Danaher Corporation (DHR) Earnings Call Transcript & Summary

Good morning, everyone. I'd like to get started with our first panel today for the Future of Water Conference. This panel is called New Opportunities in Smart Water Systems. And we're delighted to have 4 senior leaders from the global water sector with us today to share their insights into how their company is developing sensors, network and software-driven product and services that really address the new biggest pain points for municipal and industrial customers. We heard a lot about that on our keynote from Dave Henderson. Now we get to hear specifically from the company. So we have 4 panelists. Going in alphabetical order. We'll start with Kevin Klau, who's President of Hach Water Quality, that's part of Danaher. Then we'll go to Ron Keating, President and CEO of Evoqua. After Ron, where -- we have Scott Hall, President and CEO of Mueller Water. And then Patrick Decker is the anchoring panelist CEO of Xylem. So each panelist is going to have 5 minutes or so to spotlight how their company is positioned today in smart water systems and where they see this business growing. I've also asked them to address how COVID is impacting their business today in smart water and how do they see this business growing. Again, Bill Malarkey and I will be comoderators. And we'll also save time at the end, so the panelists have a 1-minute kind of parting shot, closing comments and we'll go around the horn there. And with that, let me hand the floor over to Kevin Klau, President of Hach Water Quality as part of Danaher. Take it away, Kevin.

Thanks, Deane. Good to be with everyone, and thanks for the opportunity. I'll talk about 3 things today. First, I'll talk about how we see smart water evolving. Second, I'll talk a little bit about a recent acquisition we did of a company named Aquatic Informatics. That's relevant to the conversation. And then I will talk about the impact of COVID on our businesses. As we see smart water evolving, I think the same macro drivers that others have talked about are continuing. Constrained budgets, aging workforce, explosion of data and information but not very well organized and then, certainly, COVID here. More recently it is certainly a driver that's impacting the adoption of digital water technologies. From our perspective in the Danaher platform, we have a lot of instrumentation businesses and a variety of different business models, and we've seen a lot of appetite for point solutions over the last several years and we think that continues. These are really the integration of hardware and software to solve valuable problems in municipal operations. Typically, we see this a lot in waste water, could be applications like managing phosphate or sludge or nitrification. We also see a lot of these solutions in asset management. Hydraulic modeling might be a good example there. For example, that's pretty well played out in some respects. It's certainly -- I think the adoption I saw is over 50% of utilities have embraced some kind of hydraulic modeling solutions, increasing over the next few years, we expect to be 80% or above. But then in industrial, we see the adoption of point solutions around applications like cooling towers or heat exchangers. Again, similar concepts, taking sensor data, integrating it with models, helping customers make better decisions. And those -- the benefits that customers see there are lowering operating costs, reduction risk and improved compliance. Typically, these would be purchased by more junior decision-makers. And so while we've seen this from our perspective probably most clearly in the Hach business, we do see it across a number of our businesses in Danaher. And I think Hach last year said publicly that they've seen growth of 35% in the Claros Digital Solutions offering in terms of compounded revenue over the last 4 years. And so that's certainly a growth rate well on what we would see normally in a lot of the other aspects of the sector. In addition to the point solutions, we also see an appetite for larger-scale deployments. And I think this is maybe a more recent or emerging trend. This is typically going to be at the enterprise level. And we see this, for example, in places like the environmental aspect or part of the water sector. This would be large-scale data management, water quantity, water quality reporting, could be federal or regional agencies, and they're aggregating a ton of information and informing decisions, either their own or those that depend on that information, whether those are private or public sector companies. In municipal and industrial, we also see the appetite for scale deployments. We see this in terms of compliance monitoring and reporting. And then these typically are going to be sold to more senior decision-makers. More recently, we've also seen more interest in digital twins, where people are getting a more comprehensive view of their facilities, down to the instrumentation level, whether that's a pump or an analyzer, but also extending really throughout their whole network. The adoption or trends are positive in both areas. And I think from a Danaher perspective, the acquisition I mentioned, maybe shifting to that now, is something we're really excited about. So we had a decentralized business model. We saw Aquatic Informatics as an opportunity to really acquire a great asset in the space that has a ton of capabilities. They really play nicely across municipal, industrial and environmental. And for us, it's a chance to take what we know about applications and instrumentation and bring it together with a group that really lives in the software space and helps us, hopefully, we think, over time, address a lot of the pain points, some of which I mentioned already. They have a couple of feature reference customers, maybe the most notable being the U.S. Geological Survey, one of the largest data generators and consumers in the space. And I think that's where they learn to really manage information at scale. I think when we combine that with the applications insight we have across the business, we're really, really excited about what that potential brings to us. Maybe I'll close with a few comments on the COVID impact. And here I would say it's been mixed. On one hand, on the negative side, we've seen consumable demands remain pretty solid but some of the instrumentation purchases certainly have pushed out a little bit to the right as customers absorb the implications of COVID. On the positive side, though, Deane alluded to this earlier, I think maybe Dave Henderson, there have been some new applications that emerged. Certainly, we participated in the explosion of interest in surveillance testing and monitoring of COVID-19 in wastewater. We think there's a premium being placed on insight into operations, in part due to the lack of the ability of customers over the last few months to get into the enterprise as often as they would. That's also driven an interest in remote connectivity and really the opportunity for people to partner with companies that can provide insight, can do it from a distance and really help them ensure that they can run their businesses smoothly, whether that's on the municipal side or the industrial side. So really kind of a mixed impact. We were down a little bit in Q2, but feel like our resilient business model has really served us well through some difficult times here. So in summary, I'll just say that we see some positive trends, both on the point solutions and more on the enterprise side. We're excited about having Aquatic Informatics in the fold, and we see some mixed opportunities, some positive -- uncertainly from COVID, but also some headwinds. And with that, I will turn it back over to Ron.

