Xylem Inc. is a leading global water technology company that designs, manufactures, and services highly engineered products and solutions for critical applications in the water sector . The company operates through four main segments, addressing customer needs across the water cycle, from delivery and treatment to the return of water to the environment, with a strong emphasis on innovation and sustainability . Xylem's diverse product offerings include water and wastewater pumps, smart metering, and tailored services to improve operational reliability and environmental compliance .
- Measurement and Control Solutions - Provides smart metering, networked communication devices, data analytics, and critical infrastructure services .
- Water Infrastructure - Focuses on the transportation and treatment of water, offering products such as water and wastewater pumps, filtration, disinfection, and biological treatment equipment .
- Applied Water - Serves residential, commercial, and industrial markets with products like pumps, valves, heat exchangers, and controls .
- Water Solutions and Services - Combines legacy Evoqua's Integrated Solutions and Services with Xylem's dewatering and assessment services businesses, offering tailored services and solutions to improve operational reliability and environmental compliance .
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What went well
- Strong financial performance with raised full-year guidance: Xylem delivered a very strong quarter, exceeding expectations on all metrics, with an 11% adjusted EPS growth and an increase of adjusted EBITDA margin by 170 basis points . The company raised its full-year revenue guidance to 5% to 6% and increased its EPS guidance by $0.06 from the prior midpoint, reflecting confidence in sustained growth .
- Robust demand and momentum in key high-growth verticals: The company is experiencing strong demand across most of its end markets, particularly in water infrastructure and treatment, with treatment orders up over 20% driven by large project wins . Xylem is seeing continued momentum in high-growth verticals such as pharmaceuticals, life sciences, microelectronics, and power, driven by global challenges like climate change and water scarcity, which are expected to sustain robust demand .
- Successful integration of Evoqua and progress on operational initiatives: The integration of Evoqua is progressing well, with cost and revenue synergies tracking positively, enhancing Xylem's capabilities in utility and industrial markets . The company is also advancing its 80/20 operational initiatives, expected to bring significant benefits starting in 2025, contributing to margin expansion and operational efficiency .
What went wrong
- The Applied Water segment remains challenged, with low single-digit declines expected due to softness in developed markets, indicating potential continued weakness.
- Orders in the Measurement & Control Solutions segment were down, possibly signaling future revenue headwinds despite management attributing this to project timing.
- In China, the company experienced weakness in the treatment business, with only low single-digit growth, raising concerns about growth prospects in that important market.
Q&A Summary
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Second Half Guidance
Q: Any change to second half expectations?
A: Management confirmed there's no change to second half expectations, and they increased full-year revenue guidance to 5%–6% due to accelerated performance in M&CS. -
Water Infrastructure Margins and China
Q: What's impacting Water Infrastructure margins and China exposure?
A: Margins were affected by an acquisition last year that had unusually high margins, but price cost remained positive. China exposure is largest in Water Infrastructure; China has been lumpy with some large projects delayed. -
Applied Water Outlook
Q: Can Applied Water return to growth before year-end?
A: Third quarter is expected to be down low single digits, with fourth quarter closer to zero. The decline is mainly in developed markets, but teams are leveraging technology to win larger projects and aim to return to growth next year. -
M&A Activity
Q: When will you resume M&A activity?
A: While focus is on integrating Evoqua, the company is very active with a strong pipeline and is preparing to execute on M&A opportunities, though timing is key. -
Large Project Wins
Q: Can you share details on large project wins?
A: They are seeing momentum in data centers, power transition, and semiconductors, with project wins in the $7 million to $10 million range. High-growth verticals are showing strong momentum. -
MCS Margin Outlook
Q: What is the expected margin impact in MCS?
A: Expecting about a 100 basis point sequential decrease in margins in the back half due to mix headwinds from energy deployments. -
Backlog Normalization
Q: How will backlog trend as you work through past due?
A: Backlog remains strong but will normalize as the M&CS past due backlog is worked down, reflecting robust demand across end markets. -
MCS Order Pipeline
Q: Will MCS orders recover to support growth?
A: There is significant runway in AMI adoption, and despite backlog burn, expectations are aligned with the long-term framework, with growth anticipated. -
Working Capital Improvements
Q: Will 80/20 initiatives improve working capital?
A: Yes, 80/20 will enhance efficiency with faster-moving inventory and reduced complexity, benefiting cash conversion in 18 to 24 months. -
Service Business Integration
Q: How is integration with WSS improving results?
A: Combining services has increased synergies, offering turnkey solutions, improved technician utilization, and is driving fast revenue synergies.
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Given that MCS orders declined by 18% in the quarter and book-to-bill came in under 1 due to project timing, how confident are you in the MCS segment's ability to sustain its current revenue growth, and what measures are you taking to address the order declines?
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Applied Water revenues were down 4% organically, driven by softness in developed markets. Can you provide more detail on the factors contributing to this softness, and what steps are being taken to reverse this trend in the Applied Water segment?
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You mentioned expecting a margin headwind from mix in the second half as energy meters account for a larger portion of sales in the MCS segment. How significant do you anticipate this margin compression will be, and how are you planning to mitigate its impact on overall profitability?
