Xylem delivered strong first quarter results, outperforming expectations across all metrics including high single-digit organic revenue growth and a 14% EPS growth.
Notable performance in Measurement & Control Solutions (M&CS) with over 20% organic revenue growth and more than 500 basis points margin improvement. Water Solutions and Services (WSS) also saw significant orders growth and contributed to overall margin mix.
Integration synergies with Evoqua contributed positively to the quarter’s performance, particularly in cost capture.
Financial Updates
Based on Q1 performance and resilient demand, Xylem raised full-year guidance for revenue, margin, and EPS, lifting EPS guidance by $0.08 from the midpoint.
Q1 saw a 4% increase in backlog to $5.3 billion and a 3% growth in organic orders. Organic revenues rose 7% with a 19.2% EBITDA margin, up 290 basis points from the previous year.
EPS for Q1 was $0.90, exceeding the guide by $0.05 and up 14% over the prior year.
Segment Performance
Measurement & Control Solutions: 22% revenue growth and EBITDA margins of 22.7%, up 550 basis points.
Water Infrastructure: 40% total growth, 6% organic growth with EBITDA margin up 320 basis points.
Applied Water: Orders declined, revenues down 4%, and EBITDA margin declined 380 basis points.
Water Solutions and Services: Orders grew 7% organically, organic revenue up 6%, and adjusted EBITDA margin strong at 22.3%.
2024 Outlook and Guidance
Full-year revenue guidance increased to approximately $8.5 billion, with total revenue growth at 15% to 16% and organic growth at 4% to 6%.
EBITDA margin guidance raised to about 20%, representing 110 basis points of expansion versus the prior year.
Updated EPS guidance to $4.10 to $4.25, reflecting an increase of $0.08 at the midpoint.
Q2 expected total revenue growth of 23% to 25%, with EBITDA margin approximately 20% and EPS of $1 to $1.05.
Strategic and Cultural Initiatives
CEO Matthew Pine emphasized the importance of a high-impact culture centered on empowerment, accountability, and innovation for driving the company’s growth and impact.
Xylem to introduce combined company goals for sustainability through 2030 in its upcoming sustainability report.
Question and Answer
Evoqua Integration and Revenue Synergies
Question
Can you provide an update on the Evoqua integration, particularly regarding potential revenue synergies, the rollout of the European business, and any new outsourcing contracts?
Answer
The Evoqua integration is progressing well, with cost synergies on track to meet the $100 million run rate target and revenue synergies ramping up.
The company is making quicker progress on the capital side of international expansion but is starting to build momentum on the services side, with several large-scale projects in the Americas and investigations in Europe.
Xylem has not been slowed by the integration, and the WSS segment, in particular, has shown outstanding results, including a recent large win on a long-term build, own, operate contract for a hydrogen plant.
Growth Algorithm and Portfolio Optimization
Question
What is the company’s approach to growth and M&A during the period of portfolio optimization and margin improvement?
Answer
Xylem remains focused on driving above-market growth as its top priority, bolstered by Evoqua synergies and the new leadership team’s initiatives.
The company emphasizes profitable growth and margin expansion, with a focus on simplifying the business to support both objectives.
From a capital deployment standpoint, the company will focus on high-growth markets with accretive margins and maintain consistency in its approach.
Initial Impressions and Cultural Integration
Question
What are the initial impressions after 100 days in the new role, and how is the company culture and integration progressing?
Answer
The team feels good about the progress and momentum, with a strong platform in place and a focus on value capture, simplification, and goal deployment.
The Evoqua integration is progressing well both economically and culturally, with teams coming together and working effectively.
The company is also focusing on building a high-impact culture to support consistent execution.
Organic Orders and Market Dynamics
Question
Can you provide pro forma organic overall orders for the company and discuss any notable changes in end-market dynamics?
Answer
Pro forma organic orders were 7%, indicating good momentum in Q1.
Demand remains healthy in the majority of end markets, supported by secular trends, government funding, and resiliency in municipalities and utilities.
Watch areas continue to be applied water, with a better second half comp and ongoing initiatives to improve performance.
