The operator introduces the Xylem's Third Quarter 2023 Earnings Conference Call and turns it over to Vice President of Investor Relations, Andrea van der Berg. The call will include a presentation by the CEO, COO, Senior Advisor, and CFO, followed by a Q&A session. The call will also include forward-looking statements, which are subject to risks and uncertainties. The company will not update these statements publicly and actual results may differ from anticipated ones.

The CEO of Xylem and Evoqua begins the call by providing a summary of the company's key performance metrics, including both GAAP and non-GAAP metrics. He announces that the first full quarter as a combined company was successful, with strong performance in all segments and exceeding expectations in organic revenue growth, EBITDA margin, and earnings per share. The team's focus on customers and delivering on commitments during the integration of Evoqua is praised, and the CEO highlights the expected cost and growth synergies of the merger. Overall, the quarter's results demonstrate continued momentum for the company.

In this paragraph, the speaker, who is the current CEO of Xylem, reflects on their last earnings call and announces the planned succession of both the CEO and CFO positions. The new CEO, Matthew Pine, will begin on January 1 and the new CFO, Bill Grogan, started on October 1. The current CFO, Sandy Rowland, will continue as an advisor until March to ensure a smooth transition. The speaker also thanks Sandy for her contributions and congratulates Bill on his new role. The company has had a strong performance in the third quarter, exceeding expectations in growth, margin expansion, and earnings per share in all segments, including Integrated Solutions & Services.

Xylem's overall revenues grew 50%, with a 10% increase in organic revenue. The U.S. and Western Europe saw strong growth, while emerging markets were down due to China. Demand remains resilient, with a backlog of $5.2 billion. M&CS saw a 25% increase in revenue, driven by chip supply and backlog execution, with all regions seeing double-digit growth. EBITDA margin for the segment increased by 190 basis points due to volume conversion, price realization, and productivity.

The water infrastructure business of Xylem performed well in the last quarter, with a reported growth of 40% and organic growth of 7%. This was due to strong price realization and backlog execution, as well as the integration of Evoqua's applied products technology business. The segment saw double-digit growth in all regions, with particular strength in developed markets. The Applied Water segment also saw growth in building solutions and resilient growth in developed markets. Orders were up 2% and EBITDA margin expanded by 20 basis points. The newly introduced Integrated Solutions & Services segment exceeded expectations in revenue in its first full quarter with Xylem.

In summary, Xylem's revenue, orders, and backlog have all shown strong growth on a pro forma basis. The company's adjusted EBITDA margin is also strong, and their financial position remains robust with a high level of cash and available liquidity. Xylem's investment thesis has remained constant over the past 12 years, focusing on organic growth, margin expansion, and free cash flow conversion. This has allowed them to build a durable business model and create economic and social value for their customers and communities.

The speaker expresses pride and excitement for Xylem's future under new leadership. They have worked closely with the new leader and have confidence in their ability to continue the company's growth and impact. The focus remains on solving customers' water challenges and expanding the company's reach. The speaker also mentions an upcoming Investor Day and provides a brief update on the company's integration and future outlook.

The integration of Evoqua has been successful and has brought together two strong cultures with a shared purpose. The cost synergies and growth opportunities were the main drivers for the combination, and the company is already seeing the benefits of scale and integrated offerings. There is a strong pipeline of global opportunities and the teams are working together to optimize the portfolio for growth. This includes structuring offerings to align with the needs of the water management market.

The company's goal is to make it easier for customers to access solutions and they have received positive feedback for reducing the number of vendors needed. The company has had a strong performance in the first three quarters and is monitoring potential signs of softness in certain regions. The company's 2023 outlook is based on organic growth and they anticipate continued demand from utilities and steady growth in the industrial sector. They expect high single-digit growth in the industrial sector and have seen strong demand for their AMI solutions and bundled offerings. They also expect steady CapEx spend in the wastewater market and potential moderation in emerging markets.

The paragraph discusses Xylem's expected growth in revenue and solutions, driven by steady replacement business and positive demand outlook. The company's full-year revenue, EBITDA margin, and EPS guidance have been increased, with expected organic revenue growth of 11%. The new guidance reflects a 32% total revenue growth and 200 basis points of margin expansion compared to the previous year. The paragraph also introduces Bill Grogan as the new team member and mentions his excitement to join the company.

The revised guidance for Xylem's fourth quarter breaks down growth expectations by segment, with M&CS projected to have the highest growth and Applied Water remaining flat. The company is committed to achieving free cash flow conversion of above 100% of net income. For the fourth quarter, total revenue growth is expected to be in the 35-36% range, with mid-teens growth in M&CS, low single digit growth in water infrastructure, and flat growth in Applied Water. The company also anticipates an EBITDA margin of 19.5% and EPS of $0.94 to $0.96. The CEO, Patrick Decker, expressed pride in the company's achievements and confidence in its future potential.

In the paragraph, the speaker expresses gratitude for the strong leadership team at Xylem and their ability to make a positive impact in the water industry. They also congratulate the new CEO, CFO, and express admiration for the work of analysts. The speaker then opens the floor for questions from the audience.

The speaker commends Patrick Decker for his leadership in developing the company and its portfolio. They then discuss the quarter and the progress of Evoqua, with a focus on revenue synergies and the company's guiding principles. They mention strong performance and the importance of retaining talent and merging cultures. The speaker also notes that they are on track for the $40 million cost synergy goal and have strong momentum in terms of revenue synergies.

