Xylem Inc. Q1 2023 Earnings Call

Closing comments.

Again, we ask that you. Please pick up your handset when posing your question to provide optimal sound quality.

Sure Yeah, no. Thanks to you. So just on the transaction itself as I said there are no comments I mean really pleased with the progress of proud of the teams I mean, there's a ton of work that goes into this from both companies. While you know people doing her day job. So a lot of great progress. There you know there were several countries obviously beyond the U S required approval <unk>.

<unk> clearance and all of those countries. The only remaining countries China in China. Our filing has been accepted for what we call a short form review, which typically takes no more than 30 days.

And we're moving well through that and don't expect any any issues there.

And so we've got our shareholder votes coming up on maybe 11th boasted a shareholder so we will get through that next week and again for all those reasons. We continue to expect a closest five by mid year. So that's the one that's on the transaction closure you're right. We've got a dedicated integration planning team I've spent a considerable amount of time.

<unk>, what's wrong Keating their C O and his leadership team Matthew has spent considerable amount of time with them as well we've had many many integration planning meetings and.

On the cost side, you know clear line of sight to what we committed to before that being $140 million.

You know in three years, and very simple straightforward areas I didn't say simples easy, but they're simple, but we're not going after rabbits here, we're going after big items and deliver those as quickly as possible and again, what we've always been most excited about is the the growth cinergy and so you know looking there you're right there.

<unk>, we are somewhat limited on how much detail, we can get into until we have final regulatory approvals from a competitive standpoint.

But as the change of work together were even more excited about the top line growth synergies that are out there as we mentioned before most excited about the opportunity to deepen our penetration within utilities of the can.

Buying portfolio to expand both their internationally are they're they're integrated services and solutions business on the industrial side internationally, but also a number of their treatment products.

That we can take to our channels internationally, we both have efforts going on around digital services and solutions and opportunities to leverage our combined platform there to serve your needs for different customer sets around the world and then you know, there's there's gotta be opportunity in synergy in the areas of art.

D and innovation as well as some of our portfolio enhancements in that area. Obviously Joes you know some of these synergies are gonna materialized sooner than later and you know will be in a position that once we get the transaction closed.

And in an upcoming call to give you more clarity on that in terms of how we're thinking about enhanced growth rates of the of the new company.

Thanks, guys.

Thanks, Yeah.

Thank you. Our next question will come from Mike Halloran with your line is now open.

Okay morning, everyone.

Good morning, Mike.

Filling up a little bit I think needs first question. So you think about the you've seen some studies appointments here and the.

Well, you're expecting steady deployments here on the M. C. S side over the next period of time here Coupla years, which should give you some pretty good visibility doesn't sound like the the the leg and deployments and delays and deployment is impacted.

That order cadence.

Seems like a bottomless back half of the year and first quarter saw some nice sequential improvement on that side.

I guess I would like to understand a little bit about what that that so it looks like with the conversations are looking like from a pipeline perspective on that side and how you think about the visibility here over the next period of time when you put those two together.

Appointment peace and then how 'bout pipeline and thought process with some customers as dawn.

Yeah like it's Matthew Uhm.

We feel really you're bullish on it you can see your orders growth.

Q1 was eight per cent and if you just take a step back and look at any of my adoption in total for the U S. It's only around 50 per cent today.

And you know, there's a very strong value proposition for this offering for our utility partners to.

To make them more productive and more efficient and their business and that's something you know coming through the pandemic, they've really gotten laser focused on and I would say, even you know with digital in general it really latched onto and started to ramp up their capability. So we're very bullish over the over the longterm there'll be more and more adoption, we're still kind of.

<unk> 30 per cent in and then when you take a step back and look around the globe other parts of the world or a decade behind the U S is adoption network. So.

We not only work the U S market place in in the UK, which is also very similar to the U S were now starting to focus on the international fun and how we can improve our opportunities. There is funding for non revenue water and smart metering really picks up to some of the subsidies that are coming out in Europe .

And Mike it'd be worth Matthew maybe if you want to give an update we haven't we haven't talked about the <unk> partnership that we announced last earnings call does that really speaks also to what utilities are doing around the digital side and what we're seeing there like in terms of early wins.

