Q3 2023 Xylem Inc Earnings Call
Hello.
[music].
Welcome to Xylem third quarter 2023 earnings conference call. At this time, all participants have been placed in a listen only mode and the floor will be opened for questions. Following the presentation.
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I'd like to now turn the call over to Andrea Vanderburgh, Vice President Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to Xylem third quarter 2023 earnings call with.
With me today are Chief Executive Officer, Patrick Decker, Chief operating Officer, Matthew Pine Senior adviser and former Chief Financial Officer, Sandy born and Chief Financial Officer, Phil growth.
They will provide their perspectives on the island's third quarter 2023 results and discuss the fourth quarter and full year outlook.
Following our prepared remarks, we will address questions related to the information covered on the call I'll.
Oh I see you. Please keep to one question and a follow up and then return to the queue.
As a reminder, this call or webcast are accompanied by a slide presentation available in the investors section of our website.
A replay of today's call will be available until midnight November seven.
Additionally, the call will be available for playback via the investors section of our website under the heading investor I'm back.
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.
Payments are subject to future risks and uncertainties.
As those factors described in Thailand. Its most recent annual report on Form 10-K and in subsequent reports filed with the SEC.
Please note that the company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances.
Actual events or results could differ materially from those anticipated.
Please turn to slide three.
We've provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
For purposes for purposes of today's call all references will be on an organic N or adjusted basis, unless otherwise indicated and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation.
Now please turn to slide four and I'll turn the call over to our CEO Patrick Decker.
Thanks Andrea.
Good morning, everyone and thanks for joining us.
By now you've seen that our first full quarter as a combined company with xylem and our bulk where together the team delivered very strong performance across each of our segments.
We significantly exceeded expectations on organic revenue growth.
EBITDA margin and earnings per share.
And revenue grew 10% organically.
We expanded EBITDA margin well above prior year, and we delivered EPS of 99 cents for the quarter, which represents 14% growth year over year.
Orders were up 3%.
And more importantly, our backlogs continue to grow, especially in our M. C S and ISS segment.
Total backlog is now $5 $2 billion.
This sets us up for continued growth momentum and demonstrates the health of our key end markets.
So on the strength of this performance, we are raising our full year guidance.
I want to personally give a big shout out to the team for their strong operational performance during a period of integrating two large enterprises.
Instead of getting distracted the team continued to focus on serving our customers and delivering on our commitments.
The integration of evoke way is well on track to deliver the cost synergies we promised.
It's those synergies that underwrote the transaction.
But more importantly, it's the growth synergies that excite us the most and our customers have already begun to experience the advantages of our combined capabilities.
Overall the quarter strong result, it reflects our continued momentum and that puts me in a very privileged position on my last earnings call as CEO of xylem.
In September we announced a planned succession of both me as CEO and Sandy as CFO.
Matthew Pine is going to lead xylem as CEO beginning January 1st.
All remain on as an adviser through the end of March.
Yeah.
I'd also like to formally welcome our new CFO Bill Grogan, who is on the call with US today, He's alongside Sandy Rowland.
Bill took on the role of CFO on October 1st.
And it's been a real pleasure to welcome him to the team.
Now as Sandy was in the chair through the end of September she is going to cover the third quarter's results.
But that's not gonna happen before I take the opportunity to thank her for her many significant contributions as island.
She's been a great partner and a great leader over the last few years with me and the team we simply would not be where we are today without her many contributions so now over to you Sandy.
Thank you Patrick before I go over the quarter's performance I would like to take a moment to congratulate bill in the short time since he stepped into the CFO role I've been impressed with how quickly. He has immersed himself in the business and taken on financial leadership of the company.
Blake Patrick I will continue to stay on as an advisor through March to ensure a smooth transition, but the company will be in great hands with still working alongside Mathieu next year and I couldn't be more confident and xylem future.
And now let's look at the quarter, Please turn to slide five.
As Patrick mentioned the team has continued to deliver strong performance in Q3 exceeding expectations on gross margin expansion and earnings per share.
Each segment outperformed including integrated solutions and services.
As a reminder, since the combination with a bulk glass, we began including ISS as our fourth reporting segment.
For xylem overall total revenues grew 50%, while organic revenue rose, 10% led by particularly robust double digit growth in the U S.
Western Europe grew a healthy 6% and emerging markets was down largely due to China. Despite strength in other parts of Asia and also in Africa.
From an end market perspective utilities grew 16%, mainly driven by robust demand and price realization in both M. N C S and water infrastructure.
Industrial grew 5% driven by strong demand in the U S and healthy demand in Western Europe.
Lastly building solutions grew 3% with strength in developed markets more than offsetting moderation in emerging markets.
Overall demand remains resilient our backlog is now $5 2 billion up 5% organically and this includes a $1 3 billion contribution from Evercore.
