Q3 2024 Earnings Summary
- Strong demand and improved production in the Measurement & Control Solutions (MCS) segment: Production constraints have eased significantly, with lead times reduced from 52 weeks to 5 weeks over the course of the year. This positions Xylem to meet the robust demand in the underpenetrated Advanced Metering Infrastructure (AMI) market, which has less than 50% penetration. The sales funnel is up over 25% year-over-year, indicating strong future growth potential.
- Strategic acquisition of majority stake in Idrica enhances digital capabilities: Xylem's increased ownership in Idrica allows for deeper integration of their data analytics platform, addressing utilities' biggest pain point in data management. This move is expected to drive synergies and efficiencies, with strong traction evidenced by a huge funnel and winning big orders globally.
- Successful pricing strategies contributing to margin expansion: Xylem achieved a price cost spread of about 60 basis points in Q3 , with the MCS segment contributing greater than 200 basis points. Continued focus on pricing, including 80/20 implementation and leveraging differentiation, is expected to be a tailwind into next year and beyond.
- Slowdown in Measurement & Control Solutions (MCS) growth may impact near-term revenues: The MCS segment is transitioning from previous growth rates of 20% to an expected high single-digit growth as it works through its $1.9 billion backlog. Management anticipates an adjustment period lasting the next quarter or two, which could impact revenue growth in the near term.
- Delays in Water Solutions and Services (WSS) projects due to external factors: The WSS segment is experiencing delays in project timing due to elongated commercial negotiations and interest rate uncertainty, leading to softness expected to continue into the fourth quarter. These delays may affect the segment's revenue performance despite strong underlying demand.
- Underperformance and uncertainty in the Applied Water segment: The Applied Water segment has faced negative revenue comparisons for several quarters, indicating ongoing challenges. While management is optimistic about recovery in 2025, there is uncertainty due to potential pressure from business decisions related to their 80/20 initiatives.
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue Growth | Q3 2024 | 3% to 5% year-over-year | ~1.3% year-over-year (2,104Vs 2,076) | Missed |
EBITDA Margin | Q3 2024 | 20.5% to 21% | ~5.5% ((Operating Income 28+ D&A 88) ÷ Revenue 2,104) | Missed |
EPS | Q3 2024 | $1.07 to $1.12 | $0.90 | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Measurement & Control Solutions (MCS) | Q2: +26% revenue, margin 23.4%, backlog $2B. Q1: +22% revenue, margin 22.7%. Q4: +21% revenue, margin +220bps. | Revenue +11% , backlog at $1.9B , margin 21.2% , growth downgraded to mid-teens due to project timing. | Recurring; revised growth outlook but margins remain strong. |
Applied Water | Q2: -4% revenue, orders +5%. Q1: Softness in Europe/emerging markets. Q4: Low single-digit decline outlook. | Most challenged segment, near bottom, expects 2025 recovery. Orders +4%, revenue -4%, margin -10bps YoY. | Recurring; continuing softness with potential rebound in 2025. |
Evoqua Water Technologies integration | Q2: $100M synergy target. Q1: $100M run-rate synergy, focus on revenue synergy ramp. Q4: $100M synergy in guidance. | Ahead of schedule, targeting $130M exit run-rate cost synergies in 2024 , revenue synergy via portfolio optimization. | Recurring; accelerating synergy realization. |
Idrica acquisition | Q2: Idrica enabled synergy wins. Q1: Platform for AMI data visualization in Europe. Q4: No direct mention, broader digital approach. | Majority stake to deepen digital/data offerings, closes December 2024, no material 2024 impact. | Emphasis on digital analytics; expanding solutions portfolio. |
Margin expansion and pricing | Q2: 20.8% margin, +170bps YoY. Q1: 19.2% margin, +290bps YoY. Q4: 19.6% margin, +90bps YoY. | Record 21.2% EBITDA margin , 60bps price-cost spread , 80/20 helps drive systematic improvement. | Recurring; continuous margin gains from pricing and productivity. |
China market | Q2: Larger projects face delays, lumpy orders. Q1: No specific mention. Q4: Cautious outlook, delayed revenue conversion. | Mid-single-digit exposure, project deferrals from real estate, tight municipal funding. | Recurring; continued caution amid economic and funding constraints. |
