Q2 2020 Xylem Inc Earnings Call
Please turn to slide 6 and I'll review second quarter results by segment.
Water infrastructure orders grew 7% and total backlog grew 24% in the quarter. This performance was largely driven by the hundred fifteen million dollar deal on an India, which is expected to deliver Revenue beginning late this year in over the next three years.
Shippable backlog for the remainder of twenty-twenty is up 5%
Segment Revenue declined 8% in the quarter and was significantly impacted by declines in the order in industrial and Construction Rental business.
As we noted last quarter, we expect utilities to continue to remain resilient as they focus on maintaining their critical infrastructure for Wastewater collection and treatment. This was certainly true this past quarter as our Wastewater transport business declined only 4% today. We've seen Wastewater capital projects continue with minimal delays this month important driver of the strong quarter from our treatment business which grew 7%
Well Us sales were impacted by double-digit declines in the dewatering business Western Europe revenues were flat in the quarter showing resilience in some early signs of recovery, especially with our utility customers.
As we continue to feel the near-term impacts from covid-19 across the Emerging Markets. We remain confident in the long-term growth prospects for the water sector the Chinese an Indian government, for example have expressed their ongoing commitment to continued investments in infrastructure for clean drinking water wastewater treatment and Environmental Protection.
Operating margin in the quarter was 16.2% Contracting on Lower volumes and unfavorable mix and packs from dewatering partially offset by productivity cost saved in price now, please turn to slide seven.
The applied water segments orders declined 17% in the quarter while Revenue declined 13% as site restrictions continue to impact customers across industrial commercial and residential and markets as regions begin to reopen we're seeing modest recovery in our book and ship business in both commercial and Industrial markets. We all took a strong quarter in the North American Business driven by dry weather conditions.
segment backlog grew 1% in the quarter
geographically both the United States and Emerging Markets Revenue declined 14% However, we saw demand in China begin to recover growing 2% in the quarter wage Industrial and Commercial and markets in China have been slower to recover than Utilities in our customers are indicating that it may take several months to fully recover in those in markets.
Operating margin in the segment was 13.4% margins contracted primarily due to volume declines and inflation partially offset by 573 basis points in productivity and cost savings as well as one hundred basis points price.
Now, please turn to slide eight.
Measurement and control Solutions orders declined 24% in the quarter in Revenue declined 17% as the Metrology business slowed due to utility Workforce availability and physical distance seen requirements including restrictions on approaching or entering residents homes. This is d'Alene both project deployments and installations of replacement meters.
We expect order and revenue Trends to normalize over the coming months as utility workers are able to safely return to meet a replacement and installation importantly a pipeline remains strong and there been no project cancellations.
Despite the near-term challenges. We're very encouraged by the large win. We announced with anglian water in the UK the ninety million dollar contract demonstrates, the competitiveness of our am I am digital solutions to drive key International wins.
This one in a robust pipeline of Ami opportunities highlight the continued commercial momentum and the differentiated value are offering bring through our combined in a platform networking data analytics and Metrology capabilities.
Total segment backlog grew 3% year-over-year with backlog shippable in 2021 and Beyond up 12%
segment margin performance was primarily driven by the impacts from volume declines on meter replacement activity and project deployment delays stemming from covid-19 while we continue Chrome Investments to support growth.
Looking forward we expect meaningful leverage on the upside as Revenue growth drives increase incremental margins from recent large contract wins.
With continued commercial momentum and growing project backlogs. Our segment will be a significant source of Revenue growth and margin expansion for the company in 2021 and Beyond.
now
Turn to slide not.
We ended the quarter with approximately one point six billion dollars in cash in total liquidity of roughly two point four billion dollars driven by the 1 billion dollar green Bond offering we issued in June as well as strong cash flow performance in the quarter.
The green Bond offering was opportunistic enabling us to lock in longer maturities at historically low rates while effectively pre-funding six hundred million dollars of maturity is due in October 2023 at an after-tax cost of less than 1% This offering was also the latest example of the importance of linking our financing strategy to our sustainability goals
Given the strength of our financial position in liquidity. I'll take a moment to note that our Capital allocation strategy remains unchanged alongside funding organic investments in strategic areas. M&a remains a top priority and we maintain a healthy pipeline of opportunities, which we closely monitor.
