Xylem Inc. (XYL) Earnings Call Transcript & Summary

All right. So we're going to get started again. Very happy to have you all with us. We're extremely excited to have Xylem with us today. We've got Matthew Pine, who is the CEO, joined Xylem in 2020, became CEO in January, well, last month; and then Bill Grogan, who is the CFO and joined Xylem in 2023 after a successful time at IDEX.

So maybe as I walk over here, Matt, you obviously just started as CEO, but you've been with Xylem now for several years. So maybe talk about when you started and as you've kind of gone through the progress, you've talked about 3 main priorities: the Evoqua value capture, higher overall company margin and scaling service through digital. What do you think is the heaviest lift given your operational background? And why? And ultimately, I know it's early, but when investors look back at the Matt Pine tenure, what are they going to say about you?

That's a good one. That's a tough one.

I know. Well, that's why I asked it.

Yes, it's good. It's good. Well, the first one, we have 3 execution priorities that we've talked about. We talked about it in the recent earnings call. And in terms of lift, I think they're all important, and they all probably require some level of effort. That's why we call them top-level improvement priorities. TLIPs is the acronym that we use in goal deployment. So I would say they're probably equally weighted in terms of execution. And I think we're off to a good start against them. So if you look at the Evoqua combination, we've done well there with the synergy capture. We exited last year ahead of plan, $55 million. We've got $100 million in run rate for 2024. So that's off to a good start. We've integrated the businesses quickly. We actually did a reverse integration of our services business into the new segment, WSS. So hopefully, those are proof points that things are moving in the right direction. In terms of accelerating margin rate in dollars -- this year, we finished in 2023 at 18.9% EBITDA margin rate. It was close to a 200 bps improvement. So we're definitely focused on profitable growth. And that's something that we're going to be focused on in the future through productivity initiatives, operational excellence. So I think we're making good traction there. You've heard us talk about 80/20. I think that will only continue to enhance our journey in terms of getting good operating leverage on the growth going forward. So that's the second piece. In terms of services, we talk a lot about digital. Digital is an enabler. But from a service point of view, I think the proof point would be the quick integration of WSS with a proof point there. We're using digital to drive productivity in services. When we have build, own, operate pieces of the business that are outsourced water, the more productive we can be, the more margin we can create, more value we can create. So we're using digital in that way. And then you've heard me talk about our partnership with Idrica, which is the Spanish digital platform that was born out of a utility operator. I believe that gives us the right to be the aggregator of data and utilities, and we're off to a really good start there. Now that I'm thinking about heavy lift, those are really the priorities. The lift is on culture because you can't do all those things unless you have the right culture in place. So we spent a lot of time focusing on our culture, what we call high-impact culture and high-impact behaviors. And that starts with myself and the senior leadership team. And if you heard us on the earnings call a few weeks ago, we talked about driving productivity through our earnings call. We reduced our pages from 14 to [ 6 ]. Our presentation, our talk time was down 27%. So it starts with us on how we model that. And I think that's really important for our culture. In terms of my tenure, that's hard to think about. At the end of the day, hopefully, the people will see that it's a team sport. I came up through athletics. It's not about me. It's not about Bill. It's about the team. They'll see me as a collaborator, a team player, someone that's got humility and does the right thing. I think those would be all good attributes that people would reflect back to me and that we created a lot of value, both social and economic value.

Legacies, yes. After 2 months. So maybe, Bill, I could ask you then just a follow-up. You obviously came from IDEX. You've talked about 80/20. You've got a couple of pilots in North American metrology and North American Applied Water. But you said it would take 6 to 12 months even for just the pilots to get results, right? So could you talk about though what the results are that you're looking for? And what would be viewed as good if you look at those businesses?

