Xylem Inc. (XYL) Earnings Call Transcript & Summary

Okay. I'll give the introduction and we'll get Joe's audio up and running in the interim. So as Jose mentioned, next up, we have Xylem. Xylem is a global leader in design and manufacturing of technology [ intents ] of pumps and services, filtration and disinfection applications, analytics applications and motor, electric and gas meters. Xylem is the world's largest wastewater pump producer with municipal revenues accounting for approximately $2.7 billion or 55% of the company's 2020 revenue base. Xylem has 180.4 million shares outstanding. The stock trades around $101. $18.2 billion market cap, $1.2 billion in net debt, $19.4 billion total enterprise value. So joining us today is Mr. Joe Vesey, Senior Vice President and Chief Marketing Officer. In his role, he's responsible for leading the company's marketing function, focusing on the unique needs of customers and specific industry verticals, expanding digital marketing efforts and building commercial excellence and key account management capabilities. Joe currently serves as Chairman of the Xylem Watermark Committee, which is the company's corporate citizenship and social investment program. Prior to joining the company in 2008, Joe worked at General Electric for 10 years in a number of commercial positions. Also joining us is Mr. Matt Latino, Senior Director of Investor Relations since 2017. Matt joined Xylem in 2012 after spending time at Deloitte, namely orchestrating the company's spin-off from ITT. Matt and Joe, thank you very much for joining us, and I'll turn it to you guys. If the audio's working, you can give your introduction.

Let me just see if my audio is working. Can you hear me now?

Perfect. We got you.

Okay, fantastic. Great. Matt, do you want me to kick it off?

Yes, yes. I think just with a quick intro maybe.

Yes, perfect. Great. Well, thanks for having us here. Look forward to having a good discussion and getting a sense for explaining a bit more about the company and what we're up to and certainly interested in your thoughts and questions as well. But to step back, well, first, I want to just talk about the company in general. So for those who are not familiar with Xylem, Xylem is a global water technology company. We have a mission to solve the world's toughest water challenges and a purpose to create economic and social value. And we believe you can create economic and social value from our everyday work, and in addition, in spending more time in our communities and giving back. So they really go hand in hand. Now we do this by serving customers. We serve customers all over the world. About 55% of our revenue goes towards utilities, so that's an important segment. 30% of our revenue really is targeted towards industrial customers. About 10% of our revenue is commercial building customers, and again, that's global. Now as we think about serving these customers, we do it in a differentiated way really by moving water, treating water, testing water, metering water and repairing critical water infrastructure with digital technologies. Xylem has a long history. We've been serving many of these markets, in some cases, for 100 years. In other cases, we played a critical role in creating the category that actually exists today through innovation and technology. Now moving forward, we see ourselves as a leader in digital water technology, and we are looking to work with customers, to collaborate with customers and to hopefully give them a much better, more resilient infrastructure than they have today. And that's why we're excited about the business that we're in, the customers that we serve and what we do every day. That's a little bit about Xylem.

Terrific. All right, thank you for that. I'll just kick it off and we'll be taking audience questions as they come in. I guess, first one. Joe, can you talk about some of the company's big wins from last year?

Yes, sure. Last year was obviously a tough year for everyone. And COVID certainly challenged not only our business but many pieces of the communities and customers that we serve. The first piece really, though, was thinking about, really through the lens of our sustainability framework, first and foremost, making sure that our customers are taken care of, our employees are taken care of and that our communities are taken care of. So we always had that frame throughout last year. And I'm really proud about the way we thought about it and the way we executed on that. We talked about a lot of the large deals though throughout the year, and there were many large wins. And this is all around utilities continuing to invest in critical water infrastructure. If anything taught us from last year is preparing for resilience and climate change and trying to derisk your company, derisk your utility by investing in technology. And so we saw that across the board. We saw that with certain customers taking their first big step towards digital water. And there was a great win that we talked about with Anglian Water out of the U.K. That was a big step towards Anglian, in this case, with a lot of challenges around water loss and leaks. And Ofwat, which is the regulatory body in the U.K. really is challenging those utilities to get better when it comes to leaks and water loss. And so you see a lot of investment in the U.K. targeting around leaks and water loss. And that's really great for us in terms of leading with an advanced meter infrastructure platform, followed by smart meters and that was the case with Anglian. Further to the point, typically, you'll see leak detection technologies and other technologies to get after that type of challenge. We had a great win in Columbus, Ohio, and Columbus, Ohio was really interesting. Xylem is unique in that we have a fantastic water portfolio, but we also have a wonderful energy portfolio out of our Measurement & Control Solutions business. And so for those utilities that are a combined utility, that is they have water and energy, when they work with Xylem, especially around critical infrastructure, which is the communications infrastructure that utilities put in, transfer their data from smart meters, in this case, you can invest in that critical infrastructure, AMI in this case, and you can leverage that investment both over your gas and electric and water deployments, which is quite unique. That's how Columbus stands out. We recently talked about Houston. Again, this is a utility that is taking their first step towards digital water. In this case, deploying, again, advanced meter infrastructure, that's the lead. It's a fantastic offering. It's followed by smart meters. And then other critical infrastructure that we'll continue to have conversations with Houston and other customers when it comes to these type of deployments. The last one I would mention is Winston-Salem. We talked about Winston-Salem last year as well. And again, I'd just point these out as they -- there was a unique characteristic. Again, either some customers taking the first step towards digital water. Other customers are unique in that they're a combined utility and how Xylem can serve them well. In this case here, with Winston-Salem, this is where Xylem, having a healthy balance sheet and being in a strong financial position, we can offer different business models for certain utilities. So in this case, when a utility wants to avoid heavier CapEx investments upfront, we deploy network as a service. And that's where we can allow the utility to essentially onboard the critical infrastructure they need so they can get going, and we can really turn that into more of a service, longer-term revenue annuity model. So those are some of the highlights, I would say, from last year. Again, this can't -- it was a tough year, a lot happening, thinking of how stakeholders is so important. It played out in a big way last year, serving customers and communities and our employees. So some of the big wins from the prior year.

