Steve. Thank you for the question. And maybe to start with just with respect to assumptions in the guidance, we've assumed operating conditions similar to where we're at today, related to COVID, supply chain, elected procedural levels, etc. And when we look at the third quarter, typically, the third quarter is pretty consistent with the second quarter in terms of procedural levels for us anyway. And our numbers are driven by growth, consistent growth quarter-to-quarter, but we start seeing vacations in the second quarter particularly in our European markets.
And then when we look out to the fourth quarter, as you know, our fourth quarter is traditionally the strongest quarter of the year for Paragon 28 really driven by the elective procedure, boldness that starts coming through late in the year. Last year, we grew 25% in the fourth quarter, and we expect to have another strong and finish to this year. And that, as you noted, would put us at 20% on an operational basis for the full year. And we feel really good about that, particularly where we're at and operating in a somewhat uncertain macroeconomic environment.
Great, thanks, Steve. And then maybe for Albert or for Steve, appreciate the color on the product growth by category and what the key drivers were. I wanted to see if you might provide a little bit more color on how we should think about the product category growth, foot and ankle category growth in the second half? And what, if anything may be different than what we've seen in the first half?
Yes, hey, how you doing Craig? This is Albert. I'll take a stab at this one. I think from discussions where we really tried to balance our portfolio and we feel like in times, like today, that balance of our portfolio has really benefited us. We've seen some of our more recent product launches that have impacted growth slightly disproportionate to other areas. But we were happy to report that all the sub-segments grew nicely in Q2. Second half of this year, I'd see maybe some impact from recent product launches like our soft tissue portfolio. Also the external fixator.
We recently launched the monkey rings circular fixator, which can be used in multiple segments of foot and ankle But primarily, the Charco segment could see a really nice pop from a product like that. So second half, I'd expect to see some of the usual suspects like our ankle franchise which includes fusion, total ankle replacement to tailor spacer from additive orthopedics. I'd also expect to continue to see nice movement on the fracture fixation line. But then I see the newcomer, I'd see Charco really seeing a nice pop with the influence of some of these new products.
Great, thanks for taking the questions guys.
Of course. Thank you Craig.
Thank you. The next question today comes from the line of Kyle Rose from Canaccord. Please go ahead. Your line is now open.
Great, good afternoon, gentlemen. Thank you for taking the questions. So you talked a lot about all of the soft tissue products that have launched in -- I guess the quarter or year-to-date. Our diligence that was one of the big most commonly cited product gaps, I just maybe the overall interest both in the sales force and maybe at some of your medical education around these new products launching when we should expect those to really pick up and then the secondary question there is where are the existing product gaps now that you have sold soft tissue? Thank you.
I'll take that. How you doing, Kyle? And thanks for the question. You're exactly right, I'd say two areas that we had gaps, where the soft tissue portfolio. Even though we had a few products in the soft tissue space, we were still mostly missing in that area. And if you remember, soft tissue really touches all the sub segments, as we've mentioned before. So that's, that was an important piece for us. We've recently launched things like the React stabilization system for ankle fracture.
We launched the grappler, soft tissue anchor devices, we also have the grappler, interference free devices, those are going to be really helpful not only in getting us into the soft tissue, but the complimentary effect it has on all the existing technology that we have. So areas like flat foot really see an influence there. The other area that you might remember, we were missing was external fixation. And in January, we launched the pin to bar, monkey bars, pin to bar stabilization system for primarily, trauma or fracture fixation.
And we saw a really nice pop from that. And then again, like I mentioned, the monkey rings is going to be a really nice complement for the ankle segment, as well as Charco. So we're really excited about starting to have the ability to participate in more and more of the foot and ankle ailments. And I'll tell you, our mission has always been if there's a condition below the knee, anything related to foot and ankle, we want to be a participant there, we want to Boost the technology and offer meaningful options to our surgeon customers. So we feel like the soft tissue and the experts really gave us that.
Great, and then just. Yes, I don't know if I missed it. Yes sorry go ahead.
Maybe the second part that you've mentioned, any areas that we still might be missing, I tell you that I still continue to expect to see some soft tissue products, introducing into the market. I'd also expect to see some external fixation products. And those would probably be some areas that we're still missing. And then if you remember the Smart28 is something we've got some real ambition for moving forward. So I'd say those might be some of the gaps.