Yeah, just to reframe it just for folks that it went out on the last call you noticed exclusive commercial partnership worldwide. It is a <unk> business model. The drink is headquartered in Valencia, Spain. There are there are later <unk> leader in what we called data management and analytics and as we're talking to a lot of our utility customers. The biggest pinpoint we here.

From these partners is the need to have a singular platform.

To integrate all of their applications and data.

You know they have multiple applications passwords logging siloed information and this really gives us the platform much like a smartphone like an I O S platform to integrate all these disparate systems. It's a proven platform. It's been deployed it over 300 plus utilities.

You know what I, what I would like to say a lotta, it's built by utility operator for utilities, they actually understand the utility workflows, which is really important coupled with our application knowledge that we have is in Hawaii.

You know our teams are building strong commercial momentum you know sandy talked about investments that we're making around the globe, especially in Europe on digital investments and solution swelling to deploy this these this platform and we built a significant fall over the past three months and it's really also and enable us to pull through a signal.

If you can amount of xylem content I.

I would say on the next call will be in a much better position to kind of get into some detail on that as it matures over the next 90 days.

Thanks for that and then maybe a similar conversation obviously don't have the deployment component necessarily.

With the core utility pieces with an infrastructure business, but maybe a similar conversation about <unk>.

Hitting pipeline thoughts domestic first international and the ability to maintain the momentum momentum on the pump in the treatment side there.

Yeah, so let's.

I'd say in water infrastructure.

The utility business, obviously opex is very strolling around the world, we haven't seen a really slow down capex either you know if you think about Europe , specifically, there Willie wedded to making sure they spend their capex and although you know I'm not going to get into you know go down the rabbit hole of the infrastructure Bill, but over time that will start to drip out and start to really provide <unk>.

Longterm supporting demand and utilities space with water infrastructure, both in the U S and around the world. There's there's other programs like the European recovering Resiliency Act, you've got the Amp cycle in the U K and all of these are coming online in the next you know anywhere from six to 12 to 18 months to really really buoy.

And lift the demand signal for that sector and might be a couple of other points. So that you know.

You know, we look very much at the <unk> the treatment bedding pipeline, because that's a leading indicator for the health of the wastewater side of utilities in that bidding pipeline continues to grow off a record levels to our backlog in water infrastructure itself was up 14% in the quarter, So really indicating strong health there.

And that part of the business.

Really appreciate everyone's thanks.

Thank you. Thank you.

Thank you. Our next question will come from Scott Davis with Amelia Research. Your line is now open.

Good morning team.

The morning, if you got that.

I was just kind of curious on how you guys think about the kind of.

Long term growth algorithm of industrial versus industrial production indicators and.

Kind of what I think about the ebbs and flows you know there's there's so much.

Called base, that's probably inefficient at this point could be pulled out and then there's all these new projects Mega projects that we talk a lot about including some pretty high intensity stuff like semi fabs I would imagine you guys have a lot of content. So is there any way to kind of.

Quantifier think about.

Growing too.

Two times, IP or three times or one and a half.

Kind of curious sure if you guys think about it.

Yeah, Scott Great question, So I'll I'll I'll I'll put a caveat upfront and say you know once we close the transaction with a vocal will be able to talk much more around how we how we view their <unk> look at the combined company both stand alone, but also through the revenue synergies that we're targeting Ah, but as we just look at our respect.

<unk> participation in the industrial piece of the business.

Take for Xylem, you know because of the nature of what we currently sell in to the industrial base tends to be.

More of a G D P kind of business were selling into the periphery of manufacturing facilities and so as long as the facilities are up and running there burning through various types of pumps that we sell replacement into its a good business good steady, but it's got a typically be in that low single digit sometimes mid single digit kind of gross.

When you look at what a walk with us, they're providing very different water management services into the so called industrial uses of water and what drives the growth there, which historically has been in that kind of at least mid single digit if not even higher than that depending upon where they are in the cycle <unk>.

<unk> and this is where we do believe it will outpace a broader G. D. P growth is because of the increased demands coming in to those users around one making sure. They have access to a sustainable water plotting supply to keep their operations up and running the value of water to them is not the price they.

<unk> pay per gallon or later they don't you know, it's not a big number for them the value of water to them is when they don't have it and they're operating in water stressed erez and they have production stoppage and it's lost revenue margin. The second is the increased regulatory pressure on them to manage their discharge of wastewater.

