Q4 2024 Xylem Inc Earnings Call
This is the secrets of Congress...
Speaker Change: Welcome to Xylem's fourth quarter and full year 2024 results conference call. All participants will be in a listen-only mode.
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Speaker Change: 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. Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Keith Beutner, Vice President of Investor Relations and FP&A. Please go ahead.
Keith Beutner: Thank you, operator. Good morning, everyone, and welcome to Xylem's fourth quarter 2024 earnings call. With me today are Chief Executive Officer Matthew Pine and Chief Financial Officer Bill Grogan.
Speaker Change: They will provide their perspective on Xylem's fourth quarter and full year 2024 results and discuss the first quarter and full year 2025 outlook.
Speaker Change: Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue.
Speaker Change: As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website.
Speaker Change: A replay of today's call will be available until midnight, February 18th, and will be available for playback via the Investor section of our website under the heading Investor Events.
Please turn to slide 2.
Speaker Change: These 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 in subsequent reports filed with the SEC.
Speaker Change: Please note, 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 3.
Speaker Change: We have provided you with a summary of key performance metrics, including both GAP and non-GAP metrics, with references to the 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 the 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.
Speaker Change: Now, please turn to slide four, and I'll turn the call over to our CEO, Matthew Pine.
Matthew Pine: Thank you, Keith. Good morning, everyone, and thank you for joining us today. The results we released earlier today reflect a strong fourth quarter finish to a record-breaking 2024.
Matthew Pine: In a year of transition and significant transformation for Xylem, the team served our customers and communities with discipline and delivered on our commitments, and the results show their impact.
Matthew Pine: Full-year revenue, EBITDA margins, and EPS all set new benchmarks for us. Revenue grew 6%, we expanded EBITDA margins 170 basis points, and EPS was up double digits for the year.
The team's operating discipline was apparent across all segments.
Matthew Pine: In a moment, I'll ask Bill to drill down on the fourth quarter, but the headline numbers reflect a big finish to a big year. The team executed well in resilient underlying demand, with all segments delivering Q4 orders growth of mid-single digits or better. That has given us great pace coming into the new year.
Matthew Pine: We anticipate demand will continue to be healthy overall through 2025, despite uncertain dynamics in a few end markets and regions.
Matthew Pine: The team is doing a great job managing what we can control and is committed to the transformation of Xylem we began in 2024, enabling us to improve focus, increase our speed, and drive accountable execution.
Matthew Pine: The transformation is behind our 8K filing last week, which follows through on our discussion at Investor Day, when we indicated our intent to simplify Xilin's operating model.
Matthew Pine: We're moving from a matrix to a structure with a single axis, or segments.
Matthew Pine: The plan streamlines our organization, which will strengthen our competitive positioning and enable us to better serve our customers.
Matthew Pine: We've also taken several targeted capital deployment actions since our last earnings call.
All aimed at optimizing our portfolio for growth and profitability.
Matthew Pine: In December, we increased our stake in Adreika to a majority ownership and management control of the technology platform at the heart of Xylem VIEW.
Matthew Pine: which is a strategic growth priority for us as utilities continue to digitize.
Matthew Pine: We also acquired a few tuck-ins to enhance our offerings in water solutions and services and water infrastructure.
Matthew Pine: Finally, just last month we signed a definitive agreement to divest a non-core business that came with the acquisition of Evoqua and represents about 1% of revenue.
Matthew Pine: As our 2024 performance indicates, transforming our operating model has energized the enterprise.
Matthew Pine: and that's reflected in the 2025 guidance we issued earlier today which is in line with delivering the long-term framework we committed to last May.
Matthew Pine: Before we go into more detail on that full year outlook, I'm going to ask Bill to unpack the team's fourth quarter performance, which provides the foundation for our momentum into 2025. Bill?
Thanks, Matthew. Please turn to slide 5.
Bill Grogan: As Matthew mentioned, we are very pleased with the strong finish to 2024. The team stayed focused and consistently delivered throughout the year, exceeding on our expectations, delivering record revenue, EBITDA, and earnings per share for the fourth quarter and the full year.