There you go, Ron, all yours.

All right. Thanks, Deane. Thanks, Kevin. I'll actually pick up where Kevin left off, and I'll kind of cover 3 different areas where we're focused. One is really the COVID impact. We'll start with that. I'll talk a little bit about smart water and the adoption we're seeing and the investments we're making. Ultimately, as we've entered the COVID environment, it's been very challenging. We serve a very diverse set of end markets, roughly 10 industrial end markets, along with a couple of municipal markets. But I would say that our first priority has been very focused on protecting the health and welfare of our employees. We have service techs that are out every single day actually changing the water system next to the blood analyzer that's testing for COVID. So we've got team members that are engaged, that are involved. We've had to ensure that we have continuity of supply to our customer base because ultimately they can't operate without us and ensuring that, that resiliency has been -- there has been very strong. And then ultimately, as we've entered a pretty tough environment in the overall business, the economy, as Kevin alluded to, we had to make sure we're focused on the balance sheet, make sure our flexibility is there. The balance sheet is strong. And we focus on cash flow, and it's actually been pretty good. So what we've seen in digital water and the adoption through COVID has actually shifted the curve to the left, I would say. It's improved the rapid adoption at which customers were focused on connected solutions, making sure that we're on site 24/7 virtually, whether we're on site physically or not. Ultimately, it's enabled our service techs to be able to diagnose exactly what they have to do before they go to a customer site. We have deployed really rapid dashboards around health care, around high-use markets, a lot of the health and welfare and what people are dealing with now as well as just day-to-day activity across power generation, hydrocarbon, chemical processing, et cetera, where we are watching the water system, we're watching the demand on site without actually having to be there. And then frankly, when we deploy a service tech, they are going in and they know exactly what they're focused on, being able to pinpoint and go in and execute on a service and do it right the first time and make sure we're not going into diagnose and then having to go back into that. So it has -- it's driven the adoption rate of our connected solutions across the industry as a whole and across the customer base. And frankly, it's created a bit of a pent-up demand that I think we're going to see when things start opening back up. Customers that were in the queue to have smart water deployments done prior to the COVID shutdown had to delay because they didn't want additional people on site in a lot of cases. And so we've got a little bit of demand that's pent up, that's going to happen as the market start opening back up and we actually can get into customer sites. And frankly, the ones that didn't go ahead and accepted and didn't sign up earlier are saying we made a mistake, we should have done this much more rapidly, and we are very strong -- strongly adopting the new opportunities now. So it's created a pretty resilient business model for us. I mean, on services with connected Solutions, our ISS business, is 60% service and aftermarket. So we're on site with a customer, providing quantity and quality against the guarantee. And really, the final thing it's done is it's driven investment from our customers and from us in a broader application on outsourced water. Our Water One, we have driven around primarily service deionization. We've expanded that much more broadly across the portfolio into our mobile assets as well as our municipal services offering. So we are connecting. We're looking at the water system treatment across multiple points of sales and service to be able to have multiple feedback loops so that we can expand and operate that. And frankly, it's driving customers to say, you do what you do well, providing us quantity and quality of water. We'll do what we do well, which is producing a product or service. So it's positive. Overall, I'd say the COVID environment for the adoption of digital, the adoption of connected solution is very positive for us. And with that, I'll pass it back to you, Deane or Scott.

