Q2 2024 Xylem Inc Earnings Call
Good day, everyone and welcome to the Xylem second quarter 2024 results conference call. All participants will be in a listen only mode should you need assistance. Please signal 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 one on your telephone keypad.
To withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Andrea Vanderburgh, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to the Xylem second quarter 2024 earnings call with me today are Chief Executive Officer, Matthew Pie and Chief Financial Officer. They will provide their perspective on xylem second quarter 2024 results and discuss the third quarter and full year outlook.
Speaker Change: Following our prepared remarks, we will address questions related to the information covered on the call.
So you. Please keep to one question and a follow up and then return to the queue.
Speaker Change: As a reminder, this call and our webcast are accompanied by a five presentation available in the investors section of our website.
Replay of today's call will be available until midnight August six.
Additionally, the call will be available for playback via the investors section of our website under the heading investor events.
Please turn to slide two.
We will make some forward looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties such as those factors described in silence. Most recent annual report on Form 10-K and in subsequent reports filed with SEC.
Please note that the company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events or circumstances and actual events or results could differ materially from those anticipated.
Please turn to slide three.
Provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics with references to prior year segment metrics being made on a comparative basis, reflecting the change in segments as of the beginning of the year.
Speaker Change: For purposes of today's call all references will be on their 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 Matthew Pie.
Matthew Francis Pine: Thanks, Andrew and good morning, everyone and thank you for joining US today, it's a pleasure to report the achievements of the xylem team in the second quarter as you've seen in this morning's release the team delivered another very strong quarter outperforming expectations on all metrics.
High single digit organic revenue growth, reflecting gains in both volume and price.
The team also expanded adjusted EBITDA margin of 170 basis points and without outperformance, we delivered adjusted EPS growth of 11%.
The story of the second quarter is similar to Q1 on the demand side of our largest markets continue to be resilient.
Internally, our outperformance is driven by increasingly disciplined operational execution by the team.
This kind of performance momentum is only possible when the whole team is engaged and aligned to make a difference.
Matthew Francis Pine: And I want to say a big thank you to the holes island team for the dedication and drive they've demonstrated through the first half of the year.
While there were a lot of highlights across the team I, particularly want to mentioned the standout performance in measurement and control solutions.
<unk> segment revenue was up 26% and EBITDA margins are up 700 basis points versus this time last year. The team is doing an outstanding job.
Our first half performance is a reflection of the value creation direction. We set early in the year and discussed at xylem to Investor day in May.
Matthew Francis Pine: That direction includes both resilient above market growth and accelerated margin expansion.
Matthew Francis Pine: It's gratifying to see the kind of momentum reflected in our quarterly performance.
In addition, our simplification initiatives and our work on 80 20 are progressing well and are set to pay off beginning in 2025.
Turning to the integration of a bogo in late May we passed the one year anniversary of our combination with Ebola.
Matthew Francis Pine: The combination continues to reveal its value cost synergies are well on track and the team is looking to accelerate our pace wherever possible.
And our commercial teams are successfully taken xylem combined capabilities to the many customers who will benefit from our integrated solutions, both in utility and industrial end markets.
With the Volcker integration on track strong momentum from the first half resilient demand and the teams increasing operational commercial discipline, we're raising our full year guide for both revenue and margin increasing our EPS guidance <unk> from the prior midpoint.
In a moment I will provide an update on our high impact culture, and our leadership alignment and also on our industry, leading 2030 sustainability goals, but first I'm going to turn it over to bill to double click on the quarter's results, our financial position and our outlook Bill.
Bill: Thanks, Matthew Please turn to slide five.
Bill: Q2 was another great quarter, and I want to thank our entire organization for their amazing work.
We outperformed against our guide across revenue margin and earnings per share.
Bill: We continue to see resilient demand and our backlog is at $5 $2 billion, a modest decline from prior year as we execute on Mcs past due backlog.
Book to Bill was approximately one supported by strength in water infrastructure, while organic orders were down 1% in the quarter driven by project timing within Mcs and WSI us.