Great. And then just the last question for me, is overall, I understand you have one net add from a from a productive sales reps prospective here. And I know that there's some rounding errors there as far as when are people roll on and roll off. But overall expectations with respect to hiring, I mean, should we expect that sales force on a rolling 12 month basis to increase in line with the top line. Obviously, you're launching new products or so just trying to understand what expectations should be for just new feet on the street as it stands.
You got it. Just to remind you, we report producing reps, which if you remember is a salesperson that's selling a product in every month of the quarter. our sales force actually did grow. And you can see due to seasonal changes and some other factors that can influence the producing rep count. It looks like it was steady. But we do expect that to increase and we really liked that measure moving forward as a target for us. We feel like adding, producing sales reps is a good target and will continue to be a focus for us moving forward.
Thanks for taking the question.
Of course. Thank you.
Thank you. Today's question today comes from the line of Mike Mattson from Needham. Please go ahead. Your line is now open.
Yes, thanks for taking my questions. Can you guys hear me okay.
Hi. Sorry, I'm using some headphones for the first time here. So, I guess first on the international business,. I think you grew 30% almost on a constant currency basis, based on some of the [orthopedics] company that does look like the international markets were particularly strong this quarter. Do you think that it was kind of there were just more procedures kind of a catch up going on there? Or do you think it was really just your own kind of products and execution in those markets? Combination of both.
Yes, Hey, Mike it's Steve. I think it's actually both and, as we noted in our prepared remarks, and in the earnings, release our three largest markets again, we're really driving our growth and we're just really, really pleased with the progress that we continue to make in those markets and expanding relationships with surgeons, growing with existing surgeons, and just really excellent in territory management, navigating in tough fire environments and continuing to be resilient.
And so we have continued to see some pockets of COVID challenges. And even some if you can believe this some rolling brownouts in South Africa from time to time, but our teams are pretty resilient, as we've talked about and they find a way to make the number and exceed the number. And so we're really happy with what we continue to see in those markets.
Okay, got it. And then it looks like your cash balance is down about 36 million year-to-date. I needed some M&A. So I can't remember how much of that went toward M&A versus operations. But maybe just comment on that. And then talk about your how much cash you think you'll use for the rest of the year if you're going to do that?
Yes, yes, that's right. And that's a good question, Mike. So for the first part of the year, we had cash use and operations of about $24 million. And 11 million of that was driven by inventory investments, most of it related to these new product launches that we brought to market, but also related to some opportunistic builds of legacy products. If we could find a slot on a machine that was extra somewhere, we would take it. And we built some inventory to be able to enable our growth as we move into the seasonally stronger second part of the year.
We also increased our accounts receivable balance not intentionally unintentionally related to our SAP launch. But we will recoup that that was about a $5 million impact for the quarter. so that will be recouped. And then when we look to the balance of the cash use for the year, it's about $24 million net. And that was really driven by instruments of about $6 million on a year-to-date basis and SAP of about $3 million and then other CapEx of about $3 million, principally the building.
Okay, thanks. And then with this mobile training lab that you're introducing, is that training done in that I guess vehicle can be kind of incremental to the existing training courses you're already doing either locally or at your headquarters, or will be kind of replacing some of the kind of regional local training courses you had offered?
That's a great question. I'll tell you, we're excited to expand our medical training capabilities. So the demand has been pretty high, especially with some of these new product launches, for in person medical education, really, for surgeons to get their hands on some of these new products, primarily some of the ankle products, external fixation, fracture fixation products. What we've always tried to do is find the most effective avenue to bring surgeons to our headquarters when possible, but in some situations, it's more appropriate to bring the medical education to them. And so this gives us the flexibility really to move that medical education hub around, and we expect it to be complementary to our in house facility. And we just expect to capture more surgeons who might not have the flexibility of leaving their territories to come here for some medical education and still get their hands on product. We're pretty excited about that mobile app.
Yes, okay. Great. Thank you.
Of course. Thank you.
Thank you. [Operator Instructions] The next question today comes from the line of David Turkaly from JMP Securities. Please go ahead. Your line is now open.
Great, thank you. Albert maybe you've talked about some I guess pretty impressive productivity numbers on your salesforce. Let's call it high teens 20 percentage last couple of quarters. I guess just remind us like where these guys stand today in terms of potential I can't imagine that you can keep seeing increases like that. But maybe with the new products, you can. I guess, help us think about those trends versus actual just new ads.
