Q1 2021 Xylem Inc Earnings Call
Welcome to the Xylem first quarter 2021 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for your questions. Following the presentation.
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I'd like to turn the call over to Matt Latino Vice President of Investor Relations.
Thank you Hillary and good morning, everyone and welcome to Xylem first quarter earnings Conference call.
With me today are Chief Executive Officer, Patrick Decker, and Chief Financial Officer.
Sandy Rowland day.
They will provide their perspective on the islands first quarter results and our outlook.
Following our prepared remarks, we will address questions related to the information covered on the call I'll ask that you. Please keep to one question and a follow up and then return to the queue.
As a reminder, this call and our webcast are accompanied by a slide presentation available on the investors section of our website at Www Dot xylem Dot com.
A replay of today's call will be available until midnight on June 2nd.
Please note that the replay number is 805 858 and 367 and the confirmation code is 5567 and 508.
Additionally, the call will be available for playback via the investors section of our website under the heading investor events.
Please turn to slide two.
We will make some forward looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. All references will be on an organic or adjusted basis unless otherwise indicated.
These statements are subject to future risks and uncertainties such as those factors described and as items. Most recent annual report on form 10-K, and and subsequent reports filed with the SEC, including in our form 10-Q to report results for the and the period ending March 31, 2020 one.
Please note that the company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances and actual events or results could differ materially from those anticipated in.
In the appendix. We have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
Now please turn to slide three and I will turn the call over to our CEO Patrick Decker.
Thanks, Matt.
Good morning, everyone and thank you for joining us.
We announced early this morning that our first quarter results reflect strong operational performance.
Exceeding our expectations on orders and revenue margin and earnings per share.
The quarter's growth was broad based reflecting increasing demand across all of our segments, our end markets and geographies.
Our momentum coming into the year accelerated through the quarter with a team taking full advantage of economic recovery and pent up demand and our markets.
Orders were up double digits, and all three of our business segments and backlog was up 23% organically.
Both western Europe, and emerging markets delivered exceptional organic revenue growth.
With Western Europe up 11% and.
And emerging markets up 33% year on year.
And with momentum up strong sequentially.
U S demand also continued to recover with orders up 18%.
Alongside topline growth our results reflect considerable margin expansion.
I credit the team's discipline.
Building on the benefit of volume effects and positive impact from the cost actions we took in 2020.
Our financial position, which was robust coming into the quarter strengthened even further on the combination of revenue growth and margin expansion.
Looking forward we.
We are confident about the remainder of 2021 and beyond.
Therefore, we are raising our full year guidance on the top line margin and EPS.
I'll talk a bit more shortly about trends and focus areas for the team, but first let me hand, it over to sandy to provide more detail on performance and the quarter.
Thank you Patrick the first quarter was clearly a meaningful step forward and the team delivered exceptional performance and capitalizing on demand recovery and the majority of our markets.
Revenue grew 8% organically versus the same period last year with performance better than our expectations across the board.
Strong double digit revenue growth and wastewater utilities was paired with broad based industrial demand recovery.
Geographically emerging markets and Western Europe sales grew double digits on the U S was down 1%.
Let's turn and revenue performance in more detail covering each of the segments, but in short utilities were up 3% industrial was up 14% commercial up five and residential was up 31 per cent.
Organic orders grew 19% on the quarter and all three business segments contributed double digit order gains.
Yeah.
And was also the third consecutive quarter of sequential order improvement.
Looking at the key financial metrics margins, well above our forecasted range EBITDA margin coming in at $17, one per cent and operating margin at $11 four per se.
The 480 basis points of EBITDA expansion came largely from volume and productivity, partially offset by inflation.
Earnings per share on the quarter was 56 months, which is up 143 per cent.
Please turn to slide five I'll review.
Our segment performance for the quarter.
Water infrastructure orders and the first quarter were up 14% organically versus last year with revenues up 11%.
Geographically Western Europe real unhealthy demand, while emerging markets delivered strong performance recovering from the COVID-19 impacted quarter last year.
So you went from flattish as double digit growth and wastewater transport was offset by soft industrial performance.
EBITDA margin and operating margin for the segment were up 430, and 490 basis points, respectively, and strong productivity and volume leverage offset inflation.
Please turn to slide six.
And the applied water segment orders were up 25% organically and the quarter driven by recovering demand and North America and strength and Western Europe.
Revenue was up 13% in the quarter with growth and all end markets and geographies.
Residential and industrial grew 31, and 15% respectively, while commercial grew 5%.
Geographically the U S was up modestly as residential and industrial gains were offset by lagging commercial end markets.
By contrast, improving commercial demand in Western Europe contributed 15% growth with additional strength in residential.
Emerging markets were up 51% due to the timing of prior year, COVID-19 shutdowns as well as commercial recovery and Middle Eastern Africa.
Segment EBITDA margin operating margin grew 250, and 280 basis points respectively.
The expansion came from volume absorption and productivity and.
And now please turn to slide seven and I'll cover on measurement and control solutions business.
And M and T. S orders were up 19% organically and the quarter with double digit growth across both water and energy applications.
Driven by large metrology projects.
And Ms backlog is up 29%.
As anticipated organic revenue growth showed solid quarter sequential improvement, but finished flat year on year.
Water applications grew in the mid single digits with strong demand and the test business.