Total revenues grew 26% and organic revenue rose, 9% exceeding our guidance on a healthy combination of volume and price.
Outperformance was led by Mcs and Ws S. As we saw growth in all regions led by double digit growth in the U S.
EBITDA margin was 28% up 170 basis points from the prior year with productivity savings strong volume and price more than offsetting inflation investments and mix.
This reflects incrementals of 28% on a consolidated basis and 50% on a pro forma basis.
Our EPS in the quarter was $1 nine above the high end of our guidance by <unk> <unk>.
And up 11% over the prior year.
Our balance sheet is strong with net debt to adjusted EBITDA at <unk> seven times year to date free cash flow was up 200% versus the prior year and conversion of 62% as strong given seasonality. This year over year improvement was driven by higher net income offset slightly by increased capex and we continue to benefit from it.
Working capital efficiency, please turn to slide six.
Measurement and control solutions had another great quarter, and again exceeded our expectations Mcs revenue was up 26% driven by smart metering demand and backlog execution. However, due to project timing orders were down 18% and book to Bill came in under one.
We worked down past due backlog and total backlog for Mcs now sits at roughly $2 billion, a 12% organic decrease from prior year.
We finished the quarter with impressive EBITDA margins of 23, 4% up 700 basis points versus the prior year and up 70 bps sequentially.
Margin expansion was driven by volume price productivity and favorable mix more than offsetting inflation as.
Bill: As a reminder, we continue to expect a margin headwind from mix in the second half as energy meters account for a larger portion of our sales.
Bill: Yeah.
Bill: In water infrastructure orders were up strong 8% in the quarter led by robust treatment demand.
Revenue exceeded our expectations with total growth of 22% and organic growth of 7% driven by healthy demand across all regions and applications.
Adjusted EBITDA margin for the segment was down 60 basis points with roughly 40% pro forma Incrementals. This decline was driven by inflation and acquisition, what was offset partially by productivity volume and price without the impact of acquisitions adjusted EBITDA margin improved 40 basis points for the quarter.
In applied water orders were up 5% and book to Bill was greater than one reflective of a few large project wins, which will ship next year.
Bill: Revenues were down 4% in line with our expectations lapping strong comps on 12% growth in the second quarter of last year decline was primarily driven by softness in developed markets.
Segment, EBITDA margins declined 200 basis points year over year, but increased 100 basis points sequentially higher inflation unfavorable mix was partially offset by productivity savings.
Yeah.
Closing the segments with water solutions and services orders declined 1% organically driven by timing of large capital projects offset by strength in de watering organic.
Organic revenue was up 12% with healthy growth across most of the business.
Adjusted EBITDA margin was strong at 23, 8% up 60 basis points, and driven by volume productivity and price offset in part by unfavorable mix and inflation.
Two quarters in a re segmentation, we continue to see synergy momentum and benefits for our customers and combining our service based offerings.
Now, let's turn to slide seven for updated full year and Q3 guidance.
Given our first half outperformance in both commercial and operational momentum we are raising our full year guide.
Bill: We are increasing our revenue guide by approximately $50 million up from $8 5 billion.
Bill: This reflects an additional half point of growth at the midpoint versus our prior guidance.
That will put total revenue growth at approximately 16% and organic revenue growth at 5% to 6%.
The integration is going smoothly and we continue to expect $100 million of exit run rate cost synergies in 'twenty 'twenty four with the potential to accelerate by year end.
We are confident about driving further margin expansion with operational productivity and are raising our EBITDA margin guidance to about 25%.
That represents 160 basis points of expansion versus the prior year, driven by hard volume productivity, including cost synergies and price offsetting inflation.
Bill: Our updated EPS guidance of $4 18 to $4 28 reflects an increase of six cents at the midpoint.
Bill: Free cash flow conversion for the year is now expected to be over 120% of net income.
The full year outlook at the segment level remains largely unchanged with the exception of Mcs, which we now expect to grow at high teens due to our first half performance versus our previous outlook of low teens.
For the quarter, we anticipate revenue growth will be 3% to 5% on a reported and organic basis.
