- Revenue: High single-digit growth, total revenue growth of 26%, organic revenue growth of 9%.
- Adjusted EBIT: Expanded by 170 basis points.
- Adjusted EPS: Grew by 11%.
- Backlog: $5.2 billion, a modest decline from prior year.
- Book-to-Bill Ratio: Approximately one.
- EBITDA Margin: 29%, up 170 basis points from the prior year.
- Free Cash Flow: Up 200% year-to-date versus the prior year, with a conversion of 62%.
- Net Debt to Adjusted EBITDA: 0.7 times.
- Measurement & Control Solutions Revenue: Up 26%, EBITDA margins up 700 basis points.
- Water Infrastructure Revenue: Total growth of 22%, organic growth of 7%.
- Applied Water Revenue: Down 4%, EBITDA margins declined 200 basis points year-over-year.
- Water Solutions and Services Revenue: Organic revenue up 12%, adjusted EBITDA margin 23.8%, up 60 basis points.
- Full-Year Revenue Guidance: Increased by approximately $50 million, total revenue growth at approximately 16%, organic revenue growth at 5% to 6%.
- Full-Year EBITDA Margin Guidance: Raised to about 20.5%, representing 160 basis points of expansion.
- Full-Year EPS Guidance: Updated to $4.14 to $4.28, an increase of $0.06 at the midpoint.
- Free Cash Flow Conversion: Expected to be over 120% of net income for the full year.
- Q3 Revenue Growth Guidance: 3% to 5% on a reported and organic basis.
- Q3 EBITDA Margin Guidance: 20.5% to 21%, up 70 to 120 basis points.
- Q3 EPS Guidance: $1.07 to $1.12.
Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Xylem Inc (XYL, Financial) delivered high single-digit revenue growth, driven by gains in both volume and price.
- The company expanded adjusted EBIT by 170 basis points and achieved an 11% increase in adjusted EPS.
- Measurement & Control Solutions (MCS) segment revenue was up 26%, with EBITDA margins increasing by 700 basis points.
- The integration of Volker is on track, contributing to the company's strong performance and synergy realization.
- Xylem Inc (XYL) raised its full-year guidance for both revenue and margin, reflecting strong operational and commercial momentum.
Negative Points
- Organic orders were down 1% in the quarter, driven by project timing within MCS and Water Solutions & Services (WSS).
- Applied Water segment revenues were down 4%, primarily due to softness in the commercial and industrial markets.
- MCS orders were down 18%, and book-to-bill came in under one due to project timing.
- Water infrastructure segment adjusted EBITDA margin declined by 60 basis points, impacted by inflation and acquisition costs.
- China's economic situation and project delays pose challenges, particularly in the water infrastructure segment.
Q & A Highlights
Q: Can you provide an update on the 80/20 initiative and its expected payoff?
A: (William Grogan, CFO) The 80/20 initiative is progressing well, with three businesses in the thick of implementation. We expect significant benefits to materialize by the end of this year, leading into 2025. The initiative is focused on improving customer experience, product innovation, delivery, and quality.
Q: What are the implications of the Supreme Court's decision on the Chevron doctrine for Xylem?
A: (Matthew Pine, CEO) The decision introduces some uncertainty in federal regulations, but we expect states to fill any gaps. Currently, 11 states have maximum contaminant levels for PFAS in drinking water, and another 12 have some form of PFAS regulation. We are well-positioned to partner with utilities to manage these challenges.
Q: Can you clarify your expectations for the second half of the year given the current demand trends?
A: (William Grogan, CFO) Our expectations for the second half remain unchanged, with strong performance anticipated in most end markets. We see continued demand in smart metering products and healthy growth in water infrastructure and WSS segments. Applied Water remains challenged but is expected to improve gradually.
Q: How do you see backlog trends evolving, and what is the expected book-to-bill ratio?
A: (Matthew Pine, CEO) Backlog remains strong, though it may decline slightly as we work down past-due orders. We expect robust demand and a healthy outlook for most end markets, with some lumpiness due to large projects.
Q: What are your plans for capital deployment, and are you ready for more M&A activity?
A: (Matthew Pine, CEO) Our first priority is the integration of Evoqua, which is progressing well. We have built strong M&A capabilities and have a robust pipeline of potential targets. We will continue to evaluate opportunities based on strategic fit and financial sense.
Q: Can you provide more details on the large project wins and their impact on your business?
A: (Matthew Pine, CEO) We have seen significant wins in data centers, green hydrogen, and semiconductor spaces. These projects leverage our capabilities in moving, treating, and sensing water, and we expect continued momentum in these high-growth verticals.
Q: What are the key drivers behind the strong performance in the Measurement & Control Solutions (MCS) segment?
A: (William Grogan, CFO) MCS segment revenue was up 26%, driven by strong demand and backlog execution. EBITDA margins improved by 700 basis points due to volume, price productivity, and favorable mix. We expect continued strong performance in this segment.
Q: How do you see the Applied Water segment evolving, given the current market conditions?
A: (William Grogan, CFO) Applied Water remains challenged, particularly in commercial and industrial markets. However, we expect gradual improvement in the second half of the year, driven by easier comparisons and large project wins. The segment is expected to return to growth in 2025.
Q: What are the opportunities for improving cash conversion through the 80/20 and simplification initiatives?
A: (Matthew Pine, CEO) The 80/20 initiative will help reduce complexity, improve inventory efficiency, and enhance DSO. We expect these benefits to materialize over the next 18 to 24 months, driving improved cash conversion.
Q: Can you provide more color on the treatment orders and their regional performance?
A: (Matthew Pine, CEO) Treatment orders were up 22%, with strong performance across all regions. This indicates continued capital investment and healthy demand for water quality and scarcity solutions. We expect this momentum to continue.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
