Xylem(XYL) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2023, Xylem achieved organic revenue growth of 9%, with full-year organic revenues up 12% and EBITDA margin expansion of 190 basis points [7][8] - Adjusted earnings per share (EPS) grew by 20% for the full year, with Q4 EPS at $0.99, exceeding guidance by $0.03 [13][14] - The company ended the year with a robust financial position, including over $1 billion in cash and a free cash flow conversion of 122% [14] Business Line Data and Key Metrics Changes - Measurement and Control Solutions (M&CS) saw orders growth of 14% and revenue growth of 21%, with improved EBITDA margins of 17.3% [16] - Water Infrastructure reported orders growth of 9% and total revenue growth of 30%, although EBITDA margin was down 90 basis points due to legacy Evoqua impacts [17] - Applied Water experienced flat revenues with a book-to-bill ratio of 0.9, indicating a softer demand environment [18] - Integrated Solutions and Services (ISS) had orders growth of 5% and pro forma revenue growth of 10%, with an adjusted EBITDA margin of 21.1% [19] Market Data and Key Metrics Changes - The backlog across the business grew to $5.1 billion, with organic orders increasing by 10% in Q4 [13] - The U.S. market led growth with double-digit increases across all regions [13] - Demand dynamics in China are being closely monitored, with expectations for flat revenue in 2024 [56] Company Strategy and Development Direction - The company is focused on capturing value from the Evoqua acquisition and enhancing margin expansion through operational excellence and productivity [36][37] - A new Water Solutions and Services segment was created to streamline offerings and enhance recurring revenues [10] - The company aims to simplify water solutions for customers, emphasizing the importance of reducing complexity in water management [30][39] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the resilience of end markets, particularly in utilities and industrial sectors, despite some softness in Applied Water [48][50] - The outlook for 2024 includes organic revenue growth of 3% to 5% and EBITDA margin expansion of 50 to 100 basis points [23] - The company is prepared to take additional cost actions if necessary to maintain margin expansion amid potential volume declines [25] Other Important Information - The company plans to provide recast financial information aligned with the new segment structure later in the month [20] - Xylem's investment thesis remains robust, with a focus on delivering economic and social value through its capabilities [32] Q&A Session Summary Question: What are the top priorities for the company as it starts the year? - The CEO highlighted the importance of capturing value from the Evoqua acquisition, accelerating margin expansion, and scaling the services business enabled by digital solutions [36][37] Question: Can you provide an update on the rollout of the 80/20 initiative and revenue synergy plans for Evoqua? - The CFO mentioned that the 80/20 initiative is a multi-year journey aimed at systematic complexity reduction, with pilots already underway [41] - The CEO noted that regional synergy leads have been appointed to drive revenue capture globally [44] Question: How is the company viewing the CapEx environment in utility and industrial markets? - Management reported strong momentum in CapEx, particularly in the Treatment business, with no signs of pullback in orders [48][49] Question: What are the expectations for pricing in 2024? - The CEO indicated that pricing expectations will ramp down compared to 2023 but will still be higher than pre-pandemic levels [52][53] Question: Can you comment on the situation in China? - The CEO stated that while the backlog is building, revenue conversion has been slow due to funding issues, but the outlook remains flat for 2024 [56] Question: What is the company's approach to M&A in 2024? - The CEO confirmed a strong M&A pipeline with a focus on small to medium bolt-on acquisitions while prioritizing the integration of Evoqua [60]