We expect third quarter EBITDA margin to be in the range of 25% to 21% up 70 to 120 basis points driven by higher volumes continued price realization and productivity gains.
This yield is this yields third quarter EPS of $1 seven to $1 12.
Our diversified portfolio of mission critical products and services positions us well to address our customers' evolving needs and we anticipate healthy demand across most end markets and applications.
And we talked about are driving profitability through simplification efforts and our 80 20 implementations at the Investor day in May.
Bill: We are progressing well on those initiatives and I want to reiterate our commitment to systematic margin improvement through operational excellence supporting our long term profitability framework.
While we are closely monitoring the macro environment, including geopolitical election uncertainty and tariffs our overall outlook for the year remains positive with that please turn to slide eight and I'll turn the call back over to Matthew for closing comments.
Matthew: Thanks, Bill I'd like to mention two events in the quarter that don't show up in the financial results, but our fundamental to xylem success and impact first in June just a few weeks after our Investor day, we gathered xylem as global leadership team in Washington D. C. This was the first time, we had our top 150 executives one room spanning legacy xylem and legacy of Aqua.
Matthew: It was an energizing two days of collaboration focused on the work of leadership alignment and culture.
I've spoken before about culture as the fundamental how xylem, how will deliver stronger execution of our strategy, how we realize our aspirations how will create our next chapter of xylem impact you can see in our second quarter results that the team is already working well and winning.
But our leadership summit reinforced was how much more value creation potential. We have ahead of us with an aligned team and a high impact culture. It was fantastic.
Testing to see the theme so engaged by the opportunities ahead of us.
Last quarter also saw the publication of our annual sustainability report, we're very pleased to be tracking well towards our 2025 goals, but we took the opportunity presented by this year's report to set out our aspirations beyond 2025.
We're raising the bar again by setting 2030 sustainability goals in three strategic areas. The first is de carbonization, reducing our own greenhouse gas emissions and enabling our customers to decarbonize secondly, as water stewardship aimed at reducing water demand and finally, we'll provide access to water and sanitation and.
Hi, gene for 80 million people.
Matthew: All three strengthen our customer relationships and increase our impact.
Speaker Change: Before turning to your questions I have one more special note. This is Andrew Vanderburgh last quarterly earnings call at the helm of Investor Relations. We're happy to announce that Andrew is taking on a new role within xylem and it's an exciting new opportunity for her.
Over the year. So many of you have told me you deeply value Andrew's energy accessibility and professionalism and I've benefited from her insightful counsel and positive encouragement in every circumstance. So thank you Andrea.
Some of you have already met Keith Buettner, who is taking the reins as our Investor Relations leader Keith has had great impact as the head of finance and water solutions and services segment, having joined US with your vocal combination more than a year ago. He brings deep knowledge of the business to his leadership of I R and I'm confident you'll enjoy getting to know Keith.
And we'll find great value in his insights and perspectives and with that let's go to your questions.
Speaker Change: And we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two and at this time.
Momentarily for the first question.
Our first question today will come from Deane Dray with RBC capital markets. Please go ahead.
Thank you and good morning, everyone.
Hey, Good morning, Deane, Hey, I'll add my welcome to Keith and wish Andrea Best of luck and thanks for all your help.
Thank you Dean.
Maybe we can start with 80 20 and I'll also make the observation you can see 80 20 at work and you are conference call prepared remarks, and slides and how much they've been slimmed down and and you get right to the point so really appreciate that so.
Speaker Change: 80, 20, I know you you say the pay off is a.
Likely a 2025 of that but we've heard lots of specifics at the analyst day on the rollout. So any updates you can share I know we're still in the early innings, but are you had applied water North America. Initially M. C. S. Initially any kind of early actions and what can you do here. Thanks.
No no happy to give an update so again the teams are progressing well like you said, we have three businesses in the thick of implementation implementing the tool set.
North American AWS in North America in Mcs Smart metering businesses. There are a few a few months ahead of global transport it kicked off in the second quarter and we actually just had a kickoff for applied water in Europe that started on their journey last week.