The company has successfully integrated APT into water infrastructure and appointed regional synergy leads to drive value capture. Short term, they are focused on cross-selling products into industrial and municipal sectors, with a surprise success in services. Midterm, they plan to leverage Xylem's international footprint to bring capital products to Evoqua customers. An early synergy win involved providing a full solution to an oil and gas customer's wastewater issue. There has been gradual improvement in chip supply for M&CS, with a positive outlook for orders in the third quarter.

Matthew Pine, the CEO of a company, is discussing their recent performance with analysts. He mentions that although their orders were down 11%, their backlog is up 11% and their book-to-bill ratio is greater than one. He attributes the decline in orders to timing issues and explains that larger deals take time to convert to orders. However, he remains optimistic about the adoption of their product and sees potential for growth in the future. He also mentions that their chip supply has improved faster than expected and is expected to continue in the next quarter. The CEO and another executive, Patrick Decker, emphasize that the backlog and pipeline are healthy and their win rate is impressive.

Mike thanks Patrick, Sandy, Bill, and Matthew for their contributions and looks forward to working with the new leadership team. He asks about the outlook for end markets in 2024, considering strong backlog, regulatory tailwinds, and uncertain macro backdrop. Matthew says they are committed to the long-term plans and have great momentum from the Evoqua and Xylem combination. He also praises Patrick's leadership in building a strong platform for the company.

The speaker discusses the favorable macro drivers for their business, including water scarcity, aging infrastructure, and government funding. They also mention the strength of their OpEx and utilities and the diversity of cash flows from their durable business model. However, they mention some potential watch items, such as cyclical pieces of their portfolio and the situation in China. They plan to provide more color on these topics in their upcoming earnings call.

In the paragraph, the speaker discusses the positive impact of price costs in the third quarter for Xylem and expects pricing to moderate in 2024. They also mention that the mix may be affected by the energy sector but they are working to normalize it in 2024. They also address the decline in CapEx and OpEx in China and mention that the underlying demand remains healthy.

The speaker discusses the resilience of the industrial and utilities sectors, with utilities being a mixed bag due to funding timing for both capital and operating expenses. The speaker also shares their recent visit to China and the positive outlook for demand in the water and environment market. The integration of R&D efforts between Evoqua and Xylem is also mentioned, with a focus on eliminating duplication and prioritizing projects.

The company's R&D synergies are discussed, with Snehal Desai leading the team and bringing expertise from the legacy Evoqua business. There is overlap in their work on PFAS, and the combined efforts are expected to be more efficient and expedited. The company also benefits from partnerships with academia and startups. The call also includes congratulations to new executives Bill and Matthew and a question about emerging markets outside of China.

Matthew Pine discusses the performance of emerging markets outside of China, noting that they have been resilient except for some weakness in the Middle East. He also talks about the success of Xylem's partnership with Idrica, with over 200 customers globally and a strong pipeline. Pine highlights a successful example of land and expand in a southeastern city in the US, where they were able to secure a $40 million AMI deal by using the digital platform and their own applications.

The company recently acquired a $20 million metrology project in southern Europe from a large European utility. This is due to the successful implementation of their platform and strong relationships with customers. The company believes their platform is the key to consolidating utilities information and is also leading to opportunities to bundle their services. The company's focus is on helping customers improve infrastructure and make informed decisions on where to allocate their budget. The company sees potential for revenue synergies from both the Idrica and Evoqua acquisitions in the future. The company plans to stay focused on utilities but sees potential for expansion into the industrial and building services business in the future.

Joe Giordano congratulates Patrick and Sandy on their successful earnings call and asks Bill Grogan about implementing an 80/20 culture at the company. Bill explains that the team had already started this initiative before he arrived and they are piloting it in a few locations before rolling it out more widely. Patrick adds that the company has spent the last decade building a platform for customers, which makes it a prime candidate for applying the 80/20 principle.

The speaker explains that the current timing is ideal for the combination of Bill joining the team with his toolkit. The team had been working on this already, but Bill's skills will greatly benefit the company. The speaker also mentions that the 80/20 concept is applicable to all business models, including Evoqua's. They believe the infrastructure order rate is stable and resilient. The speaker also congratulates Patrick and Sandy and expresses that they will be missed.

The speaker, Matthew Pine, addresses a question about changes in customer behavior due to economic uncertainty and higher interest rates. He mentions that 50% of their revenue is from outside the U.S. and 75% is OpEx, and they are seeing resilience in orders in developed markets and emerging markets. He also mentions that treatment orders are up 6% in Q3 and they have a healthy funnel and pipeline. The CEO, Patrick Decker, adds that they have the broadest water platform and investors should pay attention to the percentage of their revenue that overlaps with competitors.

In paragraph 26 of the article, the treatment bidding pipeline is mentioned as the most important indicator of the health of utilities. It continues to show growth, indicating a positive outlook for the industry. The applied water segment is also discussed, with a focus on inventory and orders. The company does not have much stocking in this segment and orders are mainly for specific jobs. The company has seen improvement in the residential sector, which makes up a small part of their portfolio. The speakers express gratitude for the opportunity to work with their colleagues and partners over the past 10 years.

The speaker expresses pride in Xylem's current state and looks forward to the future under the leadership of Matthew, Bill, and the team. They emphasize the importance of Xylem's work and its commitment to making a difference in the world. The speaker thanks everyone and ends the conference call.

This summary was generated with AI and may contain some inaccuracies.