Now turning to cash flow. Our performance in the quarter was very strong operating cash flow improved roughly 50% year-over-year in our free cash flow of 137 million dollars more than doubled from the prior-year. This was driven by the continued focus and discipline around working capital the timing of payment on taxes and the prioritization of our Capital spend, which was forty four million dollars in the quarter down almost 30% from the prior-year.
Working capital as a percentage of sales improved 110 basis points year-over-year as our teams continue to drive hard on Collections and payment terms while managing inventories in a very challenging demand environment.
I'm pleased with our overall cash performance through the first half of the year, and we now expect free cash flow conversion for this year will be at least one hundred percent and with that. I'll hand it back to Patrick wage.
Thanks, Mark the in market dynamics we anticipate going into the third quarter are consistent with what we saw in Q2 utilities have remained relatively resilient as expected. However, that is significant Divergence between waste water and clean water.
As Mark mention our Wastewater business was down only modestly. We're seeing continued affects spending the service Mission critical needs and continued execution of capital projects with the proof funding.
On the clean water side, the short-term declines were steeper. They were in the mid-teens. We are seeing some but not cancellations and we do expect execution to pick back up physical distancing requirements East and we've had some very impressive wins reflective of healthier long-term trends
considerable discussion about the utilities capex budgets going into 2021
We do expect modest cap that's often in the US utilities. But as a leading indicator, we are not seeing a Slowdown in our bidding pipeline for capital projects.
It is worth noting for a broader context that only 8% of our overall revenue is tied to the utilities capex by contrast off X represents 70% of our overall us utilities revenue and it remains resilient.
In addition, we see healthy multi-year Transit effects and capex and Emerging Markets Europe and the rest of the world.
Turning out to Industrial and Commercial in markets industrial didn't slow as much in the second quarter as originally feared, but it will remain soft while facilities continue to deal with restricted access phone.
Commercial has lagged industrial and the full kinship business will remain vulnerable in covid-19 hotspots.
Our backlog remains robust those Distributors who just stopped in the face of uncertainty are beginning to rebuild their inventory.
We see these in market trends fairly consistent across emerging and developing markets, but it's clear that China and Europe are showing more resilience in the US as they emerge sooner from the pandemic.
China's recovery, which was up 6% in the second quarter is a strong indicator conversely as the US is still grappling with a pandemic impact. We remain calm really cautious now, please turn ahead to slide twelve.
It's worth noting a few trends that we're seeing more broadly across the sector.
First there are some fundamental that covid-19 has not changed. The most important is the role that water plays and Society.
There is perhaps no service more essential than drinking water and wastewater.
as a result our strategy is as relevant as
the global challenges the water scarcity affordability and the resilience of our water systems remain front-and-center.
Innovation of all kinds is essential now more than ever to addressing those challenges.
Well, the fundamentals are unchanged other Dynamics R accelerated interest in digital adoption has clearly gain paste as operators seek a step-change and their operational Financial resilience.
In a constrained budget environment, they are rethinking how they spend their money.
It's become an operational and economic imperative to consider the benefits of remote monitoring automated operations and their decision support systems wage is absolutely front of mine for every utility executive I speak with and we're seeing their interest reflected in accelerated quote activity.
We're all.
To sink a ship in the way that we work with customers every day.
The trends are away from face-to-face interaction and more towards virtual customer engagement across sells commissioning and Servicing.
Because of that we're making changes to to reinforce our competitive strength.
First as you know, we took a number of structural cost actions across the island during the quarter.
Second we've reprioritize their Investments. We're focusing further on the projects that deep in the differentiation and the market leadership of our portfolio.
Things such as increasing connectivity and interoperability of their Solutions.
And we continue to invest in our highest Brooke geographies.
Lastly we are reorienting the way that we work with in xylem.
We celebrate the deployment of the I keep platforms that make remote engagement distance selling and virtual servicing easier for both our customers and our colleagues.
And we are of course assessing the permanent changes that we make to travel facilities and distance working changes that no doubt will have a positive impact on cost and productivity and also the employee engagement and morality.
We are focused through the pandemic on managing the things that we can control.
And we're taking the actions now that will make us even stronger competitor and book the near and longer-term now with that. I'll turn it back to look at work for more specifics on our Q3 guidance office.