And so you know fines penalties, but also reputation will concerns they have and making sure they're seen as responsible citizens in the community. So those are the pressures that we see are really driving the demand right now in that part what we call the industrial sector water and we see that continuing.

Yeah, that's super helpful. Patrick.

And my <unk>.

Correct to assume that a semiconductor fab is gonna have.

A pretty large Tam for you guys yes.

That is correct.

Okay I'll pass it on thank you.

Thank you Scott.

Thank you. Our next question will come from Andy capital It with Citigroup. Your line is now open.

Yeah, good morning, everyone.

Good morning Handy.

Probably from Matthew I know you've been working on a number of initiatives to enhance the island's productivity, obviously xylem raised revenue guidance nicely for twenty-three I think he kept your margins. So maybe just more colors of the progress you're making and you know what you would you see going forward there.

Yeah, I mean, I'll I'll start us off and then maybe turn it over to sandy to kind of wrap this up but we see really good momentum.

You'll be driving productivity Andy in the business. There's several different areas that we were addressing in doing that whether it's across simplifying your portfolio, reducing skews, you know, making our factories more efficient and what rebuild and really moving the long tail out you know in terms of foot.

<unk> I mean continued factory rationalizations, obviously, another point that we're looking at.

You know also in within a R. M. C. S businesses, we continue to move that business forward getting after productivity. There has been a focus area of ours is it's been kind of a 2.5% of spending we need to get that up around three and a half four 4.5%, which is kind of typical the other two segments. So that's that's another big focus area as well.

Well and also within M C as to if you've got to unpack. The backlog you know the shift of water. The water mixed will pick up over time and provide some nice drive thru and high calorie margin. So it's a combination of things that we're looking at holistically across the business to make sure over time, we continue to build a sequential momentum.

And the margin line, yeah, yeah, what what an add on top of that and he is you know obviously, we're very focused on margin expansion and are the Gulf reset for our organization for 2023 contemplated significant margin expansion and I think we've gotten out of the gate with a good good start there and if you look at what what <unk>.

Thing about the rest of the year one of the items that were focused on his you know what are the incremental margins look like and you know archive contemplates 30 per cent incremental margins you know add a period, where we are continuing to make investments and you know a period of time, where I don't have even the most optimal next as we work on the.

Appointment so yeah, I think we feel good about where we landed and we're going to continue to be focused on productivity to the rest of the year and we're going to be focused on making sure that are discretionary cough really tight.

Yeah, we were not anywhere by no means you know satisfied yet with even where we are saying margins are gonna be this you're obviously, we're gonna continue to run hard to drive those up even more but again, we feel responsible responsible prudent guide at this point in time.

Very helpful guys, and then Patrick you talked a little bit about Europe , and the U S. In terms of regions, but I think.

It's been a bit of a drag on your performance in the past seems a little better in Q1 or what have you seen out of that region.

In the near term.

Yeah no. Thanks, Thanks for the question any I it's.

It hasn't been talking about a lot and it really is an emerging bright spot for us because you know we absorbed.

So I'm pretty challenging numbers or last year, and you know that I've I've I'm I'm, a longterm bull on China, just give them where they are in the in the overall investment cycle from a water standpoint, so orders and T. One and revenue we're both up high single digit and outperformed their you know really encourage.

By the reopening across China, and what's happening from the Gdp's standpoint there.

It really sets us up for a pretty strong year I would say that we're saying a faster recovery in the industrial and commercial piece of the market there than we are utilities, but utilities based upon our bidding pipeline and backlog.

Are set to recover in the second half. So that's a further tailwind for us and again to funnel remains a very healthy there. So you know encourage by still a long way to go but we expect it to be a tailwind this year.

Helpful. Thank you.

Thank you.

Thank you this concludes.

The Q&A portion of today's call I would now like to turn that for back over to Patrick Decker for any additional are closing remarks.

Well again, thanks, everybody for your continued interest and and questions and the support look forward to catching up with you on your next earnings call and I'm sure. We'll see many of you at various conferences between now and then as always stay safe.

And I look forward to speaking do again.

Thank you. This concludes today's asylum first quarter 2023 earnings conference call. Please disconnect. Your lines at this time and have a wonderful day.

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