Orders were up 3% in the quarter and book to Bill for the company was approximately one.
EBITDA.
Margin was 19, 8% up 150 basis points from the prior year on higher volumes productivity savings and favorable price cost dynamics, our EPS in the quarter was 99 cents up 14% year over year.
Please turn to slide six and I'll review, each segment's third quarter performance in a bit more detail.
Mcs revenue was up 25% driven primarily by improved chip supply and backlog execution as well as strength in test and measurement.
All regions saw double digit growth led by an impressive 31% in the U S.
Orders were down in the quarter due to the timing of metrology waters, while assessment services saw strong growth.
Year to date book to Bill remains above one for the segment.
R. M N C backlog of $2 3 billion is up 11% organically versus the prior year, a reflection of strong continuing demand for Ami I offerings, and the accelerating trend towards Digitization.
EBITDA margin for the segment was up 190 basis points versus the prior year, driven by volume conversion price realization and productivity.
More than offsetting inflation.
Now, let's turn to slide seven and I'll cover our water infrastructure business.
Water infrastructure outperformed due to stronger than expected price realization and backlog execution with reported growth of 40% and organic growth of 7%.
As a reminder, we have integrated evoke was applied products technology business into the water infrastructure segment further building out our treatment portfolio.
This business outperformed expectations driven by stronger backlog execution.
For both utilities and industrials the U S. A robust gross well western Europe proved resilient offsetting some weakness in emerging market.
Organic orders in the quarter up 14% year over year in each region saw double digit growth with particular strength in developed markets.
EBITDA margin for the segment was up 50 basis points and 80 basis points when excluding the contribution of a full class.
Please turn to slide eight for an overview of applied water.
Applied water revenues grew 1% on continued backlog execution modestly better than expectations of flat revenue growth growth in building solutions was driven by continued strength in commercial particularly in the U S. While industrial was down modestly there was resilient growth in developed.
That's offset by moderation in emerging markets.
Orders were up 2% in the quarter on strength of the U S and segment EBITA margin expanded 20 basis points with continued strong price cost dynamics and productivity more than offsetting volume decline. Please turn to slide nine.
Last quarter, we introduced integrated solutions and services as our fourth segment.
I S. S brings a durable recurring revenue base from businesses, including outsourced water, which provide outcome based treatment services to customers.
In its first full quarter with xylem ISS revenue exceeded our expectations as implied in our reported guidance.
On a pro forma basis I S. S revenue grew 10% year over year, driven by strong price realization and backlog execution.
Orders grew on a pro forma basis by 12% year over year with broad based demand across industrial and utilities.
Book to Bill was greater than one and backlog exceeded $1 billion to end the quarter up 14% year over year on a pro forma basis.
Adjusted EBIDTA margin was strong at 22, 6% driven by price realization and productivity.
And now, let's turn to slide 10 for an overview of cash flows and the company's financial position.
Yeah.
Our position remains robust as we exit the quarter with over $700 million in cash and available liquidity of $1 7 billion net debt to EBITDA leverage is one two times and year to date, we had adjusted free cash flow conversion of 94%.
Please turn to slide 11, and I'll hand, it back over to Patrick.
Thanks Sandy.
Today is the 12th anniversary of Xylem is listing on the New York stock exchange.
And I think it's pretty fair to say that 12 years ago water wasn't very widely recognized as an investable thesis.
But since then intensifying secular trends have made absolutely clear the value of a platform of solutions to meet the global water challenges.
And that time xylem. It has evolved in our composition, our scale and our impact but our investment thesis has remained constant.
It's one that's focused on a multiyear runway of attractive organic growth with sustainable margin expansion and strong free cash flow conversion.
And it's that financial strength and confidence that allows us to effectively deploy capital as we continue building a differentiated market leading water solutions platform.
Under that thesis, we built a very durable business model and xylem colleagues and partners around the world are creating significant economic and social value as we serve our customers and communities around the world.
I'm, both proud of what we've built so far.
But also excited to see what xylem is capable of becoming under Matthew's leadership.
Matthew and I have worked side by side for the past three and a half years. So this handover is progressing very smoothly.
And I have total confidence he will lead this team to realize the full promise of our strategy and create an even greater impact and value in the years to come so now over to you Matthew. Thank you Patrick I am grateful and energize the prospect of building on xylem some momentum in creating our next phase of growth and impact most of deeply grew.
Eightfold for patch Patrick's passionate visionary leadership his legacy as islands bright future, having put xylem firmly on a path of continuing profitable growth the strength of our partnership is making it easy to deliver the continuity of essential to all stakeholders in this handover as we approach the turn of the year and as.
As Patrick said, our thesis is constant our strategy is sound and we are committed to our long range plan.
Our team is solving customers' greatest water challenges with the most advanced platform of solutions in the world.