Yes. So 80/20 at its core is the complexity reduction tool and a resource allocation tool. And ultimately, if it gets a core tenet of the cultural change that Matthew just highlighted, I think we picked some businesses that will be a great test case for the organization to show the power of the tool. So for me, there's an element of going through the analytic. And in the short term, there's an element of margin improvement as we look to rationalize our products and our customers that we shouldn't be spending our time and attention on and really focus on areas of the business where we can drive the most value. So by exiting those businesses or those customers and products, we'll free up the team's time and capacity to reallocate and focus on the things that are going to drive the best longer-term growth for us. So in the short term, I'd expect margin enhancement with the midterm will be an increased growth rate for those 2 businesses.

Bill, it's not lost on us that those 2 businesses in general -- North American Applied tends to be a little bit more cyclical. You guys have said that. And metrology has a lot of opportunity for margin expansion, right? So like do you kind of have different initiatives for each one, like you make Applied less cyclical or you make it more growthy than you think and/or it's more margin on the metrology side? Like how do you approach it from that perspective?

No, I think there's an element of baseline in both businesses to figure out, okay, what is truly driving the most value in each organization. And then I think for AWS, the business case there, I think, is we've talked -- obviously, new to the business, but talking to the team, the amount of product proliferation that has happened as they've looked to overserve all of their customers over the last decades and decades, some of the businesses there. I think the oldest one is 175 years old. So it has this reputation for solving some of its customers' most challenging problems over a very long cycle. With that comes a lot of things that we're going to take a hard look at and understand is it driving value or is it not and how do we rationalize the portfolio around that to really focus on the next generation of technology as it's a market leader in the commercial building space as energy efficiency and sustainability is a much bigger portion of how folks are managing business and pushing the technology and focus around those applications. Then with M&CS, obviously, they are probably the largest area of opportunity for margin improvement and leveraging that tool set to identify where there is laggards within the portfolio and then focus our actions there. Also though, this is to free up the team's time as they continue to look to innovate on the software side to bring digital and incorporate with Idrica and a couple of other software applications that we have to provide a better suite of products for our customer base.

That's very helpful. I wanted to follow up on margin in the context of you mentioned this year you're targeting 50 to 100 basis points of margin improvement. A lot of it comes from Evoqua synergies, right? But it seems like even really without the 80/20 stuff, incremental margins are getting better. You guide into the low 40% range for '24. So you can give us more color on what's going on right at Xylem? What has changed versus history? Because I don't think it's just price versus cost. I think you're just expecting to cover costs more or less with price.

Yes. I think there's a couple of aspects. Obviously, the team has done a much better job on the price/cost piece, just understanding the economic value that they provide for their customers and capturing that at a rate that we hadn't historically. Obviously, price is rolling back -- the rate of increase is rolling back a little bit than what we've seen over the last 2 years, but that price/cost spread is still positive. And that's really ultimately what we want the teams to manage to going forward. Then we've got some significant volume leverage in some of the segments. Obviously, M&CS is going to continue to grow at significant rates. And then the operational productivity that the teams are doing across the portfolio on how do we become more efficient with direct labor, overhead and look for sourcing and supply chain savings. The team's actually done a really good job, obviously, lining up the synergies with Evoqua, but then just also some of the operational and supply chain efficiencies within our own 4 walls pre-acquisition. So I think they've done a really good job of laying out a really robust funnel to help expand margins. So you've got price/cost. You've got operational productivity and volume leverage. Layer on the Evoqua synergies. And then that pays for some of the incremental investments that will mitigate some of the EBITDA margin expansion.

Got it. And then maybe just a quick question on the near term. You're one of the rare multi-industry companies that actually have a front-end loaded guide in the sense that you're guiding to 4% to 6% organic in Q1, but for the year, 3% to 5%. And you, I think, have easier comparisons as the year unfolds. And so we know you talked about you're watching Applied. You're watching China. What, if anything, is worrying about -- are you worried about here that gives you a pretty conservative guide? And are you seeing anything in Applied Water in China over the last few weeks since earnings?

