Q4 2023 Xylem Inc Earnings Call
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Operator: Welcome to Xylem's fourth quarter 2023 results conference call. All participants will be in listen-only mode.
Speaker Change: Welcome to the xylem fourth quarter 2023 results conference call.
Speaker Change: All participants will be in listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2.
Speaker Change: Should you need assistance. Please signal a conference specialist by pressing that Starkey followed by zero.
Speaker Change: After todays presentation, there will be an opportunity to ask questions too.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: To withdraw your question. Please press Star then two.
Operator: Please note, this event is being recorded. I would now like to turn the conference over to Andrea Vanderberg, Vice President of Investor Relations. Please go ahead.
Speaker Change: Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Andrea Anderberg, Vice President of Investor Relations. Please go ahead.
Andrea van der Berg: Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth quarter 2023 earnings call. With me today are Chief Executive Officer Matthew Pine and Chief Financial Officer Bill Grogan. They will provide their perspectives on Xylem's fourth quarter and full year 2023 results and discuss our outlook and guidance for 2024. Following our prepared remarks, we will address questions related to the information covered in 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 in the Investors section of our website. A replay of today's call will be available until midnight, February 13.
Andrea Anderberg: Thank you operator, good morning, everyone and welcome to the island's fourth quarter 2023 earnings call with me today are Chief Executive Officer, Matthew Pine and Chief Financial Officer, Doug program. They will provide their perspectives on <unk> fourth quarter and full year of 2023 results and discuss our outlook and guidance for 2024.
All in our prepared remarks, we will address questions related to the information covered on the call policy. Please keep to one question and a follow up and then return to take here.
Andrea Anderberg: As a reminder, this call and our 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 February 13th.
Andrea van der Berg: Additionally, the call will be available for playback via the investor section of our website under the heading Investor Events. Please turn to Slide 2. 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. Such statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and subsequent reports filed with us. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances. However, actual events or results could differ materially from those anticipated from those anticipated from those anticipated from those anticipated from those anticipated. Please turn to slide three.
Andrea Anderberg: Additionally, the call will be available for playback via the investors section of our website under the heading investor events.
Andrea Anderberg: Please turn to slide two.
Andrea Anderberg: 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.
Andrea Anderberg: These statements are subject to future risks and uncertainties such as those factors described in the islands. Most recent annual report on Form 10-K, and subsequent reports filed with SEC.
Andrea Anderberg: Please note that the company undertakes no obligation to update any forward looking statements publicly.
Reflect subsequent events or circumstances.
Andrea Anderberg: Actual events or results could differ materially from those anticipated.
Andrea Anderberg: Please turn to slide three.
Andrea Anderberg: Okay.
Matthew Francis Pine: We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For purposes of today's call, all references will be on an organic and 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, Matthew. Thanks, Andrea. Good morning, everyone.
Andrea Anderberg: We have 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. Our 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.
Andrea Anderberg: I'll turn the call over to our CEO Matthew Pie.
Matthew Latino: Thanks, Andrea and good morning, everyone and thanks for joining us it's a pleasure to share the xylem team's exceptional performance in the fourth quarter of a transformational year for the enterprise. The team delivered both Q4 and full year results exceeding expectations on revenue and earnings per share.
Matthew Francis Pine: And thanks for joining us. It's a pleasure to share the Xylem team's exceptional performance in the fourth quarter of a transformational year for the enterprise. The team delivered both Q4 and full year results exceeding expectations on revenue and earnings per share. Looking at the fourth quarter, strong demand drove organic revenue growth of 9%, with discipline execution delivering EBIT a margin expansion of 90 basis points. That drove double-digit order growth, and our backlog is now more than $5 billion. Our Q4 performance capped off a year in which the team over-delivered in every quarter.
Looking at the fourth quarter strong demand drove organic revenue growth of 9%.
Matthew Latino: With disciplined execution, delivering EBITDA margin expansion of 90 basis points.
Matthew Latino: That drove double digit orders growth in our backlog is now more than $5 billion.
Matthew Latino: Our Q4 performance capped off a year in which the team over delivered in every quarter.
Matthew Latino: Full year organic revenues were up 12% with EBITDA margin expansion of 190 basis points and adjusted earnings per share growth of 20%.
Matthew Francis Pine: Full-year organic revenues were up 12%, with EBITDA margin expansion of 190 basis points and adjusted earnings per share growth of 20%. The team even delivered VOCA run rate cost synergies in 2023 ahead of plan. Both the quarter and the full year give us very strong momentum going into 2024. Despite a dynamic environment and the excitement of our combination with Avoqua, the team stayed focused on serving our customers. Joining forces with Evoqua has put the sector's most advanced portfolio of capabilities in the hands of our customers and opened up new opportunities to address even more of their water challenges. On our last services call, we shared a bit about the synergy traction we're seeing between the legacy of VOCA Services business and Xylem's dewatering business.
Matthew Latino: The team even delivered a volcker run rate cost synergies in 2023 ahead of plan, both the quarter and the full year. It gives us very strong momentum entering 2024.
Matthew Latino: Despite a dynamic environment and the excitement of our combination with evoke but the team stayed focused on serving our customers joining forces with the vocal has put the sector's most advanced portfolio of capabilities in the hands of our customers and open up new opportunities to address even more of their water challenges.
Matthew Latino: In our last earnings call, we shared a bit about the synergy traction we're seeing between the legacy of OCA services business in xylem as dewatering business.
Matthew Francis Pine: And since then, we've seen the momentum continue to build as the team wins in the marketplace with our combined offering. On January 1st, we made it even easier for our customers to access the full breadth of our capabilities with the creation of the water, solutions, and services segment, effectively combining Xylem and Evoque with services offerings in a realigned segment structure. The move supports the continuing growth of our services business and expansion of recurring revenue and puts Xylem in an even stronger position to capture value by serving industrial water customers who are increasingly outsourcing water management as water stress is intensified. Looking forward, we are starting off strong in 2024 with momentum from our outperformance in 23 and continued healthy demand in our major end markets. We're keeping a close eye on demand dynamics in China and are taking a prudent view of end markets for applied water, which is our most cyclical segment.
Matthew Latino: And since then we've seen the momentum continued to build as the team wins in the marketplace with our combined offering.
Matthew Latino: On January 1st we made it even easier for our customers to access the full breadth of our capabilities with the creation of the water solutions and services segment.
Matthew Latino: Secondly, combining xylem and evoke with services offerings in our realigned segment structure.
Matthew Latino: The move supports the continuing growth of our services business and expansion of recurring revenues.
Matthew Latino: And it put xylem in an even stronger position to capture value by serving industrial water customers, who are increasingly outsourcing water management is water stress is intensifying.
Matthew Latino: Looking forward, we are starting to off to a strong in 'twenty 'twenty four with momentum from our outperformance in 'twenty three and continued healthy demand in our major end markets, though we're keeping a close eye on demand dynamics in China and are taking a prudent view of end markets for applied water, which is our most cyclical segment or <unk>.
William K. Grogan: Our backlog across the business is a source of continuing strength, especially at MNCS. We also feel very confident in our ability to drive continuing margin expansion by focusing our energy on the parts of the business delivering the greatest value. Overall, we're well positioned for profitable and sustainable growth. We expect 2024 organic revenues to be up 3 to 5% with solid EBITDA margin expansion. Resulting in earnings per share between $4.00 and $4.20. I'll now turn it over to Bill to walk through the quarter's results and our outlook for 2024 in more detail. Thanks, Matthew. Please turn to slide five.
Backlog across the business as a source of continuing strength, especially in M. C. S.
Matthew Latino: We also feel very confident in our ability to drive continuing margin expansion by focusing our energy on the parts of the business delivering the greatest value.
Matthew Latino: Overall, we're well positioned for profitable and sustainable growth.
Matthew Latino: We expect 'twenty 'twenty four organic revenues to be up 3% to 5% with solid EBITDA margin expansion.
<unk> and earnings per share between $4 and $4 20.
Matthew Latino: Now I'll turn it over to bill to walk through the quarter's results and our outlook for 'twenty 'twenty four and more detail.
Bill: Thanks, Matthew Please turn to slide five.
William K. Grogan: As Matthew mentioned, we are pleased with the strong finish to 2023. The team has stayed focused and consistently delivered throughout the year, exceeding our expectations on revenue and earnings per share for Q4 and the full year. We continue to see resilient demand and are supported by our $5.1 billion backlog, which grew 5% organically for the year. Organic orders grew 10% in the quarter, with book-to-bill approximately one for the quarter and greater than one for the full year.