In a fragmented complex market that integrated offering as a distinctive competitive advantage.
<unk> ahead of US does it make it easier for even more customers to access the full range of capabilities they need to solve their most critical water challenges.
In the process, we will grow our penetration our profitability, our durability and our impact.
The team and I look forward to sharing more color about the next phase of our growth at an Investor day in May next year, who will provide a further update on our combined company opportunity and long range plan then.
In the meantime, I'm pleased to share our near term outlook I'll provide a brief update on our revoked integration and then a picture of what we expect in our end markets over the next period.
And then finally I'll ask bill to provide guidance for the remainder of the year.
Yeah.
Moving to slide 12, as you can see the integration of a vocal his gain quick momentum and the team is coming together remarkably fast there's great collaboration and we have the benefit of bringing two highly complementary cultures with assembly strong sense of purpose together.
We committed to $140 million of cost synergies within three years as well as exiting 2023 with a $40 million run rate and as Patrick mentioned, that's well on track.
But the rationale for the combination has always been about growth the opportunity to create more value serving customers with our combined capabilities and utilities will deepen our penetration, especially with the addition of evoke was applied product technology offerings through our water infrastructure segment.
The combination allows us to provide even more constant comprehensive treatment solutions in both clean water and wastewater.
In industrial we will scale, our presence in attractive verticals with services offerings of ISS.
We see long term market expansion and growing verticals such as microelectronics power.
Life Sciences, and food and beverage.
And geographically, we will scale of oak was products and solutions internationally, including the services business by leveraging xylem as global distribution platform.
Both xylem and a vocal we're market leaders on their own but together, we're in even a stronger position.
We are already seeing the benefits of scale reach and integrated offerings and a robust pipeline of global opportunities as well as the combined wins both teams are posting.
And as we integrate our two businesses, even more deeply will take advantage of the opportunity to optimize our portfolio for growth.
That will include structuring our offerings in ways that are matched to how our end markets address water management.
The job is to make it even simpler for them to access solutions, they need and we're already hearing how customers appreciate having fewer vendors to coordinate across multiple domains.
Now, let's turn to slide 13, and I'll cover the outlook for our end markets.
Our outperformance in the first three quarters of the year provides great momentum to build on.
I, especially want to echo Patrick Shout out to all of our teams for delivering such a standout performance this year and into the third quarter, it's that kind of commitment and discipline that demonstrates the team's ability to execute through a dynamic macroeconomic environment.
That said, we continue to take a balanced outlook and are monitoring signs of softness on a regional level, particularly in China.
And some end markets addressed by our applied water segment.
As a reminder, our 2023 outlook as expressed on an organic basis at a high level, we anticipate that utilities demand will continue to be resilient and industrial demand will provide steady growth.
Utilities compromise approximately 45% of revenue.
They continued to show healthy demand and we continue to expect growth of mid teens.
On the clean water side, we continue to see robust demand for our Ami solutions on top of that we're driving backlog execution on improved chip supply and we're seeing even more traction on solution selling with our digital platform as customers increasingly value bundled offerings.
We now anticipate growth of mid Twenty's up from low Twenty's previously on.
Well on the wastewater side Opex is expanding and expect it to remain resilient in developed markets alongside steady capex spend across regions underpinning demand.
We expect to see high single digit growth in wastewater overall.
Turning to industrial end market, which is about 45% of our revenue. We now expect global growth of high single digits up from mid single digits.
Developed markets continued to be resilient, although there are pockets of moderation in emerging markets.
Lastly in building solutions, which is about 10% of our revenue. We continue to expect growth of mid single digits, driven by steady replacement business, particularly in commercial applications.
Overall, the demand outlook continues to be positive despite some variability in macro indicators.
While the organic view does not include evoke with the demand profile in ISS is resilient on a foundation of recurring revenues further increasing the durability of our business now.
Now I have the pleasure of turning the call over to Bill for the first time to walk through our Q4 guidance.
Thanks, Matthew and thanks, Patrick and Sandy for your kind words.
Credibly grateful to sandy for being so generous with her insight about the business. During this handover. She has built a strong team and culture and I wish her well in her new endeavors.
I wanted to start by saying how excited I am to join the xylem team.
I have long admired the company both because of its rise the sector leadership and also because of its distinctive commitment to both social and economic value creation.
And now a month and I'm, even more compelled by the opportunities ahead of US. It is a privilege to be part of the team that will take xylem forward building on this extraordinary platform and performance as.
As Patrick mentioned, we are increasing our full year revenue EBITDA margin and EPS guidance full year revenue will now be a processed approximately $7 3 billion.
This translates to total revenue growth of about 32% and organic revenue growth of about 11% up from 9%, 10% previously.
We are raising EBITDA margin of approximately 19% up from 18% driven by higher volume stronger price realization and productivity initiatives.