Yes and thanks for the question Dave. Great to talk to you. I'll tell you there's a few things there. One is the history of Paragon 28 we've always had such an exciting cadence of new product introductions, and we're definitely a clinically oriented organization, which means we appeal more to that clinically minded salesperson. And medical education for us as two facets, it has the surgeon trainings, but it also has sales rep, education. And so as we increase these medical education opportunities for surgeons, it's also a really nice way for our sales reps to continue to get educated on our products, while we designed the instruments and implants and the options the way we have.
So I think there is really a twofold benefit there. We launch a lot of great products. And we have a history of doing that. And we continue to do that today. And it's not slowing down moving forward. And in addition to that, we have tons of medical education opportunities to continue to Boost our sales forces ability to represent these products and just really be a service in the operating room for those surgeons. So we attribute a lot of that productivity increase to those things there.
Got it. And I guess if you'd be willing to give us sort of an update on patient specific options, I know you mentioned Talus. and then Disior, the 3D planning, I guess, I'd love to hear sort of an update of where you stand on the Smart28 platform as well. Thank you.
Absolutely. Yes, you got it. Thanks for the question. We love we continue to be really excited about what Smart28 can mean to the future of foot and ankle surgery, impacting patients, impacting surgeons, impacting basically our knowledge of these deformities and best ways to treat these. So in and of itself, Smart28 really is driven towards more patient specific identification and solutions.
I will tell you that the recent acquisitions, both of Additive Orthopedics and Disior are moving well. The Additive Orthopedics line in particular, the Talus Spacer. Just showed us how powerful some of these options can be to surgeons. These were patients, in some cases, very young patients that suffer with a vascular necrosis. And the options just weren't great for these patients, in some cases, facing amputation.
So there's just such an amazing feeling when we can provide an option a meaningful option like that that gives our surgeons those options and also benefits patients. So we're excited about that. It's doing well for us. And then the Disior side of it, which we've commented before we still think is the software really can be the foundation of the Smart28 or enabling technologies.
And right now the phases of Disior are being used primarily internally for some of our research and development work. As we do two things, one, we prepare for more of a public launch next year, but also in combining Additive Orthopedics and the Disior platform to create a really powerful solution there. So that was sort of an answer that gives you an update on those acquisitions, but also let you know where we are with the Smart28. That's a chance for us to really change the game here and Boost options for patients.
I appreciate it. Thank you.
Thank you. There are no further questions registered at this time. So I'd like to pass the call back over to Albert DaCosta for closing remarks. Please go ahead.
You got it. Thanks. Thank you again for your time today. Steve and I look forward to seeing many of you at future investor and industry conferences as well as individual meetings. Have a wonderful day.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.
66% of SAP users say the biggest hurdle is aligning business, project, and IT teams
BONN, Germany and BOSTON, July 28, 2022 /PRNewswire/ -- LeanIX, a leading platform enabling continuous transformation of corporate and product IT, today announced the findings of its SAP S/4HANA 2022 Survey. The report reveals that organizations need to view the SAP S/4HANA transformation as more than a technical upgrade — it is a business imperative. The report also found that the inherent complexity of the ERP landscape and its connection to the broader IT landscape complicates and slows down the transformation process. As a result, many organizations have barely started the transformation — and time is running out.
The survey looked at the challenges companies face in the transformation process, the primary drivers of SAP S/4HANA transformation, the phases and timing of SAP S/4HANA transformation, the levels of customization in existing ERP systems, the state of collaboration between SAP & EA teams, and the appropriate involvement of EAs in the transformation process.
Key findings from the report include:
Over half the respondents (54%) see the move to S/4HANA as a business transformation, not a technical upgrade. Respondents also identified enterprise architect management and business process modeling as the disciplines most critical to the process.
When it comes to ERP, companies face a lot of complexity. Over 70% of companies run more than one ERP system and more than half of the companies surveyed use ERP systems from more than one vendor.
About half of the respondents said both identifying interdependencies between ERP and non-ERP landscapes and defining the target architecture as the top challenges faced in in their SAP S/4HANA transformation. These challenges arise in part from the fact that fewer than 20% of respondents can establish an overview of their entire software landscape in under a month.
To complete a successful transformation, collaboration is essential. The biggest obstacle to transformation? Aligning business, project, and IT teams, say two-thirds of those surveyed. Less than half (38%) of EAs describe their involvement in the SAP S/4HANA transformation as sufficient, which represents a drop from the level of involvement reported in last year's LeanIX SAP S/4HANA survey (47%).