AWS and smart meeting have gone through their initial quads and quartile analysis and now they're working through the meat of segmenting their businesses, how they want to support their ongoing customer base and building their zero p&l's really highlighting the appropriate level of resources they need to run those businesses.
They've come out with some initial price increases.
Again, those benefits take a little while to work their way through the backlog. So again no material short term benefit, but we see a significant pickup.
At the end of this year, leading into 2025, we will see a more material P&L head.
Speaker Change: Or or pick up excuse me.
<unk> are focusing on creating communicating their customers and how the toolset is going to impact them. It really talking to their largest customers and how these changes will benefit them in the long term really improving the overall experience with xylem as we bring new product innovation to them faster improve our delivery and quality to them. So a lot of excitement around the toolset externally for their customer base.
<unk>.
So progress continues I think we're right on schedule again confident in the value 80, 20 is going to bring and provide for us over the next several years.
Really in line with what we highlighted in the additional impact of tool. So it's going to have and the framework, we laid out back in Investor day.
That's a really helpful update bill thanks, and given that most of the operating results of day are either as expected or a little bit better I can ask a broader industry question if I could.
Speaker Change: Just implications on the Supreme Court overruling the Chevron.
And I know, we're still in the early innings, but ginny any kind of high level thoughts what the ripple effects might be N P fast remediation at the federal level, the Super fun timing and look I know, it's not in your numbers, it's not in your three year guide.
Speaker Change: But just the idea here is what might the implications be in and I can see that at the state level.
That's where all the remediation efforts have been going in any way in the states like California, we're not waiting for the federal government to lead the way so just from your perspective and insight.
How do you think this plays out.
Thanks for the question Deane, we didn't see this one coming if you had asked US three months ago. This was not on our radar so.
Speaker Change: So we're reacting to lots of different.
Volatility out in the marketplace.
Speaker Change: Supreme Court striking this down the Chevron doctrine. It does introduce some uncertainty and some regulations and federal laws are at the risk of being challenged much like the Epa's final rule on P fast to your point.
Additionally, beyond that Deane, there's litigation ongoing already that's challenging epa's cost estimates used to set the mcl level. The maximum contaminant level bid for people parts per trillion as you as youre aware and it's only going to potentially push out what's already a long phase and timeline of three.
The years to test in five years too to mitigate P. Fast so to your point, we think ultimately the states are going to fill in the gaps if a national P bass regulation is reversed.
We don't really anticipate that but if it does you know you've got about 11 states today with did have M. C L.
Some of them are contaminant level for <unk> in drinking water already you've got another 12 states.
That have some kind of P fast regulation around either guidance health or notification levels things of that nature and that's over half the U S population. So while it may stumble a little bit out of the gates and theres going to be some challenges that we're already seeing challenges in litigation.
That's why we didn't bake it into our long term framework, we just think it's too far out.
Speaker Change: But we stand ready to and well positioned to partner with utilities and we have partnered with utilities as you know.
And helping them manage this and other <unk>.
Emerging contaminants, so more to come but that's kind of what we think.
That's real helpful. Thank you.
Thank you.
And our next question will come from Mike Halloran with Baird. Please go ahead.
Hey, good morning, everyone. Thanks, and good morning welcome Keith.
I'm Mike.
Just just level setting some stuff here.
If I look at obviously very healthy margins on the quarter.
And you know Bill's earlier comment on the momentum there holds but if you think about your demand commentary as well as how you're characterizing the second half of the year.
It doesn't feel like much has changed for me.
Trend thought process, how you guided in the second half of the year, just just wanted to clarify that and any any thoughts around that.
Yeah, Mike don't know change our expectations for the second half I think it's playing out exactly how we thought when we gave our update last quarter. Yes. It was the exception that we had some accelerated performance in Mcs, which drove us to take up our full year guide, we increased our full year revenue guidance up to 5% to 6% and some timing of capital.
<unk> and WSI that drove better results in the second quarter sequentially Q3 looks a lot like Q2 from a dollars perspective with just more challenging year over year comps really driving the the lower implied organic growth rate. So.
