Xylem Inc. (XYL) Earnings Call Transcript & Summary

Hi, good morning, everyone. Thanks for joining us. My name is Joe Giordano. I cover industrials, robotics and automation here at TD Cowen. We're excited to keep going today with our set of firesides. And with us next is Xylem, and we're very excited to have Snehal Desai here. Snehal, good to see you, different uniform this time. I don't even know what your official title is at Xylem yet.

So maybe we can kind of start there. I'm happy that -- it's good to have you -- I don't know if you have any prepared remarks you'd like to make, feel free to do so. Maybe first, like just let us know like what the new role is and then we can jump in.

Sure. Yes. And good to see you again. And yes, I mean, if I can break some news, that's good news, right? But it's what am I doing. Maybe for the -- for your audience and for those that are dialed in, I can give you a little sense and some sort of what's length of being here. But prior to joining Xylem here in the last several days, I have been the Chief Growth and Sustainability Officer for Evoqua. And that really covered a number of topics, including strategy, M&A, R&D, IT, digital, you name it. There were a host of things that were within my remit, also happened to be roughly 20 -- 25 years in the water industry. So kind of [ spanned of extended ] Dow running their Water and Process Solutions division before it moved over to DuPont. So pretty long time in the industry. The new role at Xylem is -- it's kind of interesting. It's a growth -- Chief Growth and Innovation Officer. So the title has some similarity to what I was doing at Evoqua, but it's a little different remit underneath it. And that I'm really going to be focusing really on that growth and innovation piece. So we're really thinking about how we get close to our customers, how we think about vertical markets and then, of course, our technology and innovation road map. In addition to that, if that's not a full-time job, I also going to be leading the integration team moving forward. I was a part of the steering committee prior to close and then since close and the announcement of my position, I'll be leading the integration team going forward. So really excited. It's been a great quick sprint through the integration planning process, but really came to understand and appreciate my new Xylem colleagues and sort of just kind of getting a chance to finally see underneath the covers and seeing more broadly what the organization is all about. And I know speaking on behalf of my Evoqua colleagues who are now -- we're all Xylem, I think there's a real palpable energy between the 2 organizations and the prospects for being better together and being able to solve bigger problems for customers. So that's the story. I'm here to talk about just sort of where we are and where we're going, but happy to be here.

And it's great to have you. And since you're running the integration, I'd appreciate just a specific update on the exact revenue and cost synergies, if you -- No, I'm kidding. I know Andrew is going to flip out for asking. No. Seriously, though, you had your running strategy and stuff at Evoqua, you have a path that you're on, now part of a broader organization. So how do you take the strategic priorities that you already had at Evoqua? How does that kind of like -- how does that become a cohesive strategy? As I know you're just in the process of figuring this all out yourself, but how does that kind of work?

Yes. I mean look, at a high level, our priorities are pretty similar between the 2 companies. We're dedicated to solving the enormous water challenges around the world, helping our customers' communities really kind of tackle this challenge. And fundamentally, when you think about the company, it just puts complementarity between what we do and what we've been doing, that the ability to now tackle the bigger problems for our customer and community base is just that much better. And so from a strategic standpoint, we're still very much in line with where we were going. I think the slight opening of the aperture, if you will, for both organizations that have come together, is that Xylem has had a very strong utility focus; in Evoqua, while we were servicing the utility sector very much on the industrial side, but there is an opportunity set across, right? So really, that's where the strategy begins is thinking how do we actually solve these problems more efficiently? We have the opportunity to be a one-stop shop to those that would actually have an interest in a one-stop shop, but we also can bring together unique technologies that fit together in a way that we couldn't do by ourselves. Now granted, there is -- there had been an existing relationship between Evoqua and Xylem. We were utilizing a number of the Xylem technologies and some of our full integrated solutions. So this isn't foreign territory. But I think principally now we can actually start to really solution those together. So the strategy around customers and markets, thinking about best ways to link these technologies together in the solutions and fully being able to deliver them to customers in the way that they want to, really helps us get it that principal challenge of addressing scarcity, resiliency and affordability for these folks. So I mean it's spot on. I mean -- and the fact of the matter is that -- it has always been a challenge to be everything to everyone, but we can be more together for many of our customers than we were yesterday.

Has it forced you like if I just think about the Evoqua side of it for a second, has it forced you to kind of like think bigger, just the scope of what Xylem is like you have to maybe think we could do -- there's more we can do from a strategic standpoint, even if we're just talking about the kind of legacy of Evoqua portfolio?

