In the introductory paragraph of Xylem's Fourth Quarter and Full Year 2024 Results Conference Call, the operator welcomes participants and explains that the call will offer an opportunity for questions after the presentation, which is being recorded. Keith Buettner, Vice President of Investor Relations and FP&A, then introduces the call, mentioning that Chief Executive Officer Matthew Pine and Chief Financial Officer Bill Grogan will discuss Xylem's fourth quarter and full year 2024 results, as well as the outlook for 2025. Participants are requested to limit their questions to one question and a follow-up. A slide presentation is available online, and a replay of the call will be accessible until February 18. Buettner also highlights that forward-looking statements will be made, accompanied by a caution about associated risks and uncertainties detailed in Xylem's SEC filings, with no obligation to update these statements publicly. Attendees are directed to specific slides for further information.

The paragraph outlines Xylem's strong performance in the fourth quarter of 2024, showcasing significant achievements during a transformative year for the company. Key metrics like revenue, EBITDA margins, and EPS reached new highs, with revenue growing by 6%, EBITDA margins expanding by 170 basis points, and EPS increasing in double digits. The successful integration of Evoqua resulted in faster-than-expected cost synergies. Despite uncertainties in some markets, the overall demand remains robust, and Xylem is well-positioned for continued growth into 2025. The company is dedicated to its transformation efforts, focusing on improved execution and speed.

The paragraph discusses Xylem's recent organizational transformation and strategic actions. The company has shifted its operating model to a more streamlined structure to improve competitiveness and customer service. They've increased their ownership in Idrica, enhancing their technology platform, and made small acquisitions to boost Water Solutions and Services and Water Infrastructure. They also agreed to divest a non-core business acquired with Evoqua. Xylem's transformation is reflected in strong 2024 performance and promising 2025 guidance. William Grogan notes their successful fourth quarter, with record revenue, EBITDA, and earnings per share.

The paragraph discusses the company's financial performance, highlighting a stable $5.1 billion backlog and a book-to-bill ratio near one for the quarter, with orders increasing by 7%. Water Infrastructure led with 10% order growth. Quarterly revenue rose by 7%, and EBITDA margin improved to 21% due to productivity and pricing strategies. EPS reached a record $1.18, and free cash flow grew by 29% year-to-date. Measurement and Control Solutions maintained a $1.9 billion backlog and saw a 6% rise in orders and revenue, though EBITDA margin declined due to mix, inflation, and investments. Overall, operational discipline and strategic execution helped offset inflationary pressures.

The paragraph details an analysis of a company's financial performance and outlook within different segments. In Water Infrastructure, there was a 10% increase in orders and an 8% rise in revenue, leading to a significant margin improvement. Applied Water saw a 5% rise in orders, but flat revenue growth due to challenges in emerging markets, although its margins improved slightly. Water Solutions and Services experienced strong demand with an 8% rise in orders and an 11% increase in revenue, alongside a slight margin gain. The company remains optimistic about its 2025 outlook, though it acknowledges potential challenges from new US tariffs, which they currently believe will not significantly impact their 2020 results. Overall, efforts are in place to simplify operations, focus on customers, and expand margins.

The company provides its full-year organic revenue guidance for different segments, aligning with their long-term framework. In MCS, they anticipate high single-digit growth, driven primarily by energy meters, despite some softness in Europe. Water Infrastructure is expected to grow mid-single digits, supported by utility market resilience, Evoqua synergies, and price capture, although challenges in China's market and 80/20 simplification actions may pose headwinds. Applied Water's growth will be in low single digits, particularly in developed markets like the U.S., balanced by exiting unprofitable businesses. WSS is projected to grow mid-single digits, bolstered by strong demand for outsourced water projects and dewatering. The overall revenue for 2025 is projected between $8.6 billion and $8.7 billion, reflecting a 0% to 2% growth in total and 3% to 4% organic growth, with implementation of 80/20 actions impacting early phases. The EBITDA margin is expected to be 21.3% to 21.8%.

The paragraph discusses the company's financial outlook, expecting significant EPS growth driven by productivity, pricing, and simplification efforts, despite challenges like FX headwinds and tariffs. Revenue growth is projected to reach 0% to 2% in the first quarter, with EBITDA margins rising due to increased volumes and efficiencies. Restructuring actions may temporarily impact cash flow, but the company remains committed to its long-term financial goals and is prepared to adjust pricing to maintain margins. The overall outlook for the year remains positive, with a strong commercial position and resilient portfolio.

