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    Xylem Inc (XYL)

    Q2 2024 Earnings Summary

    Reported on Feb 13, 2025 (Before Market Open)
    Pre-Earnings Price$141.53Last close (Jul 29, 2024)
    Post-Earnings Price$143.00Open (Jul 30, 2024)
    Price Change
    $1.47(+1.04%)

    What went well

    • Accelerated performance in Measurement & Control Solutions (M&CS) is driving increased full-year revenue guidance to 5% to 6%. High demand for smart metering products and a strong pipeline of large deals in the U.S. and Europe support sustained future growth.
    • Water treatment orders grew over 20%, indicating robust momentum in the Water Infrastructure segment. Significant project wins in high-growth verticals like data centers, power transition (20-year green hydrogen contract), and semiconductor industries, including contracts worth $7 million to $10 million, are expected to drive further growth.
    • Confidence in end markets despite macroeconomic noise: The company remains bullish in most end markets, with no material impact from macro factors. They are leveraging differentiated technology to win larger projects, aiming to return Applied Water Systems to growth in 2025.

    What went wrong

    • The Applied Water segment is experiencing continued weakness, with revenues down 4% and expected to remain soft in the second half, primarily due to declines in developed markets, especially in the commercial and industrial space. The Architectural Billings Index has been negative for 16 consecutive months, and manufacturing PMI continues to be negative, indicating ongoing challenges in this segment.
    • In the Water Infrastructure segment, China exposure is a concern, as large projects continue to get delayed, and orders were down despite revenue growth. The ongoing economic uncertainties in China are causing projects to be "perpetually shifting to the right," which may impact future performance in this segment.
    • Measurement & Control Solutions saw orders decline by 18% in the quarter, with book-to-bill under 1, due to project timing and a 12% organic decrease in backlog from the prior year. While the company expects future growth, the continued decline in orders and backlog could signal potential slowing demand in this segment.

    Q&A Summary

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

    6. 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.

    7. 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.

    8. 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.

    9. 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.

    10. 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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