Bill Grogan: Demand remains positive with our ending backlog of 5.1 billion dollars essentially flat from the prior year, driven by progress executing at MCS on their past new backlog, but offset in part by growth across the other three segments.
Bill Grogan: Our book-to-bill ratio was near 1 in the quarter and exceeded 1 in the year. Orders were healthy, up 7% in the quarter, driven by strong performance across all segments, with water infrastructure leading the way with 10% orders growth.
Bill Grogan: The team's operational discipline delivered quarterly EBITDA margin of 21% up 140 basis points from the prior year.
Bill Grogan: This improvement was driven by productivity, price, and volume more than offsetting inflation and investments.
Bill Grogan: We also achieved a record EPS of $1.18, surpassing the midpoint of our guidance by 5 cents and marking a 19% increase over the prior year.
Bill Grogan: Our balance sheet remains in great shape with net debt to adjusted EBITDA at 0.5 times.
Bill Grogan: Year-to-date free cash flow increased by 29% from the prior year. The conversion rate of 116% was driven by higher net income, offset by higher networking capital, and increased CapEx.
Bill Grogan: In measurement and control solutions, we continue to convert the backlog, though total MCS backlog remained at roughly 1.9 billion dollars in line with the prior quarter.
Bill Grogan: This is a 13% organic decrease from the prior year driven by smart metering conversion.
Bill Grogan: Orders were up 6% driven by smart metering and analytics demand.
Bill Grogan: Revenue is up 6% again driven by smart metering demand and backlog execution.
Bill Grogan: EBITDA margin of 17.1% was 120 basis points lower than prior year. Driven by mix inflation and investments more than offsetting productivity, price and volume.
Bill Grogan: As expected, there was a sequential margin headwind for mix in the quarter as energy meters accounted for a larger portion of sales.
Bill Grogan: In water infrastructure, orders were up 10% in the quarter with strong demand and transport.
Bill Grogan: Revenue increased 8% driven by treatment and transport demand across most regions.
Bill Grogan: EBITDA margin for water infrastructure was up an outstanding 360 basis points.
Bill Grogan: Productivity, price, mix, and volume more than offset inflation and investments.
Bill Grogan: As expected, revenues were essentially flat to prior year, primarily driven by softness in emerging markets.
Segment EBITDA margin increase 60 basis points year-over-year.
Bill Grogan: Productivity makes and price more than offset higher inflation, lower volumes and other costs.
Bill Grogan: Revenue growth was up strong at 11% with strengthened capital projects, dewatering and services.
Bill Grogan: Growth was also fueled by projects coming online faster than anticipated as we enter the quarter.
Bill Grogan: Segment EBITDA margins was 22.8%, up 10 basis points versus prior year, driven by productivity, price, and volume, more than offsetting inflation, investments, and mix.
Bill Grogan: Now let's turn to slide 7 for our 2025 Segment Outlook.
Bill Grogan: Before I go through our overall guidance, I want to highlight that we have not factored in any impact for the recently enacted tariffs by the U.S. administration.
Bill Grogan: At this time, we do not believe that there will have a material impact on our full year 2025 results, but it is obviously a fluid situation and we will update our guidance accordingly as we learn more.
Bill Grogan: Heading into 2025, our markets remain positive and our teams are delivering on our commitment to simplify Xylem, focus on our customers, and expand margins.
Bill Grogan: We are providing full-year organic revenue guidance for the segments that is largely in line with our long-term framework.
In MCS, we expect growth of high single digits.
Bill Grogan: Our expectation is energy meters will drive a majority of the growth in 2025, and water meters will grow low single digits.
Bill Grogan: We expect to see sequential revenue improvements throughout the year, supported by a backlog and easier comps.
Bill Grogan: In water infrastructure, we expect growth of mid-single digits. We anticipate resilient OpEx demand due to the mission-critical nature of our applications and solid CapEx demand.
Bill Grogan: In applied water, we expect modest growth of low single digits. We see growth across developed markets, particularly in the U.S., with large projects coming online and a general recovery in their end markets.
Bill Grogan: Growth will be offset in applied water as well by 80-20 actions as we exit unprofitable businesses.