"Time is running out for organizations that plan on moving to SAP S/4HANA," said André Christ, CEO and Co-Founder of LeanIX. "With only a third of those surveyed saying they will complete their transformation within the planned timeframe, organizations need to focus on actions that will accelerate the process. Enabling effective collaboration between business, project, and IT teams is the critical step they need to take. This will not only speed things up, but will also ensure that the transformation delivers lasting business value."
For more information about LeanIX, visit www.leanix.net
In April and May 2022, 100 IT experts from international enterprises participated in an online survey conducted by LeanIX and focused on the transformation process, ERP systems, the importance of collaboration and the challenges faced. For readability, the results in this report are presented as rounded percentages.
LeanIX's Continuous Transformation Platform® is trusted by Corporate IT and Product IT to achieve comprehensive visibility and superior governance. Global customers organize, plan and manage IT landscapes with LeanIX's automated and data-driven approach. Offering Enterprise Architecture, SaaS Management, and Value Stream Management, LeanIX helps organizations make sound decisions and accelerate transformation journeys. LeanIX has hundreds of customers globally, including Adidas, Atlassian, Bosch, Dropbox, Santander and Workday. The company is headquartered in Bonn, Germany, with offices in Boston and around the world.
View original content:https://www.prnewswire.com/news-releases/leanix-survey-reveals-only-12-of-sap-users-have-finished-the-sap-s4hana-transformation-301595057.html
28-Jul-2022 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
Halfords Group plc
Annual Report and Accounts for period ended 1 April 2022
including the Notice of Annual General Meeting ("AGM") - convened for 7 September 2022
The Company announces that the Annual Report and Accounts for the period ended 1 April 2022 and Notice of Annual General meeting of the Company, have been posted or otherwise made available to shareholders and published on its website www.halfordscompany.com.
The Company's 2022 AGM will be held at Halfords Group plc, Support Centre, Icknield Street Drive, Washford West, Redditch, B98 0DE on Wednesday 7 September 2022 commencing at 3:00pm.
As detailed in the Notice of AGM, we strongly encourage shareholders to vote on all resolutions by casting their votes through the use of a proxy (details of how to do this can be found in the Notice of AGM). This remains important notwithstanding the removal of the UK Governments coronavirus restrictions.
The Board is committed to ensuring that shareholders can exercise their right to ask questions, and as per last year, shareholders will be able to submit questions to the Directors in advance of the AGM via email to the Company Secretary (email@example.com) Written answers to all questions received will be sent directly to shareholders by email and answers to frequently asked questions will, to the fullest extent practicable, be published on the Companys website ahead of the meeting or, to the extent that has not been possible, will be addressed at the meeting itself.
In accordance with Listing Rule 9.6.1, a copy of the Annual Report and Accounts and the Notice of Annual General Meeting of the Company have been uploaded to the National Storage Mechanism and will be available for viewing shortly at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Halfords Group plc
The Appendix to this announcement is a supplement to our preliminary statement of Financial Results made on 16 June 2022 (the "Final Results Announcement"). It contains the information required pursuant to Disclosure Guidance and Transparency Rule 6.3.5 that is in addition to the information communicated in the Final Results Announcement and should be read together with the Final Results Announcement. This information is not a substitute for practicing the full Annual Report and Accounts for the year ended 1 April 2022.
The Chief Financial Officers Report in the preliminary statement of the Final Results Announcement issued on 16 June 2022 includes a commentary on the principal commercial and financial risks and uncertainties to achieving the Groups objectives.
Further details of other principal risks and uncertainties relating to the Halfords Group are set out on pages 72 to 77 of the 2022 Annual Report and Accounts. Specific financial risks (e.g. credit risk, foreign currency) are detailed in note 22 to the Financial Statements on pages 193 to 198 of the 2022 Annual Report and Accounts.
The following is extracted in full and unedited form from the 2022 Annual Report and Accounts.
Our Principal Risks and Uncertainties
Capability and Capacity to Effect Change
Failure to build sufficient capacity and capability (in terms of our people, processes, and systems) to successfully implement the transformation required across the business may result in the expected benefits of our strategy not being delivered, thereby risking the future sustainability of the business.
Focus in 2023
A dedicated Transformation and Change team led by the Chief Transformation Officer and supported by experienced Programme and Project Managers has enabled progress to be made during a period of increased capital investment and focus on delivery of significant strategic initiatives.