Still confident and bullish and in most of our end markets.
Yes.
Macro noise that we highlighted.
Is is there's things out there, but from our perspective, we don't see a material impact or any signaling of expected slowdown for us.
Speaker Change: You know Mcs, there's still high demand for our smart metering products and our differentiated Ami network orders were down but again Thats, primarily just project timing, there's still a strong funnel of large deals in the U S and Europe and we had several wins recently, a really good one that leverages synergies sale with the <unk>. So the team continues to do an excellent job.
Speaker Change: Of finding new projects and winning new business.
Speaker Change: WSI us again really strong growth.
Really the timing of capital projects, there, but they still have strong demand across the legacy SaaS into watering business, yes. They had some orders lumpiness again, we had a huge build on operate project last quarter. We have a couple more of those in the funnel that could.
Be realized in the orders here over the back half of the year. So.
Really nothing there that is there any concern still bullish around kind of their high growth verticals.
Speaker Change: Water infrastructure again really strong performance on healthy demand high single digit orders with gross growth across all the regions treatment was up over 20% with some large project wins. The transport business is one of our most differentiated business and continues to performed well.
So our developed markets in pretty much all of our applications within Wi are doing it.
STREAMWAY well AWS, obviously is the one market that remains a little bit challenged again. It is our shortest cycle, most cyclical group of businesses, but.
Speaker Change: What we've seen there has been pretty consistent with our expectations kind of low single digit second half comps get a little bit easier. So they'll gradually get to a lower organic decline and then some of the project wins that we highlighted in the prepared remarks, we will start to get them back on the road to growth in 2025.
Okay Super helpful. And then you know.
Maybe some thoughts on how you think backlog tracks from here and what normal looks like once you work through the pass through backlog across a couple of the segments.
And how we think book to Bill should track.
Yeah Yeah.
I would say backlog is still really strong.
It declined.
Speaker Change: Slightly organically and that was primarily just us continuing to work down the Mcs past due backlog.
That's a tough one to forecast just because of the lumpiness of some of the large projects within Mcs and again, just the new business opportunities within WSI on the build on operate so yeah.
I think we'll will bleed a little bit here as we progress through the year, but.
Speaker Change: I'm still confident in kind of a long term growth frameworks for the individual segments.
Getting into 2025.
So I would say lumpiness, probably gives us a little bit.
Speaker Change: Caution to give you a specific number but again robust demand and outlook for most of it most of our end markets.
And Bill you mean lead to a more normalized level because of the past due backlog normalization are you, suggesting something different now exactly the spot.
Great. Thanks, everyone. Appreciate it thank.
Speaker Change: Thank you.
And our next question will come from Scott Davis with Melius Research. Please go ahead.
Hey, good morning, everybody and congrats.
On your.
Good morning on your move.
Hey, guys you didn't talk at all about capital deployment, which is which is fine because you still have the vocal coming in but it is there a certain tipping point, where you get more confident being able to do deals that we are we close to that are we there.
Commentary would be helpful.
No good question.
Again like you mentioned Scott our first priority is to focus on the integration of OCA and I think you can see from the results that we are doing a great job on both the cost synergies, they're tracking well as well as the revenue synergies we have Scott built a lot of muscle on M&A over the past 18 months with the planning of a bogo and now the passing one year of execution. So we have started to.
Build that muscle in the organization, which is going to help us going forward.
Maybe the other thing I'd, just reiterate what I said at Investor Day is that we've also put in place or what I would call a strong bottoms up process in our M&A kind of acquisition process to drive more consistent organic growth in deployment.
And I think that's going to help us over the cycle. So obviously you know we just laid out the three year framework.
It's not going to happen overnight, but I can tell you that we're very active and we have a very strong pipeline that.
And that we're managing in it and it aligns well to the value mapping that we just.
We just finished up so you know again, we're going to we're going to continue to run those targets through our our decision criteria that strategic fit financials, it's got to make sense, we're not going to do anything silly.
And really you know to your point kind of organizational readiness.