Bill: As Matthew mentioned, we are pleased with the strong finish to 2023. The team has stayed focused and consistently were delivered throughout the year exceeding our expectations on revenue and earnings per share for Q4, and the full year. We continue to see resilient demand and are supported by our $5 $1 billion backlog, which grew 5%.
Bill: That organically for the year.
Bill: Organic orders grew 10% in the quarter with book to Bill of approximately one for the quarter and greater than one for the full year.
William K. Grogan: Total revenues grew 41%, while organic revenues rose 9%, exceeding our guidance of 4% to 5%. Outperformance was led by MNCS and water infrastructure. All regions grew, led by double-digit growth in the US.
Bill: Total revenues grew 41%, while organic revenues rose, 9% exceeding our guidance of 4% to 5% outperformance was led by Mcs and water infrastructure.
Bill: All regions grew led by double digit growth in the U S.
William K. Grogan: EBITDA margin was 19.6%, up 90 basis points from the prior year. With productivity savings, price, and higher volume, more than offsetting inflation. This reflects 33% incremental on the Legacy Xylem performance. We finished the year with an EBITDA margin of 18.9%, up nearly 200 basis points over the prior year. Our EPS in the quarter was $0.99, above the high end of our guide by $0.03. When excluding the impacts of Evoqua, EPS was $1.10, up 10% over the prior year.
EBITDA margin was 19, 6% up 90 basis points from the prior year with productivity savings price and higher volume more than offsetting inflation. This reflects 33% incrementals on the legacy xylem performance.
Bill: We finished the year with EBITDA margin of 18, 9% up nearly 200 basis points over prior year.
Bill: Our EPS in the quarter was 99 cents above the high end of our guide by three one.
Bill: When excluding the impacts of a whole club EPS was $1 10 up 10% over prior year.
Bill: Our financial position remains robust with over 1 billion in cash and available liquidity of approximately $2 billion.
William K. Grogan: Our financial position remains robust, with over $1 billion in cash and available liquidity of approximately $2 billion. We ended the year with an adjusted free cash flow conversion of 122%, exceeding our expectations and significantly improved versus last year. Please turn to slide 6.
Bill: We ended the year with adjusted free cash flow conversion of 122% exceeding our expectations and significantly improved versus last year.
Bill: Please turn to slide six.
William K. Grogan: Before I highlight each segment's fourth quarter performance, I want to touch on some changes you'll see in earnings materials going forward. In the spirit of 80-20, we have simplified our earnings materials to focus on what is most important for investors. To help with the transition this quarter, we have provided our historical presentation format in the appendix.
Speaker Change: Before I highlight each segments fourth quarter performance I want to touch on some changes you will see in our earnings materials going forward.
Speaker Change: In the spirit of 80 20, we have simplified our earnings materials to focus on what is most important for investors to assist with the transition. This quarter. We have provided our historical presentation format in the appendix.
William K. Grogan: And now, on to the segment performance. Measurement and control solutions saw robust orders growth of 14% with strength across the portfolio, led by metrology and assessment services. Backlog is $2.3 billion, and book-to-bill is above one, a reflection of the strong demand for our AMI solutions and other digital offers.
Speaker Change: And now on to the segment performance.
Speaker Change: Measurement and control solutions saw robust orders growth of 14% with strength across the portfolio.
Speaker Change: Led by metrology and assessment services.
Speaker Change: Backlog is $2 3 billion and book to Bill was above one reflection of the strong demand for our <unk> solutions and other digital offerings.
William K. Grogan: MCS revenue is up 21% driven by metrology backlog execution and strong demand. We finished the quarter with improved EBITDA margins of 17.3%, up 220 basis points versus the prior year and up 160 basis points sequentially on productivity, price, and higher volume. Water infrastructure also saw orders growth of 9% for the quarter, with strength across the portfolio, led by robust treatment demand globally. Revenue exceeded our expectations with total growth of 30% on organic growth of 9% driven by robust OPEX demand across all regions. EBITDA margin for the segment was down 90 basis points, driven by the impacts of the legacy of OCWA.
Speaker Change: Mcs revenue was up 21% driven by metrology backlog execution and strong demand.
Speaker Change: We finished the quarter with improved EBITDA margins of 17, 3% up 220 basis points versus the prior year and up 160 basis points sequentially on productivity price and higher volumes.
Speaker Change: Water infrastructure also saw orders growth of 9% for the quarter with.
Speaker Change: With strength across the portfolio led by robust treatment demand globally.
Speaker Change: Revenue exceeded our expectations with total growth of 30% organic growth of 9% driven by robust opex demand across all regions.
Speaker Change: EBITDA margin for the segment was down 90 basis points, driven by the impacts of legacy of Oklahoma.
William K. Grogan: When excluding the impact of Evoqua, EBITDA margin was up 50 basis points, primarily due to price, productivity, and volume more than offsetting inflation and an unfavorable mix. In applied water, although orders grew, book-to-bill was 0.9 times as we continue to work down our backlog. And we saw a softer demand environment in the US, our largest geography. Revenues were flat in line with our guide with a decline in developed markets offset slightly by growth in emerging markets. Segment EBITDA margin expanded 80 basis points with productivity and price more than offsetting inflation and volume decline. Integrated Solutions and Services. Orders grew 5% on a pro forma basis, and book to bill was one. Demand was driven by service. Proforma revenue growth of 10% exceeded our expectations, as implied in our reported guidance with healthy growth across the portfolio. The Adjusted EBITDA margin was strong at 21.1%, driven by price realization and volume.
Speaker Change: When excluding the impact of Oklahoma EBITA margin was up 50 basis points, primarily due to price productivity and volume more than offsetting inflation and unfavorable mix.
Speaker Change: In applied water, although orders grew book to Bill was 0.9 times as we continue to work down our backlog and.
Speaker Change: And we saw a softer demand environment in the U S. Our largest geography.
Revenues were flat in line with our guide with a decline in developed markets offset slightly.
Speaker Change: The offset slightly by growth in emerging markets.
Speaker Change: Segment, EBITDA margin expanded 80 basis points with productivity and price more than offsetting inflation and volume declines.
Speaker Change: Integrated solutions and services orders grew 5% on a pro forma basis and book to Bill was one demand was driven by services.
Speaker Change: Pro forma revenue growth of 10% exceeded our expectations as implied in our reported guidance with healthy growth across the portfolio.
Speaker Change: Adjusted EBITDA margin was strong at 21, 1% driven by price realization and volume.
William K. Grogan: Please turn to slide 7, I will cover our segment outward for the year. As Matthew mentioned, in December, we announced the creation of the water solutions and services segment. We are providing organic revenue guidance based on our previous reporting segment. Later this month, we will provide recast financial information aligned to the new segment. However, we expect the segment guidance outlook to largely be in line with the new segment structure and will update as needed in our Q1 earnings call. For MNCS, we expected growth of low teens.
Speaker Change: Please turn to slide seven I will cover our segment outlook for the year.
Speaker Change: As Matthew mentioned in December we announced the creation of water solutions and services segment.
We're providing organic revenue guidance based on our previous reporting segments. Later this month, we will provide recast financial information aligned to the new segments.
Speaker Change: However, we expect the segment guidance outlook to largely be in line with the new segment structure, and we'll update as needed in our Q1 earnings call.
Speaker Change: And M. A C. Yes, we expected growth of low teens.
William K. Grogan: Demand and order momentum for our AMI solutions remains strong, and we expect to see sequential revenue improvement throughout 2024, supported by a robust backlog. For water infrastructure, we expect growth of mid-single digits.
Speaker Change: Man in order momentum for our <unk> solutions remains strong we expect to see sequential revenue improvement throughout 2024 supported by a robust backlog.
Speaker Change: In water infrastructure, we expect growth of mid single digits, we expect Brazilian opex demand due to mission critical nature of our applications and a healthy capex demand.
William K. Grogan: We expect resilient OpEx demand due to the mission-critical nature of our applications and a healthy CapEx demand. We are continuing to closely monitor softness in China, where the majority of our business is in the utility and market. In applied water, we expect a modest decline of low single digits.
Speaker Change: We are continuing to closely monitor softness in China, where the majority of our business is in the utility end market.