And energy applications revenue was down mid teens and certain large deployment well completed and the same period last year.
Geographically the U S was down mid single digits, but we anticipate project deployments will ramp through Q2 on loosening site access restrictions and then accelerate through the second half.
Emerging markets were up 8% and Western Europe grew 9% from metrology project deployments and demand and the test business.
Segment, EBITDA margin and operating margins and the quarter were up 770, and 600 basis points respectively.
Modest price realization and strong productivity savings as well as the prior year warranty charge more than offset inflation.
Now, let's turn to slide eight for an overview of cash flows and the company's financial position.
Our balance sheet continues to be very strong we closed the quarter with $1 7 billion and cash.
Free cash flow was in line with our expectations as well as our historical seasonality patterns.
Managing working capital remains an enterprise wide priority and we are especially pleased with our accounts receivable performance.
Net debt to EBITDA leverage was one times one six times at the end of the quarter.
Now please turn to slide nine and I'll turn the call back over to Patrick.
Thanks Sandy.
I'd like to revisit the three focus areas, we highlighted coming into the year.
The performance of our growth platforms.
The team's operational discipline and our progress on sustainability.
Turning first to our growth platforms.
You've already heard about our emerging markets teams exceptional first quarter performance with revenue and orders up 33% and 21% respectively.
Up until now China, and India have taken the spotlight.
And both countries, our investments and capabilities and localization have created strong engines for sustainable growth.
But of course other areas of the emerging markets also represent great opportunity for us.
Many countries in Eastern Europe for example continue to modernize their economies and represent a long runway of investment and water infrastructure.
And on Africa, there are clearly big water challenges and solve as the higher growth nations continue to urbanize.
We expect emerging markets overall will continue to be a source of healthy sustainable growth for the portable seeable future.
The second platform that continues to underpin sustainable growth is our digital strategy.
Our broad portfolio enables us to combine multiple digital technologies and the integrated offers and.
Including AI enabled software platforms.
Advanced communications networks and automated endpoints.
Those capabilities have been key to our commercial momentum over the last several quarters with customer adoption of digital solutions accelerating through the pandemic.
We've spoken previously about our headline wins, and Texas and Ohio.
And Q1, we added a large transformation project and Greensboro North Carolina.
And we have just signed another exciting deals to be announced and the next few weeks.
All of these projects deliver network as a service software as a service and advanced analytics.
And each case xylem and ability to bring a suite of transformational capabilities distinguished us and was essential to winning.
And just last week, we further extended the digital capabilities, we can offer our customers by partnering with <unk>.
As we as the global leader and geographic information systems.
Gee I ask for sure.
These systems are and a central component of the utilities operating environment.
By integrating their technology with our advanced digital solutions water operators achieved unprecedented and network visibility and a clear path to increased operational efficiency and sustainability.
And with last week's agreement Zile.
Xylem, and asbury or bringing that powerful combination to the water sector together.
Our partnership includes developing joint solution, Roadmaps and joint selling to water utilities around the world.
We are very excited about this partnership and about the value we can deliver to customers together.
Turning next to operating discipline.
Our operational capabilities, we are absolutely key to coming through 2020 on strong foundations.
As you know last year, we made difficult, but essential decisions on structural cost.
And we're now clearly seeing the benefit of those actions.
In addition, the team drove strong productivity gains and the first quarter, which offset the early impact of rising inflation.
The result was solid margin expansion with incremental margins coming in at 55%.
Over the last year, we've learned that we can do more with less.
And we will remain absolutely vigilant on cost.
And as economies reopen and demand continues to recover.
That said, we are expecting some impact from the broad based inflation and commodity and component supply challenges that are affecting the industrial and tech sectors.
Now we've already taken action by strategically investing in inventory to support areas of strong demand.
And we will continue driving productivity and pricing to mitigate inflation.
Still the supply environment is likely to remain challenging for some time.
The third focus area, and we highlighted coming into the year with sustainability.
I think many of us worried that the cause of sustainability might suffer setbacks through the economic hardships of 2020.
However, instead of a retreat.
We've actually seen a broad and energetic global and grace of sustainability.
As an enterprise over the last year, we've taken several meaningful steps toward our signature 2000 and twenty-five sustainability goals.
We'll be hired on think of those and our annual sustainability report to be published and Jim.
We'll be reporting for example that in 2020.
We helped our customers prevent one 4 billion cubic meters of polluted water from entering local waterways.
Now the reported is largely retrospective.
But of course, we continue to move forward.
And 2021, we've deepened and broadened a link between compensation and sustainability performance.
It is now a component and the long term incentive program for a range of key executives.
Our commitment and our action has put us and our leadership position.
Which is both gratifying.
And a tribute to the team.
That said, we all know we have a lot more work ahead of us to deliver on our goals and on our mission and purpose.
With that I'll now hand, it back over to Sandy to provide the forward view of our end markets along with guidance for the remainder of the year.
Thanks, Patrick consistent with our previous presentations, we have provided key facts from each end market and the appendix of our slide deck.
Outlook for our end markets remains mostly consistent with our view from last quarter with a couple of notable changes.
And you.
<unk>, we continue to see strong commercial momentum and both wastewater and clean water and anticipate our utility business will grow and the mid to high single digits.