Yes, I can answer that. I don't think anything's fundamentally changed from what we discussed on the earnings call. The 2 big watch items are China. We' flat year-over-year. That's definitely a watch item to see if that goes the other way. It's really just a funding timing issue. We've got a really healthy backlog. And Applied Water is down low single digits, and it's probably more of a challenge in the first half versus second half. But we're looking at indicators like ABI just to see how far -- that's probably 8 to 9 months out in terms of where we see the impact of construction, which is about 35% of the portfolio. But those are, I'd say, the 2 big watch items. Nothing's really changed over the past couple of weeks with those businesses. And I'd say the broader portfolio is very healthy. When you look at the utility demand, that's really strong both on the clean water and wastewater side as well as the industrial piece of the Evoqua services businesses continues to have a strong funnel and pipeline. So nothing's really fundamentally changed in the past few weeks.

That's helpful, Matt. And one of the conversations we used to have with Patrick was on Applied Water's channel given its distribution focus. So how is the channel in terms of inventory? And really I thought Patrick went out of his way to say Applied water shouldn't be that cyclical. So how would you assess what's going on there?

Yes. I mean it definitely has some cyclicality to it. If you kind of go back to 2016 with the kind of the last kind of industrial downturn, that business was down low single digits. So this is not an anomaly. It happens from time to time. The business is roughly 75% replacement. So it's got some steady repeatable revenue. It's really the new construction side that we watch. But all in all, we feel good about the business. Bill has talked a lot about 80/20. With the business being down this year, we're going to be focusing on cost to make sure that it's not structural, but in getting after -- like we talked about, that business has a significant amount of SKUs. We have customers that buy onesie, twosies of things. So just cleaning up the operations and being more efficient and improving the margins and the margin rates of that business in a down year is the focus.

Got it. And like you talked about weakness in specific markets like resi or ag. Like what are you seeing in those markets? And like I would think resi has been weak for a while, so maybe it should turn at some point.

Yes. I think resi is probably starting to bottom out, and we should see the second half a more favorable comp and recovery. Some of that, whether we like it or not, is due to the weather. And we have an atmospheric river right now coming into the West Coast of the U.S. A big part of our resi business is U.S. based. Some of it's weather related. And some of it is just a little bit of hangover from discretionary income spending on second homes or updating folks' homes because a lot of that product is tied to domestic water pumping. There's like 25 million wells in the U.S. And there was a lot of planned -- I'd say planned replacement versus 911. But I think that's starting to smooth out. We should see that recover in the second half of the year, but definitely in the first half, it's a little bit of a hangover. In ag, it's a small part of our business. It's just less than 1% of our revenue. And again, that's really more of just a cyclical nature of the weather.

Got it. And then I wanted to ask you about backlog. Like how do you think about what normalized backlog should be at Xylem? Or how do we think about orders going forward? Orders were up 11% in Q4, which was robust, but I would assume it would be difficult to keep up that kind of pace given your organic revenue growth guide. So should we think something like book-to-bill of 1? Like how do you think about that as you go forward?

You want to take that?

Yes. No, obviously, really strong order performance in Q4. Ultimately, from a backlog position, we continue to look towards working down M&CS' backlog. Obviously, we entered the year at 30% past due, ending the year close to 20%. We said we'd expect them to be kind of through that heading into 2025. But yes, book-to-bill around 1 is probably a generic definition as we're just calibrating here as we go forward with probably more normalized trends in a couple of segments to see. I mean orders are probably the most varied as either a project or things shift in different geographies. So -- but holistically through the next couple of quarters, I think book-to-bill in excess of 1 as we look to continue to have growth in the next year.

Can I ask you guys like specifically to M&CS? Like how do I gauge sort of where you are in that business from a demand perspective? Like in terms of -- where are you in terms of smart meter penetration? Where could you go? Like how are your conversations with utilities going?