Bill Grogan: WSS growth is expected to be mid-single digits, driven by strength in outsourced water projects and solid demand in dewatering.
Bill Grogan: This segment is supported by a one billion dollar backlog and strong funnel activity across all of their businesses.
Bill Grogan: Now let's turn to slide 8 for our full year 2025 and Q1 guidance.
Bill Grogan: The Growth Outlook by Segment translates to full-year revenue of $8.6 to $8.7 billion.
Bill Grogan: resulting in revenue growth of 0 to 2 percent and organic revenue growth of 3 to 4 percent.
Bill Grogan: This is on the low end of our long-term framework due to the 80-20 actions we are taking across our segments that will be a larger impact in early phases of implementation.
Bill Grogan: EBITDA margin is expected to be 21.3 to 21.8%. This represents 70 to 120 basis points of expansion versus the prior year. Driven by productivity and price more than offsetting inflation and our investments in the business.
Bill Grogan: We will also benefit from our simplification efforts which help to mitigate mixed pressure from MCS.
Bill Grogan: This yields an EPS range of $4.50 to $4.70, up 8% at the midpoint over the prior year.
Bill Grogan: FX will be a meaningful headwind in the year and excluding those impacts EPS growth would be double digits at the midpoint.
Bill Grogan: As a reminder, we are committed to low double-digit free cash flow margin in our long-term financial framework. However, cash flow will be impacted in 2025 by our recently announced restructuring actions that may drop us slightly below our long-term goals.
Drilling down on the first quarter.
Bill Grogan: We anticipate revenue growth will be in the 0-2% range on a reported basis and 1-2% organically.
Bill Grogan: We expect first quarter EBITDA margin to be approximately 19.5 to 20 percent, up 30 to 80 basis points.
Driven by higher volumes, price realization, and productivity gains.
Bill Grogan: We do want to note that MCS EBITDA margin will be down year over year, driven by the energy and water mix we highlighted earlier, but will be up sequentially from Q4.
This yields first quarter EPS of $0.93 to $0.98.
Bill Grogan: We are entering the year with momentum and in a position of strength. Our balanced outlook reflects our strong commercial position, the durability of our portfolio, and benefits for our simplification efforts.
Bill Grogan: Well, we also continue to monitor broader market conditions and volatility, including potential new or additional tariffs and fluctuations in FX.
Bill Grogan: Regarding tariffs, we are ready to take additional price actions as needed to offset any increases and take cost actions to mitigate the impact on our margins.
Bill Grogan: Overall, our expectations for the year remain positive as we build on our strong momentum.
Matthew Pine: With that, please turn to slide nine and I'll turn the call back over to Matthew for closing comments.
Matthew Pine: Thanks Bill. We spend a lot more time looking forward than back, but the full year results do offer a moment for reflection and appreciation. We had a smooth leadership transition coming into 2024 and then we spent the year digging in and frankly getting a lot more done.
Matthew Pine: The results tell a great story, but not the whole story.
Matthew Pine: What we've accomplished in just one year is a huge credit to our colleagues around the world. They've delivered for our customers at the same time as doing the difficult work of deep change. I really appreciate how the team has leaned in and embraced our transformation as an energizing challenge.
Matthew Pine: Earlier I spoke about simplification and taking complexity out of our structure.
Matthew Pine: That work on structure goes hand-in-hand with refining our operating model more broadly, sharpening our high-impact culture, streamlining our processes and systems, and optimizing our portfolio with targeted capital deployment.
Matthew Pine: At the same time, we've amplified our commitments on sustainability, raising the bar again with our 2030 Sustainability Targets.
Matthew Pine: And, in 2024 alone, the team responded to more than 40 water-related disasters serving communities in times of crisis, from India to Spain to the Carolinas to Brazil.
Matthew Pine: Together, the team is transforming Xylem to be a better physician to fulfill on our purpose.
Matthew Pine: to empower our customers and communities to build a more water secure world.
Matthew Pine: In 2025, our transformation initiatives will improve our profitability, further optimize our portfolio, and make it easier for customers to do business with Xylem.