On the wastewater side operators remain focused on mission critical applications and Opex needs and the developed markets of Europe and North America.
Capex spending outlook and bid activity and China, and India remains robust.
Some lumpiness and India due to high COVID-19 case rates there.
On the clean water side, we are encouraged to see large project deployments beginning to ramp and guy.
Before I move on from utilities, Let me briefly touch on the U S administrations infrastructure plans.
Well clearly positive about the prospect of investment and modernizing the country's water infrastructure.
More broadly the plan could represent an opportunity for community across the U S to invest and greater resilience and several infrastructure categories, which would have the effect of reducing pressure on municipal budgets.
We are encouraged by those possibilities.
But to be clear, it's too early to know whether and in what form the plan may emerge from Congress.
Have not built specific upside into our expectations.
Please turn to slide 11.
Notable change and our outlook is and the industrial and market, we have seen a rebound and global industrial activity and sentiment across all three of our business segments.
We expect healthy growth and emerging markets and western Europe to continue and the first cash, although while North America will deliver modest growth.
And then we anticipate those relative market performances will flip and the second half primarily because of the compares.
Importantly, the industrial dewatering business is recovering driven by demand and construction mining and other verticals and we now expect the industrial and market to grow and the mid single digits for the year.
Our outlook on the commercial segment remains unchanged.
And you can expect our commercial and market to be up low single digits share gain.
Gaining share in Europe, and healthy demand and the U S replacement business is stable, although new commercial building is expected to be soft for most of 2021.
And residential and we now anticipate high single digit to low double digit growth for the full year, which is up modestly from our previous expectation of mid to high single digits.
Would you expect growth will moderate through the second half due largely to prior year comparisons.
Now, let's turn to slide 12, and I'll walk you through our updated guidance.
Yes.
And you can see we are raising our previous annual guidance for xylem overall, we now see full year 2021 organic revenue growth and the range of 5% to 7% up from our previous guidance of three to five per cent.
This breaks down by segment as follows mid to high single digit growth and water infrastructure up from low to mid single digit growth previously.
At a high single digit growth and applied water up from low single digit growth.
And in measurement and control solutions, we expect to continue to expect mid single digit growth.
While we anticipate delivering a number of large project deployments growth may be somewhat constrained by component supply challenges.
For 2021, and we expect adjusted EBITDA margin to be at 90 to 140 basis points to a range of 17.2 to 17, 7%.
For your convenience, we're also providing the equivalent adjusted operating margin here, which we now expect to be in the range of 12 to 12, 5% up 120 to 170 basis points.
This higher range reflects our expectation that volume price and productivity gains were more than offset inflation.
It is from restructuring savings remain unchanged.
And this yields and adjusted EPS range of $2 from 50 to $2 70 sites and increase of 21% to 31 per song over last year.
We continue to expect free cash flow conversion of between 80% to 90% as previously guided putting our three year average right around 130 per cent.
And we expect to continue delivering cash conversion of Brexit and a 100% going forward.
Our balance sheet and will remain very strong even after $600 million of senior notes are retired and the fourth quarter, which clearly offers considerable room for capital deployment.
We are continually assessing inorganic opportunities to strengthen our strategic position and differentiate our portfolio and enhanced market access.
We have provided you with a number of other full year assumptions to supplement your models those assumptions are unchanged from our original guidance, including a euro to dollar conversion rate of one point to two.
And as you know foreign exchange can be volatile and therefore, we have included a foreign exchange sensitivity table on the appendix.
Now drilling down on the second quarter, we anticipate total company organic revenues will grow and the range of 8% to 10%.
This includes high single digit growth and water infrastructure, low teens growth and applied water and mid single digits growth and M and see us.
We expect second quarter adjusted EBITDA margin to be in the range of $16 seven to 17, 2%, representing a 140 to 190 basis points of expansion versus the prior year.
And with that please turn to slide 13, and I'll turn the call back over to Patrick for closing comments.
Thanks Sandy.
Xylem is clearly and a strong position coming out of Q1, and we expect this momentum to continue throughout the rest of the year and beyond.
Demand recovery and strong commercial performance will drive organic growth.
Operating discipline will deliver margin expansion and strong cash conversion.
And a robust balance sheet will continue to underpin our strategy.
More broadly our business and mission have never been more relevant than they are today.
The economic and social value of critical infrastructure is more apparent than ever.
Not only is a critical and times of crisis, but also as a driver of economic recovery.
And it's a prerequisite for broader prosperity.
From the shocks of the last year the world has embraced the need for greater resilience and.
And the imperative of a sustainable future.
And that context, our mission, our business and our values put us and a privilege position.
Which will enable us to continue creating both economic and social value for our stakeholders over the medium and long term.
We look forward to providing an update on our strategy and long term plans at our next Investor Day, which is currently planned for September 30th.
It will most likely be a combined virtual and physical format.
But we do hope to host as many of you as possible COVID-19 restrictions permitting.
Matt and the team will follow up with more details as soon as they are pinned down.
Now with that we'd be happy to take any questions. You may have so operator, please lead us into Q&A.
At this time, if you would like to ask an audio question. Please press star one on your Touchtone phones. Once again that is star one to ask and audio question.
Your first question comes from the line of Scott Davis with Melius research.
Hey, good morning, Patrick Sandy and Matt.