Absolutely. Absolutely. I think there's a few things that we'll talk about it here in a bit, Joe. We always had aspirations of being more present in the global arena. And what was challenging there was having the beachhead to do that, that's a check out, right? Because I mean, Xylem's global presence is significantly different than ours and have been. So I think that alone was a piece of the excitement to be able to bring that integrated model, that service model to a broader platform. The other thing I would say is there is a tremendous investment in digital in Xylem. And while we -- at Evoqua, we have our own success pathway, the ability to do more, to be able to link more, to be able to be more important to our end customers that was going to be an investment that we were going to have to make. Now we can get completely integrated into the story that going on within Xylem to be able to address that challenge. So yes, a few things where they were on the strategic road map, go international, do more digital, that's now accelerated. And then by the way, there are some things that Evoqua has been doing for a long time, particularly around advanced treatment technology, solutions and services that I know has always been in the lens for Xylem, and that's now accelerated that piece into the picture so.

So I'm guessing you have a pretty big punch list of things that you have to take care of over the first year. And if you were to just kind of prioritize that, what are some of like the critical things as the head of the integration that you need to like make sure go perfectly.

Yes. Well, I mean, look, from day 1. Patrick Decker and Ron Keating who were leading our steering committee for integration, they set out a set of principles, but job 1 was to avoid distractions and deliver on '23 because both companies were really moving in the right direction, had good momentum. And we wanted to continue to make sure that we drove through -- run through the tape, if you will, and make sure that we deliver. So that continues to be the primary emphasis as we come into -- as we're thinking about this first year. And mind you, Joe, I mean, the combined enterprise is 22,000 people. The integration team that was going through the planning was roughly 50 people, right? So it really preserves the ability for the organization to focus on delivering. I think the other one, and they're delivering against plans, but it's really mostly important about really meeting our customers where they are and being able to meet our commitments, right? This customer focus, it's not an excuse that because of integration fill in the blank didn't happen. So there's been a laser focus on ensuring that our organizations continue to serve our customers, make sure that they're a primary priority. And then as we do that, we have an opportunity to learn how can we be better for them as a combined enterprise. But that's what I'm excited about, right, customer focus, making sure that we deliver. And then through that process, we can learn what else we can do, which is really where the pathway to growth leads there.

I mean I joked about revenue synergies and stuff like that in the beginning, and we're not going to get into that. But if I just think conceptually, where do the organizations like elevate each other? So what can -- what is each one bringing that wasn't there? And how can like [ do some of those parts be greater? ]

No, it's a great question. And by the way, there is a piece of this that is okay to talk about because we've talked about it publicly. But -- so before I get into the growth opportunities, we did talk -- we have talked about the cost synergies on this, which is roughly -- is $140 million that we'll get in 3 years. Just on those numbers alone, the deal pencils out, right, just on that basis. But that's not what led us to doing what we're doing, which is bringing these 2 companies together because it is really around growth and really being able to bring to market -- really after closing, we are the largest pure-play water technology company in the world. And we have a portfolio that really very few are going to be able to touch across products and services and solutions. So that alone is the gem in what this is all about. And bringing that together right now is really important because the challenge that is being faced around the world on some of these very intractable water challenges. You need to bring that breadth to bear. So that alone, the need is there, the combination has come together but then when you start to think about where can we do better together, I mentioned it before, Xylem very strong utility focus, Evoqua very strong industrial focus and penetration. There is opportunity for us to leverage each other's positions in a very meaningful and tangible way. So for example, when you think about a solution for a utility where they need filtration and they need disinfection, the filtration portfolio in Evoqua, microfiltration, for example, really nicely fits ahead of, say, UV system that Xylem has very much a presence in. But those kinds of combination conversations with customers that are having to go out and shop on their own, a one-stop shop kind of mindset to be able to help them get their arms around the problem. And frankly, that's more valuable when we bring it to them too. I mean for us as well as we kind of bring that to them. But there's -- treatment trains are pretty complex, and we now have more pieces of that puzzle that we can deliver. And on the industrial side, similarly, right? So if you think about a power plant, historically, the Evoqua would really worry about the water treatment once it got to the power plant itself and treating it from the boiler. But it had to get up there somehow, right? and that intake pump is something that Xylem has very strong presence in. And if you even go further than that, depending on where the water is coming from, it could be coming from a river stream, whatever, there is an intake screen, a screen that keeps things from coming out of that. That's something that Evoqua is very strong in. So if you kind of start to think about -- that's fragmented before this deal. Now it's more seamless, right? And if you think about how the customer thinks about it, we can wrap more of a circle around that, really seeing opportunity potentially to convert some of what would have been a product sale in the past into a solution outcome-oriented sale. So that's a biggie, all right? Another one is what I mentioned before is expanding internationally. That's a tremendous opportunity. We have had customers over the years in Evoqua that have asked us to follow them on the industrial side when they go over -- we're doing tremendous work for them in the Americas, but we weren't able to follow them into the other parts of their operation. We see that as something that we can now leverage the footprint and the landscape of Xylem to be able to get after that. And then I think beyond that, we have a great opportunity on the digital side, right? So the digital opportunity, as I mentioned earlier, we have been using digital within Evoqua to help us accentuate our service offering. But that also has provided us an opportunity for us to think about how else can we serve the customer and we knew we had other needs. I think the digital footprint within Xylem is really going to help us accelerate it on the industrial side. And conversely, when you think about our experience as being operators because if you -- we are a utility operator when you think about what Xylem now does for industrial customers, we are the utility. We also have a much better sense of where value lies, what it means to connect the information together. And it can really help us accelerate the digital-enabled service and optimization solutions that are currently developed in Xylem. So I mean that's a big one. And then finally, R&D, innovation, there's a ton to do there because both companies have tremendous capability on product and application knowledge. But when you bring that together, that's when you can actually accelerate the impact. And the speed of development. And we'll talk about one of those areas here. I'm sure around PFAS because I think that's a pretty laser-focused area where we can dive in.