Matthew Pine: We know this kind of transformation takes time and may not happen in a straight line, but we've made a great start. We have an outstanding team, the right strategy, and privileged positions in attractive markets.
Matthew Pine: Building on the progress we made in 2024, we're looking ahead to a strong 2025 and delivering on our long-term commitment to profitable growth and sustainable value creation.
Matthew Pine: With that, Operator, I'll turn the call back over to you for questions.
We will now begin the question and answer session.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Speaker Change: We ask that you limit yourself to one question and a follow-up.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Dean Dre with RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Good morning, Dane.
Speaker Change: Maybe we can start with the restructuring announcement and just based upon your analyst state last year you knew that there was this was a next step coming and maybe be helpful if you
Speaker Change: kind of gave more color on the plan. You know, is it all SG&A? It seems like it's headcount. What's the mix between North America, outside of North America, and maybe some payback expectations?
Speaker Change: Yeah, I'll start us off and I'll let Bill get into some of those details in terms of the timing and geography and things of that nature, but You know, I just want to say these actions, you know, however necessary, you know Mean that value colleagues are leaving Xylem and you know, we don't take that lightly We're going to make sure we have ensure a smooth transition and that colleagues are treated respectfully and fairly so I want to start there
Speaker Change: To your point, Dean, the plan is consistent with our 24 Investor Day in May.
Speaker Change: You know really about taking complexity out of our business which Includes not only simplifying our structure, but really the implementation of 80-20 It's a little bit of both in terms of the the 8k filing the structure and the bottoms up we've done from the initial 80-20 work
Speaker Change: You know, we are focused on reducing that complexity, making it easier for our colleagues to do their job, but also making it easier for our customers to do business with us.
Speaker Change: And we've already seen here in the back half of 24 and as we enter 25, the organization is moving much faster. They're definitely more focused and we have much more end-to-end accountability.
Speaker Change: Maybe one other point I would call out is, you know, this is in service of growth.
Speaker Change: and you know at the same time we're doing this work it does allow us to redeploy our resources in our effort across the business to focus on a customers
Speaker Change: You know, the majority of the workhorse reductions are expected to be complete in 2025, with some of them moving into 2026.
Speaker Change: Yeah, and just to level set everyone, for those who didn't see it, as we highlighted in our 8K last week, we expect to incur total pre-tax charges of approximately $95 to $115 million. You know, we incurred some initial costs in Q4, but the bulk of the remaining expense will be realized in 2025 and early 2026.
Speaker Change: We expect to realize about $130 million of net benefits for the program over the next two years, with about $75 million of the benefit coming in 2025.
Speaker Change: Timing of the benefits will be more back half-weighted as we work through the labor negotiations and different processes around the globe, as Matthew mentioned. So think of it as kind of 30% first half, 70% second half.
Speaker Change: Again these actions are going to impact all of our segments and corporate functions with water infrastructure and applied water having the two largest impacts in Europe probably the most impacted region. The plan is a impacts a little bit less than 10% of our workforce and is mostly concentrated in SG&A.
Speaker Change: Great, I appreciate all those details. That's a big help. And then the second question, unrelated, just given the administration change, there's some
Speaker Change: Anxiety about potential rollbacks of PFAS. We saw a halt of a industrial PFAS test that
Speaker Change: Just what's your expectation here? I realize PFAS is not in your framework. That was made very clear at your analyst day, but just the understanding on and how what might be done differently from the industrial side versus drinking water side, but...
I'd love to hear your thoughts. Thanks.
Thanks.
Speaker Change: Yeah, I mean, to your point, I'll just echo, we didn't have any PFAS regulatory impact in our guide or in the LRP.
Speaker Change: for municipal or industrial. And that's industrial is the one that was still kind of a draft rule. And that specific draft rule, and I think you mentioned this recently in a note, Dean was dropped with the Trump executive order to pause all regulations. And it was I think it was aimed largely at the chemical industry.
and really designed to set an affluent limitation or guideline.