Matthew Pine reflects on the achievements of Xylem over the past year and outlines the company's progress and future goals. Despite a leadership transition, the team accomplished significant changes, focusing on simplification, structural refinement, and sustainable practices. The team's efforts in responding to water-related disasters demonstrate their commitment to building a water-secure world. Looking ahead to 2025, Xylem aims to enhance profitability, optimize their portfolio, and streamline customer interactions. Pine emphasizes the ongoing transformation, acknowledging that it takes time but expressing confidence in the team's strategy and market positions.

The paragraph discusses Xylem's plans for 2025, focusing on profitable growth and sustainable value creation. It addresses a restructuring announcement, emphasizing that although it involves valued colleagues leaving, the process will be handled respectfully. The restructuring is aligned with the 2024 Investor Day plan to reduce business complexity, streamline operations, and implement an 80/20 strategy. This initiative aims to simplify the organizational structure, enhance efficiency, and improve customer interaction. The company has already observed increased speed, focus, and accountability towards the end of 2024 and entering 2025.

The paragraph discusses a company's strategy to drive growth by reallocating resources and focusing on customers, which includes shifting some customers to channel partners for better service. This involves workforce reductions expected to be completed by 2025-2026, subject to local laws. William Grogan mentions anticipated costs and benefits, with total pretax charges estimated at $95-$115 million, and net benefits of about $130 million over two years, primarily in the later half of the timeline. This plan affects less than 10% of the workforce, focusing on SG&A, particularly impacting Water Infrastructure and Applied Water segments in Europe. Deane Dray then shifts the discussion to concerns about potential regulatory rollbacks on PFAS due to an administration change, to which Grogan notes PFAS is not part of the company's framework.

In the paragraph, Matthew Pine discusses the impact of PFAS regulations on both the industrial and municipal drinking water sectors. He notes that there hasn't been any PFAS regulatory impact factored into their guidance for either sector, partly due to a draft rule for the industrial sector being paused by a Trump executive order. This rule was primarily aimed at setting limits for PFAS chemical manufacturers. Pine mentions that the municipal drinking water regulations were finalized last year and there is no expected rollback. Lee Eldon, in his confirmation testimony as Head of the EPA, indicated support for PFAS cleanup efforts. While the industrial regulations might be delayed at the federal level, some states, like Georgia, are setting their own standards. Overall, they remain optimistic about PFAS regulations and acknowledge that progress may vary between state and federal levels, with the municipal side continuing to advance.

The paragraph discusses the anticipated margin progression for MCS throughout the year. It highlights the sequential improvement expected due to a mix shift between water and energy, despite year-over-year declines primarily driven by this mix change. The adjustment period is expected to take up to three quarters, during which energy meter sales will increase while water meter volumes decrease. Full-year MCS margins were strong, improving by 370 basis points last year. Continued strong pricing, solid productivity, and restructuring actions are expected to positively impact margins in the coming year.

The paragraph discusses the company's margin expansion and growth prospects. It notes that while there may be short-term margin contraction, margins are expected to expand significantly in the latter half of the year, with 2025 ending at a higher rate than 2024. Despite some softness in Europe, overall demand remains strong, supported by a solid project pipeline and significant growth in the North American water business and energy meters sector. Energy meters are projected to grow by nearly 40% due to a refresh cycle and clear project timelines. The company is confident in its growth trajectory, particularly in the energy sector, while water meters are expected to experience modest growth.

In the paragraph, Nathan Jones from Stifel inquires about the restructuring benefits expected to be realized by 2025, noting the estimated $75 million benefits and questioning why margins aren’t expected to increase more despite various positive factors like organic growth and simplification benefits. Matthew Pine explains that while productivity and pricing will offset material and labor inflation and continued investments, resulting in about 50 basis points of margin expansion, restructuring actions and Evoqua synergies will contribute an additional 125 basis points. However, a negative mix within MCS adds 75 basis points of pressure due to a shift in energy and water, leading to a net 100 basis points of expansion. Jones also asks about the possibility of further restructuring post-2025, to which Pine responds that current plans will extend into 2026.