Speaker Change: I think we're trending well we've got good momentum and are ready to execute our M&A pipeline. Some of it's just timing, but it is an important piece as we outlined at Investor day to our EPS growth at mid teens over the cycle. So.
We're very active but some of it's just timing and we're still in early innings.
Okay. Good question are a good answer thank you.
And guys I don't I'm sure you don't want to give them.
A lot of detail here, but you referenced the large project wins.
Speaker Change: Those are domestic or are they related to mega projects.
A little bit of color on kind of the scope and size historically versus how.
Are you kind of think about you know what large looks like so many pay yeah.
Speaker Change: Fixed semi plans to step out there the scope that we've never seen before then.
Speaker Change: Love to get a little color from you on those projects if you can.
Speaker Change: Yeah I think.
Back in Investor Day, we talked about data centers, that's starting to ramp up for us.
And especially in our applied water business, but I think we're positioned uniquely to.
Scott and the fact that we also move water through pumping we treat it and then we also sense for it so.
Speaker Change: As we're winning these kind of data centers, we can offer a more turnkey solution and we're kind of.
Speaker Change: I'm working at bottoms up as well as some of the actual providers that are building the data centers themselves. So that's started to pick up some momentum we had a nice win in applied water. We've had a couple actually.
Kind of at the $7 million to $10 million range.
And so that's going well also I'd say on the power transition, we highlighted a big win last quarter.
Speaker Change: With a green hydrogen and so the water needed for that over a 20 year contract is big we've got some other ones that have.
Not kind of fit within the quarter that are in the pipeline that we've got a lot of momentum around as well a ramp around power and we see more and more consistency in the semiconductor space with micro electronics and the need for clean water and a lot of these places have water scarcity issues and so the water reuse is super important there so.
Speaker Change: I would say that some of these kind of high growth verticals, we're seeing momentum in big projects.
Speaker Change: And we don't see that slowing we see it only continuing and it will be a little lumpy with nws's specifically, but.
Speaker Change: We see good momentum had a good pipeline.
Speaker Change: Okay.
Thank you and congrats on the first couple of quarters of the year here.
I'll pass it on.
Thank you.
And our next question will come from Nathan Jones with Stifel. Please go ahead.
Good morning, everyone.
Morning.
Nathan Hardie Jones: I wanted to start out with some follow up questions on Mcs.
Orders down in the quarter I understand there's some lumpiness around that or is it being down.
Speaker Change: Have declined a little bit the last couple of years signing off some backlog in 'twenty three 'twenty four.
Could you just talk about the visibility into the OTA pipeline that you have to see that turn around and start heading in the right direction to support growth.
And with that I now high single digit to the long term kind of guidance here, but you are buying a fairly significant amount of backlog down in 2024 should we expect the 2025 growth to be a little bit lower than the long term average because you're comping against that backlog.
Yeah, I'd start us out here and then maybe turn it over to Bill again, just a reminder, we're still in fairly.
Fairly early innings to mid innings in Ami adoption. So.
There is a lot of runway out there.
Speaker Change: And although it doesn't always show up in orders we do.
Bill: Obviously put some of the orders and backlog and its or some of the con.
Contracts and backlog and how they convert orders can be a little lumpy and this is also a reminder, that only 20% of that business is kind of big deals 80% of it is book and ship or what we call flow.
But Nate this looking at the pipeline that I see we've got a lot of room for continued growth in that business.
Nate: And we don't see it slowing down it's just a matter of timing.
More than anything yes, our expectation next year is that it will be in line with our long term framework. It's just the backlog bleed to get US there so maybe a little bit stronger before we get to kind of that high single digits at some point in time next year, Yes, and I think you'd asked a few.
Nate: Calls ago about where we are in past due we expect to be almost complete with the past due backlog by the end of the year and probably wrap that up in Q1 of next year. So that burn is happening.
And obviously, leading to the increased guide in Mcs revenue at the high teens.
Speaker Change: Second one I wanted to ask was on cash conversion obviously.
Taking up to 120% and I would think that 80 20, and the simplification initiatives should have any impact on working capital.
