Xylem Inc. (XYL) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Q2 Performance

  Xylem delivered high single-digit organic growth, expanded adjusted EBITDA margin by 170 basis points, and achieved an 11% growth in adjusted EPS.

• Standout Performance in MCS

  Measurement & Control Solutions (MCS) segment revenue was up 26%, with EBITDA margins increasing by 700 basis points compared to last year.

• Resilient Demand and Operational Discipline

  The company witnessed resilient demand across its largest markets and attributed its outperformance to disciplined operational execution.

• Successful Integration of Evoqua

  The integration of Evoqua is on track, with cost synergies well on track and commercial teams successfully leveraging Xylem's combined capabilities.

• Raised Full-Year Guidance

  Xylem raised its full-year guidance for revenue, margin, and EPS, reflecting strong momentum and resilient demand.

Pessimistic Highlights

• Orders Down in MCS

  Organic orders in the MCS segment were down 1% in the quarter due to project timing.

• Decline in Backlog

  The company's backlog declined modestly to $5.2 billion, primarily due to executing on MCS past due backlog.

• Margin Pressure in Applied Water

  The Applied Water segment saw a 200 basis point decline in EBITDA margin year over year, impacted by higher inflation and unfavorable mix.

Company Outlook

• Positive Full-Year and Q3 Guidance

  Xylem increased its full-year revenue guidance to approximately $8.5 billion, reflecting additional growth. EBITDA margin guidance was raised to about 20.5%, and EPS guidance was updated to $4.18 to $4.28. For Q3, revenue growth is anticipated to be 3% to 5% on a reported and organic basis.

• Continued Focus on Operational Productivity

  The company is confident in driving further margin expansion through operational productivity, including cost synergies and price offsetting inflation.

• Monitoring Macro Environment

  While closely monitoring the macro environment, including geopolitical and economic uncertainties, Xylem's overall outlook for the year remains positive.

Q & A Highlights

• Q: Can you provide updates on 80/20 implementation and its impact? (Deane Dray, RBC Capital Markets)

  A: The 80/20 initiative is progressing well, with initial price increases and customer communication underway. Significant P&L benefits are expected to start in late 2024 into 2025. (Bill Grogan)

• Q: What are the implications of the Supreme Court overruling the Chevron doctrine on PFAS remediation? (Deane Dray, RBC Capital Markets)

  A: The ruling introduces uncertainty in regulations. However, states are likely to fill gaps if national PFAS regulation is reversed. Xylem is well-positioned to partner with utilities on managing emerging contaminants. (Matthew Pine)

• Q: How does the current demand environment and guidance for the second half of the year look? (Mike Halloran, Baird)

  A: No significant changes in demand trends or guidance for the second half. The company remains confident in its end markets, with robust demand and a strong order pipeline. (Matthew Pine)

• Q: Can you discuss capital deployment and readiness for M&A? (Scott Davis, Melius Research)

  A: Focus remains on integrating Evoqua, but the company is building M&A capabilities and has a strong pipeline aligned with strategic goals. Timing and organizational readiness are key considerations. (Matthew Pine)

• Q: How is the combination of the service business with WSS changing conditions on the ground? (Joseph Giordano, TD Cowen)

  A: The combination is driving synergies, improving back-office processes, and enhancing technician utilization across the portfolio, leading to better results and customer experiences. (Matthew Pine)