The continued advancement of our change programme is managed through a Transformation Board, providing the necessary governance for delivery of the strategy. The Transformation Board ensures there is a robust approval process for each project, allocates resource and monitors progress. Programme and Project Managers are in place within the business to whom projects can be assigned and this has been supplemented by specialist resource to boost capability. In affecting change, Halfords is requiring all contributing colleagues to
observe the principles of Responsible, Accountable, Consulted, and Informed (RACI)
Continue to align our Transformation plan with the key objectives of our corporate strategy.
Closely monitor progress on individual programmes, realigning requirements and resources where relevant.
Embedding a new organisational design to strengthen with even greater focus on best practice change management and adoption, delivery of benefits and standardisation of process
Delivery of a new operating model, specifically
in technology and digital teams, will drive more agile, effective and efficient delivery of changes,
with a greater emphasis on the unlocking of value
Failure to secure and maintain our stakeholders (investors, suppliers, colleagues) support for our strategy will mean they may lose confidence in the business and withdraw their resources.
Focus in 2023
Throughout the year, we demonstrated progress in the execution of our strategy, building confidence in external and internal stakeholders.
Our equity placing in FY22 received exceptional support from our investors, and we continue to see strong progress in both customer NPS and colleague engagement
Maintain progress on the delivery of our strategic
Address colleague engagement challenges through a regular cycle of survey and review.
Proactive investor relations programme of events
and communication with a planned Capital Markets day for the second half of the year.
If investment in our motoring product value proposition and Group value perception is insufficient to retain existing customers and/or attract new ones, and/or we continue to lose market share to online retailers and discounters, the impact could be a loss of sale volume. Balancing price investment will be important in the current environment and there is a risk that investing in price without a corresponding increase in volume leads to a diminution of financial returns, but equally, increasing prices outside of market movements could create further damage to our value perception.
Focus in 2023
To differentiate ourselves in a competitive retail market, our vision is to consolidate Halfords as a super-specialist in motoring and cycling. Our strategy emphasises the importance of creating value for the customer by delivering services alongside the sale of a product. Progress continued through a refreshed financial services campaign and ongoing Cycle to Work proposition supporting greater accessibility for our customers, further enhanced by the launch of our pre-pedalled bikes offering.
Launch of the Halfords motoring club loyalty programme, designed to reward loyal customers and inspire a greater proportion to shop across the Group.
Introduction of a new halo message to support a
change in perception over the medium to long term.
Establishment of the motoring club help club
customers enjoy greater savings and benefits and
ensure we help customers motor for less across the UK.
Further investment in pricing motoring products to deliver greater value for customers.
Brand Appeal and Market Share
Investment in awareness of our brand and our services is insufficient to increase our brand relevance, in which case we will be unable to maintain and grow our customer base or Boost our customer shopping frequency and spend and correspondingly build market share.
Focus in 2023
Building on a positive response to our status as an essential retailer we have grown awareness of our Halfords Mobile Experts and garage services. Customer NPS and satisfaction has achieved record levels for Trust Pilot and Google scores for the Group
Improvement of our cycling proposition, allied with better than market availability and support for the cycle to work voucher scheme, has strengthened market share
Integration of National will support greater brand
awareness of garages and mobile vans.
Promotion of the motoring club offering free and
Investment in the growth in electric mobility to
strengthen our market-leading proposition
Climate Change and Electrification
The climate crisis is already having a profound effect through extreme weather events floods, drought and rising sea levels all of which have the ability to disrupt our supply chains and impact our ability to operate our business effectively. These risks have been assessed in detail and whilst flooding is likely to impact select Halfords stores and garages across the UK, our most material climaterelated risks and opportunities are in response to the evolving regulatory landscape; in particular, the ban on new internal combustion engine (ICE) vehicles being sold in the UK from 2030 as part of the UK Governments net zero ambitions. More sustainable mobility options, including electric vehicles, E-bikes and E-scooters are therefore going to be crucial over the next decade as the country prepares for the shift away from conventional fuel sources and transition to a lower-carbon economy. This transition will impact our motoring and cycling business in the short, medium and long-term.
Failure to respond adequately to the demand for sustainable mobility options through our products and servicing offers could lead to a loss in confidence, market position and revenue.
Our service proposition does not match customer demand for electrification solutions in motoring and cycling, leading to profound
disruption in our core markets.
Failure to deliver against our climate strategy and net zero targets, leading to a loss in confidence from our stakeholders and potential reputational damage.