Speaker Change: and maybe a comment I would make I'd say you know Lee Zeldin recently stated in his confirmation testimony for EPA head of EPA that he would be an advocate for PFAS cleanup
Speaker Change: So it'll be kind of a wait-and-see when it comes to the industrial side, but we don't see any any rollback of the municipal side And I think the Trump administration is a lot of people know Were the ones that initially started the PFAS regulation for municipal drinking water in the first term so
Speaker Change: In general, we're, you know, we're still bullish on PFAS. We know that the timing is going to push out, but, you know, states, as we've talked about in the past,
Speaker Change: have taken action of their own, and specifically on the industrial side, Dean, we've seen a few states, specifically Georgia, recently
Speaker Change: Set standards for industrial affluence. So, you know, it'll be a little bit of a tailwind from a state-by-state basis But from a federal perspective, you know, the industrial side will will probably push out but the muni side is still tracking
Mike Hulloran: The next question comes from Mike Hulloran with Baird. Please go ahead.
Good morning, everyone.
Good morning, Mike.
Mike Hulloran: So first on the MCS side, maybe just talk through how you think about the margin progression through the year. I know you said sequentially improves through the year. What are we thinking for an exit rate or an approximate exit rate?
Speaker Change: But I have to imagine some of it's what your customers are saying, front logs, stuff like that too.
Speaker Change: Yeah, maybe I'll take the first shot. So if we start just with the Q4 margin performance and first just highlight again that's really related to the mixed shifts between water and energy. There's a couple, a few small one-timers, but fundamentally mix is the biggest driver of the year-over-year decline. You know, we talked about that last quarter, you know, and highlighted that.
Speaker Change: Then I think we need to just talk about the adjustment period over the next couple quarters as we do go from less water meter customer volume as they re-phase their deployment schedules
Speaker Change: Continue to work with our partners and customers to get home access and labor scheduling nailed down. We said that was 1 to 2 quarters, it's probably closer to 3 quarters, inclusive of Q4.
Speaker Change: This is going to shift that balance of sale towards the energy meters that we saw in Q4 and expect that through the first half of the year.
Speaker Change: And then I just want to make sure, again, from the full year perspective, MCS margins were phenomenal, right? They were up 370 basis points last year. And some of those core elements we will see next year as they continue to capture strong price, you know, the teams continue to drive solid productivity. Obviously, with this restructuring actions, they're going to get some benefit. Mix is probably the only thing that's an outlier relative to our short-term margin expansion journey for them.
Speaker Change: We've said I think Q4 is probably the bottom, they'll sequentially improve through the year as mix normalizes, some of the impact from the restructuring starts to take hold.
Speaker Change: And for the full year, we will see expanded margins. You know, first half there's a little bit of contraction, but then we'll see significant expansion in the back half with net-net. 2025 will exit at a higher rate than 2024.
Speaker Change: And then the second part of the question was just how you help me get to the high single digit organic guide and what that means from a customer perspective.
Yeah, so
Speaker Change: Overall demand is still healthy. The team has a very strong pipeline. We've won a couple of verbal awards that we haven't just received in the backlog yet.
Speaker Change: Really, Europe's the only place we've seen some softness, but the fundamentals across the majority of the business are still solid.
Speaker Change: You know, we're kind of a long way to go in the AMI adoption curve. Really, the short-term noise is just along this project rephasing. And just to remind everyone, right, the North American water business over the last two years has grown 30% per year.
Speaker Change: which is absolutely phenomenal relative to our peer set in that market.
Speaker Change: So, as we look to next year, again, the energy meters relative to the refresh that they're going through.
Speaker Change: will grow at a significant rate, you know, close to 40 percent. You know, it's the refresh cycle, and we've had a couple projects in backlog that we have full visibility to with defined ship dates. And then on the water side, relative to the backlog phasing that we have in line of sight,
Speaker Change: Customer Projects that we've won that have yet to just get into our backlog. We're pretty confident in the ramp that we'll see there in the back half. But again, on the water meter side, kind of low single digits and energy being the significant driver of growth.
Nathan Jones: The next question comes from Nathan Jones with DFEL. Please go ahead.
Good morning, everyone.
Speaker Change: I wanted to go back and follow up on some of Dean's questions on the restructuring. I think you said $75 million that you'll realize in benefits in 2025.