This reflects about 200 basis points of margin expansion versus the prior year.
In addition, we are lifting full year adjusted EPS guidance to $3 71.
To $3 73.
Up from $3 60 at the midpoint.
The revised guidance breaks down by segment as follows low twenty's growth in Mcs up from approximately 20% previously high single digit growth in water infrastructure.
And mid single digit growth in applied water.
And we remain committed to achieving free cash flow conversion above 100% of net income.
We have also provided you with a number of full year assumptions in the appendix on slide 19.
And now drilling down in the fourth quarter.
We anticipate total revenue growth will be in the 35% to 36% range on a reported basis and 4% to 5% organically.
By segment, we expect revenue growth to be mid teens, and Mcs low single digits in water infrastructure and remained flat in applied water.
We expect fourth quarter EBITDA margin to be approximately 19, 5% driven by higher volumes continued price realization and productivity gains.
This yields fourth quarter EPS of <unk> 94 to 96.
Our operational discipline commercial momentum and backlog strength give us confidence for the remainder of the year and delivering our long term plan.
With that please turn to slide 15, I will turn the call back over to Patrick for closing comments.
Thanks Bill.
And thank you Matthew and Sandy.
This is a bittersweet moment for me I'm wrapping up my last earnings call with xylem.
Leading in helping build this enterprise has been absolutely the greatest privilege of my career.
I'm so proud of what the team has achieved in the past 10 years.
Of the work that we've done alongside our partner, serving our customers and communities.
And of the value we've created together.
That said, it's clear to me personally we are only just beginning to realize our full potential.
Xylem is strongly positioned.
Our momentum is accelerating and there has never been a greater need for solutions to the world's water challenges.
It's incredibly gratifying to know that me that my more than 22000 xylem colleagues and our partners are going to take the work of solving water forward under an exceptionally strong leadership team.
We are poised to have an even greater impact.
To create even more value in the many years to come.
On a final personal note to the many of you whose jobs include closely tracking and analyzing our business.
I've come to know you quite well as you followed xylem is growth.
I admire and respect the work that you do.
All the very best to each of you.
And simply go keep making a difference.
Now.
We're going to take your questions and so operator, let's open it up for Q&A.
The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
Any point. Your question is answered you may remove yourself from the queue by pressing star too again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. We will take our first question from Deane Dray with RBC capital markets.
Good morning Deane.
Good morning.
You'll have to indulge me I need to start with some important congratulation. So let me just rattle through them here so sandy.
Thank you for all your help.
And wish you all the best Matthew you and I have already connected twice in person since the announcement, but in my view, you've got the right skill set and leadership.
To lead xylem from here so congrats.
Thank you Bill.
Youre welcome.
And I don't want to put too much pressure on you, but we are expecting the same sort of elite CFO contributions that we saw for years that Jack So congrats and welcome to you.
I appreciate it.
Alright, so and Patrick.
No no tissues here, but you've had a fabulous 10 year run you're handing off the range truly in it from a position of strength.
And I just remember when you joined xylem. It was a company that thought of itself as a pump company I mean, thats, what they said and the entire portfolio has evolved to where I love how you phrased it youre solving water. So just you should feel really proud about.
How you develop the company in the portfolio and the leadership team. So congrats.
Thank you Dan that and that means a lot coming from you.
You've been here beginning.
Yes, Sir yes, Sir.
Alright, so, let's just talk about the quarter, if we could and and maybe start with E book, why and how the business.
Sure.
Matthew referenced some new wins, just how have the.
Revenue synergies started conversations.
Conversations with customers what it will be the first opportunities maybe to take evoke was business with existing copper.
Existing customers to Europe, so any color there would be helpful. Thanks.
Yeah. Thanks, Dan for the question, maybe I'll just start at a very high level and just talk about the guiding principles that Patrick really stated when we did the you did the deal.
Which I think were really important to our execution. The first was we said we have to deliver on a 23 plants and as you can see from Q3 really strong performance as most of you know that was the legacy <unk> business Q4, and this past fiscal calendar Q3, so great execution by the team and I couldnt be happier.
The second we need to make sure we deliver on the value capture of the cost and revenue synergies.
What I would call the softer side, which is equally as important when you bring two companies together is to make sure we get the right talent on the field or the pitch. If you will and make sure we retain top talent and we've done a really nice job there and then lastly, bringing the best of both cultures together so.
Obviously, the works not done, but we're off to a good start in those guiding principles have helped really get momentum in the business.
Just quickly on cost synergies, we're tracking to the $40 million exit rate that we talked about those.
Three buckets of corporate costs procurement and footprint, but more so on the revenue synergies what you're getting at.
Dean the momentum is strong we've just completed the <unk> integration into water infrastructure, which is really our ami.