Yes, I can start this out. I'd say we're still in fairly early innings. I've talked a lot about in the U.S., which is predominantly where our cash flows are and the revenues are in metrology, we're still in pretty early innings. There's 50,000 utilities. The top 400 make up close to 45% of the smart meter capture out there. The top 5,000 make up 80%. And so that -- there's a very long tail. When you think about penetration in those 2 segments, the first one, the 400 is probably 40% penetration. And then the top 5,000 is probably in the mid-30s. So the value proposition is very strong to move to AMI. There's a lot of benefits. You've got lots of trucks, lots of people going out, reading meters, driving by to get meter data. A lot of our utilities are focused on net 0, driving down carbon emissions. And we've got millions of truck rolls out reading meters every year. That's a huge benefit. It's a huge cost savings, but it's also from a net 0 point of view, something they're keenly focused on. So we're still in the early innings. I think from an international perspective, there's opportunity. We do quite a bit of business in the U.K. But outside of the U.K. and the U.S., I'd say that the rest of the world is probably a decade behind the U.S. and U.K. when it comes to smart meter deployment. And as water scarcity becomes more and more of an issue and countries are trying to manage -- we call it non-revenue water because it leaks and they can't charge for it. But in essence, it's a leak. And with water scarcity, they want to make sure they get as much of their production to their end-user customer as possible, especially in certain parts of the world where water scarcity is becoming a real issue.

Very interesting. So I want to open it up to the audience in a second, but maybe little bit more into demand you're seeing by region. We talked a little bit about China. You're forecasting flat in '24. Is there anything more you can do there to help you drive growth above market? Or you just have to sort of wait for a recovery? And then conversely, I think Europe has been a general strength for Xylem for quite a long time. Now you're taking Evoqua's business to Europe. So it's usually quite economically sensitive there for other multis, but does it continue to be a source of strength for you guys?

Maybe I'll touch on China first. Last year was actually, from an orders perspective, fairly strong. I mean we have significant backlog. As we look go forward, it's really just funding timing on when some of those projects get funded and then put into play. We've talked to the teams on the ground. I think they're fairly confident as China is in the fourth year of their 5-year plan that those funds will be spent. Our expectations this year has been -- for 2024 is for it to be flat. Obviously, it's grown at significant rates over the last several years for Xylem and has been a key component of our growth algorithm. And we look for that to return here. I think once we get past, I mean, they've got some larger, more broad economic challenges that they're facing. But obviously, solving some of their challenges and building up their infrastructure to support their clean water and air initiatives is a key priority for them. So we look for that to come back. More broadly, yes, I think we continue to see strength both in Europe and in North America relative to some of the commercial synergies we expect to realize with Evoqua and then just core market growth and demand for our technologies as infrastructure demand and funding initiatives have both been created in the states and multiple countries within Europe.

You have like a big India not so long ago. Like maybe just talk about -- I've heard from other multis today like India is pretty fast growing, all that kind of stuff. Does it become -- especially for you guys, does some of these other developing markets become pretty big markets over the next, let's call it, 5 years?

Yes. Bill and I were just in India at the beginning of the year. We spent about a week in India and spent another 4 or 5 days in Dubai in the Middle East. Yes, India's got great potential. I told the team there, the stars are aligning at the right time. They've had really good consistent government policy. Businesses like consistency. They've got a lot of water initiatives that are in play right now. Tap to every house is a big initiative, bringing clean water to all the residents of India. They're doing lots of projects, and we've been involved in these projects on river linking. And so starting -- coming out of the Himalayas down through the central part of the country, linking rivers for irrigation, also for clean water. Delivery is a big focus, and we've been involved in wastewater treatment plants in Mumbai. 80% to 90% of the wastewater goes straight into rivers without being treated in India. And the same thing for Mumbai, one of the largest cities in India. And we've won significant treatment projects in that region. And we see a lot of opportunity. And there's a lot of consistency in funding, and the local governments seem to be very aligned to the national government. And the other thing, too, there, we've got an incredible team. We've got tremendous amount of R&D resources there as well as commercial capability. And we're looking to build more manufacturing capability as well not only in country for country but also looking out to export into the other parts of the regions around that area.