Speaker Change: which is about 90 basis points of margin expansion and kind of accounts for all of the margin expansion you're expecting at the midpoint of the guidance for 2025. You do get some organic growth, there should be some simplification benefits, there should be some pricing and other productivity benefits.
Speaker Change: Yeah, yeah, no, the simple walk, Nate, here is, you know, if we look at roughly the midpoint of 100 basis points.
Speaker Change: Our productivity and price are more than offsetting all of our material and labor inflation, as well as our continued investment in the business, giving us about 50 basis points of expansion with that group.
Speaker Change: Then, to your point, we're getting the benefit of our restructuring actions and the balance of the Evolquist synergies gives us about another 125 basis points of favorability.
Speaker Change: So about 175 basis points there, but then the biggest piece in the math is really the negative mix with an MCS that puts about 75 basis points of pressure, again, due to that energy and water mix shift netting out to the 100 basis points.
Speaker Change: You're still pretty early in the 80-20 rollout and I wouldn't imagine that this restructuring program gets you to the end state that you're looking for. Are you able to comment on the potential to see opportunities to do some more restructuring in 2026 or 2027 or whenever you get through this and start looking at the next round?
Speaker Change: Driven by the kind of first wave of 8020 with predominantly focused on our legacies island business
Speaker Change: with a lot more focus on applied water and water infrastructure and a little bit on on MNCS so
Speaker Change: Obviously, we didn't get through the entire segment. I think we talked about having about 40% of the business kind of exiting 24th fully through the tool. And through the first quarter of this year, we'll have about 70% of the business. So, absolutely, there's going to be more opportunity.
Speaker Change: as we continue to, you know, really optimize the portfolio and, you know, the customer, customer line simplification. So, you know, this is a journey. It's a, we need to move from a, you know, we talked about a transformation. It's really developing a transformative mindset in the business.
Speaker Change: and that means you're kind of never done optimizing so for sure there'll be there'll be more things that we look at over time.
Speaker Change: The next question comes from Andy Kaplowitz with Citigroup. Please go ahead. Good morning, everyone.
Hey, good morning, Andy.
Andy Kaplowitz: Matt or Bill, can you give a little more color into the bookings environment that you're seeing and maybe some of the cyclical headwinds in the emerging markets and or in applied water that you've seen and when they might turn, orders up 7% obviously seems solid in Q4. Would you expect that kind of order strength to continue in the 25 and it looks like you're predicting a modest turn in applied water. Can you talk about the visibility into that?
Andy Kaplowitz: Yeah, I think orders in the in the fourth quarter overall for all of our segments was extremely strong So we're continue to be pleased with the commercial momentum we have across
All of our businesses.
Andy Kaplowitz: Specific to applied water, yeah, they'll be back to growth in 2025.
Andy Kaplowitz: Yeah, we do see momentum across the developed markets, particularly in the U.S.
Andy Kaplowitz: They continue to have some larger project wins that we realized through 2024, a lot of those will be coming online. And then just a general recovery in a lot of their end markets.
Andy Kaplowitz: After a fairly challenging year, you know, we did talk about, you know, growth will be offset a little bit by some over 80-20 actions, exiting unprofitable businesses.
Andy Kaplowitz: As we really look for applied water to simplify their product portfolio and geographic presence to your point They have seen some challenges in emerging markets
Andy Kaplowitz: really where we want to leverage our technology and specific applications to win in those markets.
Andy Kaplowitz: and a double down on our core here in our developed markets with our largest customers through some new technologies and better overall operating performance.
Speaker Change: So, Applied Water is back to growth, you know, with a little bit of pressure from some of the 80-20 actions. But even on the 80-20 side, I think the incremental pricing they're getting from that tool set is really positive. So, bottom line performance for them in 2025 will be really strong.
Speaker Change: Very helpful, and then it appears Xylem passed on some large water assets that were available for a while But you do have a very strong balance sheet. So how are you thinking about M&A right now versus
Mike Hulloran: Yeah, thanks Andy. You know, first I just want to say how proud I am of the team's execution on the integration of Evoqua. I don't want to skip over that. I mean, that was a big transaction and we've delivered 18 months early in our cost synergy, so we built a lot of muscle and actually that muscle has translated well into our operating model transformation.