Milestone for us.
We've appointed regional synergy leads in each one of the regions to drive the value capture.
The incentives are in place and the training is ongoing both for the sales team as well as the services organization.
The short term as you talk about really the short term, we're focused on cross selling our products into industrial and back into municipal I think the services, which I will touch on in a minute has been the biggest surprise so far midterm, we're going to leverage the xylem footprint.
In Europe to bring capital products.
Products to customers to the evoke are products that are in international and bringing those folks from the U S. International and then lastly long term, we're moving our services internationally, but I wanted to give you. An example of an early synergy when we have a power customer.
It's the oil and gas will actually its oil and gas customer.
We do the process water for them. It's a build on operate we do not do the wastewater and they had their wastewater system go down and it was crippling their operations. So within 48 hours, we were able to bring the legacy businesses together, both on the treatment side as well as the pumping and transport of wastewater.
In that facility and keep them up and running and also keep them away from having fines. We've had several examples like that where we can bring a full solution to the customer with one phone call and I think that's really important.
That's all really good to hear and if I could have a follow up on <unk> just yet.
Your update on the chip supply it looks like we continue to see gradual improvement there and then the comment about the orders in the third quarter and just kind of what the funnel looks like thanks.
Yeah, I'll start with orders and I'll come back to chip supply, although we were down 11% backlogs up 11, $2 3 billion in M. C. US book to Bill ratio greater than one <unk>.
The bid activity remains really strong.
And Mcs, especially metrology.
Really the reason for the decline in orders in the quarter was more of a timing of the backlog conversion to orders as you know a lot of the larger Ami deals they sit in backlog for a period of time anywhere from three to 12 months, while the utilities getting ready for the deployment and when we receive the Po is when we book it as an order so it's more of a timing issue.
And that can be a little bit lumpy, but in general we're really bullish on AMR.
Adoption and it's still fairly early innings on the chip supply. The original guide this year for the business was low teens now when we're in the low 20, so we've seen continual gradual chip improvement quarter over quarter.
I think this quarter it came in a little faster than we had thought and it can be lumpy, but really chip supply in Q3 was strong we see that continued momentum into Q4, especially with our product Redesigns and then obviously, we've got with the backlog we have a lot of potential in 'twenty four and Mcs.
Deane. This is Patrick just to punctuate, what Matthew had said and that segment again orders are only a function of when they are placed.
Key metric there is what's happening with backlog.
And again the backlog is very healthy the deal pipeline is very healthy and the win rate, especially in North America.
Is very impressive.
For Ami.
Great that all sounds good and congrats again to everyone.
Thank you Dan Thanks, Dan.
And we will take our next question from Mike Halloran with Baird. Your line is open.
Hey, good morning, everyone.
Hey, good morning.
Thanks, Patrick for everything over the years, it's been a long long run, but really appreciate everything sandy same not quite as long with best of luck moving forward and obviously doing math here I look forward to work on both years. So appreciate it everyone.
Kevin I don't think Ive had fourth for congratulations on a call before.
Yeah, Hey, Mike We don't we don't we don't do things Orthodox here, so, but we do them the right way through it's called succession planning. So thank you.
Alright, so following up on Dean's Mcs order question, maybe broaden it out a little bit.
As you think about end markets heading into 2020, certainly appreciate matthew's comments on the fourth quarter itself.
Where are the optimistic points, where the concern points and a lot of moving pieces here right. You have really strong backlog you have some regulatory tail winds that are starting to hit or at least it seems like it but you also had this uncertain macro backdrop and some of these emerging market regions, where theres a little less clarity. So maybe just talk about some of those moving pieces as you are thinking about next.
Year, and where you think there could be some demand sustainability or where you have a little bit more concern points.
No. It's a great question.
Mike we're committed to both the legacy businesses long range plans that were presented back in 'twenty, one to start right there and just get that out and really we have great momentum heading into next year with a platform. That's been built by the of local xylem combination.
If you look back over the past decade of Patrick's leadership, 50% of the company didn't exist six or seven short years ago.
And we're really operating from a position of strength in terms of the platform that has been built so that feels really good as a jump off point I think if you kind of think about the macro drivers are favorable drivers or secular trends continue to be strong scarcity of water aged infrastructure in developed markets.
Water quality is increasingly an issue.
As many of US have seen this year with flooding happening all over the world. So those trends will continue and they'll continue to buoy. The business government funding, we talk a lot about the funding it's going to be a dimmer switch is going to come over a period of time, but the next six to seven years, we will see continued trickled funding globally not only in the U S. I think the resiliency of.
Opex and utilities will continue to be a strong point.
I think the ISS durable business model with the combination coming together with 75% services and aftermarket gives us a lot more diversity of cash flows as we move into 'twenty four and then lastly, Mcs backlog, which we just talked about.