That's terrific. And maybe, Matt, would you be able to provide maybe a broad state of the end markets as you all see them? Which markets do you expect to trend positively this year, which maybe remain a bit sluggish?

Sure. Yes, yes. I think through the back half of the year, certainly into Q4, we saw some positive momentum really start to pick up across the businesses. I think absent a bit of a project scope change that we saw in a large project in India in the fourth quarter, we had -- we would have had growth over all 3 of the segments as it was. We were there in 2 out of the 3, and that really sets us up for a strong backlog that's up 16% heading into this year. What's shippable this year just in '21 is up high single digits. And that's really been driven by the utilities being pretty resilient through even the course of this pandemic. So we were down about mid-single digits in 2020. But what you saw in the fourth quarter results was the start of some acceleration around some of the projects within the M&CS side. So Joe talked about a lot of the commercial momentum continuing in terms of winning those contracts. Now utilities are getting ready to start moving forward. So as we expect in the second quarter, mid to late period of that second quarter and then really ramping into the second half, where once you're getting the vaccines rolled out and you're getting some other stabilization, especially here in the North America market, those projects will start to move forward. None have been canceled. People aren't backing off on these projects here. It's just more shifting out to the right as a result of some of the home access and site access restrictions into buildings that was impacting some of the deployments. So the utilities overall, we expect they're going to be kind of in the low to mid-single-digit range for 2021. We have a business that's about a little north of 50%. As Joe mentioned, it splits between wastewater and clean water. And so the -- on the wastewater side, we expect we'll be in about that low to mid-single-digit range as well. And then the clean water side should be up -- or up on the mid-single digits and especially starts to ramp as we get into the back half with those project deployments. The industrial side, it's about 30% of our revenue. We've seen some good sequential improvement there. It's clearly one that's lagged a little bit through the course of the recovery. Short-cycle orders had been one that you were kind of waiting to see that activity start to pick up as industrial activity started to ramp. But that's been one that we've started to see here. So we expect industrial kind of flattish to up low single digits for this year. And then the commercial side, which is about 10% of our revenue, the U.S. had been -- continue to be a bit sluggish, I would say. There is -- we're still very much in the pandemic and going through that right now. But Europe had recovered pretty well. They -- we have seen double-digit growth in the European markets. We had launched a couple of nice eco-efficient products that are really getting some good traction there. And so that's one where we expect the commercial market because the new build construction, especially here in North America where there's more exposure for us, that will probably be down a bit. So this is one we expect to be flattish to down slightly this year. And the last piece is the residential side. It's only about 5% of the revenue for us. But clearly, with everyone at home, work-from-home measures in place, there's been a lot of activity there, both in the U.S. as well as parts of Europe. And even in the emerging markets as they think about a secondary clean water supply in places like China, we've seen a lot of growth there as well. So we think that will probably be up about mid -- low to mid-single digits but pretty small overall in terms of exposure.

Terrific. Okay, great. And that ties in my next question. I was going to ask on maybe kind of broad government potential tailwinds. If we were to see, say, a large infrastructure package in the U.S., can you talk about which areas you all are tracking that you think will most directly benefit Xylem? And then as you're mentioning that, what potential benefits do you see as a company from greater focus on water quality in China? So it's 2 separate questions.