Robust Electrification strategy discussed at the Transformation Board regularly. Challenges, performance and successes are analysed, and strategy regularly adjusted as appropriate.
Regular monitoring of legislative changes, climate-related due diligence and reporting requirements as well as monitoring of the regulatory environment for changes to policies around e.g., sale of ICE vehicles,
tax breaks for e-mobility or infrastructure evelopments
Regular landscape monitoring for electric vehicles (EVs) both from a manufacturing side and consumer uptake side so that we canappropriately respond to the rise of e-mobility.
Task Force on Climate-related Financial Disclosure (TCFD) roadmap developed and being actioned to support ongoing reporting and risk management requirements.
Science-based carbon targets developed to tackle the immediate carbon emissions reductions required across our business and supply chain. These will form the foundations for our net zero pathway and will be monitored to ensure we hit our longer-term net zero target.
Investment in systems approved that will enable the collection of supply chain emissions, to measure, monitor and reduce our Scope 3 emissions which make up a significant proportion of our overall carbon footprint.
Focus in 2023
Continue to work with Government to support the
path to legality for private E-scooters.
Continue to train and equip our colleagues to work safely and confidently on hybrid and battery EVs and continue to meet all appropriate regulatory standards.
Focus on growing the penetration of hybrid and
battery electric vehicles in our fleet.
Further Board training on climate change and the
Boards due diligence requirements, including
specialist training for those directly responsible for
Develop a process whereby climate-related risks and opportunities can be updated on an annual basis.
Integrate climate risk relating to weather (floods, etc) into risk management process for our estate.
Begin collecting supply chain data on Scope
3 carbon emissions and climate management,
particularly for areas of supply that may be
disrupted due to severe weather.
Develop and report on Halfords Net Zero plan;
headline information on how we will transition to
a lower-carbon economy
Sustainable Business Model
Alongside pre-existing changes in customer habits and expectations, the recent spike in UK supply chain and consumer Inflation is creating challenging economic conditions. Unless we can continue to mitigate the significant levels of cost inflation (through cost mitigation and savings, growth in new business areas, and increasing selling prices), we will be unable to maintain a sustainable business model.
Focus in 2023
An ongoing strategic focus on the growth of services will build more stable revenue streams, lessening the Groups relative exposure to discretionary expenditure.
Selling solutions and cross-shop initiatives will maximise the revenue from existing transactions.
Detailed price/elasticity analysis alongside price trials will optimise consumer pricing decisions.
Long-standing supplier relationships will be optimised to extract value from supplier contributions/support.
A new Cost Transformation framework programme has been established to target cost reduction during FY23/FY24.
US Dollar hedging programme in place.
Recent three-year refinancing extended for a fourth year.
Strategic programme focused on selling more
full solutions to customers, supported by digital
Cross-shop sales opportunities boosted by launch of the new Motoring Loyalty Club programme.
Customer referral encouraged from Retail to
Autocentres/Halfords Mobile Experts via new
services roles in Retail.
Cost Transformation programme established to focus on short-, medium- and long-term cost reduction opportunities.
Ongoing goods for resale supplier discussions
targeting mutual value opportunities.
Fixed cost contracts entered into for inflationary cost categories e.g. Freight and Utilities.
Rental costs reduced through property renegotiations; underperforming stores/garages closed at lease renewal.
Productivity analysis ongoing through digital
New Group Data Platform identifying sales, cost and productivity opportunities.
FX hedging programme.
Continuing to focus on margin improvement,
eliminating unnecessary cost through targeted
efficiencies and scale benefits.
Regulatory and Compliance
A failure to adhere to our legal and/or regulatory obligations for some or all of the Groups activities leads to an inability to meet our responsibilities to stakeholders and/or the imposition of financial penalties, placing a strain on the business.
There is continual monitoring of legal and regulatory developments for all regions where the Group operates. A suite of policies sets out the Groups commitment to conduct its business with honesty and integrity. The senior leadership team communicates tone from the top to provide guidance to colleagues on all policy commitments.
Compliance training is provided to new colleagues as required with refresher courses thereafter. Regular horizon scanning is undertaken to capture new regulations and requirements.
We have a code of conduct with our suppliers whom we monitor for compliance across ethics: nvironmental management; labour practices; and human rights.
Health and safety, data protection and Financial Conduct Authority compliance are managed by experts reporting to dedicated committees with representatives across the business to assess our regulatory rigour.