Hey, good morning, Scott how are you doing that.
Good congrats on the Incrementals and good to see for share.
Thank you I'm not sure.
And if you mentioned anything about price hit and I didn't hear it and the prepared remarks, but as <unk>.
Price generally up.
With your cost structure or is there any color you can give us there.
Yeah sure sure Scott, So I think you're asking specifically about the first quarter and and.
If we look at our first quarter, our first quarter performance around price.
It's basically flat slightly slightly positive and.
And very much in line with our expectations and we did go out with a price increase.
But that was back end loaded and the courtyard and didn't take effect until the back half of back half of March.
And where we're not unique we're seeing increased inflation headwinds and so we do expect to see more realization on the price front as the year unfolds, we do have a second price increase that will.
We will take effect later in the second quarter.
And that actually was a higher and a higher price increase and what we went out with some earlier in March So and Scott are you know from our <unk>.
Past experience the teams are doing.
Rather good job on making sure the pricing sticks.
So we get pretty good realization when we go out with these price increases and I think the market and the market is clearly expecting.
Thing from us and our competitors.
Okay. That's helpful and then.
It sounded like this quarter at least you have a lot higher confidence on the meter deployments as it is visibility is it clearly.
Clearly site access is an issue kind of everywhere still but.
Is the increased confidence more around the efficacy of <unk>.
Vaccines, and some reopening and developed markets or is there.
Other any other factors that you want to.
Scott.
Yeah, I think Scott you know look at the data right. So very encouraged about the projects that we have lined up from a deployment perspective.
And as we kind of track, we book and award it goes into our backlog and.
The next phases that we received tangible orders from our customers and and then you start to see it reflected in our and our revenue and so we're kind of at that and middle stage now if you look at our orders performance in the quarter.
What then M and C S.
And right about 20% orders growth year over year, and a big piece of that is the large project deployments starting to convert into and to tangible orders. So and we saw we saw Scott to your to your question.
It absolutely is being driven largely by <unk>.
Sites opening up not not everywhere, but part of that is again.
The vaccine being distributed.
I think part of it and its growing confidence on the part of the utilities to move forward with these projects and that's also what drove our strong order growth and backlog growth and dewatering that.
Net net we're.
Staying at this point in time and site access.
Great. Good color. Thank you good luck.
Thank you thanks Scott.
Your next question comes from the line of Deane Dray with RBC capital markets.
Thank you and good morning, everyone.
Good morning, David Good morning Deane.
I'd like to talk about guidance and some of the embedded assumptions here and first of all I fully recognize it's a first quarter and you guys on typically boost guidance. So that's per starter is different and we certainly recognize there's lots of COVID-19 uncertainty still and we're early in the year.
But so it really does flag the just the questions about component shortages and the second quarter Guide looks fine and you know just that looks perfectly fine and so you're probably pretty locked in in terms of visibility on the component supply. So is this a second half component.
Net supply just a risk and may.
You can give us some more details about what particular components I know, it's probably changes day to day, but just as it stands today, which ones are or where the supply chains are more stretched and a meaningful way.
Yeah sure Deane, let me start with some southern and some color you know first of all we think that our team did a really good job and the first quarter and meeting supply in and what was a challenging supply chain environment.
And we feel like we're in and good shape for Q2 and.
And we're continuing to monitor the situation from the back half of the back half of the year.
It's a fairly dynamic situation and we have certain components micro chips that look good and then that can change and then we solve that problem. So it says it's a dynamic situation. Our team is on top of it very focused on it.
We've worked we work closely with our contract manufacturer partners.
And there they are very plugged in and and larger than we are and so we think that provides some protection, but having said that it's a risk item for the second half of the year and and so we want to be measured and watch how this unfolds over the next 90 days and next time, we're together.
And we'll come back to you with the.
With an update and this is dean as you well know this is happening across.
Our sector, especially in the metrology piece of the business.
It's widespread across the sector. So it's not really creating any competitive pressure right now it would be a matter of if we had shortages and things would move to the right and.
In terms of installations et cetera. So we're not we're not seeing that as of yet, but it certainly if it's a risk it could be a risk and the latter part of the year.
That's that's good to hear and.
So certainly that's helpful in terms of the assumptions.
And then the second question is a broader discussion around the every partnership because it really looks like this has significant implications and and expanding your offerings and smart water.
Especially and applications using artificial intelligence and this the launch project with a utility that you cite the water main feature.
So just talk about specific applications, where does that bring to the table a little more color about this utility deal using AI for water main monitoring and then any color on the economics of the partnership.
Just as a shared economics and and how is that structure things.
Yes, so on the.
In terms of what problem are we trying to solve for here, particularly with the utilities.
We already had some of our businesses working with Asbury.
And that with our pipeline condition assessment business, the artist Formula and it's pure.
As well as walks water, which does a lot of the.
Val pipe replacement work force.
For utilities, and so really building off of that long term partnership, but really expanding now across the rest of our portfolio that is sold into the utilities. So it really is about harnessing the power of the geographical data.
As Reed has they've got a very large share base of utilities around the world. This is not limited to a U S opportunity.
We think that the power of the collective I know they are very very excited about working with us because they don't have right now we don't have access to weather data and they do at the same time. They don't have the deep subject matter expertise of being able to advise the utility on.