Are you confident like some -- one potential pitfall you see in other -- in deals in the past is like when you talk about revenue synergy opportunities like this, like, hey, you have a strong relationship here. I have strong relationship here, but we can pull in. Are you confident that it's like the same person that you're talking to at the customer? It's like, well, that can conceptually make sense, I can see a situation where you're like, well, the guy that Xylem's selling to is a completely different person who's not even going to care about the filtration side. Is that -- you're comfortable that this is like a one person that you're both attacking, right?

Well, I think we are learning, for sure. But I'm pretty comfortable when you get into the utility sector. If you're in the drinking water part of the operations, you're pretty much talking to the same people. If you're in the wastewater part of the operations, you're talking to the same people and we have solutions for both of those, what's really kind of interesting is that within the utility, they don't talk to each other, right? And so what I feel is an opportunity for us is this gives you the opportunity to raise the conversation with the customer all the way to the general manager, someone higher. So you can start talking about that holistic opportunity. We've seen this happen inside the utility sector. We were traditionally treating water on the front end of the process. Wastewater guys were totally in a different place. But now as the advent of reuse comes in, where you're now linking those 2 ends of the process, you actually can elevate the conversation. So a, I'm comfortable that we are talking to the right people and the same people in the right part of operations, but where I think the real value is going to arise is when we actually can kind of tie that together for the customer and to show them what the holistic cost of operation -- holistic operational improvements can be and over time, be just that much more resilient. So I'm very satisfied. But look, we're also being quite diligent as we go out. I mean just like I said, what, 2 weeks or less, but we're being very diligent with our sales teams who are extremely enthusiastic to be able to help them understand what each of the companies have in the portfolio, what can we do? What can't we do? When can we do it? That's really the process we're through right now.

So reshoring is obviously one of the big themes that's on investors' minds and one of the big themes that's happening at the government level now. As we think about some of these assets that are being built, semiconductor plants, things like that, they seem to be clustered in places. They use a lot of water and they're being built in places that have none or very little. And there's claims being made about building these things and using like kind of having no net impact to the water table and not taking anything. One, do you believe that that's even like practical? Can we do that? Can we build all these things and have them being net zero users of water in the areas? And if so, how are you guys now as a combined entity, like perfect -- kind of like uniquely positioned to help deliver that outcome for them?