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With the Supreme Court's decision to strike down the Chevron Doctrine introducing uncertainty around PFAS regulations, how might potential delays or reversals in federal regulation affect your growth projections, especially considering that PFAS remediation was not baked into your long-term framework?
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Despite robust treatment demand leading to an 8% increase in Water Infrastructure orders, adjusted EBITDA margin for the segment was down 60 basis points due to inflation and acquisition headwinds. What strategies are in place to improve margins in this segment, and how do you plan to offset these ongoing challenges?
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024 and FY 2024
- Guidance:
- Full Year Guidance (FY 2024):
- Revenue: Increased by approximately $50 million, up from $8.5 billion, reflecting an additional 0.5 point of growth at the midpoint versus prior guidance. Total revenue growth is expected to be approximately 16%, with organic revenue growth at 5% to 6% .
- EBITDA Margin: Raised to about 20.5%, representing 160 basis points of expansion versus the prior year .
- EPS: Updated guidance of $4.18 to $4.28, reflecting an increase of $0.06 at the midpoint .
- Free Cash Flow Conversion: Expected to be over 120% of net income .
- Segment Growth: MCS segment expected to grow at high teens, revised from previous outlook of low teens .
- Third Quarter Guidance (Q3 2024):
- Revenue Growth: Anticipated to be 3% to 5% on a reported and organic basis .
- EBITDA Margin: Expected to be in the range of 20.5% to 21%, up 70 to 120 basis points .
- EPS: Expected to be $1.07 to $1.12 .
- Full Year Guidance (FY 2024):
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q2 2024 and FY 2024
- Guidance:
- Full Year Guidance (FY 2024):
- Revenue: Approximately $8.5 billion, reflecting a total revenue growth of 15% to 16% and organic revenue growth of 4% to 6% .
- EBITDA Margin: About 20%, representing a 110 basis points expansion versus the prior year .
- EPS: Updated guidance of $4.10 to $4.25, reflecting an increase of $0.08 at the midpoint .
- Cost Synergies: Expecting around $100 million of exit rate cost synergies in 2024 .
- Free Cash Flow Conversion: Expected to be 115% of net income .
- Second Quarter Guidance (Q2 2024):
- Revenue Growth: Anticipated total revenue growth of 23% to 25% on a reported basis and 5% to 7% organically .
- EBITDA Margin: Expected to be approximately 20%, up 90 basis points .
- EPS: Expected to be $1 to $1.05 .
- Full Year Guidance (FY 2024):
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: FY 2024 and Q1 2024
- Guidance:
- Full Year Guidance (FY 2024):
- Revenue: Total revenue is expected to be between $8.4 billion and $8.5 billion, resulting in total revenue growth of 14% to 15%. Organic revenue growth is projected to be 3% to 5% .
- EBITDA Margin: Expected to be between 19.4% and 19.9%, representing a 50 to 100 basis points expansion versus the prior year .
- EPS: Projected to be between $4.00 and $4.20, up 8% at the midpoint over the prior year .
- Cost Synergies: Approximately $100 million of exit run rate cost synergies are expected in 2024 .
- Free Cash Flow Conversion: Expected to be 115% of net income .
- First Quarter Guidance (Q1 2024):
- Revenue Growth: Anticipated to be in the 36% to 38% range on a reported basis and 4% to 6% organically .
- EBITDA Margin: Expected to be approximately 18%, up 170 basis points .
- EPS: Projected to be between $0.80 and $0.85 .
- Full Year Guidance (FY 2024):
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: N/A
- Guidance: The documents do not contain information from the Q3 2024 earnings call for Xylem (XYL). Therefore, I cannot provide the guidance they issued during that period.
Competitors mentioned in the company's latest 10K filing.
- Grundfos: Competitor in both the Applied Water and Water Infrastructure segments .
- Wilo SE: Competitor in the Applied Water segment .
- Pentair plc: Competitor in the Applied Water segment .
- Franklin Electric Co., Inc.: Competitor in the Applied Water segment .
- KSB Inc.: Competitor in the Water Infrastructure segment .
- Sulzer Ltd.: Competitor in the Water Infrastructure segment .
- United Rentals: Competitor in the Water Infrastructure segment .
- Trojan (Veralto Corporation): Competitor in the Water Infrastructure segment .
- Veolia: Competitor in the Water Infrastructure segment .
- De Nora: Competitor in the Water Infrastructure segment .
- ProMinent: Competitor in the Water Infrastructure segment .
Recent developments and announcements about XYL.
Corporate Leadership
Leadership Change
Who is leaving: Jeanne Beliveau-Dunn, a Director at Xylem Inc., has decided not to stand for re-election at the company's 2025 Annual Meeting. She will remain on the Board until the meeting.
Why: Her decision is not due to any disagreement with the company or its Board on operations, policies, or practices.
Who is stepping up: No direct replacement has been announced. The Board size will be reduced to nine members following her departure.
Board Change
Jeanne Beliveau-Dunn has decided not to stand for re-election as a Director of Xylem Inc. at the 2025 annual meeting of shareholders. She will continue to serve on the Board until the meeting, after which the Board will be reduced to nine members.