Speaker Change: In applied water, we expect a modest decline of low single digits. We continue to see pockets of softness across our end markets, particularly in developed markets, which make up about 80% of our business.
William K. Grogan: We continue to see pockets of softness across our market, particularly in developed markets, which make up about 80% of our business. We also expect to see headwinds as we lap price increases and our backlog returns to more historic levels. ISS growth is expected to be mid single digits with growth across both capital and services.
Speaker Change: We also expect to see headwinds as we lap price increases at our backlog returns to more historic levels.
Speaker Change: I S. S growth is expected to be mid single digits with growth across both capital and services.
William K. Grogan: We continue to see strong activity in our funnel, particularly in high-growth verticals such as food and beverage, energy, and life sciences. This segment is supported by $1 billion in backlog and a durable service business. And as a reminder, the ISS Growth Outlook is on an organic basis. Now, let's turn to slide 8 for our 2024 and Q1 guidance. The growth outlook by segment translates to 2024 full revenue of $8.4 to $8.5 billion, resulting in total revenue growth of 14 to 15% and organic revenue growth of 3 to 5%. EBITDA margin is expected to be 19.4 to 19.9%.
Speaker Change: We continue to see strong activity in our funnel, particularly in high growth verticals, such as food and beverage energy and life Sciences.
Speaker Change: This segment is supported by $1 billion in backlog and a durable service business model.
Speaker Change: And as a reminder, the ISS growth outlook is that on an organic basis.
Speaker Change: Now, let's turn to slide eight for our 'twenty 'twenty, four and Q1 guidance.
Speaker Change: The growth outlook by segment translates to 'twenty 'twenty four full revenue of $8 four to $8 $5 billion.
Speaker Change: Resulting in total revenue growth of 14% to 15% organic revenue growth of 3% to 5%.
EBITDA margin is expected to be 19.4 to 19, 9%.
William K. Grogan: This represents 50 to 100 basis points of expansion versus the prior year. (Inaudible) This yields an EPS range of $4 to $4.20, up 8% at the midpoint over the prior year. We're expecting approximately $100 million of exit run rate cost synergies in 2024, which is embedded in our guide. Pre-cash flow conversion for the year is expected to be 115% of net income.
Speaker Change: This represents 50 to 100 basis points of expansion versus the prior year.
Speaker Change: And by higher volume productivity and price offsetting inflation.
Speaker Change: This yields an EPS range of $4 to $4 20 up 8% at the midpoint over prior year.
Speaker Change: We are expecting approximately $100 million of exit run rate cost synergies in 2024, which is embedded in our guide.
Speaker Change: Free cash flow conversion for the year is expected to be 115% of net income.
William K. Grogan: Drilling down on the first quarter, we anticipate total revenue growth will be in the 36 to 38% range on a reported basis and 4 to 6% organically. We expect first quarter EBITDA margin to be approximately 18%, up 170 basis points, driven by higher volumes, continued price realization, and productivity gains. This yields first quarter EPS of $0.80 to $0.85.
Speaker Change: Drilling down on the first quarter.
Speaker Change: We anticipate total revenue growth will be in the 36% to 38% range on a reported basis and 4% to 6% organically.
Speaker Change: We expect first quarter EBITDA margin to be approximately 18% up 170 basis points, driven by higher volumes continued price realization and productivity gains.
Speaker Change: This yield first quarter EPS of 80 to 85.
Speaker Change: We are entering the year with momentum and from a position of strength, our balanced outlook reflects our strong commercial position and the durability of our portfolio.
William K. Grogan: We are entering the year with momentum, and from a position of strength, our balanced outlook reflects our strong commercial position and the durability of our portfolio. [inaudible] Overall, our expectations for the year remain positive as we build on our strong momentum. With that, please turn to slide nine, and I'll turn the call back over to Matthew for closing comments.
Speaker Change: While we also continue to monitor broader market conditions, particularly in China, and applied water, which is our shortest cycle business.
Speaker Change: In the case of larger than expected volume declines, we're ready to take additional cost actions as needed to ensure a continued focus on margin expansion.
Speaker Change: Overall, our expectations for the year remained positive as we build on our strong momentum.
Speaker Change: With that please turn to slide nine and I'll turn the call back over to Matthew for closing comments.
Matthew Francis Pine: Thanks, Bill. It's been incredibly exciting to step up as CEO at a time of such great momentum and opportunity for Xylem. I began the year by spending time with customers and colleagues in India and the Middle East.
Matthew: Thanks, Bill it's been incredibly exciting to step up as CEO at the time of such great momentum and opportunity for xylem.
Matthew: I began the year by spending time with customers and colleagues in India and the Middle East.
Matthew Francis Pine: Bill and I started off in India, and the scale of ambition there to modernize infrastructure and tackle the big water challenges is frankly inspiring. We have an outstanding team there doing great work to serve customers from our localized R&D and manufacturing platform that gives us a real competitive advantage. And both India and the Middle East provide great reminders of the fundamental interconnectedness of economic value and social value creation in our business. These markets present expansive commercial opportunities, and in both markets, every project improves lives and increases the sustainability of communities. We took some time out with colleagues in India to visit a school in a rural area outside of Bangalore.
Matthew: And I started off in India in the scale of ambition, there to modernize infrastructure and tackle the big water challenges is frankly all inspiring.
Matthew: We have an outstanding team there doing great work to serve customers from our localized R&D and manufacturing platform that gives us a real competitive advantage.
Matthew: In both India, and the Middle East provide great reminders of the fundamental interconnectedness of economic value and social value creation in our business.
Matthew: These markets present expansive commercial opportunity into both markets every project improves lives and increase the sustainability of communities.
Matthew: We took some time out with colleagues in India to visit a school in a rural area outside of Bangalore.
Matthew Francis Pine: We got hands-on building a small-scale water treatment system that now provides clean drinking water to those students and their communities. I'll be honest, the experience of celebrating with those kids and their teachers as the clean water started to flow, well, it's just hard to describe. And you also know that the impact on educational outcomes, health, and quality of life is likely to be profound. That experience drove home for me not just the importance of what Xylem does, but it reinforced the focus we're bringing into 2024. Whether at the scale of a school or the scale of a megacity, we have to make it easier for customers and communities to solve their big water challenges. Reducing the Complexity of Water Solutions is our focus. Simplifying Water
Matthew: We got hands on building a small scale water treatment system now provides clean drinking water to those students and their community.
Matthew: I'll be honest the experience of celebrating with those kids in their teachers is the clean water started to flow well, it's just hard to describe.
Matthew: And you also know that the impact on educational outcomes health and quality of life is likely to be profound.
Matthew: That experience drove home for me not just the importance of what xylem does it reinforced our focus we're bringing into 'twenty 'twenty four.
Matthew: Whether at the scale of a school or the scale of a Mega city, we have to make it easier for customers and communities to solve their big water challenges, reducing the complexity of water solutions that is our focus simplifying water.
Matthew Francis Pine: We have assembled the most advanced and most comprehensive portfolio of products, solutions, and services in the sector. The value creation opportunity in front of us is to make all that capability far easier for customers to access, to empower them to solve their most critical water challenges and deliver great outcomes with far less complexity. We started the year with great pace and strong execution off the back of a great Q4 in 2023 across both the legacy Xylem and legacy VOCA businesses. And our integration is well on track to deliver on the full value creation opportunity of the combination.
Matthew: We have assembled the most advanced and most comprehensive portfolio of products solutions and services in this sector the.
Matthew: The value creation opportunity in front of us is to make all of that capability far easier for customers to access to empower them to solve their most critical water challenges.
Matthew: And deliver great outcomes with far less complexity.
Matthew: We started the year with great pace with strong execution off the back of a great Q4, and 2023 across both the legacy xylem and legacy of vocal businesses.
Matthew: And our integration is well on track to deliver on the full value creation opportunity of the combination.
Matthew: Our end markets are resilient and as long as the long term trends in water has continued to intensify our team is energized to take all of our capabilities to deliver even greater impact for our customers.
Operator: Our end markets are resilient, and as long as the long-term trends in water continue to intensify, our team is energized to use all of our capabilities to deliver an even greater impact for our customers. Our investment thesis remains robust, and we continue to execute on the strategy that has positioned us so strongly for further economic and social value creation. We look forward to sharing further insights into our priorities and strategic direction at our upcoming Investor Day on May 30th in Washington, D.C., when I hope many of you will join us. Now, operator, I'll turn the call back over to you for questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Matthew: Our investment thesis remains robust and we continue to execute on the strategy that has positioned us strongly for further economic and social value creation.