Thanks, Ron. Scott Hall, President and CEO of Mueller Water, you're up next.

Thanks, Deane. Thanks, and thanks for having us this morning. So yes, like the other presenters, I'll talk about 3 things. First and foremost, around COVID and its impact. And then as Kevin mentioned, the accelerating need for smart water. And last but not least, where we are with the development of our sensor array and the Centrix product line, which is meant to be a UI that allows water utilities to look at their infrastructure, their health of it and start making intelligent decisions around asset management, and in particular, their valve pipes and hydra infrastructure. So first, COVID's been fairly difficult in the manufacturing sense in that we have several thousand employees around the world that are always within 6 feet of each other prior to the outbreak of the disease, and we've had to redesign work. And redesign both the nature of work, at workstations, relayout factory floors, things like that. And I think most of it's behind us. Certainly some efficiency loss. But on the whole, we did a really good job, I think, from a logistics point of view and from a personal protection point of view and from a work separation point of view. And so I expect going forward, the impacts to be minimal. Obviously, we're watching for the communities that have not got their arms around the outbreak. And we feel like that from where we are, we can see visibility to the demand environment as we expect it to be a little softer in the project world as a result of all of the funding difficulties that the utilities are going to be looking at. And I think also a lack of will to understand where to turn next or what the economic recession is going to look like as a result of COVID-19. So all in all, I think it's going to be something that the industry, Mueller and all of us really managed through. And I think, as Ron said, I expect cash flow and performance to continue to be pretty good as it was in our Q3. The acceleration of smart water and COVID though really are kind of linked. I think that certainly, in the -- in the sense that water utilities used to send crews out to exercise hydrants or exercise valves, a lot of work, a lot of that drive-by metering, reading, a lot of kind of if you have cloudy water, send a crew out and do a truck roll. And I think people are realizing that, that was all kind of busy work and that most of that could be automated today. You take that coupled with the fact that the infrastructure post World War II installation is the bulk of the water infrastructure, it's approaching 70 years old, we've seen break rates, leakage rates and all of those things accelerate over the last 7, 8 years. I think we're nearing end-of-life in a lot of communities for the useful life of the infrastructure for drinking water. And the result is that I think, as you know, we are kind of a mind that the time for reinvestment in it has long since passed and that the amount of money it would take to go replace that infrastructure is not realistically going to be raised from water receipts. And so I think that asset management is bubbling up to the top of the crisis for water utilities. And as a result of that, the tools available from smartwater via analytics, the informatics and the monitoring systems that Centrix represents, I think, are going to be more and more important to water utility operations, and we're going to see more automation. We're going to see more analytics. As Kevin talked about, trying to manage that infrastructure asset management problem, that's becoming one of the largest drivers for water utilities in the near future. Which brings me to my third subject, and then I'll turn it back to you, Deane, that is we have been on a 3-year journey, creating a UI that not just rent our meters and not just integrate it to our smart hydrant or to our leak detection technology, but it's meant to be an interface for pressure monitoring, virtual digital metering areas, virtual sensing, along with real log sensors and part sensors. And so we have the leak detection rolled out. We're in the midst of rolling out the meters, and we expect pressure and flow to be the next 2 that come out and have transducers and sensor arrays available. And so we remain really optimistic as, frankly, the only company positioned to actually make the products that go in infrastructure and put the sensors and have the analytics. And so we're on schedule and on target with that. I do think the adoption will pick up as a result of COVID. And I do think that we're going to start seeing more actuation in the world, more automation of water and water routing and more automation around the asset management aspect. And so we're very excited about the future and looking forward to working not just with the panelists, but with all of our customers around what's next for them. And with that, Deane, I'll turn it back to you. Thanks.

Thanks, Scott. Patrick Decker, you're up, CEO of Xylem. Take it away.