Mike Hulloran: You know, we talked about we'd be optimizing the portfolio, whether that, you know, divestitures or just access across products or business lines through 8020.
Mike Hulloran: that are underperforming or no longer fit. You know, one thing I'd highlight, and I might have mentioned this on the last call, but we put in place a very strong kind of acquisition committee process, and it's a much more strong bottoms-up process to drive more consistency.
Mike Hulloran: and help us gain momentum. Obviously, we want to deploy capital, obviously to our core, but second to that, we want to do accretive M&A.
Mike Hulloran: and we'll do opportunistic share buybacks if needed, but really we want to be consistent deployers of capital. And hopefully you're starting to see this as we exit 2024.
Mike Hulloran: To your earlier point, we're going to remain disciplined. And we're also going to be very aligned to our strategy and the value mapping work that we completed last year. So that's a little bit on capital deployment. And in terms of ADRICA,
Mike Hulloran: You know, we signed that, signed and closed that in Q4.
and moved our ownership to majority.
Mike Hulloran: So we could more deeply integrate and rationalize the R&D investments of that joint venture and with the Legacies Island business.
Mike Hulloran: And quite frankly, leverage the platform across is a standard for Xylem to help us be more efficient.
Mike Hulloran: We have a lot of confidence in the platform and its ability to solve a lot of our customers' biggest pain point, which is trying to manage their data in application management. So I think that's a really good fit for us and a lot of good momentum in that acquisition.
Scott Davis: The next question comes from Scott Davis with Mellius Research. Please go ahead.
Hey, good morning guys.
Hey, good morning, Scott.
Speaker Change: Guys, I wasn't, maybe I missed it. Is it fair to assume that the 80-20 headwind is about two points? Does that sound kind of ballpark?
Speaker Change: If you said it, I apologize, I didn't hear it. No, no, we did and it's a little less than two points.
Okay.
Matthew Pine: and then just to take a step backwards you know Matthew when you joined on time deliveries was was was kind of
Matthew Pine: you know, when it went through kind of a dark day.
Speaker Change: had to get to the other side of it. Where do you stand now on on-time deliveries and and maybe just some context to where where do you stand now and perhaps where do you think you'll be in a year? Assuming you're not where you want to be now.
It's a great question. I just did a
Speaker Change: Tour of North American factories a couple weeks ago and the two biggest thing I focus on, Scott, is quality and on-time performance. If you do those things right and you have a great product with a fair price, you're going to win.
Speaker Change: We have made improvements in on-time performance. It's only going to get better through 80-20 because 80-20 will help us
Speaker Change: simplify our factories and have better flow and just better execution.
Speaker Change: We've already started to see it happen. You know, we don't really get into quoting our on-time delivery, but I would just say that we probably, over the course of 2024, made a 500 basis point improvement. And we have about, I would say,
Speaker Change: 705 to 700 basis points more to go to hit our kind of what I would call our entitlement or where we think best in class is and you know if I look at our roadmap and our KPIs we will come close to that this year.
So we're keenly focused on that metric.
Brian Lee: The next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey guys, good morning. Thanks for doing the questions.
Brian Lee: I guess one on the free cash flow. I know you're talking about, you know, this kind of being a little bit of a softer year. If I back into it, I mean, you've given us.
Brian Lee: conversion targets in the past. I think this year I'm flying around maybe 70 to 80 percent. So one, is that kind of a fair range to be thinking about? And then two, you know, what are some of the biggest factors here in 25 that you know you have visibility or confidence around, you know, will revert back in 26 and is the target for 26?
Brian Lee: to be back to that 100% or higher free cash flow conversion.
Brian Lee: Yeah, I think, again, a little bit in the prepared remarks is really the largest
Brian Lee: Negative factors, the cost of the restructuring program, weighing on overall cash flows.
Brian Lee: Alright, fair enough. And then I know you mentioned also in the prepared remarks, you're not factoring in.