Matthew: We look forward to sharing further insights into our priorities and strategic direction at our upcoming Investor day on May 30th in Washington D. C. When I hope many of you will join US now operator ill turn the call back over to you for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Operator: [inaudible] To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Deane Dray with RBC Capital Markets. Please go ahead.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Deane Dray with RBC capital markets. Please go ahead.
Deane Michael Dray: Thank you. Good morning, everyone. Hey, Matthew, as we start the year, I'd love to hear what's top of mind for you in terms of your priorities. I know we're going to get a lot more specifics at Analyst Day, but I think everyone would love to hear more about what you think the path and the opportunity for margin improvement broadly, and just some early thoughts on optimizing the portfolio potential. Great. Thanks, Dean. You know, first, I want to just acknowledge the team's Q4 and full year performance during a really transformational year for Xylem. You know, we had the Evoqua combination.
Deane Dray: Thank you good morning, everyone.
Deane Dray: Hey, good morning Deane.
Deane Dray: Matthew as we start the year I'd love to hear what's top of mind for you on your priorities I know, we're going to get a lot more specifics at the analyst day, but I think everyone would love to hear more about what you're thinking the path and.
Deane Dray: And the opportunity for margin improvement broadly.
Deane Dray: And just some early thoughts on optimizing the portfolio potentially.
Matthew: Great. Thanks, Dean you know first I wanted to just to acknowledge the teams Q4 and full year performance during a really a transformational year for xylem.
Matthew: Had the evoke where a combination we announced that in January.
Matthew Francis Pine: We announced that in January, followed by the Adreka partnership. And then, obviously, we had a leadership change, all that while dealing with a lot of macro challenges out there around the globe. So the team's done an incredible job staying focused. You know, I'm really humbled and excited to lead Xylem into the next chapter.
Speaker Change: Followed by the drinker.
Speaker Change: <unk> and then obviously, we had a leadership change all of that while dealing with a lot of macro challenges out there around the globe. So the team has done an incredible job staying focused you know I'm really humbled and excited to lead xylem into the next chapter we built as I've said before an incredible platform over the past decade, if you look back six or seven years ago half the company did.
Matthew Francis Pine: We built, as I've said before, an incredible platform over the past decade. You know, if you look back, six or seven years ago, half the company did not even exist. So, a lot of really good momentum there. And, you know, from my perspective, we're in a very unique position with our platform leadership on this 10-year journey to have visibility across the water value chain. And this really enables us to provide a holistic kind of optimized solutions to our customers. And, you know, moving forward, excuse me, moving forward, we're going to continue to build on that platform. You know, as CEO last year, I did lead the strategic planning process at Xylem.
Speaker Change: Not even exist.
Speaker Change: So a lot of really good momentum there.
Speaker Change: And you know from my perspective, we're in a very unique position with our platform leadership of this 10 year journey to have visibility across the water value chain and this really enables us to provide holistic kind of optimized solutions to our customers.
Speaker Change: And you know moving forward.
Speaker Change: Excuse me moving forward you know, we're going to continue to build on that platform.
Speaker Change:
Speaker Change: As C E L O last year I did lead the strategic planning process at xylem. So we have you know I'd say really strong strategic continuity as we transition this year.
Matthew Francis Pine: So we have, you know, I'd say really strong strategic continuity as we transition this year. And I've talked about three strategic execution priorities that we're focused on. Number one, we have to deliver Avoqua value capture. That's first and foremost.
Speaker Change: And I've talked about three strategic execution priorities that we're focused on number one we have to deliver the evoke lower value capture that's first and foremost that's our the transformational deal that we did last year and number two is and you hit on it is we got to get after margin expansion and acceleration and we're going to do that through productivity and continuing to do.
Matthew Francis Pine: That's the transformational deal that we did last year. Number two, and you hit on it, is we've got to get after margin expansion and acceleration, and we're going to do that through productivity and continuing to drive operational excellence through the business. And then lastly, scaling our services business enabled by digital, which we'll probably talk about later in the call about the WSS segment for 2024 and its ability to help us do that. You know, one thing I'd mentioned that we don't talk about a lot, it's kind of the soft side, and that's culture.
Speaker Change: <unk> operational excellence through the business.
Speaker Change: And then lastly, scaling our services business at aim, but enabled by digital which we'll talk probably later in the call about the Ws that segment for 2024 and its ability to help us do that.
Speaker Change: Yeah, One thing I had mentioned that we don't talk a lot. It's just the kind of the soft side and that is on culture. You know as we bring two large companies together culture is really important and we've put a lot of focus in that area, we call. It high impact culture, and theres behaviors to drive alignment around our culture in those behaviors are first of all first of all that have.
Matthew Francis Pine: You know, as we bring two large companies together, culture is really important, and we put a lot of focus on that area. We call it high impact culture.
Matthew Francis Pine: And there are behaviors to drive alignment around our culture. And those behaviors are, first of all, to have our people be inspired to innovate. We don't want people to feel a fear of failure; we want them to innovate.
Speaker Change: Our people will be inspired to innovate we don't want people to feel a fear of failure, we want them to innovate and that's going to drive. The next you know cash flows and topline growth in the company the.
Matthew Francis Pine: And that's going to drive the next, you know, cash flows and top line growth in the company. The second thing is we want them to be empowered to lead and Empowered in the Business. And then thirdly, and most importantly, you know, we want them to be accountable for delivery. And so those are things we're really pushing the organization on to get alignment around that'll, I think, help us going forward. Maybe the last comment I would make is, you know, we have a call to action in the company that we've been working on over the past few months, and that is, we want to simplify water.
Speaker Change: The second is we want them to be empowered to lead.
Speaker Change: And empowered in the business and then thirdly, and most importantly, we want them to be accountable to deliver.
Speaker Change: And so those are things, we're really pushing the organization on to get alignment around that will I think help us going forward and maybe the last comment I would make is you know we have a call to action in the company that we've been working on over the past few months and that's we want to simplify a water and what that means is really bridging our aspiration, which is let saltwater which everybody knows are.
Matthew Francis Pine: And what that means is really bridging our aspiration, which is "let's solve water," which everybody knows our tagline, to our strategic execution priorities, which is really what we're going to focus on. And so, you know, that's really the rallying cry in the organization, and that's where we're going to be focused in 2024. Appreciate all that color.
Speaker Change: Tagline to our strategic execution priorities, which is really the what we're going to focus on so you know that's really the rallying cry in the organization and that's where we're gonna be focused in 2024.
Speaker Change: I appreciate all that color and just as a follow up for Bill would love to get an update on the rollout of 80 20. Besides you have to check the box a successful recast of the slides, which I really like and then could you also lead in the update on the revenue synergy plans on E.
Deane Michael Dray: And just as a follow-up for Bill, I would love to get an update on the rollout of 8020 besides the checkbox a successful recast of the slides, which I really like. And then could you also lead in on the update on the revenue synergy plans for Evoqua specifically; I know there's a plan to roll out existing North America customers who have asked to have similar facilities outsourcing in Europe. So an update: Maybe I'll start with the first part of the question and, you know, first off, 80-20 is a multi-year journey as it gets woven into the fabric of the culture. You know, Matthew just highlighted that we are on a cultural evolution to incorporate some new tools and behaviors into the organization. And you have to remember 80-20 is kind of about systematic complexity reduction, you know, and that takes time.
Bill: Bulk water, specifically I know, there's a plan to roll out existing North America customers, who have asked to have similar facilities outsourcing in Europe. So an update there. Please.
Bill: Sure maybe I'll start with the first part of the question and you know first off 80 20 is a multi year journey you know as it gets weaved into the fabric of the culture. You know Matt you just highlighted we are on a cultural evolution incorporate some new tools and behaviors into the organization and you have to remember 80, 20 is kind of about system.
Bill: Matic complexity reduction you know and that takes time, it's not just a quick math exercise and you're done.
William K. Grogan: You know, it's not just a quick math exercise, and you're done. It's really about focused resource allocation methodology, aligning the teams around the things that matter most in the business. Obviously, there's a tremendous margin opportunity that comes with the tool set. But longer term, you know, it's really a tool to drive better organic growth performance by over-serving your best customers and innovating around your best ideas. You know, we kicked off two pilots late in Q4 within Applied Water North America and North American Metrology within MNCS.
