Yahoo Finance Xylem Inc. (NYSE:XYL) Q1 2024 Earnings Call Transcript
Xylem Inc. (NYSE:XYL) Q1 2024 Earnings Call Transcript May 2, 2024
Xylem Inc. beats earnings expectations. Reported EPS is $0.9, expectations were $0.839. Xylem Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Xylem's First Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Andrea van der Berg, Vice President of Investor Relations. Please go ahead.
Andrea van der Berg: Thank you, operator. Good morning everyone and welcome to Xylem's first quarter 2024 earnings call. With me today are Chief Executive Officer, Matthew Pine; and Chief Financial Officer, Bill Grogan. They will provide their perspective on Xylem's first quarter 2024 results and discuss the second quarter and full year outlook. . Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up and then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website. A replay of today's call will be available until midnight May 9th.
Additionally the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide 2. We will make some forward-looking statements on today's call including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances and actual events or results could differ materially from those anticipated. Please turn to Slide 3.
We have provided you with a summary of our key performance metrics including both GAAP and non-GAAP metrics with references to prior year segment metrics being made on a comparative basis reflecting the change in segment as of the beginning of the year. For purposes of today's call, all references will be on an organic and/or adjusted basis unless otherwise indicated. And non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation. Now, please turn to Slide 4 and I'll turn the call over to our CEO, Matthew Pine.
Matthew Pine: Thanks Andrea. Good morning everyone and thank you for joining us today. The Xylem team delivered a very strong first quarter, outperforming expectations on all metrics. The team drove high single-digit organic revenue growth reflecting a healthy balance of both volume and price. And the team also expanded adjusted EBITDA margin, almost 300 basis points. And without outperformance, we delivered EPS growth of 14%. The story is pretty straightforward. We have strong commercial and operational momentum with resilient underlying demand in the majority of our segments in end markets. I want to thank all our teams for doing a great job. But I want to highlight two teams in particular Measurement & Control Solutions and Water Solutions and services.
In both segments, focused effort paid off in really outstanding numbers. In MCS organic, revenue grew more than 20% and margins are up over 500 basis points year-over-year. And in its first quarter as a combined segment, WSS stayed focused on serving our customers and deliver both the highest orders growth of all segments and made a significant contribution to Xylem's overall margin mix. In addition to operational and commercial performance, the first quarter also reflected continued momentum on integration synergies with Evoqua. We saw a very solid Q1 run rate on cost capture and we're confident in how we're tracking both on revenue and cost synergies. On the basis of our momentum, the team's disciplined performance and continuing resilient demand, we're raising our full year guidance for both revenue and margin and lifting our EPS guidance $0.08 from the midpoint.
As we look forward operationally we're focused on maximizing value from every additional incremental volume we deliver. The team's impressive first quarter margin performance reflects our increasing operational discipline. We're driving simplification across our business, doing the few things that matter most, even more efficiently. To solve water, we have to simplify water, both for our customers and for ourselves. Strategically, our demand outlook continues to be supported by secular trends that are set to continue across economic cycles. As the headlines reflect, we're seeing an increasingly water-challenged world. And just as with energy, the water economy is intertwined with every part of business and life. So as water security becomes pressing, we'll continue to see increasing demand for the solutions that can help make companies and communities more water secure, and Xylem's platform of capabilities is uniquely positioned to meet this demand.
We recently announced we'll be hosting our Investor Day on May 30 to take place both virtually and here at our headquarters in Washington. We're looking forward to the opportunity to provide updates on our strategic outlook, long-term growth and financial framework and our 2030 sustainability goals. And with that, I'll hand it over to Bill to cover the quarter's results, our financial position and our outlook in more detail. Bill?
Bill Grogan: Thanks, Matthew. Please turn to slide 5. Q1 was an excellent start to the year, exceeding expectations across revenue, margin and earnings per share. I want to echo Matthew's thanks to all of our teams for remaining focused and turning in an outstanding quarter. We continue to see resilient demand with our backlog increasing 4% to $5.3 billion. Organic orders grew 3% in the quarter with book-to-bill above 1%, supported by strength across developed markets, particularly in WSS. Total revenues grew 40%, and organic revenues rose 7%, exceeding our guidance and a healthy combination of volume and price. Our performance was led by M&CS and WSS and we saw growth in all regions led by double-digit growth in the US. EBITDA margin was 19.2%, up 290 basis points from the prior year with productivity savings, strong volume, price and mix more than offsetting inflation and investments.
This reflects incrementals of 26% on a consolidated basis and 57% on an organic basis. Our EPS in the quarter was $0.90, above the high end of our guide by $0.05, up 14% over the prior year. Our balance sheet remains healthy with ample liquidity to support capital deployment. We started the year with free cash flow conversion of 9%. This represents significant improvement versus typical seasonality of negative Q1 free cash flow conversion. This year, we delivered higher net income, offset slightly by increased CapEx. Please turn to slide 6. Measurement & Control Solutions had a great quarter and exceeded our expectations. Orders grew 3% on continued smart metering demand. Backlog rose to $2.2 billion, up 6% organically and book-to-bill came in slightly under one due to greater backlog conversion.