Any questions from the audience? Anybody want to ask a question? Okay. I will continue. Let's talk about Evoqua. So you're going to be $100 million of run rate synergies, I think, 1.5 years after deal closing versus your guide of $140 million within 3 years. Does that mean you could end up much higher, $200 million cost synergies versus your original target? And regardless of the exact outcome, can you give us a little more color into what has gone better than expected so far? And where do you still see significant cost out opportunity?

Yes. I think Bill can chime in on this one, too. We've made really good progress, better than we had planned for, which I think is a great thing. The teams have a lot of momentum. When you're -- when you have that momentum and you're exceeding your targets, it kind of feeds on itself. So look, the deal model we had, we talked about $140 million of cost synergies. Obviously, we're aiming higher than that because you want to make sure, A, deliver that. But we're tracking well. I think at the end of this year, we'll have a good idea how much more we potentially can deliver over the $140 million. We'll be in a better position to talk about that, but we're off to a really good start. The deal was obviously done to drive revenue as well. The cost synergies paid for the deal. We're off to, I think, a good start. The cost synergies were well known when you come into the integration planning. It's redundant corporate cost. It's procurement. It's footprint. And those were known, and we got a head start. The revenue synergies, you got to get the deal closed. You can't gun jump. And a lot of those synergies are anchored around treatment, which is more of a long-cycle business. And so I think from an activity standpoint, you have to measure activity now. The activity is still right. We have the regional revenue synergy leaders in place. Folks are being incentivized, I think, in the proper way to stay focused on revenue capture. And I think the early indicators are that the revenue synergies are going to be really, really good. That's why we did the quick integration with WSS. We think the service revenue will come quicker. But I think there's some real home runs out there when we do European expansion, international expansion of the services business. And then also, what this combination gives us is 90% of content in a wastewater or clean water treatment plant we now have. And so we can walk in the door with our sales team, basically being able to offer everything in a treatment plant. And so that will take time to work with architects and engineers. But when you think about having all those products and capabilities, you can offer more of a solution when more of those are knitted together in a more optimized way. So that's what the teams are getting educated on and figuring out how to deliver a solution versus a discrete product.

Matt, maybe just one more thing on the cost synergies. Could you roughly bucket like the usual suspects like procurement and footprint rationalization and labor? I assume you can tackle labor somewhat quickly. So how are these things going versus your initial expectations? And timing of the rollout of this?

I think they're going well. The biggest one is procurement. Out of the $140 million, that's over half. And then the next biggest one is corporate cost, functional redundancy. And then the last one is footprint, which is the smaller of the 3. What you've seen kind of with the $55 million run rate exit of $23 million is primarily corporate costs and redundant functional costs, the quick integration of APT into water infrastructure as well as some of the reverse integration of WSS, which -- of the Xylem legacy service business, which there will be a little bit more to come there. But that was executed well. And we're off to a little bit better start than we thought on procurement. So this year, it's more about moving deeper into procurement and then making sure we're tracking to the footprint moves that we need to make, probably more so at the end of this year and then into '25 and then early '26.

I wanted to just go back to one thing you said in the beginning about culture. Like the 2 firms, similar culture, like how did you think about that?

Yes. I mean I'd say pretty different. We share a lot of things. I think we all share a passion for solving water. You can see that in both cultures that people care. There's a purpose. I think solving water and the social impact that, that has attracts talent to the organization. It retains talent. I would say that the legacy Xylem business, being more of a product and engineering business, moves at a different clock speed than Evoqua that was more of a service engine business, and they tend to move at more of a mass unit kind of speed. Hey, we got to do some triage here and make things happen. And so taking the best of both cultures is what we've been working on. And those high-impact behaviors we talk about, accountable to deliver, empowering people to lead. And that's one thing that I give Ron and the team a lot of credit from Evoqua. They empowered their people. There was not a lot of coming up for approvals. And that's something we needed to work on in legacy Xylem business. So we're taking the best of both cultures, and that's the high-impact culture that I talked about and that we're deploying.