Probably over the next at least couple of years that maybe drives cash conversion higher than the long term average as you simplify the business taking inventory out work on receivables and payables and stuff like that so any commentary you can give us on opportunities you're seeing in working capital as a result of days 80 20 simplification.
Thanks.
Yeah, I know Nate I think you're exactly right. That's a big part of the tool set as you start to reduce a lot of the complexity of the product portfolio portfolio, we get a lot more efficiency.
Through just.
Faster moving inventory, obviously, you reduced the complexity of a tremendous amount of long tail customers and your DSO improves from that perspective so.
I totally agree we will see some benefits the team does a phenomenal job right now with overall cash conversion, but I think 80 20, we'll be able to take it to the next level.
But I think that will be on the back end of the P&L benefits that we get so I'm probably looking at as you get through the implementation you always said, Hey, 12 to 18 months to realize the P&L benefits, it's probably in that 18 to 24 months. That's the second phase of simplification on the backend.
Makes sense, thanks, very much for taking my questions.
Thanks Nathan.
And our next question will come from Joe Giordano.
G R Donner with T. D. Cohen. Please go ahead.
Hey, good morning, guys.
Yeah, Andrea Thanks for everything you've been a huge help.
If anything happens that water infrastructure will now know who to blame on it so [laughter] identified.
Identify that.
Speaker Change: [laughter].
Speaker Change: A lot of my questions has been asked.
But maybe you could touch on.
It's moving the service business and combining it with WNS.
Any like concrete kind of examples of how this is changing like conditions on the ground for you guys and even better results.
Yeah, I can start us out I mean, I think that.
We did it for a few reasons one is to increase our synergies because there is a lot of synergies. When you now can move water and treat water and so now we're able to go in with a turnkey solution and we're already seeing probably that segment be the quickest to drive synergies that some of those we highlighted.
At the Investor Day. So also I'd say just a common tool set when you think about back office, we had to service companies when we put the two companies together.
The legacy of vocal business was much more mature had good processes and tools and now leveraging that across the entire services business has been a big help.
Speaker Change: I think probably the biggest thing is over time will be our technician utilization being able to utilize technicians across the entire portfolio now now everybody is not completely spongebob but.
Say, a third to half of your technicians now can flex and do other types of work that they were doing before and it also gives our aqua pros is what we call them.
Water career path so I.
Speaker Change: I'd say theres different aspects of how we're seeing it play out but it's the fastest part of our revenue synergy right now and it's working well.
And then if I can ask maybe you talked about data center and stuff like that if I. If I think about like the large project pipeline is have you assessed and maybe also Mike General industrial type exposure at marine infrastructure.
Are you seeing any like bifurcation, there because data centers definitely strong but.
Commentary around large project activity in other sectors, and just kind of weakening so I'm curious if you're seeing like puts and takes in any of those businesses there.
Not really I mean are data centers that I think as I've mentioned is not a huge part of our portfolio. It mainly shows up in applied water. Although we've seen some synergies that we went through in one of those in China at our Investor day, but we've seen some other synergies where we're managing water in a data center as well as doing treatment, but it's.
It's not something that's going to be a big swing for us because it's not a large part of our business but.
But in general we're seeing high growth verticals like pharma life Sciences Microelectronics power.
You need to be really robust and no look no matter what regulations are whatever's happening from that perspective, what's happening around climate and water scarcity is driving a lot of interest I mean, we get I get phone calls all the time from leaders and Ceos in different parts of the world that are dealing with some real challenging stuff in terms of being able to keep their off.
Speaker Change: Operations open or the quality of their water because of.
Because of maybe saltwater intrusion dealing with a different type of water. They are trying to treat so.
We don't see any any real slowdown we were in a really strong high growth verticals in data centers is one that is not big for us, but we're going to take advantage of it while it's a while it's hot.
Thanks, guys.
Thank you.
And our next question will come from Andrew Kaplowitz with Citigroup. Please go ahead.
Morning, everyone. Andrea Thanks, so much for your help.
Thank you Andy.