Given the uncertainties related to the re-emergence of covid-19 across parts of the US and other geographies and its potential ramifications for the back half of the Year. We're not waiting for your guidance. However, we do have reasonable visibility through the third quarter, which I'll briefly highlight.
We expect Revenue declines of eight to twelve percent and operating margins in the range of 11 to 11:00 and a half percent this reflects approximately 200 basis points of sequential margin Improvement in your over your decremental of approximately 45%
The decremental margins are impacted by continued softness in our high-margin dewatering in North American census water businesses along with a tough prior year compared to last year's third quarter off where we had 90% incremental margins on Revenue growth.
well, we've seen some positive Trends in the second quarter the global economic landscape remains uncertain and we are by no means Out of the Woods
What Europe is showing positive Trends towards recovery, we're closely monitoring the trajectory in the United States. The pandemics impact varies widely across emerging markets off from a return to normalcy in China to ongoing shutdowns in India and parts of Latin America.
Lastly I want to provide a little more clarity on the structural cost actions. We announced in early June.
In that announcement, we detailed our plans for permanent actions to simplify our operations and increase our ability to act as one company.
These actions help us better serve our customers in a Ford us long-term Financial resilience.
This year we expect to incur eighty to a hundred million dollars in restructuring in realignment charges this predominantly reflects the actions that we announced in early June but also suck carryover related to Prior programs. We have also provided a summary table on this slide which details the total savings. We expect to realize in 20 20, 20 21 from our announced structural costs programs as a reminder that includes savings from restructuring in realignment actions. We initiated before this year as well as Thursday from actions. We announced in June of this year in total. We expect to realize approximately seventy million dollars in savings this year and an additional savings of approximately $80 in 2021.
They'll please turn to slide 14 and Patrick will close with some final remarks.
So before we go to Q&A, there are a few other Milestones that deserve a mention the first to touch on sustainability.
We release our most recent sustainability report in June and I'm very proud of the work by the team and it reflects the impact. Our colleagues have delivered across the company. It shows how we delivered on our 2019 goals and establishes comprehensive 2025 charges.
It also reinforces irrelevance and the value of a strong sustainability approach even in these difficult times.
We thought was that up with the launch of our green financing framework, which underpinned our recent 1 billion dollar green Bond offering in addition to showing up our financial strength and liquidity in exchange. Our commitment that sustainability is at the heart of our business strategy something we've been doing and we'll can you continue to do
We recently announced that Mark will be retiring at the end of the year.
I feel confident in saying he will take with him the Gratitude of all stakeholders, but most of all mine.
Its impact has been undisputable and its commitment to both our principles and to delivering value has been constant and unwavering.
We have appointed an outstanding CFO to succeed Mark has been CFO International both while they were publicly traded and just becoming part of Samsung and that experience is put her right at the intersection of innovation technology and disruption.
And her board Rolla. Josh makes her no stranger to Capital Goods Manufacturing Community Markets.
We look forward to introducing her after she joins us on October 1st.
Mark is going to be with us through the end of the year, which will ensure an orderly and a smooth transition.
And lastly, we also announced today that we've appointed two new members to our board of directors as part of our normal succession process.
The board is appointed Leila critical who's a corporate vice president at Microsoft in a globally renowned technologists. And we look forward to her bringing that perspective to the digital transformation of our sector.
Our second new board member is who is president and CEO of Eaton electrical sector and he brings a discipline Global operating perspective to our growth these appointments further deepen our boards diversity our technology and our Global orientation.
I'm very pleased that xylem continues to attract this quality of talent to our purpose and to our mission as a company.
With that, let's open up the questions and operator. Please lead us into Q&A.
Certainly, the floor is now open for questions at this time. If you have a question or comment, please press star one on your touchtone phone. If any point your question is answered. You may remove yourself from home by pressing the pound key again, we do ask that while you pose your question that you picked up your handset to provide optimal sound quality. Thank you. Our first question is coming from danger of RBC Capital markets. Thank you. Good morning. Everyone a good morning. I wish you all the best in this is your second retirement. Do I have that right? I'm just going to be your last one. That is that is correcting on both counts. Okay, great. We're definitely going to miss you. Thank you absolutely dead first question. So the whole premise of the growth opportunity for xzilon really does hinge on this adoption of digital and I love seeing them.