How to use this data to go address.
Pipeline issues or water treatment plant issues now whatever challenges that utility may be facing and that's what they're looking for us to really bring in and they see it as the power and breadth of our portfolio because we're not limited on.
Few offerings in terms of equipment.
The case study example, all of the one utility that we talked about in the mid Atlantic and the mid Atlantic.
And we help them reduce their non revenue water bite through a four time reduction and pipe failures.
And that one project is going to end up cutting their pipe replacement costs by $70 million.
On the commercial.
Side of the relationship I'd, rather not get into details on that right now we can perhaps cover that maybe there at our Investor day later and year.
Great. Thanks for the color and will but just think it's an exciting development for you guys on that front. So I appreciate it absolutely we are we're thrilled.
Thanks Kim.
Thanks Damian.
Your next question comes from the line of Andy Kaplowitz with Citigroup.
Hey, good morning, guys.
Good morning, Good morning, Patrick.
Patrick you mentioned that China was up 90 person and I think year over year, So wireless and easy comparison versus last year's I think he had a 36% drop I did and you put your business there well over where it was pre COVID-19. So can you talk about what is going on over there and towards your penetration to that market, you mentioned strength and transport and treatment, but maybe you could talk about.
And how much is just more awareness about water sustainability your own sustainable growth strategy, you know how much that's helping you on the emerging markets and what it can mean for xylem was under underlying growth moving forward.
Yes sure Great question, I would say that Youre right part of the growth in Q1 is an easy comp.
But we are expecting.
And double digit growth for the full year and.
And China.
It's really it's broad based and.
It really is cutting across each one of our end markets. So it's not limited to treat.
Treatment or transport or utilities even.
And part of that is again, there has been improvement and China in terms and start access.
And opening up more.
More broadly of the economy, and so we see that investment flowing.
From a long term perspective, there really are we see a couple of key drivers here.
The whole focus on sustainability.
And environmental impact by the Central government, there, which has been part of their long range plan for a while now is driving real investment and we see that in our bidding pipeline and our project backlog.
Secondly on.
It is really being driven also from a competitive standpoint by all of the work that we've done over the number of years to localize.
Our supply chain as well as strengthening our engineering capabilities on the ground, there and our selling capabilities.
We've got a great team there.
And we've got a quite strong brand name actually across China.
Especially on the utility side.
Got it and things of that Patrick and then Cindy just following up on Dan's question. It looks like your implied incremental margins and the second half of the year are quite a bit lower than Q1. We know you have more difficult comparisons and the second half, but is your second half guidance, reflecting just conservatism regarding the component Jordan chips component shortages, which has talked about and pricing.
And the costs and would you say, we'd just be careful about how we model and then see us margin improvement given those issues.
Yes. So you know good good question Andy.
No I think first of all when we went out with our guidance for the full year of 2021, we did expect that the margin expansion would be stronger first half second half.
And there is there's multiple multiple reasons for that so starting with the restructuring actions that we took in 2020, we realized about $70 million on restructuring and structural cost benefit last year about $50 million of that was in the back half of the year and.
And we're calling for about $60 million of restructuring savings in 2020, one and that will be more from front end loaded. So two thirds of that should come in and in the first and so you have a little bit of a difference from a timing perspective on the on net restructuring side.
And then the other the other thing is some of our discretionary costs.
<unk> got about 60 $60 million and discretionary costs last year and in our plan, we have about 40% of that returning that.
And that actually was it you know.
A tailwind for us and Q1, because we had travel and other items going on last year, and Q1 that will start to flip and the second half of the year and become.
And become a headwind and the other area I think that's really important as we've we've strategically staggered the timing and space the timing of our investments and so those are to support our growth platform. So things like building on our digital platforms continuing to we just talked about the emerging markets where.
Were expanding our channel in the emerging markets, we're continuing to focus on localization and and so those investments will come come in higher and the in the second half a day second half of the year and I think you know the new thing is that inflation and has continued to pick up and.
And while we're taking we're.
And we're taking pricing actions.
They don't always perfectly offset from a timing perspective, and and certainly you know we're watching the supply chain constraints constraints closely.
Very helpful color Sandy thank you.
Your next thanks, Randy and.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Good morning Nate.
Patrick I'd like to start off on the comment you made in your prepared remarks talking about network as a service I know you guys have been testing various business models around that area and has there been some movement on potentially putting xylem and balance sheet to work a little bit more.
To transform the business model around how some of those things work.
And any comments you can give around that and initiative there.
Yeah, we do a combination of structures.
And these are not actually for us large scale and.
Investments that are required so I wouldn't want to spook anybody on the call and thinking that when we say we'd be using our balance sheet that we're talking about something larger than what it actually is.
These are rather small investments and our network that we can make.
And oftentimes happens when maybe there is a consortium of utilities were on their own they can't really afford it they don't need to have it dedicated to them. So we will make the investment and we will allow we'll lease it back to them.
It does it does address the.
The affordability issues for for.
For the utility for the customer.
But that's not the only model we do I mean, there are customers that literally make the investment themselves.
So two different models there.
I would say, we're still in early stage and scaling.
And again, we'll have we'd have much more to share there and investor day in.
In September.
Fair enough.
The next one on my follow up question and then on productivity I think productivity and the quarter was 510 basis points, which I don't think I've stated a number that high out of xylem before and that category.
