• Revenue Growth: Total and organic revenue grew at 1% in Q3.
• EBITDA Margin: Record quarterly EBITDA margin of 21.2%, up 140 basis points from the prior year.
• Earnings Per Share (EPS): Record EPS of $1.11, a 12% increase over the prior year.
• Free Cash Flow: Year-to-date free cash flow increased by 27% from the prior year with a conversion rate of 79%.
• Net Debt to Adjusted EBITDA: 0.6 times.
• Orders Growth: Orders up 8% in the quarter, with strong demand in MCS and WSS segments.
• Backlog: Total backlog reaching $5.3 billion.
• Measurement & Control Solutions (MCS) Revenue: Revenue up 11%, driven by smart metering demand.
• Water Infrastructure Revenue: Revenue increased 1%, driven by transport demand.
• Applied Water Revenue: Revenues down 4%, primarily due to softness in emerging markets.
• Water Solutions and Services Revenue: Organic revenue down 1%, with segment EBITDA margin at 24.7%, up 200 basis points.
• Full Year Revenue Guidance: Approximately $8.5 billion, with organic revenue growth of approximately 5%.
• Full Year EPS Guidance: Narrowed to $4.22 to $4.24.
• Fourth Quarter Revenue Growth Expectation: Roughly 2% to 3% on a reported and organic basis.
• Fourth Quarter EPS Expectation: $1.12 to $1.14.

• Warning! GuruFocus has detected 5 Warning Signs with XYL.

Release Date: October 31, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Xylem Inc (NYSE:XYL) reported record EBITDA margins and earnings per share for the third quarter of 2024, demonstrating strong operational discipline.
• The integration of Evoqua is ahead of schedule, with cost synergies exceeding expectations and contributing to profitability.
• The company experienced healthy orders growth across all segments, with organic orders up high single digits and a book-to-bill ratio greater than one.
• Xylem Inc (NYSE:XYL) is increasing its stake in the Idrica joint venture, which will enhance its data management and analytics capabilities for water utilities.
• The company's balance sheet remains robust, with a net debt to adjusted EBITDA ratio of 0.6 times and a 27% increase in year-to-date free cash flow.

Negative Points

• Revenue growth was moderated due to project timing pushouts in the Measurement & Control Solutions (MCS) and Water Solutions & Services (WSS) segments.
• There are pockets of softness in Europe and emerging markets, impacting the company's performance in those regions.
• The Applied Water segment experienced a 4% decline in revenues, primarily due to softness in emerging markets.
• The company faces challenges from election uncertainty, geopolitical tensions, and tariffs, which could impact future performance.
• Xylem Inc (NYSE:XYL) noted some delays in project deployments due to elongated commercial negotiations and interest rate uncertainty.

Q & A Highlights

Q: Can you discuss the impact of decision-making delays on WSS and the timing of capital projects? A: Matthew Pine, CEO: Q3 was a tale of two stories. Utilities end market was up 10%, but industrial and commercial building end markets were down 4% due to project pushouts and slight softening in mining verticals. Bill Grogan, CFO: The delays are due to elongated commercial negotiations and project delays. We expect a little softness in Q4 but anticipate a pickup at the beginning of next year.

Q: What is the status of the MCS backlog and the expected growth rate? A: Matthew Pine, CEO: We are out of production constraints, and lead times have improved significantly. The demand is there, but deployments need rescheduling. William Grogan, CFO: We expect high single-digit growth in Q4, with potential continuation of rephasing into early next year. MCS should normalize to high single-digit growth for the year.

Q: Can you provide an update on the segmentation and identification journey of the portfolio? A: Matthew Pine, CEO: 2024 was a year of deep dive analytics. Implementations are happening in Q4, with results expected in Q1 next year. We are committed to a 4% to 6% growth outlook over the next three years, despite some potential top-line pressure.

Q: How is the pricing strategy impacting your segments? A: Matthew Pine, CEO: We aim to be price-cost positive, achieving a 60 basis point spread in Q3. MCS contributed significantly with over 200 basis points. We continue to leverage differentiation for strategic pricing, which will be a tailwind into next year.

Q: What is the outlook for Applied Water, given recent order growth? A: Matthew Pine, CEO: Applied Water has been challenged but is expected to recover in 2025. The team has leveraged technology to win larger projects, supporting a positive view for next year. Fundamentals are expected to improve over the next few quarters.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.