Bill: Really about focus resource allocation methodology aligning the teams around the things that matter most in the business. Obviously, there is a tremendous margin opportunity that comes with the tool set.
Bill: But longer term, it's really a tool to drive better organic growth performance by over serving your best customers and innovating around your best ideas. We've kicked off two pilots late in Q4 within our applied water in North America, and North American metrology within Mcs.
William K. Grogan: You know, it takes some time to do the analytics, and I look to see some benefits starting to evolve within six to 12 months. Obviously, as we get to Investor Day, we'll be able to put some more specific numbers around that. But I really think it's going to be a transformational tool for the organization as we roll it out and a big part of our longer-term margin improvement story. Yeah, maybe a little bit of color on revenue synergies, Dean. You know, I'm proud of the team in Q4; we completed the APT integration into water infrastructure, which was a big deal. We've appointed regional synergy leads for revenue capture around the globe, and incentives are in place to drive that execution.
Bill: It takes some time to do the analytics and I look to see some benefits starting to evolve you know within six to 12 months, obviously as we get to Investor day, we'll be able to put on some more specific numbers around that but I really think it's going to be a transformational tool for the organization organization as we roll it out and be a big part of our longer term margin improvement story.
Bill: Yeah, maybe a little bit of color on the revenue synergies Dean.
Dean: That was proud of the team in Q4, we completed the a P T integration to water infrastructure, which was a big deal.
Dean: We've appointed regional synergy leads for the revenue capture around the globe and incentives are in place to drive that execution and one thing we've been really focused on is training our sales teams as well as our service teams.
Matthew Francis Pine: And one thing you know we've been really focused on is training our sales teams as well as our service teams. And as you know, in December, we announced the creation of the WSF segment for 2024. And there were a few comments there.
And as you know in December we announced the creation of the Ws that segment for 2024.
Dean: And a few comments there number one we feel it's going to accelerate our synergies both on the cost side as well as the revenue side, which is where we're focused the most.
Matthew Francis Pine: Number one, we feel it's going to accelerate our synergies both on the cost side as well as the revenue side, which is where we're focused the most. One thing that maybe is not as intuitive, I do think it's going to help us with technician utilization so we can leverage our technicians across the broader portfolio and also provide better career pathing for them long term, as well as leverage technology. And then the big thing it does for us, it really helps us leverage and enable the international expansion of WSS going forward in 24, like I said, internationally. And then, the most important thing, it makes it easier for our customers because, at the end of the day, it's about customer focus.
Dean: One thing that maybe is not as intuitive, but I do think it's going to help us with technician utilization. So we can leverage our technicians across the broader portfolio and also provide a better career path for them long term as well as leveraging technology and then the big thing it does for US it really helps us leverage and enable the.
Dean: International expansion of WSI us going forward in 'twenty four like I said internationally and then the most important thing is it makes it easier for our customers because at the end of the day, it's about customer focus.
Michael Patrick Halloran: And our customers, instead of picking up the phone to make four phone calls, they can make one to Xylem to solve their biggest problem. The next question is from Mike Halloran with Baird. Please go ahead.
Dean: And our customers instead of picking up the phone to pick four make for phone calls I can make one to xylem to solve their biggest problems.
Dean: Okay.
Dean: The next question is from Mike Halloran with Baird. Please go ahead.
Matthew Francis Pine: Good morning, everyone. Morning, Michael. A couple of questions here. First, you commented on confidence in the end markets and the sustainability of existing trends. Maybe talk a little bit about the utility and industrial markets. What the customers are saying at this point, you know, willingness to put capital forward for CAPEX-related projects. Any signs of softness, acceleration, you know, how are you thinking about things on that? Yeah, I could start us out.
Mike P. Halloran: Hey, good morning, everyone.
Mike P. Halloran: Good morning, Michael.
Mike P. Halloran: So a couple of questions here for you.
Mike P. Halloran: You commented on confidence and markets.
Mike P. Halloran: The inability of existing trends, maybe talk a little bit about see utility in industrial markets. What the customers are saying at this point no willingness to put capital towards or Capex related projects.
Mike P. Halloran: Any signs of softness acceleration.
Mike P. Halloran: How are you thinking about things on that side.
Speaker Change: Yeah, I could start us out I mean from us on the Capex front. We've seen continued momentum there you know that for US. The proxy is our treatment business orders were very strong both in Q4 and the full year up double digits and so that's you know that gives us a lot of confidence in that number is not only just in the U S. That's a global number. So every region is performing very well.
Matthew Francis Pine: I mean, on the CapEx front, we've seen continued momentum there, you know, that for us, the proxy is our treatment business. Orders were very strong, both in Q4 and the full year at double digits. And so that gives us a lot of confidence. And that number is not only just in the US; that's a global number.
Speaker Change: Well in treatment so from a capex perspective, we haven't seen any pullback or any concern there and obviously a big part of our focus in our portfolio and utilities is focused on on the Opex side and that's about 75% of the revenue and that remains pretty strong and it's also you know we've talked about buoyed, especially the long term it's not.
Matthew Francis Pine: So every region is performing very well in treatment. So from a CapEx perspective, we haven't seen any pullback or any concern there. And obviously, a big part of our focus in our portfolio in utilities is focused on the OpEx side, and that's about 75% of the revenue, and that remains pretty strong. And it's also, you know, we've talked about buoyed by regulation, especially in the long term. It's not going to be this year or even in the next year, but over the next five to seven years, it's buoyed by regulation globally. Whether that's, you know, in the US with the infrastructure bill, which includes PFAS funding, or if you get into Europe with the Recovery and Resilience Act and then the AMP cycle in the UK, that gives us a lot of confidence that we'll continue to see those markets do well. You know, I'd say industrially, it's a little bit of a mixed bag in the new segment WSS, which is a legacy ISS business that includes assessment services and dewatering now.
Speaker Change: Gonna be this year or even into next year, but over the next five to seven years, it's buoyed by regulation globally.
Speaker Change: Whether that's you know in the U S with infrastructure Bill, which includes P fast funding or if you get into Europe with the recovery and Resilience Act and then the amp cycle in the U K that gives us a lot of confidence that we'll continue to see those markets do well.
Speaker Change: Industrially, it's a little bit of a mixed bag on the new segment Ws S, which is a legacy.
Speaker Change: I S S business, which contains assessment services and dewatering now.
Speaker Change: We're seeing strong momentum there, especially in you know power.
Speaker Change: Power a life Sciences microelectronics, we're seeing a lot of bid activity there and we feel good about that we've seen a little bit of lumpiness in the applied water end markets, especially.
Matthew Francis Pine: You know, we're seeing strong momentum there, especially in power, life sciences, and microelectronics. We're seeing a lot of bid activity there, and we feel good about that. We've seen a little bit of lumpiness in the applied water end markets, especially RESI. Some of that is just due to, you know, coming out of the pandemic, when people were, you know, investing their discretionary income and upgrading their houses. And also weather's played some of a role in that, because a lot of our RESI products are applied in agricultural applications. And so we've seen some lumpiness there in the U.S. and a little bit in Western Europe. So that's a little bit of, you know, the view of the landscape.
Speaker Change: Especially <unk> some of that is just due to you know coming out of the pandemic where people are you know.
Speaker Change: Investing their discretionary income and upgrading their houses.
Speaker Change: And then also weathers play to some of our role in that has a lot of resi products are applied into AG applications and so we've seen some lumpiness there in the U S and a little bit in in Western Europe. So that's a that's a little bit of you know the view of the landscape.
Speaker Change: I appreciate that second question just on the pricing side of things I guess twofold. One how are you thinking about pricing for 24 and as you think about the multiyear journey here as you're rolling out 80, 20, and all the other two cancer you're going to be implementing.
Speaker Change: What is the opportunity for pricing as you think about the broader portfolio.
Speaker Change: Yeah, Mike maybe I'll I'll take that one so price expectations for next year are going to ramp down versus the capture that we experienced in 2023 will be a little over a point.
Matthew Francis Pine: Appreciate that second question just on the pricing side of things. I guess there are two parts to that: one, how are you thinking about pricing for 24? And as you think about the multi-year journey here, as you're rolling out 8020 and all the other toolkits you're going to be implementing, what is the opportunity for pricing as you think about the broader portfolio? Yeah, Mike, maybe I'll take that one.