That has a digital offering so you just clarify what part of digital that they're taking and then Patrick you also hinted that they're the front long also has some digital component to it. And just if you could reflect on where you're seeing traction there, but yeah, thanks Dan so off on the anglian when you know, certainly the Cornerstone of the deal is a smart Network deployment which is really centered around Ami me during deployment. But when you look back and say, okay what problem is angling and quite frankly other utilities across the UK that we are pursuing right now is part of the 7th cycle certainly non-revenue water and strong overflow and overall affordability are three major themes that each one of utilities are dealing with so beyond the Ami metering deployment. There's also a level of data analytics wage.
As well as remote monitoring that is built into that project in terms.
They'll be front log, you know, we do have a number of other deals in the pipeline one that we just recently announced, uh, you know, literally live as we speak is we offer, you know, we want a large deal just shy of fifty million dollars and Winston-Salem. And again, that's also a smart networking deployment. So we feel good again. It's a big market Lafayette activity and I think right now what I'm most encouraged by is, you know, we're not seeing a slippage or a cancellation of projects as a result of a pandemic. If anything else in some areas. It's being accelerated based upon this need for operational resilience.
Great, and then the second question is on the Outlook and the guidance for the third quarter and appreciate all the detail on page thirteen and you've just clarify the the the notion here as you've got a pretty similar Revenue sequential ramp, but you're getting two hundred basis points of margin Improvement is that all the cost savings reading through driving that two hundred basis points. So how much is coming through for the third quarter?
Yeah, that's that's exactly what it is. It is, you know the benefit of the, you know, the ramp in some of those restructuring savings and Thursday and then we also you know, we didn't guide for obviously the entire back out of the year. So we didn't talk about to 4 but we also you know, we expect even a large portion of those restructuring savings to roll through and Q4. And then also we would expect improving mix as we do see, you know, a return to some level of normality within the the the the Clean Water side of utility in terms of being able to do meter installs domestically here in the US.
Great, and this lastly this doesn't count as a question. But Patrick, I think you undersold page twelve that picture of the the birth of your media business and hazmat suit. I think you should tell that story and thank you know, I appreciate that Dean and and yeah, Paula is is off of our leader of our business in India. He actually just got recently promoted to lead our Global treatment business. And so, you know, that's just one example of many where you know, what our team has gone through to continue, you know certain customers and obviously our customers are the ones who, you know, keep the resources flowing so it's a joint effort. But you know, we've had a number of you know, all these large pretty much been negotiated on Zoom or some remote platform, you know, we've got customer service locations where it calls are being moved to people's homes again, we're not alone in this but I do think wage.
For calling out that these are not normal times. Uh, and our people are really, you know, climbing mountains here to uh,
Continue to deliver a really I I've never been more proud of him.
Thank you. We had a gentleman sitting in a car for eight hours waiting to get into a building, you know to close the deal and you know driving hours, you know back and forth from home to home. So it was $115 deal. But it was it was still a heck of a sacrifice. Yes.
Thank you. Thank you.
Thank you. Your next question is from Scott Davis.
Hey, good morning, guys. Hey, good morning. And I'll let go Dean's comments Mark congrats. Thank you a great run. Sorry to see you go off. But enjoy your all right with them disappear on us. Anyways, I have a couple of questions. If you are taking me a little bit. The first one is just Patrick. Can you help me understand? What a green bond is? I mean what what's other than it sounds good. And I know you know, obviously, you know bath mat or two, but what does it what does it mean just leave it at that. I'll take it off and then Mark and go through a little bit more the granularity, but effectively, you know, it's it's a it's a financing structure that is tied to service apis that we have to deliver on in order to be able to achieve that financing and it really is is tied to our sustainability goals and metrics as a company, but Market you want to get that's right Patrick the Dead
2025 goals and and the the way it works is as we achieve those goals we get you know, we took credit those goals are audited that performance is audited by sustainalytics and um, but it's interesting and in addition to the you know, the benefit on Thursday the rate what was fascinating was the the amount of demand that we got from investors who are focused on sustainable missions. And um, the the the offering was five times over to subscribe in in those small part to the fact that we had 50% of those investors as you know focused on sustainable missions. So not only do we have a an opportunity by executing against or very dead.
Sustainability goals to drive the rate down, but it you know, it was very helpful from a pricing perspective.