Brian Lee: Any tariff impacts you're not expecting anything at the moment just to kind of level set us
Brian Lee: You know, either supply chain or procurement, you know, exposure to some of the regions that are being talked about in terms of being potentially impacted by tariffs. Thank you.
Brian Lee: Yeah, I'll start us off and turn it over to Bill to get into some of the numbers, but you know, we don't believe that tariffs will have a material impact on our full year results for 2025. Our teams were ready, you know, sprung into action yesterday to help, you know, offset the tariff increases and
Brian Lee: You know, we were out obviously with our China increase. We had to pull back on a couple of others that we thought would be going out yesterday, but we were quick to take action and
Brian Lee: and we have taken action with regards to China. And, you know, we're obviously moving and mobilizing our supply chain where possible to make sure that we're taking advantage of second sources. We've spent a lot of time over the past two to three years
Brian Lee: on diversifying our supply chain, especially as we look at Asia.
Brian Lee: And then lastly, you know, just making sure that we're buttoned up on discretionary costs to mitigate any impact. So, you know, the teams are ready and we've taken some action with regard to the China tariff.
Brian Lee: We'll continue to monitor the situation over the next 30 days and see what comes of Canada and Mexico.
Brian Lee: You know, obviously monitor our customers and our channel partners and just try to understand how this may or may not impact their order pattern. So that's something that we'll keep a keep a close watch on. So maybe I'll pause there and turn it over to Bill just to give a little color on the numbers.
Bill Grogan: So if we look at, let's just call it the proposed tariffs for Canada and for Mexico and the enacted for China, they impact about 5% of our material costs as a percentage of sales.
Matthew Pine: The Canadian tariff impact is really negligible, and to Matthew's point, the team's done a phenomenal job post-COVID lessening our dependency on supply from China. The supply chain there is really just for in-country production. The Mexico tariff is the 80 for us and primarily impacts MCS and applied water.
Matthew Pine: Again, you know, both segments are taking the appropriate actions to mitigate the impact on our customers and on our bottom line. So, I think we're well positioned, you know, it's obviously a very fluid situation. So, we're keeping a close eye on it and taking any and every action necessary to mitigate the impact.
Speaker Change: The next question comes from Andrew Buscaglia with BNP. Please go ahead.
Hey. Hey, good morning, guys.
Hey, good morning, Andy.
Speaker Change: I'm just curious what the trends are in that segment. I know that can be pretty lumpy, but what do you see going into the first portion of the year? And then, you know, you got a couple months to digest President Trump and his new EPA pick. Obviously, treatment can be influenced by some policy there. Could you just talk a little about specifically what you guys think, you know, of this new administration and how it pertains to water solutions?
Speaker Change: Yeah, we knew there was a chance of this happening, but low enough probability they didn't want to build it into the expectations for the quarter.
Unknown Executive, Andrea Berg
Unknown Executive, Andrea Berg
Speaker Change: The funnel is extremely strong and we have a lot of sight to some larger wins here later in the year. So I think we're excited about what that segment's only been in effect for one year and the combination is really delivering.
Speaker Change: Some strong consistent performance. So maybe I'll turn it over to Matthew to talk about the regulatory environment. Yeah, so
Matthew Pine: We'll start by saying, you know, we operate in a sector where there's, you know, from my perspective, strong bipartisan consensus regarding the need for
Matthew Pine: and you know we do checks obviously with several utilities in the U.S. and we've confirmed you know continued OPEX and CAPEX spending increases into 2025 to improve you know a significant aging infrastructure in the U.S.
Matthew Pine: You know, we'll stay close to our government affairs team, myself and some other team leaders. We're going to stay close to the incoming administration as they take their new positions.
Matthew Pine: and you know again in his nomination hearing he did talk about PFAS and the need to make that a top priority. So I'd say net-net we're pretty positive on
Matthew Pine: The new administration's focus on water and you know, we'll continue to drive those relationships to make sure we understand it
Yeah, all right, thank you guys.
Thank you.
Matthew Pine: Okay, we'll wrap it up there. Thanks for your questions and thank you to everyone who joined today. And as always, we appreciate your interest in Xylem. All the best.
Matthew Pine: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.