Yes. That's a wonderful question. And it is -- Yes, I've seen the messages. I've seen the stories. And we actually are involved with many of [ those very ] companies as they look at standing up operations and what you would traditionally have said is an arid space, right? But frankly, for some of the types of companies, semiconductors is a good one, they need that environment, that low-humidity environment. So it's sort of like a number of trade-offs, right? But this is a convergence of a number of trends. I mean these industrial users of water have become more and more concerned about just pure access to water, right? I mean in water scarce regions, the first folks to get either the higher price or reduced volume is an industrial customer more so than an ag or a community will be. So they were already seeing that they have to have mitigating strategies and climate change is only accelerating that. But there are also now discussions around what is the water risk inside your portfolio if you're an industrial customer, they're having to deal with this challenge. So the onshoring is a thing. The places where they'd like to locate is absolutely part of what we see is happening is in the Southwest here in the U.S. That's where a lot of it's going. And so what that really then says is that going in -- traditionally, an industrial customer might not have actually put a lot of forethought into their water strategy, like what are we going to do? How are we going to do it? Who we are going to get it from but that's allowing for a very different conversation. And I'm excited because it's not just around what we as Evoqua have been doing for these very same customers, designing water systems that would allow for more accelerated reuse. But when you layer on to a more efficient pumping technology, when you layer on to a digital solution so you can be efficient in how you run the operation, that's what these clients are going to be needing. That is what they're asking for. And many of them have tried to do some of this on their own. I think the complexity that is starting to arise of managing all of these variables is really ripe for opportunity for Xylem to be able to come in now more holistically to help them address that challenge. And at the end of the day, net zero is kind of, I would say, it's -- what do they call it, it's a destination, but it's the journey to get there. They're doing everything they can to mitigate water risk [ per store. ] That's including efficiencies in operation as well as recycle reuse. And they need expert partners to be able to help them deal with that. And we're really well positioned. We're already pulled in on a number of these projects across the U.S. where they're looking for holistic providers on the industrial side. And the Xylem portfolio is actually very additive to that conversation to be able to help make that real.

You mentioned PFAS earlier. Let's -- we can touch on that. Where are we with this? I mean it's hard to track because every state is doing something. The EPA is doing something. I think the average person, the average investor doesn't really know where -- what's required by municipalities at this point.

Yes. Well, maybe I can take a little bit of a step back to because for some people, it feels like it just got here the story, but for several of us in the water industry, it's been kind of percolating for quite a while, probably the last 4, 5 years. But look, I think the critical thing is, if you go back 3 years ago, 4 years ago, there was no money that was being assigned to it. There was still a debate on whether or not there was a contaminant level that needed to be addressed. We've kind of come through quite a bit there with money that was allocated out of the infrastructure bill as well as the EPA coming out with their guidelines that 4 parts per trillion as being the maximum contamination, which is quite a low number, by the way. I mean, 4-part per trillion is hard, a, hard to measure it; and b, it's practically 0. But that was an important signal of the market for the end customers to say, okay, now that you know what the goalpost is, what do you need to do? So for the next say, 2 years-ish, there'll be a lot of, I'll call it, level setting. So a lot of testing, a lot of baselining that the utilities will have to do to stay, here's where I am and that baseline is not shifting because by the way, there are some communities, depending on where they're sourcing their water from that the intrusion of this contaminated water into the ground water source is changing. So they have the baseline in that, right? Testing is going to be probably the first thing that's going to go on. And it's not easy. I mean it's a more complicated process, the mass spectrometry to do that. It's not in this field. So there's a cost to doing that. And then the second piece of it is the implementation of solutions. Now if you kind of look at Evoqua's history in this space, we have been one of the leading providers of solutions that are available today, best available technology today, which is granular activated carbon, ion exchange resins and even reverse osmosis. Those have been identified by the EPA as the currently best available technologies. We have been one of the providers of that in a various set of fashions, whether it's selling capital systems or putting those types of technologies and mobile assets to be able to move them in on a temporary basis. So we have a very good line of sight as to what the activity is. That state level action that you mentioned is what we saw before the federal limit was set because there are certain states and even communities that had decided to take action early, whether it's because of the legacy of what existed inside their community or frankly, these have become town hall conversations, right, major conversations. And so once they got to that level of public awareness in a community, they need to go do something about it. I mean look, 4 parts per trillion is a low number. But if you've measured 200, you're not waiting for anything. You actually have to start making a move to putting in some type of a solution. And today, those solutions are these absorption resins, filtration, and we see that. Now the second phase of this is really going to be interesting because what those current strategies allow you to do is take the contaminant out of the line of fire, meaning take it out of the drinking water so that the community has safe drinking water, but you then are left with what you do with the materials and where does the PFAS go. That's the -- I mentioned in the R&D synergies between the companies, both Evoqua as well as Xylem have been looking at destruction technologies. What do you do to really remove the contaminants because these are very [indiscernible] they don't want to go anywhere. There's a reason why the technology was developed to be able to withstand heat and withstand -- its used in firefighting foams. But you have to then address it with some very advanced technology. That's where we're spending our time. We're coming together now to kind of look at our different options between the 2 companies and where we've actually validated things. What's really nice, though, is that with Evoqua's presence at least in the Americas, that last mile still matters. The ability to take it all the way to the customer potentially deliver it as a service solution. So there's a lot there that we feel we can leverage. But that's the next phase of this. But look, I mean, if you take really a step back, I will state that the flag has been raised now with the limit from the EPA. It's going to take a couple of years to baseline. Once the baseline is established, then utilities start to go through the design process, they bid it out, they think about it. I mean we're talking 3 to 5 years, right, before we see the real systems go...