An established whistleblowing process enables colleagues to report suspected or actual wrongdoing in confidence
Focus in 2023
Continued monitoring of legal and regulatory
developments for all regions where the Group
Increased headcount within the Health and Safety function to support the growth of the Group.
Review and improvement of policies supported
by training programmes for colleagues.
Regular training and information provided through user-friendly channels.
Establishment of a new Finance Risk Committee to focus on all aspects of financial risk and compliance.
The services we provide fall below the quality standards to which we are committed, placing customers at risk of harm.
Focus in 2023
All colleagues are provided with dedicated training and adhere to established quality control and safety procedures, with compliance audits by management. We also have a dedicated compliance team monitoring our regulated activities.
In Autocentres our digital operating platform PACE enables increased workflow, productivity, and quality assurance. PACE drives service quality by requiring quality controls to be completed on all workshop
colleagues as determined by the Technician Quality Rating. All our Quality Controllers follow an approved training pathway and receive refresher training annually.
We have a Retail Contact Centre that provides a level of call answer rates that ensures we can provide a quality service to our customers whatever channel they choose.
Stores and Service calls to be migrated to self service or digital channels for ease and optionality for customers to access support in channel of choice.
Our Retail Plan will remain unchanged into FY23
to ensure we drive consistency across the estate
and continue the focus on embedding the Retail
An annual skills plan ensures we are able to maintain our skill level as we drive down our labour turnover.
Integration of National garages to include the
adoption of the Halfords Quality procedures and roll out of PACE.
Our Operational Excellence team will continue to
review our inventory of tools to do the job.
Fusion will be our focus on our next go to operating model as we roll out Core and Enhanced formats.
If we fail to sufficiently prevent, detect, and respond to cyber incidents and attacks they may result in disruption of service, compromise of sensitive data, financial penalties from regulatory authorities, financial loss, and reputational damage.
Focus in 2023
Our security partner, TCS, provides first line assurance security operations capabilities including vulnerability management, email filtering, and website security.
Within our Risk Management Framework our information Security team provides the second line assurance role identifying and managing cyber-related risk, and developing and implementing our internal control framework.
Third line assurance is provided by Internal Audit.
A perpetual education and awareness campaign is provided to all colleagues. Regular briefings promote an understanding of the risks to our data and the benefits of good security practices.
The Audit Committee is regularly briefed by senior Technology management on the business cyber security framework
Consolidate technical cyber security solutions across the Group, including acquisitions.
Mature processes for internal control assessments to Boost identification and ongoing management of cyber risk. Conduct gap analysis against the CIS Critical Security Controls for critical systems. Remediate findings to ensure critical systems are protected.
Mature cyber resilience of critical systems, including both proactive and reactive incident response capabilities.
Mature processes and documentation relating to
security of data focusing first on regulated personal data of both customers and colleagues.
Conduct a network security review including
segmentation and firewall positioning, legacy and
end-of-life devices, and regular security testing
(vulnerability scanning and penetration testing)
Our employment model may not be sufficiently attractive to recruit and retain the talent that we need. We do not maintain a sufficiently positive culture, failing to support a diverse and inclusive community.
Focus in 2023
A five-year People Strategy that develops the colleague journey across the areas of Find me, Train me, Grow me, Keep me and that creates the opportunity for a career at Halfords with an employee brand Your Journey, Our Journey make it your own.
The continued development of our colleague engagement programme and survey, and further focus on our colleague network groups.
Through the provision of wellbeing facilities and regular updates using huddles and blogs we keep our colleagues informed and supported.
Implementation of Year 1 of our People Strategy with activities focused on delivering improvements to the colleague journey of Find me, Train me, Grow me, Keep me.
Benchmark our pay and benefits to ensure we are competitive in the market.
Move to an engagement model that inspires ongoing engagement, listening and action.
Develop our colleague network groups to support change in areas of diversity that develops our attraction and engagement with our colleagues.
We may be unable to recruit, retain and develop enough people to have the different mix of skills that we need at all levels across the business, in the near and longer term.
Focus in 2023
We have reduced our reliance on external recruitment and as part of our colleague strategy developed our internal pipeline for technical and leadership capability. We have also further developed crossgroup career pathways and succession planning as well as continued investment in our training and development.
Training and development are a fundamental part of our business and
a great attraction for new applicants. We apply a targeted approach to
further enhance skill levels for centres as we do with stores, by mapping
against the optimal skills mix.