Thanks, Deane. First of all, Deane, just a big shoutout to you for creating awareness and interest in the water space, not just for social causes, but as an investable asset. And again, the fact that you're taking the time to arrange this is a big deal for me, I know. If I step back, and I'm going to keep it brief here, if you think about what problem are we solving for from a social perspective and economic perspective. We, at Xylem, look at things in kind of 3 major challenges. The first is the scarcity of water. The second is resilience of infrastructure to water challenges. And then third, how do we address those in a way that's affordable? Scarcity, people immediately go to famine areas in India or Africa or parts of the U.S. No, it's also -- it's clearly that, but it's also the access to water of our industrial customers as they try to expand globally. And we see drought-stricken parts of the world that we've never seen before. We also see resilience challenges of climate change. Now you could say it's also the pandemic. But I think what we see most is the affordability issue, Deane. How do utilities, governments fund this? But at the same time, how do individual rate payers pay for it? Here in the U.S., the wealthiest country on the planet, those who make the lowest 20% of wages in the country, the water bill can represent up to 20% of their net take home pay. That is unconscionable. And it's also become a huge political issue. And so the good news is there are so many ways through technology to be able to address and deal with that. So scarcity, resilience affordability. The good news is the technologies exist today, Deane, as you know, to be able to address these challenges. And that's what I look forward to talking about. But it's also not just digital. Everyone in this panel, we've got a number of product and solutions that have capabilities embedded in them, that have been around for years that are solving these problems. And I'd love to spend as much time talking about that in terms of how we are connecting our existing products and solutions in these areas than just purely digital. We tend -- you know, Deane, but we -- as a sector tend to spend more time talking about the U.S. This is a global issue. 70% of the investment in new water infrastructure is happening outside the U.S., and I'd love to spend some time talking about how each of us are addressing that. And we've seen growing demand in China and India like never before. It's certainly reinforcing our top line and our bottom line. But more importantly, for those that are listening in, I just want to make sure we don't get stuck in a U.S. water utility discussion when there's so much else going on around the world. Lastly, technology, Deane, for me is also having a huge impact on sustainability. And I talk about sustainability with a big S, not just environmental, health and safety. It really is what are we doing as companies on this panel to make sure that we have enterprises that are around over the next 20, 30 years to actually solve these challenges? The World Economic Forum says that by 2050, up to 25% of the world's population is going to be facing absolute water scarcity. What are we doing as companies to make sure that we are around by 2050 to help solve that challenge. So with that, Deane, you've always said, don't invest in any one of us because we're in the water space, okay? That's a great end market. I could go through the whole economic thesis for each one of us, but I'll hand it back over to you.

Thanks, Patrick. Yes. That last point, we always say, just because -- we tell investors, just because you're in the water sector, doesn't make it automatically a good investment. It's -- you still have to orchestrate consistent growth, cash flow and present that regularly to investors. But the good news is you all are in a critical essential market. That was clear during COVID that you all -- instantly, every one of your businesses was essential and you had to figure out how to get your workers to the plants and help the customers because people were still turning on their faucets and flushing toilets and expecting that all to work.

All right. So look, you all have done a terrific job in setting the stage exactly the way we had hoped you would in terms of what the key topics are. We not want to do initially since, not surprisingly, I got 3 e-mails while you guys were all speaking. Everyone has this urgency to get a sense of what municipal budgets are like currently in next year. And Patrick, on your point, it's not just -- don't just address the U.S., but talk about what the budgets look like and the urgency looks like outside the U.S. developed markets and emerging markets. So municipal budgets, what's going and what we should know? We're going ask the next panel as well, that we have the utilities. But let's have the expectations of the key suppliers. We'll go in reverse order. Patrick, and -- why don't you start? Start there, please.

Yes. So the point I made, Deane, was affordability is -- has always been one of the top challenges, and I'd love to hear the others' perspectives on this. In the developed markets, so let's think about North America and Europe. Anywhere -- our data, again the others may have different data, our data suggests that somewhere between 60% to 70% of the utilities in North America and Europe, their funding comes from ratepayers. So rates already approved, it's simply a collection issue, which is a challenge in and of itself. Whereas in the emerging markets, it's quite frankly the flip flop. Almost 2/3 of the funding actually comes from the government. In China, it's 65%. In India, it's roughly 60%. So those dynamics are very relevant in terms of how the utility is thinking about their planning cycle. The other thing I would say, Deane, is I think even in the U.S., we tend to assume that every utility is on a kind of fiscal year-end -- calendar year-end. They're not. And so what we're paying very close attention to right now, and I would love to hear, especially from Scott because, Scott, you're probably most exposed in any of us to the U.S. utility, is they're on different planning cycles. And so we're paying close attention right now to what are we seeing coming out of June fiscal year-end, September fiscal year-end, now December. And so I don't think, Deane, this is so much of a, let's guess what's going to be happening. I would suspect, Scott, you're able to comment immediately. I mean, I can give you my perspective on that, but I don't want to spill the show here. So Scott, go ahead and maybe give your perspective on what you're seeing.