So Matt, I know you talked more -- you said revenue synergy, more exploration is to come. But like maybe if I just think about sort of WSS and what you're doing, like you combine ISS with Xylem's dewatering business. Like I remember Evoqua's service business was sort of steady mid-single-digit grower. Like is the opportunity for WSS better than that? Like how do you think about the combination there?

Yes. Well, I mean we did WSS for several reasons. One, it was to accelerate synergies, both on the cost and the revenue side. When you have one leader versus 2 segment leaders in the business, not that we don't get along with each other, but it just makes it easier when one person owns it. And so getting that alignment with one segment leader was important. Also, I'm very focused on the customer. And making it easier for our customers to access the solutions with one phone call is a big part of that. And we've already seen that play out. When we announced the new segment in December, we engaged some of our customers. We were 3x oversubscribed to the demand during the holidays to go meet with customers about how we put together transport, pumping transport and treatment of water. So it's going really well. That's where we're going to see the initial wave of synergies. And then like I said, you're going to move into the longer-cycle things that we're building capability around right now. So again, we're off to a good start. The WSS segment, I think, is a good proof point that we're making good progress.

Got it. And then Matt, like one of your main competitors, I don't think you have a ton of overlap with them, but they're a new public company. So everybody compares you to them. Like Dave talked about a little bit of sluggishness in the U.S. from municipalities on spending, mostly in the testing area. You guys are pretty small in testing. You've been pretty bullish on U.S. water treatment. But maybe give us a view of your conversations with U.S. utilities on the ground. I know obviously, it's an election year. Like do you worry about that at all? Like how do you think about growth for U.S. utilities?

Yes. The U.S. utility demand has been really strong. You've seen it in our orders numbers. We were very close to our customers. We're talking to them all the time. Kind of the bellwether, kind of big customers that we lean on, their spend is growing. And so we feel really good. I mean when you kind of unpack utilities, you think about clean water, that's a proxy more for M&CS. You think about our AMI solutions, you look at our backlog. You look at our order rates, backlog up again there in the business. That seems pretty healthy. When you kind of unpack the wastewater side, there's an OpEx and a CapEx element on how we look at it. The OpEx is still very resilient. And on the CapEx side, we were up double digits in the CapEx portion, which is really treatment as a proxy for that. Not only in the U.S., but globally, every region was up double digits. And then lastly, we don't talk a lot about analytics, but that's a really good business for us. It sits in the M&CS segment. And we see that business demand kind of about mid-single-digit growth. And all in all, that market has been really resilient for us, the U.S., especially in utilities.

So in the analytics space, you haven't really had anybody to say, oh, I don't want to replace my equipment or anything like that.

No, it's -- again, it's a pretty global business for us. It's kind of spread out equally around the regions of the world. And we play in 3 pieces of 3 segments in that market. We're in what I would call lab. We're in environmental. And we're also in process, which is kind of the proxy for utilities. So I think we're pretty well balanced in terms of our end markets and where we focus on that business.

And then everybody ask me and I'm sure they ask you about fiscal stimulus and what that means. And I think you guys have said we might see stuff. We're not seeing a ton. Like any update there? Like does the CHIPS Act help you and focus on ultrapure water, for example? Like obviously, there's stuff coming out now.

Yes. I think there -- I guess I always talk about it's icing on the cake. It's how I see it. It's not really baked into our guide or long-term framework. These things kind of take time to materialize. And I think it's just going to be like -- we kind of use the analogy of a dimmer switch. It's just going to slowly build over time and move its way in, whether that's PFAS, whether that's funding for chips in terms of building fab plants, infrastructure spending. It's just going to take time to trickle down. It's the first time in U.S. history that we've had infrastructure funding from the federal government. And the process is not perfect. It's got some kinks that we're working through with EPA and others to get the money to flow. But again, it's just going to be a slow build over the next 5 to 6, 7 years.