Okay good color. And then Patrick, you know you comment on a patch on Project delays, which I think everybody seeing but does that change the economics of the deal for you guys at all? She does it make it less attractive because you end up perhaps having lots of projects all having to be done at the same time because everybody restarts and you know say sake of argument January 8th, and you know, and you're having to put in a lot of overtime wages and I mean, how do you Cadence that I guess is another question to ask and and not run into having all kinds of projects challenges bath.
yeah, and that's
Emily Scott a that's predominately a a a US issue, you know, we've already begun to see I don't want to call it returned it almost see but you know, if you follow the key fob the right to say I follow the virus around the world our businesses have been affected along that same line. So, you know China Asia pack, you know already seeing good growth signs of recovery. So that's not creating a pinch in our supply chain as mentioned before, you know, we're back up north of 90% in terms of capacity. Europe is also already, you know beyond even Eastern Europe Europe broadly speaking is already showing signs of recovery. So we're kind of working through that demand rebuild as we took it really is centered around the US it's predominantly in the utility space Scott because you know, we've mainly deal through distribution and channel Partners on Industrial and Commercial building.
And they certainly, you know are close to the close of the street. It's mainly an inventory replenishment. And so again, it's going to be more on our supply chain just to be able to provide that inventory to them. Then it really, you know, you're back down to quite frankly that roughly 8% of our Revenue that is US utility capex, and that's where you tend to see more of the bigger projects that we focus on we don't see there being a big pinch in terms of Workforce demand, you know, our people are still very much engaged, you know, our supply chain issue. So it's a long way of saying we don't really see that being a major concern for ourselves, but I had to go through a bit of deduction Scott to kind of help you get there on that on that piece wage. It's really helpful. Well best of luck guys. Hope you have a great summer. Thanks. You too.
Thank you. Your next question is from Scott Graham A rosenblatt securities.
Yeah, hey, good morning and Mark was morning again. And actually I we don't hope to see you again. We hope you just sort of ride off on Thursday and enjoy thank you very much. So just a couple of questions here really regarding the access to sites on the water side. It looks like the access on the infrastructure side is maybe coming a little bit more easily and or just as less intensive than it is on the South Side, you know, the the the third quarter metering guidances, I guess a little bit less than what I would have thought. Could you talk about that, you know sort of the intensity around off the the the the need to be at the site for that tanks.
Yeah, it's a good question Scott. So I think simply put first of all utility while you know, all these services are essential I would say that they would all agree with that. The Wastewater side of utility is absolutely mission-critical they have little choice, but to continue keeping those operations running and deployments and life spanning. It's tougher to I would say an hour in our water infrastructure business and certainly Wastewater is much more of a global business today than what we do throughout the S on the queen Waterside, which is still largely a North America or us Centric business. I mean, we're certainly working hard to to change that and obviously some of these International deals will help in that regard but I would say it's as much also the the the geographic focus of our business so, you know on the meter inside those dead
Also critical and they will get done, you know, we're not seeing projects canceled canceled at all. But right now it really isn't a
Matter of sight access at the home level as opposed to more the outdoor and the treatment facilities that we serve on the water infrastructure side, but it really is just a you know on the clean break it really it's just the timing and safety Dynamics.
Yep, that's that makes a lot of sense. I guess my follow-up question was simply be you know, in terms of the sales that you're seeing in water infrastructure. I know that a lot of that is, you know, the brake and push the objects. Is that a higher-margin business we're at you know, where by you know, two quarters from now we could be looking at a mix issue or you know affects versus Catholics. Could you talk about the mix set the sales mix and water infrastructure how that works Scott roughly seventy percent of the the revenue base is and this is in the US. It's it's a little bit different as you move around the world, but in the US 70% is effects related and you're right those that the margins on that are a little richer for sure and 30% would be would be capex in Emerging Markets. We have more of a
A mixed towards a capex side as we build, you know our position there and build our installed base. So that continues to be the case. But as we've done that now over the years will begin to see a shift more into the opposite side, but it is a richer mix of margin and the margins are typically about, you know, one and half times, you know, the size of a project when you get in to get installed base and the aftermarket piece.
Okay, that's that's great. Thanks. If I can just sneak one last one here. The warring business was actually not as down as I thought as I thought it would be. Have you one new placement there. What's what's the drive from?