Mike P. Halloran: Yeah, that's still significantly higher than pre pandemic pricing, but it is an opportunity as we look forward as we calibrate and honing the skills to continue to capture the value for our products across the portfolio obviously that.
Mike P. Halloran: One point plus varies across the different segments, Yeah O S M and C S and WSI going forward, probably stronger price capture opportunities and then 80 20, I think it'll be up as we rollout opportunities within AWS as they've done some initial the analytics and we look for just better pricing methodology and capture on some of the longer tail customers that we.
William K. Grogan: So price expectations for next year are going to ramp down versus the capture that we experienced in 2023 by a little over a point. You know, that's still significantly higher than pre-pandemic pricing, you know, but it is an opportunity as we look forward, as we calibrate and hone in on the skills to continue to capture the value for our products across the portfolio. Obviously, that one point plus varies across the different segments, you know, with MNCS and WSS going forward probably having stronger price capture opportunities. And then 8020, I think will be up as we roll out opportunities within AWS, as they've done some additional analytics, and we look for just better pricing methodology and capture on some of the longer tail customers that we have.
Half obviously, we're leveraging price is one of our components to offset inflation you know the team does a really good job driving operational productivity as a second lever to offset inflation. So yeah, we're going to manage price and material costs and stay positive yeah, obviously that'll compress a little bit next year as pricing goes down but also our expectation.
Mike P. Halloran: Relative to inflation will be price material cost positive and then look for productivity to really enhance our margins as we move forward.
Mike P. Halloran: The next question is from Scott Davis with Melius Research. Please go ahead.
Scott Reed Davis: Hey, good morning, everybody.
Scott Reed Davis: Hey, good morning, Scott.
Scott Reed Davis: I wanted to.
Scott Reed Davis: You've made some comments in incrementally on China, It seemed a little bit more cautious which is not a surprise just given what we've heard from others, but.
William K. Grogan: Obviously, we're leveraging price as one of our components to offset inflation. You know, the team does a really good job driving operational productivity as a second lever to offset inflation. So, you know, we're going to manage price and material costs and stay positive. Obviously, that'll compress a little bit next year as pricing goes down, but also, our expectations relative to inflation will be priced material cost positive and then look for productivity to really enhance our margins as we move forward. The next question is from Scott Davis with Milius Research. Please go ahead. Good morning. Hey, good morning.
Scott Reed Davis: It looks like your business there has held up okay at least versus some peers out there, but what we.
Maybe a little bit more granularity there would be helpful. Thanks.
Yeah. Thanks for the question Scott you know China for US now with the new combination of the company is about mid single digit.
Speaker Change: <unk> of our revenue.
Speaker Change: With over 50% of that being water infrastructure from an exposure standpoint, largely tied to public utilities.
We've seen pretty decent orders there Q4 orders were up 11% full year up 10.
Speaker Change: You know on the revenue side, we were up on a full year about 2% low single digits, but if you look back on a two year stack, we're down mid single digits in China. So the backlog is building, but we haven't seen that convert to revenue yet.
Scott Reed Davis: I wanted to, you know, you made some comments on China that seemed a little bit more cautious, which is not a surprise just given what we've heard from others. It looks like your business there has held up okay, at least versus some peers out there, but what, maybe a little bit more granularity. Yeah, thanks for the question, Scott. China for us now with the new combination of the company is about mid single digits in terms of our revenue, with, you know, over 50% of that being water infrastructure from an exposure standpoint, largely tied to public utilities. You know, we've seen some pretty decent orders there.
Speaker Change: You know things continue to slide to the right in terms of funding I think if you read the news you continuing to see the government's intervention in the economy, there and thats, taking some of the funds away from investing in some of the infrastructure.
Speaker Change: We believe that's more of a short term issue.
Speaker Change: Across the utilities exposure, we continue to see you know again, a healthy pipeline and we will continue to monitor monitor that funding.
Matthew Francis Pine: Q4 orders were up 11 percent, full year up 10. You know, on the revenue side, we were up for a full year about 2 percent, low single digits. But if you look back on a two-year stack, we're down mid-single digits in China.
Speaker Change: I would say on the industrial side, it's a little bit of a similar demand environment and that's held up a little bit more resilient to be honest over utilities.
Speaker Change: And the last thing I would say you know with China overall, we expect China to be roughly flat.
Matthew Francis Pine: So the backlog is building, but we haven't seen that convert to revenue yet. You know, things continue to slide to the right in terms of funding. I think if you, you know, read the news, you continue to see the government's intervention in the economy there, and that's taking some of the funds away from investing in some of the infrastructure.
Speaker Change: In 2024 for the business.
Speaker Change: Okay, that's super helpful.
Speaker Change: Are your balance sheets in fantastic shape.
Speaker Change: Given the.
Speaker Change: Structurally VAALCO deal just.
Speaker Change: Leads me you know it's a natural question would be are there should we expect kind of both some bolt on acquisitions or anything kind of in 'twenty for that.
Matthew Francis Pine: But, you know, we believe that's more of a short-term issue. You know, across the utilities exposure, we continue to see, you know, again, a healthy pipeline, and we'll continue to monitor that funding. I would say on the industrial side, it's a little bit of a similar demand environment, and that's held up a little bit more resiliently, to be honest, over utilities. And the last thing I would say, you know, with China, overall, we expect China to be roughly flat in 2024 for business. Okay, that's super helpful.
Speaker Change: Perhaps you could talk about your M&A backlog in and just as much as talk about the pipeline, perhaps talk about your interest in doing deals.
That would be helpful. Yeah, I know, it's no thinks it's a good question. We closed out 2023 very strong following the close of our largest.
Speaker Change: Transformational deal in our history and so one of the things we're laser focused on is making sure that we integrate the vocal well and we get the value capture in the near term to.
Speaker Change: To your point, we do have a strong M&A pipeline.
Speaker Change: And the structure of the Wilco deal allows us flexibility with a strong balance sheet.
Scott Reed Davis: Are your balance sheets in fantastic shape? Unknown Speaker, Unknown Speaker, leads me, you know, the natural question would be, are there, should we expect kind of bolt-on acquisitions or anything kind of in 24 that? Perhaps you could talk about your M&A backlog. Just as much as talk about the pipeline, perhaps talk about your interest. Unknown Speaker Yeah, I know. No, thanks.
The short term focus Scott is going to be you know to focus on small to medium bolt ons evoke look we can fairly ring fence within the business, but there's other parts of the portfolio, where we do want to continue to be inquisitive.
Speaker Change: With again with small to medium bolt ons and we will continue our disciplined approach and we're evaluating our longer term capital allocation framework and we'll share more about that at Investor day in May.
Matthew Francis Pine: It's a good question. You know, we closed out 2023 very strong following the close of our largest, you know, transformational deal in our history. And so one of the things we're laser focused on is making sure that we integrate the voice well, and we get value capture in the near term. You know, to your point, we do have a strong M&A pipeline, and the structure of the Evoqua deal allows us flexibility with a strong balance sheet. The short-term focus, Scott, is going to be, you know, to focus on small to medium bolt-ons.
Speaker Change: The next question is from Andy Kaplowitz with Citigroup. Please go ahead.
Andrew Alec Kaplowitz: Hey, good morning, everyone.
Andrew Alec Kaplowitz: Good morning, Andy.
Andrew Alec Kaplowitz: Men are bill when you look at the 50 to 100 basis points of margin expansion from 24 could you give us a little more color on how that margin improvement improvement translates by segment and then you mentioned 80 20 pilots with a focus on Mcs you did a nice improvement margin improvement and MTS in Q4. So how do you think about the margin potential in that particular business over.
Scott Reed Davis: Evoqua, we can fairly ring-fence within the business, but there's other parts of the portfolio where we do want to continue to be inquisitive with, again, small to medium bolt-ons. And, you know, we'll continue our disciplined approach, and we're evaluating our longer-term capital allocation framework, and we'll share more about that at investor day in May. The next question is from Andy Kaplowitz with Citigroup. Please go ahead. Good morning, and you're watching the Real Housewives of New York.
Andrew Alec Kaplowitz: The longer term.
Andrew Alec Kaplowitz: Yeah, I mean relative to you know the largest impact in margin expansion for next year I think Mcs leads the pack.
Lee.