Synergy Targets and Investment Allocation
Question
Are synergy targets more of an input or output, and if the synergies track above the target, will they likely be invested back into the business or shown on the margin line?
Answer
The company is running to a target higher than the original $140 million and will use the upside to both expand margins and fuel future growth.
Areas of Improvement and Focus
Question
What areas of the business do you see as historically over or under-invested, and where do you see opportunities for improvement?
Answer
The primary area of focus is simplifying the business to better serve customers and colleagues, with a customer-backed mentality and a focus on commercial execution.
This includes leveraging tools like 80/20 and other initiatives to reduce complexity and drive growth.
Applied Water Market and Trends
Question
Can you provide more insights into the Applied Water market, particularly in light of the book-to-bill ratio exceeding 1 and recent project wins?
Answer
The Applied Water market is largely as expected, with a tough compare to prior Q1s but ongoing softness in Europe and emerging markets.
The company expects a low single-digit decline in this segment for the year but remains confident in the long-term outlook and has initiatives in place to address headwinds.
Impact of EPA Rules on PFAS and Xylem’s Capabilities
Question
How do the new EPA rules regarding PFAS impact Xylem, and are there any capabilities the company is currently exploring, such as sampling or destruction?
Answer
The rules provide clarity and a timeline for compliance, and Xylem is well-positioned to partner with utilities on PFAS and other emerging contaminants.
The company has over 80 PFAS installations and a differentiated offering through its service capabilities.
Xylem continues to work on destruction technology and real-time sensing solutions through its combined company and Innovation Labs team.
Drivers of M&CS Margin Performance
Question
Can you provide more details on the drivers of the M&CS margin performance, including any one-time benefits and the outlook for sequential improvement?
Answer
The M&CS team delivered outstanding results with EBITDA margin up 550 basis points and almost 50% incrementals.
Drivers include labor and material productivity, incremental pricing, restructuring actions, and 80/20 initiatives.
The first quarter was stronger than expected, and while the sequential improvement may not be as significant, the team is expected to exit the year at record margins.
IIJA-related Growth Opportunities
Question
Can you provide an updated perspective on IIJA-related growth opportunities, including the potential impact on Xylem and the forward opportunity?
Answer
Xylem expects a slow and gradual increase in government funding, both in the U.S. and other markets, supporting market growth over the next 3 to 5 years.
The company does not anticipate a significant jump in its long-range plan due to incentives or subsidies.
Price Management and Inflation
Question
Can you provide more details on the company’s approach to managing price increases and offsetting inflation, particularly the shift from a target of price plus productivity to price offsetting material inflation?
Answer
The company is focusing on price capture with rising inflation and will discuss a new approach to strategic pricing at the upcoming Investor Day.
The goal is to offset material inflation with price and let productivity handle the balance of indirect and SG&A inflation, funding investments.
Opportunities from Increased Focus on Non-Revenue Water
Question
Are there any material opportunities for Xylem’s business from the increased focus on non-revenue water, particularly in Europe, and how is the company positioned in this area?
Answer
Xylem sees significant opportunities in this area, particularly through its Idrica platform, which can help utilities visualize data through AMI systems.
The company is actively working with utilities in Europe and globally on non-revenue water initiatives and sees opportunities in smart metering and analytical instrumentation, supported by its Idrica partnership.
Xylem’s Exposure to PFAS and Capabilities
Question
Can you provide more details on Xylem’s exposure to PFAS and its capabilities in sampling, destruction, or other areas?
Answer
Xylem has technology to capture PFAS through its acquisition of Evoqua and has over 80 PFAS installations.
The company is focusing on innovation and commercialization of destruction technology and real-time sensing solutions through its combined company and Innovation Labs team.
Xylem as a Data Center Play
Question
Can you explain the opportunity set for Xylem in the data center market, particularly on the power side or within the buildings themselves?
Answer
While currently a small part of the business, data centers represent a growing opportunity for Xylem, with solutions for water treatment, reuse, and outsourced water management.
Data centers require significant water for cooling, and Xylem’s offerings are well-suited to address the water resource challenges in this market. E