With the supply chain improvements I think are all positives I think if I had to mention a few watch items are more cyclical pieces of the portfolio with the end markets in applied water or definitely a watch item.
Theres pockets of industrial weakness, it's really niche <unk> when you think about Azure marine, but theyre very small pieces of our business, but in general industrials tended to hold up pretty well.
I think the last thing I'd mentioned is China, which I mentioned in the opening comments.
Industrial has remained pretty resilient in China for us.
It's been the utilities, but it's been more on just a push to the right.
More than anything in China, which we can talk a little bit more about that later, but.
That's kind of the insights how we give obviously in our February earnings call, we'll be able to give more color but.
That's what I see right now.
Great I appreciate that and then second question just on the <unk>.
On pricing and mix, so price cost in the quarter.
It sounds like the backlog for Mcs is better than the margin profile today. Thanks, a lot of sense and maybe just talk about some of those two dynamics as youre looking forward ability to continue to manage the price side of things against resilient inflation and how we should think about mix on a forward basis.
Yeah, just price cost in Q3.
Continue to be positive for xylem were up 70 bps, we expect.
Pricing to moderate in 2024, as we lap the previous increases.
I think 24 is going to fall more in line with historical trends, but as in terms of Mcs.
You know definitely price cost contributed to a little bit of that.
The incremental the Incrementals this quarter, but we feel really positive and a step up in Q4 and into 'twenty. Four we've taken some pricing actions that will start to really materialize into 'twenty four and in terms of the mix.
It'll continue to be a little bit lumpy with energy, but we're working that backlog down and we expect that to normalize as we get into 'twenty four.
Great I appreciate it thanks, everyone.
Thank you.
Yeah.
And we will take our next question from Scott Davis with Melius research.
Hey, good morning, everyone.
Good morning, Scott and Scott.
I'll, let dean.
Congratulations.
Take that take the lead for me in since he's the elder statesman.
I will defer to him, but I agree with everything you said.
Everybody. Thank you Scott Thank you.
No problem Matthew can you just on China can you can you guys help us understand kind of the <unk>.
Interplay between Opex and Capex.
I assume it's all Capex, that's decline and pushed to the right, but is there a certain opex impact as well.
Yes, I think it's.
Yes.
Arms of China, Yes.
I'd just say the underlying demand does remain fairly healthy.
Like I said industrial has been more of the more.
Resilient in utilities, but with regard to utilities, it's a little bit of a mixed bag.
It's really timing of funding not only for Capex, but also for for Opex as well and as we've seen in.
In the treatment piece of our business in China, it's been actually a little bit more resilient than transport transport tends to be a bit more opex centric.
So it's a little bit of a mixed bag Scott when it comes to the funding it's.
It's both Capex and Opex.
Hey, Scott.
I guess two weeks ago I met there.
Two weeks ago I was there for a week and I spent time with our leadership paying and the team and visited our locations in Nanjing Shanghai.
Shanghai <unk>.
Around met with customers met with the team and the whole purpose was to really get a sense for.
How things scale in China.
All I can say is based upon our portfolio. What we have there yes. There are some near term shifting to the right on when backlog gets converted on the utility side, but.
Underlying demand is still very strong there.
That market is very positive and.
As many of you've heard me say before as my father said every generation thinks there is a last this is my third time talking about the future of China.
In terms of demand for water and environment and things felt very very good in terms of.
Robust underlying demand.
That makes sense.
You guys I don't think I ever I'm not sure I have.
When asked this question I don't think you've talked about or maybe you have and I just didn't remember but.
How are you integrating the R&D efforts between evoke glut enzyme how are you kind of integrating in.
And eliminating duplication if there was any I would assume there would be some maybe like in things like P fast and things like that and then how are you prioritizing.
Projects with assuming there is some level of integration, but I'll just let you guys comment on that thanks.
Yes, that's a great question, we haven't talked a lot about the R&D synergies, but for sure. They're there let me first start out by saying all of the size, leading that team and I are actually here in D. C. Today with this leadership team.
So he comes over from the legacy of vocal business and yes. There is some overlap, especially when you think about the work that's being done in PFS. Both obviously the capture technologies there about the destruction and the.
In the <unk> sensing is really where the innovations required and obviously one plus one can equal three there we were both working on that to get separately, but now together, we think we can get there more efficiently and in a more expedited fashion, but in general yes, there there were different solutions.
<unk> solutions that we were working on separately that as we come together, we can get leverage from that combined spend in really that effort and I think Scott I would just add that.
Part of our innovation effort, because R&D is only one part of innovation.
Was through the partnerships that we have through academic venture.
Venture capital.
Startups coming to us and that's where I think the scale and platform of xylem and our relationships will benefit what the legacy <unk> business was looking.
Looking to capture around things like PFS, but other other other treatment solutions facing our customers.