Talk about what exactly goes into the productivity bucket and what drove such good performance there and the first quarter.
Yeah. So yeah, we put a number of things and in that and that bucket and first of all I need to give a shout out to the team because the performance in the first quarter was exceptional.
Exceptional and stronger than what we had had modeled so we put things in there like our continuous improvement activities that take place in our manufacturing centers and within our within our supply chain.
We also put our procurement.
And negotiation upsides that come through productivity.
And that kind of offset some of the inflation headwinds that were feeling as we're able to and corporate things like value engineering or.
Better design for existing existing products.
From a restructuring savings were were a contributor this quarter as well that was about 100 basis, a 100 basis points and purely restructuring and other structural cost savings and take out with another 100 150 basis points. So it's really a combination of a number of factors and <unk> and every <unk>.
All parts of it contributed this quarter.
Great. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Ryan Connors with Boenning and Scattergood.
Great. Thanks for taking my questions.
I think in your slides and Q&A, you've been very comprehensive so I just kind of have a couple of bigger picture questions.
Patrick you talked earlier about the sort of tech the M. C S side of the business and.
And I understand that it's smartwater and sort of and irresistible theme, but M. C S.
Kind of lagged.
Growth and profitability relative to other parts of the portfolio Youre not alone and that we've seen that from <unk>.
Some other peers as well where sort of the more boring business. If you will.
Actually outperforms some of the sexier stuff, if you will and what are your thoughts on that and to what extent can we conclude from that that maybe.
Boring is good and mature markets with good channels that are established are good and how does that inform your M&A.
<unk> going forward.
Yeah. So obviously.
We love all of our businesses, so and I don't consider them and big boring, but I know I know, that's a bit tongue and cheek on your part.
But.
We think about our.
And of our core businesses over the history of the xylem wheat.
We've continued to invest organically.
And those businesses and we've done some small tuck in bolt ons like and treatment itself.
Its sector as well.
But you know where we.
And we're increasing that investment and the second half of the year to where about two thirds of the investment that we're going to be making and the second half is weighted towards.
Kind of the core equipment product offerings that we need to do.
The remainder really being and more the digital side.
From a from an M&A standpoint, we are we are open we evaluated opportunities across the spectrum.
And for each one of our businesses in the segment because youre right. Its really important that we maintain and extend our market share leadership.
And those businesses are.
And not be purely fixated on just what's going on within Mcs. So that's a big theme across the company right now.
In terms of.
And the dynamics of slower ramp and topline growth and margin expansion and M and yes, I know we said this before and you began to see that here and the first quarter that really is a function of timing I mean as these large deals begin to get deployed other courses. This year second half and then next year, and but and beyond youre going to see that.
Turn on.
Especially when we look at it from an EBITDA standpoint relative to the rest of xylem.
Okay. Okay. No. That's helpful. And then my second one was you know again another big picture question. Patrick you are an important kind of voice and this industry and I wanted to get your response to something you know as it relates to federal dollars right. So we've seen some great progress and the last decade on forecast pricing by local water systems.
We've seen great progress on consolidation and and.
Acquisitions by industrial and players who are great customers for you as you've demonstrated and your past at analyst day, and so forth and so my question is to what extent does a big infusion of sort of no strings attached federal money.
And to that sector put those and sustainable drivers of.
No.
Full cost progress and consolidated and at risk in other words, you could throw a lifeline. They don't have to increase price. They can even lower price they don't have to sell through and investor owned.
What are your what are your thoughts on that and the risks associated with federal money coming in and a big way.
Yeah, It's a great question.
And the answer right now as you know.
No one really knows because nothing has been approved yet, but I think directionally as you well know historic historically capex and in the U S water utility space, which is really what we're talking about is more on the capex side.
It has not been funded by federal legislation.
And so on.
If this pilot money come through I mean, quite frankly on a relative basis right now that number is around 110 billion I believe.
And that to be personally is underwhelmed.
Relative to the price tag of the rest of infrastructure is being kicked around.
And so I think by the time, you spread that out across.
And the utilities and the states are at a local level.
Think it's going to put as much pressure on.
Utilities, you pointed out are moving away from otherwise progressed, they would be forced to make.
To protect their investments so.
And we'll see when we get there that's not the rumbling that we're getting I mean, we stay close for example to non accrual, which you will know is the north American clean water Association.
And that's one of the questions. We ask are those large utility players.
What do they think about the proposed bill.
And they are encouraged but they're not making any plans based on it right now I mean, not at least widespread.
Okay.
And that's very helpful perspective, Thanks for your time this morning.
Thank you.
Your next question comes from the line of Connor Lynagh with Morgan Stanley.
Yes. Thanks.
I think we've spent a fair bit of time on that on a chip supply chain issues, but obviously, there is plenty of issues and sort.
Basic commodities as well I was wondering if you could just discuss.
And any sort of material pressure youre feeling from.
<unk> steel or copper or anything like that.
Youre sort of sourcing strategy is and if we should expect any any sort of impact on on your margins from that.
Yeah. So thanks, Thanks for the question question Connor.
And where we're feeling it.
It's something that we're watching closely both from an inflation perspective, and a shortage perspective.
Particularly from a shortage perspective around resins and plastics.