Yes. I think that people have to realize that CapEx to OpEx budgets have been shifting dramatically since -- especially since 2008. So if you look at the U.S. congressional data, you would see that the OpEx budgets continue to go up and up and up. And the break fix as a percentage of OpEx budgets continues to go up and up and up. And I don't think there's anything a utility can do about that, Deane. The reality is that the infrastructure is old, and they're going to have to spend money just on fixing it, and that they have these critical break areas and critical breakdown areas in wastewater management and drinking water delivery and all those. So I would expect the operating expense budgets to continue their [ inabsorbable ] creep up. You may be able to delay proactive maintenance a year or 2, but there's not a lot the water utilities can do there. And so I would expect that the project piece of the CapEx spending for water utilities to be the thing that's going to be, I think, a little softer in the near term. And I would say that we were all expecting that before COVID anyway. Every time we've had an election year with the President, every time they get around talking about infrastructure spending and an infrastructure bill, it almost freezes the water utilities a little bit. They're kind of like, we're going to wait and see what funds are available or what is going to happen, and so let's just delay this 6 months or 8 months. And so I think to Patrick's point, we have multiple cycles with the April fiscal year start and the October fiscal year start with water utilities along with a few that are in the calendar year. And those budget cycles, I think, have a little uncertainty about them in the near term, but mainly around CapEx, not so much around OpEx. I don't think there's a lot that they can do there because, frankly, I think it was the [ Folkman ] study at Utah State that showed we've seen a 28% increase in breaks in a 5-year period between '12 and '17. And we expect with those [ level ] curves to continue and therefore breaks to continue to accelerate. So we don't see a lot of downturn in the near term in the U.S. If I could comment briefly on Western Europe, I think they're faced with some of the same problems. A big post-World War II buildout and now a neglect infrastructure, aging, especially if you look at France and if you look at parts of Germany, I think that you're going to have that same trend there.

I would say, Deane, just real quick, on the U.K., you know the [ AMP ] cycle, we are seeing that the U.K. AMP cycle, which is a 5-year funding cycle is very robust. And they are focused very much on the use of digital, especially around nonrevenue water as well as storm water management as major issues. And we've continued to see the funding move there in a significant way. So just for those that are listening that are European focused, I wouldn't want you to think that U.K. is somehow in the dump here.

Got it. Ron, muni is about 30% of your business. It's not as critical. But what's your observation here?

It's interesting, Deane, and I'll kind of echo what Scott is saying. We're obviously not in the transmission part, we're in the treatment part. So the treatment system from the centralized system, we're seeing a big investment in retrofit and rehab. So getting the current assets that absolutely have some age on them back up to the target priorities, where they were productivity of the level that it was at before. The other thing we're seeing the spending in is emerging contaminants. They're having to deal with emerging contaminants around municipal water systems. So whether it's [ BFIS ], microplastics, whatever, they're dealing with it and they're investing in that because, frankly, there's no option not to. So the dollars are coming. We see that. And then we actually see an investment in disconnected systems. So smaller package plants rather than the massive systems that are coming in. We have a lot of bilateral negotiations with different municipalities around smaller packaged plants and retrofits there. And that's where they're investing. And it's all around creating a treatment train that ultimately can service the customer base in a little more efficient way than trying to do it with a massive system that's been there with an aged infrastructure that they're trying to support it.

Great. And just we'll finish up with Kevin and then Bill's got some questions teed up. But for, Kevin, observations on the municipal budgets. But also can you address this new COVID business of the [ temping ] COVID in the wastewater, specifically your conversations and business opportunities with colleges. Anything that you can enlighten us there. Sounds really fascinating. It sounds just like you've got the right solution. But municipal budgets and then specifically detecting COVID water.