Makes sense best of luck, everybody take care congrats on the quarter.
Thanks Scott.
And we'll take our next question from Nathan Jones with Stifel.
Good morning, everyone.
Hey, good morning Nate.
I'll add my congratulations to Patrick and Sandy and congratulations to Bill and Matthew.
Thank you. Thank you Jonathan maybe just.
In markets outside of China, I mean, you've talked about some of the issues that China's during the quarter.
Not particular to your business I don't think so.
Maybe you could talk about the emerging market performance outside of China.
Yes, I think ex ex China emerging markets has been pretty resilient for us.
Across all different end markets Nate.
I think with the exception would probably be a little bit of weakness in the middle East in our applied water business, but in general if you look at the other businesses they've been really resilient outside of China.
And it helped buoy the little bit of the tough.
Tough pushed to the right that we've seen in China.
That's across all different regions Africa.
Northern Asia Southeast Asia, India.
And Australia New Zealand.
Yes, thanks for the follow up I'll ask about <unk>.
Greek upon adoption.
Adoption you guys had.
Some pretty broad.
Presentations at Ace in it at West, Texas, maybe you can talk about customer reception to those kinds of things and customer uptake for those kinds of things.
Yeah, no. It's been it's been fabulous actually it's exceeded our expectations. We've engaged over 200 customers globally and it's the thing I'm excited about it's been really balanced across the globe, both the U S Europe and emerging markets.
We've got a tremendous pipeline bill we're working now on executing from orders to sales and deployment.
I did if you remember I highlighted I'm going to highlight a couple of examples one was in the U S. In the southeastern city, a large city, we're able to cut what I'll say land and expand we took the.
The platform the <unk> platform into the utility to aggregate all of their applications.
And then making it easy for them then we bolted on two of our own applications, which is recurring revenue and then from there we picked up a $40 million Ami deals. So it's kind of land and expand but it's all it's also pulling through our products and solutions.
On the heels of that we just also.
Picked up in Europe from a large European utility $20 million of treatment in metrology.
In Southern Europe same situation, where they have the platform implemented and we're able to leverage our relationship and pull through treatment and Ami solution. So.
I've talked a lot about the platform being the consolidator of utilities information, we believe that's true, but the pull through we're getting and the relationships. We're building allows us to bundle our offerings and that's really exciting and Nate.
Matthew <unk>.
He led the effort on cultivating the <unk> opportunity over a number of years.
And obviously he's been involved in cultivating the.
Opportunity over a few years.
What I would just offer up here is this has always been as we've said about helping our customers turn the lights on on their infrastructure to understand have a better feel for what's going on.
In infrastructure, so that when they spend the next dollar of Capex or Opex, where best to spend it.
And I think the.
A few opportunities that Matthew mentioned already where its the pull through.
That is as much the opportunity as the initial services sell to the customer.
Maybe I'll have to add a discussion on the revenue synergies from <unk> get to the revenue synergies from a borgwarner at the analyst day next year.
Yes, I think but I think it's a good it's a good comment because we do think the platform has scalability into the industrial and building a services business.
Obviously, we're going to stay focused on utilities to fit first so we.
Stay focused and deliver but it does have the ability to expand into industrial.
Great. Thanks for taking my questions.
Thank you. Thank you.
We'll take our next question from Joe Giordano with Cowen.
Hey, guys good morning.
Hey, Good morning, Joe Joe Hey.
Patrick Sandy.
Thank you for everything congratulations and with five simultaneous calls going on today for me being done with earnings call. It sounds wonderful so I'm very jealous for both of you.
Congratulations.
Thanks, Jeff.
Bill maybe I'll start with you like as you come over from IDEXX, and you kind of want to bring the best of what that firm had how do you kind of kickstart, an 80 20 kind of culture here.
It's involved in really doing that and driving it to be at the forefront.
Yes, no great question and the team had already started that initiative before I got here.
Ignite that it's a core tool that ultimately frees up organizational capacity right. Its focus is to eliminate complexity focus on the things that matter most.
Obviously, the core analytics from a product and customer perspective, but thinking about more broadly and then leveraging those tools to help enhance our strategy. So we're doing it very much like we did at IDEXX piloting it in a couple of locations getting folks familiar with the tools and the concepts and then rolling it out more thoroughly as we have any.
<unk> successes and wins. So it is something I think that's going to have a tremendous amount of value both on the top and bottom line.
Creating velocity to innovation for our customers and creating longer term returns for our shareholders.
And I think Joe. This is Patrick go ahead, Patrick Alright, Alright, Yeah, Thats, Alright, I would just add that I think the way I would encourage you.
Investors to look at this is we've spent the last decade building a platform.
That customers can access for their needs, which means growth and when you built that platform. Then you have something to actually apply at <unk> 22.