We think that the storm that took place earlier and earlier in the year and Texas put some some pressure on the global sales on the supply chain and.
Our teams have been working at that and I think they've been making good progress and so when it comes to plastic shortages and we feel good about the supply that we secured for the second quarter and I think we're in a good place from a momentum perspective still work to do but those are kind of resolving themselves and if any.
And favorable favorable way.
We're seeing inflation in copper and aluminum and steel and and that's you know that.
And part of why we've gone out with a second price increase.
And the second and second quarter.
Yeah understood. So I think and in the and the bridge you provided it seems like price cost is.
Pretty neutral thus far.
I think you were guiding the full year to be.
Marginally dilutive.
Any updated thoughts on that and just how youre thinking about all those different moving parts there.
Yeah, I think that hasn't changed but what when you incorporate the productivity that we're going to continue to drive out of our manufacturing sites and within our supply chain that will be on the positive side of that.
And I and I think I think partly what we're what we're.
Really suggesting here is the uncertainty continues around the supply chain and areas that it's moving around.
And we've just gone out with price increases and we have another one being rolled out so we really want to see how how that sticks and how that plays out.
As we get through Q2, and then we'll have a better view on the second half at that point.
Yeah understood I guess, I guess, where I'm ultimately driving with this is you are starting from a very nice place on margins, particularly on.
And the <unk>.
Water infrastructure and applied water businesses.
It doesn't sound like you're seeing anything right now that would suggest we should assume.
On abnormal seasonal trend, which usually is a positive one correct no and they give me look at what we implied guide you'll see margin expansion in the second half compared to the first half. So we are we are you know I think we're off to a great a great start and we're.
And on a quarter on that.
Sequential basis, you should see margin expansion and the second half as well.
Clear thank you.
Yeah.
Your next question comes from the line of Sarah Boyce Jetski with Jefferies.
Good morning, So just a follow up on your pricing commentary you talked about the other pricing and second quarter, but given your strong orders and backlog how do you think about when you actually see the benefit of this price increase.
Yeah, you know I think that day, because that's a good question and there have been some orders that have been placed to.
And take advantage of pre price.
Before the price increase takes effect and so that's why what we've modeled.
Is that we'll see greater price realization coming in Q3 and Q4 as we work through the existing orders that are in better and backlog.
And then and it looks like the 25 per cent order increase and applied water was partially attributed to the extended lead times and North America, how should we think about the impact of this and how is the underlying demand and trending.
And so you know first of all.
And with 25% year over year growth there is definitely an uptick in demand.
And so we can't dismiss it and we think that there was some placement.
Placement of orders, a little bit earlier than normal because.
And many many companies are dealing with the supply chain constraints and shortages and so customers want to get what they want to be first in mind to protect their supply.
But net net.
Very good performance, we're seeing good recovery on the industrial side.
<unk> remained strong and commercial and starting to come back, particularly outside of the U S.
Okay.
Perfect. Thanks for taking my question.
Your next question comes from the line of Scott Graham with Rosenblatt.
Hey, and good morning, Patrick Sandy, Matt how are you.
Good morning, Scott.
Hey, Sandy complements on.
Your handle over the details.
Really impressive.
To maybe tap into that a little bit more on the productivity on and there was some questions had been asked around the productivity of 510 basis points, certainly we know that discretionary.
And as a little bit attitude within that.
And so were structural you said 100, 250, but boy that still leaves a lot of just sort of core productivity.
On improvement in the quarter and I'm just wondering if you can kind of take us under the neat that a little bit and what that would look like for the rest of the year.
Yeah. So if we look at Q1.
And we're seeing is about.
About 70 basis points from cut came from what we call continuous improvement and that hard work that takes place day after day, and our and our manufacturing centers and.
And then on procurement organization.
Delivered about 220 basis points of savings this quarter.
Which was a really good which was a really good good number.
And so you know I think that that's a high number but net.
Net net this productivity element is a core part of our planned margin expansion for the for the year and we're very glad to start seeing it right out of the right out of the gate.
So and so you think that that you just laid out that 300.
Sustainable for the rest of the year.
Okay.
Hum.
Our full year are fully full year projection around productivity is right around 300 basis points.
Okay. So then that would imply that that comes off a little bit and the second half I understand.
And the first quarter was very strong yep yep get at Aha.
This is one for you Patrick.
I didn't hear mention of a a.
Maybe you can kind of.
Assuming it's still cold that but kind of give us a.
You know sort of what was the sales growth and what you've called AIA.
And what is your thinking for the full year.
Sure Matt.
And that when you go through the <unk>.
Number is and I'll talk about what we're seeing in terms of just momentum and the business and we have and we still show. It is that from a reporting standpoint as AIA within the Mcs segment.
But from a branding standpoint, we now refer.
Piece of that which is the pure digital and xylem view.
As our consulting and our consultative business.
And then we have the.
The pipeline condition assessment business.
And the artist formerly known as pure.
And that's in there as well so those are two very different businesses and they're there now run separately.
We saw a nice momentum and.
And both businesses Mack and share the detailed numbers, but really good look at bidding.
Bidding activity on the digital side.
Order growth backlog gross margins.
Strong incremental margins on that business and so that team that we set up last year really is getting and get some big traction now not just with utilities and the U S. But also across emerging markets and Europe yeah.