So not a bill you mentioned inflation in water infrastructure and margin in that segment after being up nicely in Q1, a year over year was down a bit in Q2, I know you said that acquisition that was acquisition related but could you give more color into what youre seeing on the price versus cost side, particularly in that segment did anything materially changed or is it just lumpiness and we know yet.
And China exposure in there. So maybe you could talk about the competitive environment in China.
Price cost was positive there I think the biggest impact and Thats why we highlighted just the acquisition element.
Second quarter last year during the short.
Speaker Change: Time that <unk> was part of that segment you had unusually high margin was at a low twenty's versus its normalized rate of kind of in the teens. So that was the biggest difference. That's why we added in the pro forma margin expansion 40 bps and just it was at 40% pro forma incremental so fundamentally the profit there is still strong it's sequentially improve.
We expect expect it to continue to sequentially improve as we progress through the back half and have year over year margin expansion.
I would say from a water infrastructure perspective, they do have probably the largest piece of our China exposure, China has been a little bit lumpy for us it's actually the first half it's been positive from a revenue perspective.
The orders were down, but we see kind of some of the larger projects, especially within treatment continue to get delay just as I think China is trying to figure out the overall economic situation and how theyre going to fund several things across.
Their investment framework. So that's probably the one area. We are continuing to keep our eye on as things just seem to be perpetually shifting to the right.
Very helpful. And then just maybe focusing a little more in applied water orders as he said look good and David for long cycle projects, maybe talk about the short cycle market as you see it is the business sort of kind of bouncing along the bottom what's the channel telling you and you obviously mentioned the easier comparisons in the second half of the year. So.
I know you talked about applied water returning to growth in 'twenty five but it didn't do that before the end of the year.
Yeah, I think third quarter still down low single digits fourth quarter. It was probably closer to closer to zero excuse me at zero.
Again, it's relatively in line I mean sequentially that the dollar amounts.
The decline is largely seen in developed markets and primarily in our commercial and industrial space again from a macro perspective, the institutional Abi has been negative for 16 consecutive months, we continue to see manufacturing PMI, which are good indicators for us for that business.
But it gave it seems a lot of crowded Matthew highlighted they are making their own luck leveraging their differentiated technology to win some of these larger projects to get back on a growth track into into next year.
I appreciate all the color.
Thanks, Andy.
And our next question will come from Bryan Blair with Oppenheimer. Please go ahead.
Thank you good morning, everyone. Andrew Thank you good morning.
Thank you Brian.
Very solid quarter and Mcs again.
Speaker Change: And since margin against it out.
I'm sorry, if I missed this detail, but bill you just you have called out you've been very upfront about there being some mixed headwinds going into the back half with energy deployments, you're willing to size that sequential headwind relative to the strength as well.
One eight.
Yeah Yeah.
We think it could be around 100 basis points in the back half sequential decrease from where we finished the first half.
Okay I understand I appreciate that.
I was hoping you offer a little more color on how the treatment orders phase through the quarter. I think you cited around 20% growth. There so very robust for a business that tends to be a leading indicator.
Any meaningful differences by region.
That you would call out and how the street and momentum influence your team's confidence in the back half that one.
Speaker Change: Yes, we've seen this is Matthew Brian and we've seen really good momentum in treatment across all regions.
You said were up roughly 22%.
Speaker Change: For the entire business and probably led by the U S and emerging markets.
China as Bill pointed out it's been a little bit we could actually that was a little bit of a rights on bright spot on orders themselves. So we were up slightly low single digits in China.
On treatment. So all in all it's a really good indicator that capital continues to flow the funding, we see capital investment continuing.
And good momentum for <unk>.
<unk> treatment, which is a big part of not only water quality, but also scarcity of water. So we see those trends continuing.
Yeah.
Very good thank you again.
Speaker Change: Thank you.
And this concludes the Q2 earnings call I would like to turn it back to you Matthew Pine for any closing remarks.
Thank you we'll wrap it there thanks for your questions and thanks for everyone, who joined today as always we appreciate your interest in xylem and all the very best.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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