Yeah, it was it was not as not as hard hit as we expected but it was it was down substantially. I mean oil and it would close, you know over 20% you know down you're over year. So we were thinking it might be in the high twenties. So and it was really a lot of it was, you know industrial driven, but it was it was down in in most of them. I mean the good news was backlog was up healthily. But again the overall Revenue was certainly uh down again considerably June in the quarter. Yes, but not as not as much as I thought it anyway, but look, thank you for all the information appreciate it and good luck mark.
Thanks, Scott. Thanks.
Thank you for next question is from Ryan Connors of boning Scattergood. Great. Thanks for taking my questions. And yeah, congratulations best of luck Mark. Thanks, Ryan Bledsoe Patrick. I appreciate your comments on on the outlook for the you know, the intermediate-term outlook for the utility Market, but I wanted to Probe on that a little bit just from the perspective of the history. So, you know Asylum when a stand-alone public company when the last recession, but if we look at the earnings releases and the transcripts from your former parent and then xylem later on, you know, we we we had similar talk about resiliency early on but then you know xylem was still seeing headwinds and utilities latest 2012, which was a good, you know, three or four years removed from the recession. So I guess my question is you know, what they use it that's really different this time that would that would cause us to believe that that history is not going to repeat especially when you know, the the portfolio at least in water infrastructure still is
relatively similar to what it looks
Like then so just looking for any kind of tangible thoughts you have on what what's different this time? So it's it's a very relevant correction. And obviously, you know, we we are not taking anything for granted here. I mean, we're staying close to the markets in the utility customers are really understanding how they're how they're viewing the world right now from a funding standpoint. I would say a couple of things are different this time. First of all, the percentage of our total revenue that is tied to Utilities in the US again is roughly 8% on the cat bath and it really is the capex piece that is tends to show that kind of fluctuation from a funding standpoint to you know, we do have you know, the edge of the platform on the claim Waterside. So well, we're absorbing some of those delays right now clearly, you know, we're not seeing cancellations there. These are projects that are tied to issues of affordability dead.
Non-revenue water and certainly what we're hearing from utility leaders, but they don't they don't see those projects being canceled, you know or or killed in anyway, so that's a different Dynamic than wage. I've had back in the time and and you know, eleven and twelve lastly. I would say it goes back to that overall percentage of Revenue even tied to us capex is we've also got a much larger portion of our Revenue today and emerging markets and we see that demand, you know, continuing to to increase considerably
Okay, that's very helpful. And then and then related follow-up is you know so much right now seems to ride on the federal government across the economy. And I guess resile mm. I wonder if you can count on how you that Outlook you just described and then utility. I mean how that differs under a scenario where Congress, you know does bail out state and local governments versus a more laissez-faire suggest where things are just sort of left to run their course and and maybe get some greater budget cuts. How do you handicap that? And and and how does your outlook differ in those two scenarios? Sure, so I great question. I I think certainly we've mentioned before and I I don't think our viewing that's changed is we certainly are not counting or riding on any kind of federal bailout or federal funding along the way, you know, as you well, you know, the water sector generally speaking in the US has never really relied heavily on federal funding. It's always been in a state and local level. So any any move there on the positive from the federal government wage
Would be upside but I wouldn't bake That Into You Know people's outlooks or forecast of the business because it'll it'll be awhile in the coming but likewise. There's really no downside wage in that regard now, obviously, we're staying close to the local utilities and immunities to understand, you know, those parts of the country that are feeling more stress at this point in time, but I would say it's we're kind of just roll on the whole Federal funding aspect. Got it very helpful. Thanks for your time. Thank you.
Thank you. Your next question is.
From Andy kaplowitz of Citigroup. Good morning guys, Mark. Congratulations. Good luck. Just focusing on the Cadence said you saw because you did not mention a very strong June. So can you elaborate on that in terms of the growth? You saw as a quarter developed? And then what are you seeing in July, especially considering, you know, you did mention that you're not rejecting guidance given the recent Resurgence and infections in the
Sure, and yeah, the you know, we we started off the quarter, you know down mids down mid-single digits and and wage. Yeah. I wish it was mid single-digits mid-teens. It's like flashing at Mid single-digit age is true for you know got a little bit better in May and then we had a a really strong June. So we ended up down, you know low low double-digits 12% off, um the and as we mentioned orders were still in the quarter down 9% you know in July, we're we're we're seeing some modest Improvement and and that's that's encouraging but you know as we look at the Q3 Outlook, you know, the fact is we're you know shippable backlog, uh for the call log.