And so that's why right now is the perfect time.
For this combination to be coming together and bill coming in but its toolkit. The team had already been working on this that I think.
What he brings to the table is going to be.
Incredibly valuable to the enterprise in terms of value creation.
Is that concept.
Even more applicable to the <unk> platform I, just think of them as having been built from like almost so we have everything kind of ethos rate of being nationally available and having tons of different products. It just feels like given the breadth of skus there like maybe something like this whether it's keeping everything in discharging appropriately or.
Is it just feels like it might be more appropriate for that business is that fair.
On balance it would be similar to the opportunities we have at xylem.
It's not hugely differentiated there obviously there is a 2020 is applicable to all different business models.
The service aspect versus a product based organization, it's still a tool that will drive significant value.
Okay and then just last from me is the infrastructure order rates do you feel like Thats stable here. So it's a pretty it's a probably a number that caught most people by surprise being that strong. So is that is that in dollars kind of a good number.
Yes, the water the water infrastructure order rate, yes included.
A couple of a couple of big projects in custom pump, but in general yes, we're seeing good demand resilient demand.
In developed markets and ex China and emerging markets. So we feel pretty good and it's been pretty resilient.
Thanks, guys I'll pass it along.
Thanks, Joe Thanks, Joe.
And we'll take our next question from Andy Kaplowitz with Citigroup.
Morning, everyone.
Hey, good morning, Andy.
Patrick Sandy Congrats we'll Miss you man, we're looking forward to working with you.
Maybe I could start just doesn't look like it but are your customers outside of China changing their behavior at all based on higher interest rates or economic uncertainty your new public competitor a competitor in the water space you mentioned that some north American municipalities are holding off on plant upgrades and some investments, but it doesn't seem like that is what you are.
Utility or industrial companies are doing but maybe you can give us some more color on what youre seeing.
Yes.
Maybe just specific to utilities and wastewater I think as a proxy for the question. Just a reminder, that 50% of our revenue is outside the U S and 75% of that is opex, which can be a little bit different in terms of the mix.
We're seeing continued resiliency and orders in developed markets, leading the way with emerging markets kind of minus China like I said to Joe contributing nicely.
With regard to Capex I'd point to our treatment orders, which were up eight which were up 6% in Q3.
And we have a healthy funnel and pipeline up 8%.
We have been reaching out to customers kind of qualitatively across section of customers across the globe.
And specifically in the U S. They don't really see a major funding shift in spending.
Plus the addition of stimulus money, that's going to trickle in over time, Andy I think will also help kind of keep things stable, but in general we haven't we haven't really kind of seen anything.
That's alarming for us it would be a watch item Andy This is Patrick.
Again, one thing I would offer to investors as you think about I know, we have some new entrants into the space.
I think it's important that our investors understand that we've got the.
The broadest water platform.
That's out there and so I think drilling down into what percentage of our total revenue actually overlaps.
With some of our competitors that are out there is an important thing to pay attention to.
The treatment bidding pipeline.
As Matthew alluded to is the single most important indicator as the health of the utilities overtime.
And that continues to be up I think mid to high single digits. So.
That's a reflection of what the underlying health of the utilities are.
And again I would just offer that as something for you all to focus on.
Definitely definitely appreciate that color guys and then maybe I could ask you for a little more color on what Youre seeing in the applied water segment, and specifically across your channel and channel inventory. There can you give us color in to sell out versus sell in do you still see inventories in balance and do you see a period of slower orders for that segment, where they just.
Can you be a bit lumpy.
Yes, Andy within our applied water business, we don't have a tremendous amount of stocking again.
If you kind of look at resi commercial of the overall xylem business, it's only 10%.
But a lot of our orders Andy or configure to order engineered to order. So there for us for a specific job, yes, we have book and ship.
It's mainly in our resi business and a little bit commercially in a lot of that has kind of worked itself out.
If you look at our compares on the resi business, which makes up 3% of our business were up on a on a.
Year over year basis, and we've kind of hit the bottom and we're coming out of coming out of the downturn on resi, but again, it's a small part of our portfolio.
I appreciate the color guys congrats again.
Thanks, Andy Thank you.
This concludes the Q&A portion of today's call I would now like to turn the floor over to Patrick Decker for closing remarks.
Well. Thank you all I mean, it's been a great privilege to work with such an extraordinary set of colleagues and partners over the past nearly 10 years.
I couldnt be more proud of where we are today and I'm looking forward to seeing all that Matthew Bill and the team are going to do is they take xylem into its next chapter.
The work has never been more important as to what xylem is doing and this company has never been better positioned to make a difference.
As we're committed to doing with our customers and communities around the world.
Again, I want to thank you, everyone and all the very best to you and your families.
Okay.
Thank you. This concludes today's xylem third quarter 2023 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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