Andrew Alec Kaplowitz: We've started our journey on margin improvement and recovery as they've gone through chip supply shortages, which I think for the most part is resolved yeah, they've added capacity within the production facility to meet kind of the record backlog levels that they've had they've gone out with incremental pricing to improve the quality of the margin within the backlog and I think the value of their.
Andrew Alec Kaplowitz: And I'm Scott Davis. I'm with Andrew. Thanks for joining us, Scott. Thanks for having me. Thanks for having me.
Andrew Alec Kaplowitz: <unk> and solutions are able to continue to drive incremental price as we go into next year or so.
Andrew Alec Kaplowitz: I think their ability to exit the year at near historic record levels of EBITDA margin is the target you know as they continue to leverage our volume and drive some pretty significant productivity as they look at their labor and material footprint around their products. So we're excited about the progress that they've made.
Andrew Alec Kaplowitz: I'm with Andrea Berg. I'm with Susan Kennedy. It's a pleasure to be here. So, good morning, guys. I'm with Susan Kennedy. Thank you for joining us. Good morning.
Andrew Alec Kaplowitz: Hi, everyone. I'm with Andrea Berg, and I'm with Susan Kennedy. And I'm with Susan Kennedy.
Andrew Alec Kaplowitz: And look for them to continue to sequentially improve as we progress through the year in 2024.
Andrew Alec Kaplowitz: Bye-bye. Thank you. Bye. Bye-bye. Bye. Bye-bye. Bye. Bye. Bye.
Speaker Change: It's very helpful and Matt maybe just a bigger picture question for you I know you want to guide conservatively for this year.
William K. Grogan: Matter Bill, when you look at the 50 to 100 base points of margin expansion for 24, could you give us a little more color on how that margin improvement translates by segment? And then you mentioned the 80-20 pilots with a focus on MCS. You did have a nice improvement in margin improvement in MCS and Q4. So how do you think about the margin potential in that particular business over the longer term? Yeah, I mean, relative to, you know, the largest impact of margin expansion for next year, I think MNCS leads the pack. Obviously, we've started our journey of margin improvement and recovery as they've gone through chip supply shortages, which I think, for the most part, have been resolved. You know, they've added capacity within the production facility to meet kind of the record backlog levels that they've had; they've gone out with incremental pricing to improve the quality of the margin within the backlog.
Put in applied in China, but you got such a strong growth business in MTS and you're still only got 3% to 5%.
Matt: Xylem is had a longer term algorithm in four to six so as you take over the CEO range do you worry at all that that's higher given all of the self help focus focus and Digitization. All of these kinds of things that that's still the right longer term growth rates.
Speaker Change: Yeah, I think you know again a lot of a lot of that has not changed from what we said in the past. It's just I think being balanced in our approach and with a watchful eye to China.
Speaker Change: We've got that flat year over year, but you know there could be some potential headwinds there and also with applied water, which is some of that cyclicality and timing are.
Speaker Change: You know as we think about that Andy. So you know from a long term framework. None of that's changed its just really more thinking about it in the context of 2024 and are thinking about going out with a balanced approach.
William K. Grogan: And I think the value of their products and solutions is that they're able to continue to drive incremental price as we go into next year. So, you know, I think their ability to exit the year at near historic record levels of EBITDA margin is the target, you know, as they continue to leverage their volume and drive some pretty significant productivity as they look at their labor and material footprint around their product. So we're excited about the progress that they've made and look for them to continue to sequentially improve as we progress through the year in 2024. Very helpful And Matt, maybe just a bigger picture question for you. I know you want a guy who is conservative for this year.
We do have a lot of healthy demand across our largest end markets. You know when you look at the year from a seasonality standpoint, its normalize there's no change in terms of the seasonality of our business and how we ramp from Q1 through the balance of the year.
Speaker Change: You know I think the thing I'd leave you with two is our margin guide reflects low forty's pro forma incrementals and.
Speaker Change: And so we feel really really strong about the margin that we're delivering as well on the growth.
Speaker Change: The next question is from Nathan Jones with Stifel. Please go ahead.
Speaker Change: The next question is from Nathan Jones with Stifel. Please go ahead.
Nathan Hardie Jones: Mr. Johnson your line open.
Nathan Hardie Jones: Good morning, everyone.
Nathan Hardie Jones: Hey, good morning Nathan.
Matthew Francis Pine: Unknown Attendee, Susan Kennedy, Matthew Diserio, Xylem Inc. Yeah, I think, you know, again, a lot of that is not changed from what we said in the past. It's just, I think, being balanced in our approach and with a watchful eye on China, you know, we've got that flat year over year, but there could be some potential headwinds there. And also with applied water, which is, you know, it's some of that cyclicality, you know, and timing.
Nathan Hardie Jones: And then a follow up on the margin question I think the bulk of the cost synergies get you something like 80 basis points and you're already seeing going to get some pretty good margin expansion out of the MTS operating leverage.
Speaker Change: And I do the math gets me well in excess of the 100 basis points helped by end of your margin expansion target. So can you talk about what what could be the offsets there.
Speaker Change: Our increased growth investments or anything that's kind of.
Matthew Francis Pine: You know, as we think about that, Andy, and I, you know, from a long-term framework, none of that's changed. It's just really more thinking about it in the context of 2024. And, you know, thinking about going out with a balanced approach. We do have a lot of healthy demand, you know, across our largest end markets. You know, when you look at the year from a seasonality standpoint, it'
Some of that margin expansion that I might otherwise expect.
Speaker Change: Yeah, I think the biggest piece probably in your high level math as we continue to invest in the business. Obviously, we've got significant growth opportunities over the long term that we want to make sure that we're allocating resources around you know across all four segments, there's exciting things relative to product launches and market expansion.
Matthew Francis Pine: There's no, you know, change in terms of the seasonality of our business and how we ramp from Q1 through the balance of the year. You know, I think the thing I'd leave you with, too, is that our margin guide reflects low 40s pro forma incrementals. And so we feel really, really strong about the margin that we're delivering as well as the growth. The next question is from Nathan Jones with Stiefel. Please go ahead.
Speaker Change: Yeah, we put a little bit of pressure on some of the significant accretion relative to productivity and then the synergies that you highlighted and then also Nate Theres, obviously, a volatile macro environment that you don't want to make sure that we're we're prudent relative to the guide that we have the ability to account for things that come up.
So I think our our guide relative to the margin expansion is fairly balanced.
Speaker Change: You know I think in.
Nathan Hardie Jones: Andrew Jones, is your line open? Good morning, everyone.
Speaker Change: Matthew just highlight highlighted at 40% Incrementals on a pro forma basis, that's really strong flow through so I'm excited about the opportunities. The team has laid out here as we look for a really strong year on our margin expansion journey and I think longer term. Obviously, we're just starting with the 80 20 implementation that that'll add some.
Nathan Hardie Jones: Hey, good morning, Nathan. I'm going to follow up on the margin question. I think your vocal cross-synergies get you something like 80 bass notes a point.
William K. Grogan: You're obviously going to get some pretty good margin expansion out of the MNCS operating leverage. When I do the math, it gets to me well in excess of 100 basis points, the top end of your margin expansion target. So, can you talk about what could be the offsets there or increased growth investments or anything that's kind of... Muting some of that margin expansion that I might otherwise expect? Yeah, I think the biggest piece probably in your high-level math is that we continue to invest in the business. Obviously, we've got significant growth opportunities over the long term that we want to make sure that we're allocating resources around, you know, across all four segments. There are exciting things relative to product launches and market expansions that, you know, put a little bit of pressure on some of the significant accretions relative to productivity and the synergies that you highlighted. And then also, you know, Nate, there's obviously a volatile macro environment that we want to make sure that we're more prudent relative to the guide, so that we have the ability to count for things that come up.
Speaker Change: Tailwind as we exit the year and into 2025 to try to get us at the higher end of that range longer term.
Great and then my follow up.
Speaker Change: Bill I think you just mentioned that the chip supply issue as well.
Matthew: Work itself out can you guys comment on by the past due backlog is in Mcs today, and when you expect that to get to whatever a normal level of past due backlog is.
Matthew: Hey, Nate I'll take it it's Matthew Yeah, we're making good progress on the past due backlog. If you remember we started 2023 around the 30% past due we exited at 20 and we feel that we're going to get the bulk of the past due backlog in 2020 for some of that may stray into 'twenty five but for the most.