Launch our employee brand and integrate through our attraction and recruitment materials. Broaden our attraction resources and develop simpler and quicker recruitment processes.
Develop and expand our apprenticeship strategy and the Halfords Academy to grow our own technical skill base.
Expand our Tyre fitter to Tech programme and
change hiring approach to recruit on behaviour as
we will train the skill.
Develop a cross-group approach to talent and
Investment in our selling skills across Group
IT Infrastructure Failure
Failure in our IT system(s) may cause significant disruption to, or prevention of, normal business-as-usual activities
Focus in 2023
Extensive controls are in place to maintain the integrity of our systems and to ensure that systems changes are implemented in a controlled manner. We have resilient infrastructure in place for remote working colleagues to access Halfords hosted applications, such as SAP.
Halfords key trading systems are hosted securely within data centres operated by a specialist company and in specialist cloud services operated by Microsoft. These systems are supported by disaster recovery arrangements, including comprehensive backup and patching strategies. IT recovery processes are tested regularly.
Continue progression towards a fully cloud-based
hosting structure with a transfer of risk to cloudbased service providers who can maintain higher levels of contracted availability.
Reduce dependencies on legacy and end-of-life
systems for key business-as-usual activities.
Deep-dive analysis into targeted areas of
infrastructure, managed through the Risk Committee.
Disruption to end to end supply chain
The Halfords end to end (E2E) supply chain is an integration of the process from sourcing of products (including the raw material procurement and product design by our supply partners) through to scheduling and delivery of goods to our customers (through our distribution centre (DC) network and via stores or direct to consumer).
Disruption to the E2E process creates a major impact to customer fulfilment and/or customer-facing price increases due to supply shortages, increased demand for raw materials impacting availability and input price, production delays that lead to an extension in supply lead times, logistics delays in the form of shipping of goods, or the potential closure of one of our distribution centres, all of which challenges our ability to meet sales and profit projections.
Focus in 2023
The need to respond to the pandemic in FY21 has tested our business continuity plans and given us confidence in alternative supply chain solutions and resilience.
Our Commercial and Financial processes support continued active demand forecasting through regular weekly reviews, a transparent Open to Buy process, a stock policy that increases cover for important and
volatile lines and a currency hedge policy that smooths out variability.
Our sourcing capability and supplier relationships are delivered through dedicated UK, Asian and Near sourcing teams. These teams maintain both strategic and upstream supplier relationships, operate multiple sources, dual sourcing, product engineering and are engaged in the ESG agenda.
Our in-house expertise delivers the high global trading standards from Authorised Economic Operator accreditation, import/export expertise
and dedicated security at each of our DC sites.
Our 3PL relationships give expertise and options. We contract with multiple shipping lines for flexibility and leverage, we have access to large organisational support from Yusen Logistics, Wincanton and Clipper
logistics and PwC provide external trading and compliance expertise.
Our transformation plans reduce risk through scheduled work on the replacement of our warehouse Management System, a UK distribution centre physical network review, the replacement of our Forecasting and replenishment tools and our Customs and Duty platform.
We have invested in a multi-sea freight carrier solution to balance costs and flexibility to move our direct import cargo in an unprecedented inflationary market.
Development of a replacement Warehouse Management System.
Development of an enhanced Customs and Duty
Investment in a more senior dedicated Customs and Trade compliance team to reduce the risks associated with international sourcing activity.
Investment in additional storage space in a fifth DC to hold overstocks and protect availability rather than cut intake too hard and damage both customer availability and supplier relationships.
The directors are responsible for preparing the annual report and the financial statements in accordance with UK adopted international accounting standards and applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with UK adopted international accounting standards and have elected to prepare the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss for the group for that period.
In preparing these financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether they have been prepared in accordance with UK adopted international accounting standards, subject to any material departures disclosed and explained in the financial statements;
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business;
prepare a directors report, a strategic report and directors remuneration report which comply with the requirements of the Companies Act 2006.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the companys transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the groups performance, business model and strategy.
The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Companys website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the companys website is the responsibility of the directors. The directors responsibility also extends to the ongoing integrity of the financial statements contained therein.
Directors Responsibilities Pursuant to DTR
The directors confirm to the best of their knowledge:
The financial statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit and loss of the group.
The annual report includes a fair review of the development and performance of the business and the financial position of the group and company, together with a description of the principal risks and uncertainties that they face.
Approved by order of the Board.
15 June 2022