So I feel like that's kind of -- okay, so now there's awareness is rise. So people are getting freaked out that they're drinking poisonous water. And now EPA is moving good. I have no doubt as we roll this stuff out. No doubt that Evoqua/Xylem will get a huge piece of this market. But I guess my fear is the consumer would be like, okay, now I know about this, am I going to wait 7 years or whatever, until like my utility does something. So we had -- I had dinner with the CEO of Pentair the other day, and he's talking about making systems that like treat this at your house, and it could be like installed, like when you build -- is there -- is that going to -- is it some sort of combination? Like I think at the end of the day, we will have municipal scale treatment of PFAS, like that will happen. I just don't know when but it's in the interim is that -- are people going to act on their own to kind of fix a problem because I would imagine that whatever side of the aisle you're on, confidence that government fixes problems is going down, not up.

Yes. It's -- no. Look, it's a good point. But I mean, look, this has been already going on in the water industry all over the world, which is consumers have means to be able to deal with the treatment of water right before they drink it, point of use, point of entry for sure, right? And that is not going to go away. I mean in fact, I live in Pittsburgh and there are times of the year where the water doesn't taste exactly like you thought it would. So you have a water pitcher in your house, you might have a home filtration. These are things that are going on irrespective of whether PFAS is there or not. There have been a lot of reasons to decide to treat in the home, which, by the way, is still better than necessarily buying bottled water. These are not overly expensive solutions. But over time, yes, I think treating it centrally, treating it in a place of where its source is coming from will overall be the most economical. But I mean, you're right, the bridging strategy is if you have a high concern, you'll do something about it at the point of use, and then you work your way back into the system. And it is the hybrid. I mean we've seen this all around the world. I mean I think we've seen that in Vietnam, China, parts of Europe where there were similar challenges. You saw a spike on the consumer side and then the building out of the municipal system. So I would think we were going to be in a bit of that same cycle.

Well, I have like 20 or so questions left and 2 minutes, so I think I'll try to take one more here. Look, so connected utility is something I feel like we've discussed in the sector since I've been around. And it's just really slow all the time for a million different reasons, particularly at large-scale utilities. Like how does that dynamic change? Like what can we do to accelerate deployment of real technology into some of these places because the technology, it exists. It's just not installed.

Yes. It's -- I think it's a really good question. And honestly, this wasn't an area of deep dive for me when I was sitting in Evoqua. But as we went through the process of getting to know each other through integration and diligence, I really got excited about it because it was actually almost coincidental with the announcement of our deal in January that the [indiscernible] announcement was made as well at that time. And it was very fascinating because while there's a whole lot of other things going on, I was just starting to get to really learn what was going on with that partnership. And at the end of the day, as I learn more about it, it makes a lot of sense. Here you have technology solutions that was built by a utility that's using it [indiscernible] to be able to manage their own utility platform. And it was really with the mindset of a user built -- the user built something that was good for them and that they were actually utilizing to take that type of a designed platform to be able to help utilities get their arms around the data and the analytics of running a water utility every day in face of -- and I think one of the biggest challenges right now is labor and skilled labor, right? That is not going away anywhere in the world as far as an ongoing challenge. So the timing is perfect to bring something like an integrated solution that's going to help a utility operator, make sure that everything that they're working on is actually what it needs to be and hopefully optimized. But with this idea that is also kind of -- it fits the eye of a utility operator coming from the Evoqua platform. I think that's going to be a significant advantage. And I think this alone is going to accelerate both a purpose-built solution that looks right to the user as well as this labor pitch that's clearly going on and the need to find ways to get operational costs out. I think we're at the very early stages of seeing the adoption curve. But I'm quite bullish on it because you can see it, right? You can see the factors that are converging where utility operators. And honestly, this same platform, I'm super excited because it also has very good applicability to the industrial sector, where you're running utility, your utility is for a large petrochemical plant or something, similar challenges exist. And so there's a lot of opportunity even between that. So I mean, I think, it's times now, but at the same time, utilities have a time cycle of getting stuff built in. But the early adopters are moving, which is great.

Unfortunately, we have to leave it there. We're at the end of our time. But Snehal, I appreciate it. It's always great to talk to you and congrats on the new role.

Thanks. Thanks. Appreciate you having me, and look forward to talking again.