And you mentioned the CapEx was reasonably strong. Like I used to think of Evoqua like in those 2 buckets, the capital projects and then sort of everything else. Like as you look at the Evoqua platform in '24, is it growing in line with the rest of the company, better or worse, just the capital projects you think?

Yes. I don't think about it in terms of capital versus kind of service. The business is 75% services and aftermarket. So a big chunk of it is services aftermarket with the balance being capital. But look, we like capital, but we also want to make sure that we deploy capital and we can service it. So that's the mission. And we want to work with our customers to say we can do it better because we have the expertise and with more regulation and challenges around. If you look at just what happened in New Orleans with -- everybody read about the salt wedge coming up the Gulf because of lack of rain in the Mississippi River. And when that water changes, that composition and chemistry, it changes how you treat it. And if you're not kind of in tune to that, it can cause real havoc on your operations. So we have the folks that have that expertise and know how to adapt the treatment systems to deal with the changes and conditions of water. And we think we can bring a real value proposition to that versus just selling the capital. Obviously, there's customers that just want the capital, but we prefer to do both.

Makes sense. And then you briefly mentioned PFAS. Like still pretty small as a percentage of the company. Is there any clear time line of when it might start to really ramp up?

All I know is that in -- whenever the rule goes final from the EPA, which could be any day now, I imagine Q1, Q2 of this year, utilities have 3 years to comply. And I think you'll continue to see the utilities that are much more forward leaning and proactive will start their journey. And some other smaller ones that maybe don't have the resources, it's going to take them -- we're going to have a log jam. It's going to take time. And so I think you're just going to see a snow plow out 3 to 4 years from now, and everybody is going to be trying to comply with industry standards. That's just my hypothesis, but I think we're 3 or 4 years from any meaningful demand in PFAS.

Are there any other emerging contaminants that we should be more excited about, do you think or...

I hope not.

As a consumer, no.

Yes. As a consumer, no. I mean that's a big one. I mean it's in 45% of our tap water, PFAS. And I read -- I was trying to read the other day around bottled water. It said -- I wonder -- I googled it. So I don't know if this is true, but it said 38%. So it looked like a credible source that I read, but it's probably equal to the tap water. So it's an issue. And there's some long-term health effects from these things, and we've got to get it cleaned up.

So you're telling us no water is safe. At least Google says that.

At least Google says that.

All right. And then I know you'd give us more at your Investor Day, but when you're asked about what Xylem might be interested in buying with a strong balance sheet, you suggested small to midsize bolt-ons. It's obviously early in your tenure, so I'm sure you don't want to make some big debt. But are there any obvious white spaces for Xylem that you see? Because you've been with the company for a while. And then a separate question. As you mentioned you're bullish on Idrica, is it going to help you grow your service business? Like how should we look at Idrica? Is it just to really get these larger AMI projects? All of the above? I think I asked you 5 questions in there. So I'll remind you if...

Yes, remind me. So the first one is on capital deployment.

Yes.

Yes. So the first thing is we've got to execute on Evoqua, period. I mean that's the largest deal in our history. There's a lot of value capture to be done there, and we got to make sure we execute. But we've got a good balance sheet, a good healthy balance sheet. And there's -- we have a strong M&A pipeline. There's good small to medium opportunities that we've got in front of us. We can ring-fence Evoqua, I think, fairly well in the organization and get after some of the other pieces in the pipeline that we've got. So that's what we're going to do, and we're going to be smart about it. We're going to follow our process and make sure we're creating value. But we're going to be active, and we're going to be able to be ambidextrous. And the second part was on digital?

So white spaces.