Part, we feel pretty confident.
Matthew: It will get through the past due backlog in 2024 with again with a little bit of carryover into 'twenty five.
Matthew:
Matthew: And so you know really from a bottleneck standpoint, it really just comes down to our customers' ability to go out and execute the deployments chip supplies flowing we've made investments over the past few years and our capacity. So there's no capacity limitations from our point of view internally here at xylem and our four walls.
William K. Grogan: So, I think our guide role to the margin expansion is fairly balanced. You know, I think in, you know, Matthew just highlighted, you know, at 40% incrementals on a pro forma basis, that's really strong flow through. So, I'm excited about the opportunities the team has laid out here as we look for a really strong year on our margin expansion journey. And I think, you know, longer term, obviously, we're just starting with the 80-20 implementation. That will add some tailwind as we exit the year and into 2025 to try to get us at the higher end of that range over the long term.
Matthew: The next question is from Joe Giordano with TD Cowen. Please go ahead.
Joseph Giordano: Hey, guys good morning.
Joseph Giordano: Hey, good morning, Joe.
Hey, so I wanted to touch on injury Guy I guess, one of the more interesting kind of high level, where can we go type stories within water you know how to get a real connected utility and I'm. Just curious how you guys think about this like how do we judge success, what how meaningful could something like this.
Nathan Hardie Jones: And then my follow-up question, Bill, I think you just mentioned that the chip supply issue has basically worked itself out. Can you guys comment on where the past year backlog is in MNCS today and when you expect that to get to whatever a normal level of past year backlog is? Hey, Nate, I'll take it. It's Matthew.
Joseph Giordano: Turning to you know kind of over a near to medium term and you just kind of maybe set expectations about where that can go.
Speaker Change: Yeah, I mean I've been pretty bullish on this so you know you've heard me talk about being the aggregator of data and the utilities much like <unk>.
Speaker Change: Folks are in the building a management world or in the residential home. We believe we have the capabilities through this partnership to be able to be the leader in aggregating utility data we're off to a really good start we only had about six months under our belt last year. Once we got the combination closed in.
Matthew Francis Pine: Yeah, we're making good progress on the past due backlog. If you remember, we started 2023 around 30% past due. We exited at 20.
Speaker Change: The teams have made great progress globally, and we built a significant pipeline and one of the things I've talked about as you know it's one thing is to get the platform in play at the utility, but it's about building on the applications as well as pulling through our core products. So you know a little bit of a land and expand is how I would frame. It you know get the Pla.
Matthew Francis Pine: And we feel that we're going to get through the bulk of the past due backlog in 2024. Some of that may stray into 2025. But for the most part, we feel pretty confident that we'll get through the past due backlog in 2024 again, with a little bit of carryover into 2025. Unknown Speaker: And so, you know, really from a bottleneck standpoint, it really just comes down to our customers' ability to go out and execute the deployments, with chip supplies flowing. We've made investments over the past few years in our capacity, so there are no capacity limitations from our point of view internally here at Xylem within our four walls. The next question is from Joe Giordano with T.D. Cowan
Speaker Change: At four am in place help them optimize their water networks with our applications.
Speaker Change: As well as pulling through our our products like a M I.
Speaker Change: Our treatment products et cetera. So we've had some significant wins some of those I've highlighted on prior calls we continue to have wins and build momentum like I said and it's not a specific region is across the world.
Speaker Change: That's in the U K, Italy, we just won a big deal in the Middle East, which as you know.
Joseph Craig Giordano: Please go ahead. The next question is from Joe Giordano with T.D. Cowan.
Speaker Change: For a new city with fully digitizing their water management system with this platform and I've talked in the past about some of the deals in Spain and the U S. We've done you know in.
Matthew Francis Pine: Please go ahead. Hey guys, morning. Hey, good morning, Joe. [inaudible] turn into, you know, kind of over the near to medium term and just kind of maybe set expectations about where that can go. Yeah, I mean, I've been pretty bullish about this. You know, you've heard me talk about being the aggregator of data in the utilities, much like, you know, folks are in the building management world or in the residential home. We believe we have the capabilities through this partnership to be able to be the leader in aggregating utility data. You know, we're off to a really good start. We only had about six months under our belt last year once we got the combination closed.
Speaker Change: In terms of putting the platform in and being able to sell a M ideals as well as treatment products. So I think it can be a big opportunity for US. Obviously, we will give you a lot more color as we as we get closer to may 30th at our Investor Day.
Speaker Change: But we're really bullish on the partnership.
That's great color and then I just.
Speaker Change: And apologies if you mentioned some of this on the prepared remarks, and I joined late but.
Speaker Change: On on evoke what like.
Speaker Change: Revenue side synergies I know like selling and ISS solution outside the U S. It's going to take a long time to build out but I'm curious if there's anything you can point to about like leveraging existing channels that you have in like Europe.
Matthew Francis Pine: The teams have made great progress globally, and we've built a significant pipeline. And one of the things I've talked about is, you know, it's one thing to get the platform in play at the utility, but it's about building on the applications as well as pulling through our core products. So, you know, a little bit of a land and expand is how I would frame it, you know, get the platform in place, help them optimize their water networks with our applications, as well as pulling through our products like AMI, you know, our treatment products, et cetera. So we've had some significant wins. Some of those I've highlighted on prior calls. We continue to, you know, have wins and build momentum. As I said, and this isn't a specific region; it's across the world.
Speaker Change: I can put product through which you know I would imagine would be a lower lift and sort of try to do a solutions based though.
Speaker Change: Yeah, that's kind of us.
Speaker Change: <unk> had a medium term.
Speaker Change: Our objective and we've already had some wins, we just had one in South Africa actually where we took the capital from the legacy of vocal business through the legacy xylem business in South Africa. So we were able to execute and deploy that capital into an industrial application.
Speaker Change: That really having to have service you know folks on the ground and infrastructure. So those are things that we're focused on kind of in the short to medium term is leveraging the product side.
Matthew Francis Pine: Whether that's in the UK, Italy, we just won a big deal in the Middle East, which is, you know, for a new city fully digitizing their water management system with this platform. And I've talked in the past about some of the deals in Spain and the U.S. we did, you know, in terms of putting the platform in and being able to sell AMI deals as well as treatment products. So I think it can be, you know, a big opportunity for us. Obviously, we'll give you a lot more color as we get closer to May 30th at our Investor Day, but we're really bullish on the partnership. Just a quick color, and then I just apologise if you mentioned some of this in the prepared remarks. I had to join late.
Speaker Change: Really the capital side of the legacy of vocal business through the xylem channels, both in the U S as well as internationally.
Speaker Change: So we are starting to see progress there.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Matthew Pine for any closing remarks.
Matthew Latino: Yeah, I just want to thank everybody for joining our call today and for your interest in xylem. We look forward to speaking again in early May followed by our Investor day on May 30th where we're going to provide more details on our long term outlook take care and make it a great day.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Matthew Francis Pine: Unknown Speaker On the revenue side synergies. I know selling an ISS solution outside the US is going to take a long time to build out. But I'm curious if there's anything you can point to about like leveraging existing channels that you have in like Europe to put product through, which I would imagine would be a lower lift and to try to find a solution. Yeah, that's kind of a shorter to medium-term objective. And we've already had some wins.
Speaker Change: [music].
Matthew Francis Pine: We just had one in South Africa, actually, where we took the capital from the legacy of local business through the legacies of island business in South Africa. So we were able to execute and deploy that capital into an industrial application without really having to have service, you know, folks on the ground and infrastructure. So those are things that we're focused on kind of in the short to medium term, leveraging the product side and really the capital side of the legacy of local business through the Xylem channels, both in the US as well as internationally. So we are starting to see progress there. This concludes our question and answer session. I would like to turn the conference back over to Matthew Pine for any closing remarks.
Speaker Change: Okay.
Speaker Change: [music].
Matthew Francis Pine: Yeah, I just want to thank everybody for joining our call today and for your interest in Xylem. You know, we look forward to speaking again in early May, followed by our Investor Day on May 30, where we're going to provide more details on our long-term outlook. Take care, and have a great day. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Yes.
Speaker Change: [music].
Operator: Unknown Speaker. Unknown Speaker. Unknown Speaker. The Ultimate Parody Site! Unknown Attendee, Susan Kennedy, Matthew Diserio, Xylem Inc.