The paragraph discusses the initial announcement in an 8-K document concerning Xylem's operating structure, highlighting a focus on the 80/20 strategy, which initially concentrated on legacy business areas like Applied Water, Water Infrastructure, and M&CS. The company has completed 40% of the business transformation and aims for 70% by the first quarter. The transformation is ongoing, seeking to optimize the portfolio and simplify customer lines continuously. Following this, a Q&A segment begins, where Andy Kaplowitz from Citigroup inquires about the bookings environment and cyclical challenges in emerging markets and Applied Water. William Grogan responds by noting strong order performance in Q4 and predicts Applied Water will return to growth in 2025, with significant momentum in developed markets, especially in the US.

The paragraph discusses Applied Water's progress and strategic decisions. The company anticipates project wins by 2024, a general market recovery, and faces challenges in emerging markets. They are focusing on simplifying their product portfolio and geographic presence while enhancing their position in developed markets through new technologies and improved operations. Although growth may be slightly impacted by actions like exiting unprofitable businesses, these measures are expected to provide positive pricing benefits. The paragraph also notes strong financial performance anticipated for 2025. Regarding mergers and acquisitions (M&A), although Xylem passed on some large water assets, they have a robust balance sheet. Matthew Pine highlights the successful integration of Evoqua and mentions the creation of a transformation management office to further capitalize on achieved synergies.

The paragraph discusses the company's capital deployment strategy, emphasizing the goal of achieving mid-teens EPS over the long term. It highlights plans to optimize the portfolio by divesting or exiting underperforming business lines through an 80/20 approach. The company has strengthened its acquisition committee process to ensure consistent capital deployment, focusing on core investments and accretive mergers and acquisitions (M&A). Opportunistic share buybacks are also considered. The company aims for disciplined and strategic alignment. The acquisition of Idrica in Q4, which was integrated with the legacy Xylem business, is expected to enhance efficiency and address customer data management challenges. The discussion then shifts to a question from Scott Davis regarding the 80/20 headwind, asking if it reflects a two-point impact.

In the conversation, Matthew Pine discusses improvements in on-time delivery performance at North American factories. He emphasizes the focus on quality and on-time performance as key drivers for success, alongside having a great product at a fair price. Pine mentions that they have made a 500-basis-point improvement in on-time performance in 2024 and aim for an additional 500 to 700 basis points to reach their best-in-class target. He expresses confidence in approaching this target based on their roadmap and KPIs. Following this, Brian Lee from Goldman Sachs asks about free cash flow, noting the year's softer performance and referencing past conversion targets, questioning if a 70% to 80% range remains valid and what factors might improve in 2025.

The paragraph discusses a company's financial outlook and strategic actions in light of potential tariff impacts. William Grogan mentions that the largest negative factor affecting free cash flow conversion is the cost of a restructuring program. He also notes the impact of upfront capital for build-on operates projects and investments in system improvements. Brian Lee inquires about potential exposure to tariffs. Matthew Pine responds that they do not expect tariffs to materially impact their 2025 results. The company has taken quick actions, especially with regard to China, and is adjusting their supply chain to minimize effects by utilizing alternative sources.

The paragraph discusses the company's efforts to diversify its supply chain, particularly in Asia, and manage discretionary costs to mitigate impacts from tariffs, specifically those related to China, Canada, and Mexico. The China tariffs affect about 5% of their material costs relative to sales, with negligible impact from Canadian tariffs, while Mexican tariffs primarily affect their MCS and Applied Water segments. The company has reduced its dependency on Chinese supply post-COVID and is taking necessary actions to lessen the impact of tariffs on customers and finances. The situation remains fluid, and they continue to monitor it closely. Andrew Buscaglia asks about the Water Solutions segment's performance and future trends and mentions having time to assess President Trump's new EPA pick.

The paragraph discusses the influence of a new administration on water solutions, highlighting the unexpectedly fast progress of water projects in Q4 compared to Q3. The company anticipates strong demand for outsourced water solutions, which may cause fluctuations in revenue before stabilizing as the business grows. They expect another strong year for Water Solutions Services (WSS), leveraging synergies within their portfolio. Dewatering had a successful year and is expected to continue performing well. The regulatory environment is favorable, with bipartisan support for clean and affordable water services, and water infrastructure funding is expected to remain stable.

The paragraph discusses ongoing efforts to improve the aging infrastructure in the U.S., with confirmed increases in operational and capital expenditures through 2025. The speaker emphasizes maintaining close relationships with the incoming U.S. administration, highlighting the administration's focus on water issues, including PFAS contamination. The speaker expresses optimism about the administration's priorities and commitment to strengthening these relationships. The paragraph concludes with expressions of gratitude to participants in the discussion, as well as an appreciation for interest in Xylem, before the conference call ends.

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