Yeah, Scott I would just say this.
Looking at and and a whole right and in terms of and we've been out a little bit and in the first quarter. Most of that is pure because seasonally this.
And this is usually a slower period of time for them doing a lot of that in pipeline assessment service work, it's harder to do as you know and in a lot colder freezing temperatures so sit.
And so down a little bit that was expected they bolt on kind of on on target for what our plan was that'll ramp we're seeing good activity good interest.
Bidding around both of the businesses.
Some good orders good momentum on the on the view side and we'll have more to share about that digital strategy and and the component that his view.
And at Investor Day, but I think importantly, too. It's also there's synergies with that view business into other parts of the business and so for example, we highlighted that greensborough win that we had this quarter and that is on a M. I deployment, but it also comes with some digital components in terms of pipeline.
Condition assessment service.
On the walks water piece of it addresses non revenue water and also.
Our valor analytics technology that goes at the.
At the at the meters that need to be replaced and targeted first.
To address so both of those are in that deal, it's nice to see that bidding and scope work getting expanded.
And I would say Scott. It was it was dose digital capabilities that were in some cases, the distinguishing competitive advantage and it really kind of help get it across the finish line.
Yes, and it was something you've been talking about for a while Patrick Thank you all.
Thank you take care.
Your next question comes from the line of Brian.
Li with Goldman Sachs.
Hey, good morning, everyone. Thanks for taking the questions.
And what's the appropriate here hey, good morning.
But just wanted to maybe.
And talk about Mcs for a second.
And the only segment that isn't getting a bump up in the outlook for the guidance. So just trying to understand how much of that is just project timing and visibility and not having improved or changed much.
This is just building and more risk for supply chain issues.
So maybe the puts and takes there as you thought about providing the updated guidance here and if it is some of the ladder I know you talked about this a little bit but what what specific actions are you taking to mitigate or you're adding new suppliers and you're building inventory.
And just wanted to better understand kind of what the what the situation is there.
Yeah. Thanks, Brian Good good question I think from the orders growth if.
If we did not have supply chain constraints, we would have likely increased the guidance there because the.
Large project deployments, which.
It's a core part of our plan are coming through in line with our expect expectations and our customers are already ready to go which we're very very encouraged about.
But the the situation on the electronic components and very very dynamic and so we want to continue to monitor and see how that that plays out over the next.
The next few months and.
Well, we've taken extra inventory, where it was possible it takes a little bit of time to substitute parts out and get those certified but that's something that our team is also working on and you know I think we're not alone here. So I think this is well understood and the industry that there is a shortage of them.
Microchips and so.
And so far we've kept everything up and up and going and where we're going to keep fighting and yes. We have been I mean, we had been working to qualify additional suppliers, but the predominant work. That's been done is to work closely with our largest contract manufacturer which is flextronics.
And obviously with their large procurement.
Capabilities and the mass.
Procurement they do.
And we've got a really nice partnership with them and we've been able to make sure up to this point that we're getting our fair share of the other components that are out there despite the shortage.
And we just got to stay close to them and keep working that through the year.
Okay, Great. That's helpful. And then and then maybe one for you Patrick and I'll pass it on.
Just at a high level Big picture outlook for M&A. You know you guys, obviously have a very healthy balance sheet.
Sticking to the free cash flow view here for the year generally what are you seeing in terms of multiples out there. There is there anything more attractive and the context of your stock having done well over the past year, and then just what focus areas or holes.
You might be looking to address and the portfolio here. Thanks guys.
Yeah.
Thanks.
M&A is clearly an important piece of our long term strategy.
And so we continue to actively cultivate.
The pipeline it is a very robust pipeline.
And so very active.
We would really be focused on further strengthening our digital platform.
Really.
Diversifying some of our end market concentration so as we said before.
Perhaps something and the industrial water space and then of course as I mentioned earlier always look at opportunities to strengthen our core.
In terms of valuation.
We have seen some multiple.
And our inflation, there, but really tends to be around things and the digital space of scale.
We've not been actively participating and some of those deals had been announced here recently, because we like the portfolio that we've got but we're always in the game on those in terms of looking at it but we would do we do want to be disciplined on valuation.
The what I would say is I acknowledge your comment and that is we've got a strong balance sheet.
Equity is a valuable currency right now.
And both of those give us we think relative advantage to bring some of these differentiated assets into our portfolio. There is a reminder, that we've got we've got the 600 million dollar note. That's due in early Q4, so that's not going to constrain us, but as you all are modeling our cash and balance sheet just make sure that.
And you keep that in mind.
Okay. Thank you I appreciate the color.
We have reached the end up on our allotted time for questions I will now turn the floor back over to Patrick Decker for additional or closing remarks.
Thank you well. Thank you all for joining and for your continued interest and engagement here are really appreciate the support I look forward to seeing you again on our next earnings call, but also at our Investor day.
Timber 30th Matt and the team will be reaching out and coordinating with all of you to make sure that you get that scheduled for you.
And so on the meantime, again have a great remainder of your spring and summer stay safe stay well.
And all the best to your families and colleagues we will see you soon.
Thank you. This does conclude today's xylem first quarter 2021 earnings conference call. Please disconnect. Your lines at this time and have a wonderful day.
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Okay.
And Jeremy.
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