Yes. Thanks, Deane. I'll pick up on some of the comments made already. I think maybe first on the municipal budgets. As Scott said, I think it's really favoring the OpEx bias that we have in many respects, because we're pretty well -- tightly woven integrated into these utilities. And well, we've seen some of the CapEx projects shift to the right. I think we look at our consumables as an indicator which has held up well. We look at our service business, which has held up well. I think maybe to Ron's point, number of utilities probably extending asset life beyond what they might have originally, but now they're calling on service and other strategies to try to allow them to defer some of that spend until periods further out. I think, as Patrick was alluding to, in the AMP cycle, we've seen some similar things in the U.K. China, 5-year plan. There's been some money set aside now in Brazil to fund more municipal investments. So I think it's really a bunch of different stories, frankly, globally. But I think by and large, the points that have been made, I would echo, OpEx has hold up well, CapEx a little delayed here, but still a lot of interest and then some other opportunities. So your other question on COVID-19 in wastewater, I'd say a couple of things. It does look to us that the big opportunity in the near term is in universities. And so a couple of factors there, a lot of campus facilities. It's easy to segment that network pretty tightly so you can really get a sampling system in each of the dormitories, for example. And it really looks like more of a presence, absence test, at least at this stage. Do I have it? And if I have it, then I can go kick into a treatment area, testing cycle to then decide what to do with the people in that building. So for us, that looks like a sampler. They need to extract a sample from a complex stream in wastewater to then be able to run it on a PCR test when the test kit and get them a time to result inside of a day and do it at an effective price point. So I think we saw a few months ago, they were doing a lot of this on their own central labs, kind of their own testing and sampling programs. And I think as they figured out that there's something here, now they really want to deploy it widely, and they're trying to do this. We're seeing it really, demand has exploded over the last several weeks as people are seeing, okay, I can do this well. I can get actionable insight. I can then make a decision that helps me in my business if I'm running a university. So we -- yes, it's pretty real time, but we've definitely seen a lot of uptick in this. I think over time, we might see more of quantification or enumeration, how much is in the sample. And therefore, what might I conclude, if I know if it's a small concentration or larger. But right now, it's really about presence and absence, do I have something? And if I do, then can I kick into a testing routine? And then can I keep my business under running? So that's universities, but we would also see things like larger care facilities, maybe private high schools or small business campuses, anybody that has the same dynamic, multiple sites, I can segment the network, I can get that information to make a decision. It looks to us like that's an opportunity, and we certainly are seeing it in [indiscernible].

And I would put in there around what you were talking about earlier, Deane, that wastewater surveillance overall, as Ron was talking about, with the microplastics, TFOS; what Kevin is talking about with COVID detection; Patrick has tons of products in there, I think it's something that we, as an industry, are going to start seeing more and more science around and more and more products around as a result, because I think the wastewater stream is going to give us a tremendous amount of insights into some of the stuff Patrick was talking about earlier as it regards to human health and the health of a population in a subcounty level or in a university environment or something like that. And I think it's an underinvested area from a detection point of view today that I think is going to be fairly high growth in the water industry in the future.

Great. Bill, take it away.

One question. So one thing that all of your companies have in common, you all come from a heritage of being essentially component suppliers. So how are you moving from the model of being a component supplier into -- especially around the areas of automation and then smartwater that we've talked about, to offering a service that not only provides more of a solution for your customers but also get you the recurring revenue stream that you want? What does that service started to look like? And what's -- what kind of uptake are you seeing on that? I guess, we'll start in the middle of this time. We'll start with Ron and work our way out.

Great. Thanks, Bill, and I appreciate the question because I would say that we were -- had a history of being a component supplier, but that is the smallest part of our business now. The majority of our business is integrated solutions and services, where we are providing design source and assemble systems to guarantee quantity and quality of water against an influence coming in to an affluent specification that a customer is looking for. The other thing that we're able to do because of the component supply capability and what we know how to do is really handle the wastewater, handle the recycle reuse on the back end and make sure that we're driving sustainability and minimum liquid discharge inside of our customer's application. So they do what they do well, which is provide a product or a service that they manufacture. And we do what we do really well, which is give them ultrapure water, treat their wastewater, recycle it and reuse, minimize the liquid discharge, maximize their efficiency and provide them with uptime on operations. So I think we've been on this shift for quite some time. I mean, ultimately, you look at our ISS business, which is about a little greater than 2/3 of our overall revenue, and 60-plus percent of that is service and aftermarket. That's what we do. So every system that we sell, we sell with the service and aftermarket tail, ensuring that we are supplying that customer with their need. And we've driven it very heavily along the connected solutions with digital now. And I think that's really given us an opportunity to continue to deliver a value to a customer where we don't have to be there personally all the time, but we're there virtually all the time.

