Xylem Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• The team delivered strong earnings in Q3 with record EBITDA margins and EPS. Operational discipline accelerated Evoqua integration, ahead of schedule and capturing cost synergies.
• Healthy orders growth across all segments, organic orders up high single-digits, book-to-bill >1. Moderated revenue growth due to project timing pushouts and tough comps, but orders up sharply in MCS and WSS.
• Updated full year guidance: narrowing EPS guidance to $4.22-$4.24, maintaining EBITDA margin guidance of roughly 20.5%. Expect to increase stake in Idrica joint venture to majority ownership, consolidating into MCS segment.
• Change in executive team: Meredith Emerick appointed to lead Applied Water, succeeding Franz Cerwinka.

Segment Performance

• Measurement & Control Solutions (MCS): Backlog sits at roughly $1.9 billion, a 14% organic decrease from prior year driven by smart metering conversion. Orders were strong at 12%, revenue up 11%. EBITDA margin was 21.2%, up 350 basis points versus the prior year.
• Water Infrastructure (WSS): Orders were up 6% in the quarter, revenue increased 1%. EBITDA margin was up 50 basis points.
• Applied Water: Orders were up 4% and book-to-bill was 1, but revenues were down 4%. Segment EBITDA margin declined 10 basis points year-over-year but increased 110 basis points sequentially.
• Water Solutions and Services: Orders increased 11% driven by strength in outsourced water and dewatering. Organic revenue was down 1%. Segment EBITDA margin was 24.7%, up 200 basis points.

Guidance

• Full year revenue guide $8.5 billion, ~15% growth with organic revenue growth ~5%. Evoqua integration cost synergies exit run rate $130 million in 2024.
• Narrowed EPS guidance to $4.22 to $4.24 from $4.18 to $4.28. EBITDA margin guidance roughly 20.5%, 160 basis points expansion versus prior year.
• Q4 revenue growth anticipated to be roughly 2% to 3% on reported and organic basis. Q4 EBITDA margin expected in range of 20.5% to 21%, EPS $1.12 to $1.14.

Risks

• Macro environment risks: election uncertainty, geopolitical tensions, tariffs.
• Pockets of softness in Europe, emerging markets, and specific industrial segments.
• Project timing pushouts impacting revenue growth in certain segments, such as delays in MCS and WSS project deployments.

Question and Answer

Q: Tone of business, timing of decision-making, impact on WSS A: Q3 had utilities end market up 10% but industrial and commercial building end markets down 4% due to project pushouts. WSS had delays but fundamentals strong with healthy orders and expected pick-up in Q1 Q: MCS backlog, ramp down, orders A: MCS production constraints resolved, demand still strong. Backlog bleed continuing but high single-digit growth expected, with funnel up over 25% year-over-year Q: Price in segments, pockets of Europe/Asia weakness A: Price a tailwind, MCS with >200 basis points price cost spread. Europe and emerging markets have softness, China specifically with project delays due to economic environment Q: Idrica acquisition, Applied Water outlook A: Acquiring majority stake in Idrica for integration and synergy capture. Applied Water showing momentum with larger projects expected to support recovery in 2025 Q: Dewatering strength, margin progression A: Dewatering business strong but storm impact fringe. 4Q margin step down due to portfolio mix, including water infrastructure seasonal increase and MCS energy exposure