Yes. So the white space, that's a great question. We -- about 2015, Patrick and the team did a lot of great work on something called value mapping, and it's trying to build the opportunity set of how we can build the company. And we've done a great job of taking a $3.5 billion spinout from ITT, which is more or less a pump company and creating a very large water platform. Now it's time to execute against the platform. But we're starting -- we've started last year our next kind of set of value mapping work. And we're kind of -- next week, we've got a Board meeting. We're going to be kind of finalizing the report out on that. In our Investor Day, we will inform some of -- not that we're making a big student body right move, but it will inform a little bit of where we're going to shift our focus in terms of future M&A, future focus on organic growth. And we're finishing that work right now.

And then Idrica, just what's the main goal really of Idrica? And then maybe there's a bigger question that you mentioned around recurring revenue. Again, Evoqua had a good core in service. I feel like you guys are working toward that, but still maybe more of a product company.

Yes. I think Idrica is -- if you don't know what Idrica is, it was a digital business that was spun out of a company called Global Omnium in Valencia, Spain. Global Omnium is much like Veolia, SUEZ. They're a utility operator. And so they've been able to kind of use the utility as a sandbox to develop this digital platform over 15 years, and it has a lot of capability. For us, it's about, again, partnering with them. We have expertise. The joint venture has expertise in deploying this platform because one of the things -- again, it starts with the customer. The customer's biggest pain points, when we talk to utilities, they say, I've got like 50 data sets coming at me, and I can't make sense of them all. And I've got multiple passwords, multiple interfaces and applications, and it's just super clunky. So how do we -- much like a phone, an operating system, how do we stitch together all the applications, one password, one user interface? How do we democratize the data across the utilities so they can run analytics off of it and then drive productivity? That's the mission. Now with that, I call it a land-and-expand strategy. You get the platform in place. You help them solve their biggest problem, whether it's our solutions or other company's solutions. And it's agnostic. And then we bring in our bespoke discrete applications that help the utility with a specific problem. That is a recurring revenue stream on top of the platform. And then we bring in our traditional products. Now we've had examples I've talked about where we've gone in utilities. We put the platform in. We've dropped in a few applications to help them whether it's wastewater treatment optimization or treatment optimization for energy usage. And then we won an AMI deal, $50 million. We won a treatment deal of $20 million. And so bringing our solutions to bear. And I think that's really the value proposition that Xylem has, is we cover the entire water value chain. Now that can be a blessing and a curse because we also got to get focused, and we are through 80/20, and really prioritizing. But it gives us a holistic view of the utility, and we can come in and offer a solution. So that's really that, in a nutshell, let's get in, help them with a pain point and then expand our solutions into the platform.

Very quick last question that I have asked all the companies. What are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse?

I don't think there's anything that's earth shattering that's not already known. If you think about some of the trends that are out there -- I talked about this earlier today in our breakouts. In the U.S. specifically, we need $750 billion to maintain the current service of wastewater and clean water. The infrastructure spending is around $66 billion, so it's nothing. So that's a real problem. So affordability. 2/3 of companies are going to run into water scarcity challenges, and it should be on their enterprise risk management matrix. That's a real problem and resiliency of business that we've got to address. We talked about water scarcity, 40%. There'll be 40% more demand globally for water than supply by 2030. That's a real problem. I talked about PFAS, 45% of tap water. These are real big issues that we have to tackle. They're not new, but that's where we're focused. I think if I had to leave with one thing that's emerging that has come out of our value mapping work and that we're looking at, it's water reuse, where you're getting into a lot of areas that are stressed in water. And that affects industrial customers and making sure they're water neutral. That's why what we do with the acquisition of Evoqua matters. And then from a utility standpoint, when they don't have access to water, we have to reuse water. And so taking wastewater and making that for either irrigation or for treating that back into a tertiary process to make a drinking water again. You're starting to see that happen in the U.S. in different states, and you're seeing it around the world. So that trend is really emerging right now, water reuse and circular water.

Very interesting. Well, Matt, Bill, Andrea, thank you so much for being here. Appreciate it.

Thank you.