Government funding | Q2: No mention [—]. Q1: Incremental, slow rollout over 3–5 years. Q4: No mention [—]. | No mention in Q3 [—]. | No longer mentioned; was discussed previously as a gradual tailwind. |
Backlog and order growth | Q2: ~$5.2B backlog, book-to-bill ~1. Q1: ~$5.3B backlog, strong orders. Q4: $5.1B backlog, book-to-bill ~1. | Total backlog ~$5.3B, book-to-bill >1, MCS backlog normalized. Some revenue impact from project timing. | Recurring; healthy backlog with timing pushouts. |
Digital solutions and AMI technology | Q2: Early-to-mid AMI adoption, strong outlook. Q1: Idrica for data analytics. Q4: High demand, aggregator strategy. | <50% market penetration, robust pipeline, major long-term growth opportunity. | Recurring; significant future growth potential. |
Water Solutions & Services (WSS) project delays | Q2: Minor timing issues, but no external factor emphasis. Q1: Not discussed [—]. Q4: Not discussed [—]. | Timing pushouts from elongated negotiations, election/interest rate uncertainty; not cancellations. | Recurring; broader external factors highlighted in Q3. |
-
MCS Growth Outlook
Q: Will MCS growth normalize next year?
A: Management expects Measurement & Control Solutions (MCS) growth to normalize to high single digits next year. They have caught up on past due backlogs and anticipate positive results, though there may be timing differences between the first and second half. Demand remains strong, with the smart metering business operating at its long-term framework. -
China Sales Weakness
Q: How is the sales performance in China?
A: China's revenue declined, with Q3 orders down mid-teens and revenue down low single digits, decelerating throughout the year. Tight liquidity and economic challenges are causing project delays, especially for municipalities, impacting water infrastructure and building services markets. Management expects the softness to linger short term but believes China will return as a significant growth area. -
Idrica Acquisition
Q: What's the impact of acquiring Idrica?
A: By taking a majority stake in Idrica, Xylem aims to integrate and rationalize R&D investments, leverage Idrica's platform company-wide, and drive synergies and efficiencies. This will enhance their ability to scale and address utilities' data management needs. The financial impact this year is minimal, with closing expected in December; more details will be provided next year. -
Applied Water Recovery
Q: Has Applied Water reached its bottom?
A: Applied Water has been the most challenged segment, with low single-digit declines. Management believes they're close to the bottom and expects growth rates to improve in Q4 and into 2025. Winning larger projects will support recovery, though some pressure may arise from 80/20 implementation decisions. -
Margin Progression
Q: Why will margins decline in Q4?
A: The anticipated margin decline in Q4 is due to portfolio mix. Water Infrastructure, which has a lower margin, increases seasonally in Q4. Additionally, MCS has more energy exposure versus water in the back half. No significant costs from 80/20 implementations are impacting margins. -
Pricing Impact
Q: Are you still able to get incremental pricing?
A: Yes, management continues to achieve positive pricing across all segments. They've targeted to be price/cost positive, achieving a price/cost spread of about 60 basis points in the third quarter, with MCS contributing over 200 basis points. Efforts from the 80/20 implementation and leveraging differentiation are expected to continue providing pricing tailwinds into next year and beyond. -
Portfolio Optimization
Q: When will we see impact from portfolio segmentation?
A: Significant impacts from portfolio segmentation and 80/20 initiatives are expected next year. Implementations are happening in Q4 2024, with results starting to show in Q1 2025. While there may be some pressure on the top line initially, they remain committed to a 4%-6% growth outlook over the next three years. -
WSS Project Delays
Q: How are delays affecting WSS projects?
A: Water Solutions & Systems (WSS) experienced project delays due to elongated negotiations and uncertainties like elections and interest rates. These are not cancellations but timing issues. Management expects some softness to continue in Q4, with a pick-up at the beginning of next year. Fundamentals remain strong with high demand for unique solutions. -
Dewatering Business
Q: Any impact from storms on dewatering?
A: Storm events had minimal impact on the dewatering business, affecting it only marginally. Despite some softening in specific mining applications, the dewatering segment was resilient and performed strongly in Q3.