M&CS revenue was up 22%, driven by smart metering demand and backlog execution. We finished the quarter with EBITDA margins of 22.7%, up 550 basis points versus the prior year and up 440 basis points sequentially. Margin expansion was driven by productivity, higher volume and price and favorable mix more than offsetting inflation. In Water Infrastructure, orders grew 6% in the quarter, led by robust transport demand. Revenue exceeded our expectations with total growth of 40% and organic growth of 6%, driven by healthy demand across all regions and applications. EBITDA margin for the segment was up 320 basis points driven by productivity, mix, volume and price offsetting inflation. In Applied Water, although orders declined versus a year ago, book-to-bill was greater than one, reflective of a few large project wins.
Revenues were down 4%, in line with our expectations against strong growth in the first quarter last year, primarily driven by a decline in developed markets. Segment EBITDA margin declined 380 basis points year-over-year, an unfavorable mix, higher inflation and volume declines, partly offset by productivity savings. Wrapping up with water solutions and services. Orders grew 7% organically led by dewatering and 19% on a pro forma basis with book-to-bill well above one in the quarter, driven by a large order for a 20-year outsourced water contract, but even excluding that large order, pro forma demand increased. Organic revenue was up 6%, while pro forma revenue increased 9%, with healthy growth across most of the businesses. Adjusted EBITDA margin was strong at 22.3%, driven by favorable mix in volume and price and productivity.
The outperformance across WSS is a great reflection of our team staying focused on what matters, serving our customers throughout this integration and re-segmentation. Now, let's turn to slide 7 for our updated full year and second quarter guidance. Given our first quarter outperformance and both commercial and operational momentum, we are raising our full year guidance. We are increasing our revenue guide to approximately $8.5 billion. This reflects an additional point of growth versus prior guidance. That will put total revenue growth at 15% to 16% and organic revenue growth at 4% to 6%. We are confident about driving further margin expansion with operational productivity and are raising our EBITDA margin guidance to about 20%. That represents 110 basis points of expansion versus the prior year driven by higher volume, productivity, including cost synergies and price offsetting inflation.
Our updated EPS guidance of $4.10 to $4.25 reflects an increase of $0.08 at the midpoint. We continue to expect around $100 million of exit rate cost synergies in 2024. And free cash flow conversion for the year is still expected to be 115% of net income. The full year outlook at the segment levels remain largely unchanged from our comments in February. For the second quarter, we anticipate total revenue growth will be 23% to 25% on a reported basis and 5% to 7% organically. We expect second quarter EBITDA margin to be approximately 20%, up 90 basis points, driven by higher volumes, continued price realization and productivity gains. This yields second quarter EPS of $1 to $1.05. We came into 2024 at a healthy pace, and we've had a strong start to the year, building further momentum.
Our diversified portfolio positions us well to address our customers' evolving needs, and we anticipate healthy demand across most end markets and applications. While we are closely monitoring the macro environment, including inflation, higher interest rates for longer, a strengthening dollar and geopolitical uncertainty, our overall outlook for the year remains positive. With that, please turn to Slide 8, and I'll turn the call back over to Matthew for closing comments.
Matthew Pine: Thanks, Bill. Two things I want to mention before we close. First, it's been such a privilege in my first 100 days as CEO to spend time with so many Xylem colleagues around the world. You can see they're doing fantastic work, and it's evident in today's results. And our integration progress is a great indicator of how smoothly the Xylem and Evoqua teams have come together. As a combined company, there is so much potential for growth and impact, especially as we pivot to even stronger execution of our strategy. To achieve our potential, we're being very intentional about the culture we're building. Specifically, we're creating a culture centered on behaviors that drive empowerment, accountability and innovation.
We call it our high-impact culture, and it's the heart of our how, how we are creating the next phase of Xylem's growth and impact. Of course, culture change takes time, and it starts with myself and the leadership team. So it's incredibly energizing to see the cultural alignment already coming to life in our town halls and business reviews at all levels in the organization. We'll talk a bit more about how we're fostering our high-impact culture when we gather together for Investor Day at the end of May. Lastly, on Investor Day, we'll also be launching our 2023 sustainability report. We're very proud of what we've achieved and even more motivated by the work ahead. In this year's report, we'll be introducing our combined company goals for the first time, setting our ambition for impact through 2030.
Given how fundamental sustainability is to Xylem's business model, I invite you to give it as much attention as you give our financial results. And as always, we welcome your feedback. And with that, I'll turn it over to the operator to lead us through Q&A.
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