Is is less than 2% And so we're still going to need a strong, you know orders performance of in the in the next two months and and we think all in package well aligned with you know, with what we laid out in terms of the range which obviously is is tighter than we had last quarter because we have better, you know some better visibility on a cellphone Market I think in June when you announced sort of the bigger structure of cost out you also talked about spending forty to fifty million to exit certain business activities. I think they seem to be focused on him and see us as that's where it seems like you're taking the bulk of your restructuring. So could you just elaborate on what you're doing now? They're what you're what you're getting out of and and why?
Yeah, and it's and I think the the numbers it's not quite that large. It's probably in the you know twenties and it's it's it's you know, a number of smaller lines on a business and just just those that you know aren't as profitable and artists cord to our mission moving forward. Yeah. There's nothing there is nothing in there that was strategic in terms of you know, we're deciding to exit something from you know, material perspective. We would have even called them out. If it weren't for the fact that it did contribute to some of the costs are the cost being taken. Therefore. We you know, we had to disclose that but again, the amount of Revenue is is is surrounding area.
Great. Thanks guys, Mark. Good luck.
Thank you. Thank you.
Thank you. Your next question is from Joe. Hey, good morning. Good morning, Joe and congrats Mark is everyone's going to sit here. You will be missed just to start here. Can we Patrick? I know that the situation can change dramatically between now and Thursday twenty Twenty-One, but just giving what where we're at right now with with uh, the macro and your view on developed Market utilities is like the appropriate kind of Benchmark for now to be like dead. Hopefully overall budgets are kind of flattish, maybe capex pressure and maybe effects is kind of stable but like lower tax receipts. What kind of hoping for a flat overall special environment that utility. Is that like a fair Benchmark right now?
you know, I think Joe it's
you know, it's too early to tell you know, I think there is still a lot of uncertainty there. I mean, you know, we're encouraged by the bidding pipeline. We're encouraged by lack of project cancellations, but I I really wouldn't want to I'm guessing what overall meaning budgets are going to be again, you know, I go back to what portion of our total revenue that represents in the u.s. In the fact, we are already saying some emerging strength in other parts of the globe. I think it's also you know, the the focus we have right now with our teams is you know, this is clearly highlighted for the utilities the need for greater operational excellence and obviously, you know, we're certainly learning a bit about the financial resilience. But you know, we're focusing in on with the utilities on helping them do more with a whole lot less. And so that's where they are looking for alternative Solutions the digital dimension of things, uh,
And that's that's really where we have our teams focused in taking share. Obviously the same time. I think it's important that everyone on this call understand that I think what we're also seeing in our portfolio and this goes back to maybe you know, the questions earlier around what's different this time versus before it really speaks to the durability off and and critical nature of our traditional Heritage product lines that you know, we don't talk as much about over the last year or so because of the Acquisitions we've done but they are absolutely core right now and essential to what the utilities need a good color. Um, a couple just related ones on m c s wage one. Are you confident that asking like a market deterioration? We're done with negative margins here and then to you guys have done a lot over the last several years building out a pig.
oh, yeah, um, it's an interesting mix of of applications that
There's been some issues some xylem issues some Market issues. But like, you know curious what you've learned from this whole experience of building this out and how you feel about whether that business is red or m&a incremental from here.