That's great. Thank you. Kevin, you're next.

Maybe I'll make a couple of points here. So first, I would agree with Ron, similar, we've been on this journey for a while. More than half of the Hach business is recurring revenue today, which is a combination of consumables and service. And I mentioned Aquatic Informatics earlier, more than 2/3 of their business is recurring. So I think when you have a business model with that dynamic, it really is a very different business to run than if you are selling components and selling instruments exclusively. I'd say the second thing is, for us, it's about deepening the customer partnerships, really understanding better what value they can bring. It sounds similar perhaps to Ron in the point he's making, do what we do well and let them do what they do well. And maybe the last point I make is it's different culturally to run a business as a service than it is to run a component business. And perhaps for us, having Aquatic in the house for a couple of months now, we see that. They wake up every day as a software company. And so many of the rest of the part of the water in our platform is more waking up thinking about different business models but not thinking about just exclusively software. And so for us, it's been really time to incubate that and now we'll let them stand alone as a software business inside our platform because we don't want to lose that culture, we don't want to lose that DNA. We want as best we can, match that together. We want the cultures of the businesses we have. But whether it's running a business as a service or whether it's integrating software, there is a very different dimension culturally. I wouldn't minimize that. It takes a long time to get to a point of maturity and then to really see the opportunities from a different lens. And so I think we're trying to do both, really, frankly, run the businesses we've had and run them well. We'll also try to embrace some of that new thinking around more of the service model and more of the software model.

Scott?

Yes, thanks. Yes, just echo kind of what Kevin said, we probably are the newest kid on the block of before moving toward digital water. I think that we still want there to be excellence in manufacturing, but we recognize in every other industry that's undergone some digital disruption, the profit pools shift over time and that there is a need in infrastructure and there's a need in -- once you get past the the water treatment plant, you have this big blind zone called infrastructure and then we pick up information again at the meter, and so everything basically in between is unknown. And that's our space. And we realize that the fusion of insights and solutions, along with the ability to actually make the products was an opportunity that we were uniquely positioned for and so wanted to exploit that. But with that said, I'm always, Bill, surprised by the industry's kind of questioning around adoption rate and technology in the water sector. I think we've seen basically every industry in construction, in utility, whether it be the electrical smart grid or whatever, undergo some kind of digital disruption. And we are undergoing a digital disruption. We're in the midst of it, and we still have a lot of people saying, well, I don't know if this is going to take or not. No, no, this is what it feels like. This is what disruption feels like. And you better get on board and start figuring out what you're going to add or, you're going to miss it and the profit pools will shift away from your traditional component manufacturing.

That's a good point, like people who are actually living it and being impacted by wondering when it's coming. So a good way of describing it. Patrick?

Yes. I think to Scott's point, I come back to this whole affordability issue. And they're really -- we see it as a trilemma. There are the investment needs that the water sector has, there is the pressure to tackle growing affordability issues and there is the pressure to improve productivity at utilities. So as we think about it, and I've got very little to add to what panelists have offered here, is there's no -- I think it's important that investors that are following this understand that there's no need to -- for us to be shy about our component and equipment and hardware businesses. They're what make it happen every day. What we're trying to do, I think all of us are trying to do, and it is hard, to Kevin's point, it is really hard to get our teams to be able to sell this value over time, and so we're all figuring out how to structure accordingly is, the way we look at it is, if for a utility, which is 50% of our business, industrial, another 1/3, scarcity is a big deal. So how do we focus on things like reuse? Within the utility space, we focus in on things like nonrevenue water, what are losses, storm water overflow. These are massive challenges for our customers. So -- but what we try to do is how do we bring our digital insights, our data analytics from their systems to help them identify how to make their hardware perform better? How do they extend the life of their hardware? How do they reduce the cost from a CapEx standpoint of new budgets? When -- again, in all respect to our engineering consulting colleagues, if you do things the way we've always done them, they're really expensive. There are new ways to do things in a much more affordable fashion than we've done them before. And so to me, I just always put it in the context of what are we solving for? And what we're solving for is to help our customers be more successful in terms of what their pursuits are. And that's where digital comes in. And I completely agree Scott, anybody who thinks that this sector is not going to get disrupted has their head in the sand. It might be slower than any one of us actually want it to happen, but it is absolutely, it's happening and it's going to happen.