Yes, so I would say that the your question of margins. We we certainly expect to be, you know back in the black and and see positive margins. We expect second quarter to you know, the third quarter to be a positive. We were we were just about so, you know break even and and in Q2, so, you know with a little bit of a ramp in terms of some of the deployments the you know, installations and and just tossed actions where we're going to see equipment there. I I think you know in Patrick. I'm sure because I think in terms of Lessons Learned I think I you know, the you know, what we've learned is it you know adoption of some of these new technologies is a little bit more challenging particularly in the developed markets, but I think in
Terms of the capabilities that we've built particularly what we're seeing through this pandemic in the discussions that were having with customers. Ugh. I I think we're you know, we're very pleased with what we have done the Acquisitions. We've made in the capabilities. We've built you know, as we emerge from the pandemic is that that is going to provide us we believe with a competitive. Yep. Yep. So Jill on the I'll touch on both as well on the margin, uh, comment or question there. I think it's important that uh all understand the bulb fixed cost base we have with an mncs given this Services profile in terms of the R&D Investments and building out new product development role at separate. And so, you know, you know some of the restructuring action taken do get out that you know that overhead cost base and so but our view and incremental is ringing and changed very attractive incrementals in that business and so as we see dead,
You know projects being deployed returned to work in the second half of the year. We would expect the incremental to be quite attractive in in that business. So no change in view there on the lessons learned that I would I would also just throw in Joe that I think that it does speak to adoption. But I think it's also the fact that you know, the Solutions in value propositions that we're bringing to the sector wage are disruptive and any time that you are aiming to disrupt the stuff, you know, it's going it's going to take longer than what anybody ever wants it to it's always going to be a bit harder than what we need is a beeping but our views around the attractiveness and the need for the sector to get disrupted in a positive way, especially around the idea of making infrastructure more affordable.
That issue remains unchanged and so it's not going anywhere. And so I think
You know, we we want to be we want to be appropriately impatient in in this regard, but we've got to keep it in perspective as to the long-term Journey that we're on here.
Thank you guys.
Thank you. You too.
Thank you. Your next question is from Nathan Jones at stifel. Good morning everyone. Hey, good morning. I am now it's $115 unavailable to get back to the office in here. So a lot of the utility leaders that we've talked to are far less focused on State and local government funding and much more focused on with the the ability to collect water rights, which is I understand it is a much bigger part of the funding equation for utilities anyway, and they're concerned about things like, you know people going into this Intercity going to work will reduce the water consumption there. So places like D or New York City are the areas where those water rates are going.
To be collected less than those budgets are going to be a little more challenged. So I wonder if you could come in on on that angle of it. I think people are a little bit too focused on state local government and and not focused enough water rights and then could you contrast that with how utilities are funded outside of the US versus inside the US?
Yeah, so I think you I think you you've you've hit you hit it on the US side. You're absolutely right the you know, the biggest concern that the utility leaders have at this point in time, especially on the clean water side of the equation is again, their revenue sources in terms of you know, rape cases, right collection Etc. So I don't really have much offer their other than again. It is a concern of theirs. They do look back at previous life and try to understand it is a different Dynamic now and they're trying to get their hands around now, they're also uh, you know, letting me know that they're seeing increased consumption at the household level because people are staying so some of that just from one kind of, you know metering point to another but I don't want to minimize that in turn off.
So there will be you know, some potential impact there. Uh, they are still generally speaking from the utility leaders that we're engaging with. Uh, they're still pretty confident around their ability to whether this and it really is a matter of getting through the second half of this year. I think we'll learn a lot more as they go through their budget approvals and that's not all you know, it's not all calendar as you know, a lot of those are you know, July one October one kind of fiscal budgets. And so we're keeping a very close eye on that. But again, I I want to keep it in perspective as to what percentage of our total revenue that represents across the company outside of the US it tends to be and we saw this the last downturn it tends to be much more stable. And that's because a large majority of the funding certainly Emerging Markets is at a federal or or state level. I mean it is it is much more of a kind of independent funding and much more dead.
two less reliant on
You know the actual Revenue collection.
Yeah, I think it's an important point that outside of the to be much more stable on the collection site. You guys have said the last call that you know, a More normalized decremental Level would be 35% We probably wouldn't say that until the second half of the year. Is that still a car that we should be thinking about for the fourth quarter?
Yeah, I I absolutely you know, a couple of reasons one we're going to see a bigger ramp is Patrick mentioned earlier in terms of our cost-saving then said, you know, we had a you know, some you know some items that made the compare some items last year that made the compare this year tougher. So for Q2 computer. Yep. Yeah Q2 in Q3. Yep. So, uh, so we we do expect. Um, we do expect to see that normalize in the in the fourth quarter.
Okay. Thanks very much for taking my questions.
Thank you.
Thank you. We have reached our lot of time for questions. I will now turn the call back to Patrick Decker for any additional or closing remarks everybody for your interest and for your support. Really appreciate life again, you know, I want everybody to stay safe stay strong. Have a great end of your summer and we'll be back with you on our next earnings call. Thank you all very much.
Thank you. This does conclude today's Island second quarter 2020 earnings conference call, please disconnect your lines at this time and have a wonderful day.
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