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Text: They will provide their perspective on Xylem's fourth quarter and full-year 2020 results and discuss the first quarter and full-year outlook for 2021.
A replay of today's call will be available until midnight on March 5.
Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events.
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.
We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics, in the appendix.
Every segment and every end market made considerable gains on a quarter sequential basis.
And for Xylem overall, the team outperformed expectations across the major metrics.
Those being revenue, earnings and cash.
As the year came to a close, we took full advantage of stabilizing markets.
Both Water Infrastructure and Applied Water Systems showed quicker resilience than anticipated.
And we also affirmed our growth trajectory in Measurement & Control Solutions, building on the large project wins we talked about last quarter by adding another headline AMI deal in Houston, Texas.
We also gathered pace with our industry-leading digital portfolio as the pandemic accelerated customer adoption of digital transformation.
Revenue and orders trends both improved significantly.
One caveat is that orders were still down slightly due to a scope reduction and a previous large win in India.
Otherwise, orders grew in all three of our segments.
Xylem's large installed base of core products and established markets provided exceptional resilience on underlying demand for essential services.
At the same time, our global presence allowed us to capture the benefits of early recovery in places like China, which grew 18% in the quarter; and also in Europe, where we grew 6%.
As a result of that positioning on a large and resilient installed base, combined with a vibrant growth platform, we entered 2021 with healthy backlogs.
They're up 16% overall, and up 30% shippable in 2022 and beyond.
We know growth really happens in a straight line.
And clearly, the global challenges of 2020 put a hitch in year-on-year numbers, including margin.
But I am very pleased with how we responded given these conditions.
We took quick action on spending and on structural cost, and we also made significant productivity improvements.
As a result, we returned to progress on margins in the third and fourth quarters, although we didn't entirely offset COVID's effects.
Our supply chain execution ensured we kept customers served in pandemic, and we help them to deliver the essential services their communities depend upon.
Our operational discipline delivered favorable bottom line outcomes, even in unfavorable market conditions, strengthening our financial position through the year.
The team corrected for the volatile conditions so quickly that, in fact, we delivered free cash flow conversion north of 180%.
Looking ahead, we are encouraged by early signs of market recovery.
The ramp-up of vaccinations offers hope for an eventual return to normalcy, but we're not there yet.
We are still in uncertain times.
But we've nevertheless entered 2021 in a very strong position, and we are on course to capitalize on our increased competitiveness, financial strength and commercial momentum.
With that, I now want to hand it over to Sandy for more detail on how our segments performed.
We have continued to see steady quarter sequential growth improvement across our businesses since the low point in April.
And this quarter, we took another meaningful step forward.
Fourth-quarter revenue growth was down 2% organically versus the same period last year.
That performance exceeded our expectations with upside in all of our end markets and geographically strong growth in China and Europe.
I will touch on revenue performance in more detail covering each of the segments.
But in short, utilities and industrial were both down 3%.
Commercial was flat and residential was up 15%.
We also saw quarter sequential improvement in orders.
Organic orders were down 1% in the quarter as we delivered a second consecutive quarter of sequential orders improvement.
This result most notably reflects the return to growth in M&CS orders, which delivered double-digit gains, including the large win in Houston, which Patrick mentioned.
Applied Water contributed solid mid single-digit growth, and Water Infrastructure orders grew mid-single digits, excluding the scope reduction of a project in India.
We're still negotiating with the customer, but felt it was most prudent to reflect the scope reduction now.
Otherwise, orders growth would have been high single digits for Xylem overall.
With orders accelerating and several large contract wins contributing to double-digit growth in backlog, we have good visibility of future revenue streams heading into 2021.
I'm very pleased with the team's operational execution and cost discipline.
Fourth-quarter operating margin and EBITDA margin of 13.8% and 18.8%, respectively, are above our forecasted range.
Compared to the prior year, lower volumes and unfavorable mix were partly offset by strong productivity and cost discipline.
I'll review operating margin performance by segment in a moment.
Our earnings per share in the quarter was $0.81 due to higher-than-forecasted revenue and earnings and from a lower tax rate due to favorable jurisdictional mix.
Water Infrastructure orders in the fourth quarter were down 16% organically versus last year.
As I mentioned a moment ago, that decline was driven by the descoped India project.
Otherwise, orders would have been up mid-single digits, reflecting healthy momentum in the segment as a whole, particularly in the wastewater utility businesses.
Notably, treatment was up 10% as wastewater utility capex budgets continue to show resilience globally.
Water Infrastructure revenue was flat organically in the quarter.
Modest growth in wastewater utilities was offset by modest declines in our industrial businesses.
Geographically, results were mixed.
The U.S. was down high single digits, while Europe and emerging markets were up low single digits and mid-single digits, respectively.
These results generally reflect the stage of COVID recovery in each region.
Operating margin and EBITDA margin for the segment were down a modest 60 to 70 basis points, respectively.
Significant savings from productivity and cost reductions were offset by inflation, the recognition of reserves and negative mix from declines in our U.S. dewatering rental business.
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Revenue declined 1% in the quarter.
Mid-teens growth in residential was offset by softness in industrial.
Commercial revenue was flat.
was down mid-single digits as COVID impacts drove declines in the industrial and commercial businesses, offset by that strong residential growth that I just mentioned.
Europe delivered high single-digit growth, primarily driven by good pace in commercial and modest growth in residential.
Emerging markets were down low single digits.
Softness in industrial markets in the Middle East were partially offset by strength in the residential and industrial markets in China.
Segment operating margin and EBITDA margin declined 90 and 170 basis points, respectively.
Volume declines in the industrial end market and overall inflation more than offset solid productivity gains, favorable mix and some price realization in the quarter.
In M&CS, orders returned to growth in the quarter, up 13% organically.
This was largely driven by double-digit growth in both water and energy.
Orders in our test business were up low mid -- were up low single digits.
Revenue improved considerably on a sequential basis.
From the mid-teen declines we experienced in the second and third quarters, this quarter we finished the quarter down 5%.
While our core U.S. metrology business continued to experience COVID-19 related softness, the largest decline is related to the timing of project deployments.
Large-scale projects that were in process pre pandemic in both the U.S. and the Middle East have been completed.
And new projects, which are part of our backlog, have been temporarily delayed due to site access restrictions.
We expect that large project deployments will resume toward the end of the second quarter and further accelerate in the back half of the year.
These declines were partly offset by high single-digit growth in our analytics and advanced digital solutions businesses.
was down mid-single digits for the reasons I just mentioned.
Emerging markets was down double digits due to the timing of prior year project deployments in the Middle East.
And Europe grew double digits from demand in the test business and from the start of the Anglian Water metrology project in the U.K. Segment operating income and EBITDA margins in the quarter were down 330 and 350 basis points, respectively.
Lower volume, inflation and unfavorable mix were partially offset by strong productivity and cost discipline.
I was particularly pleased with our strong cash performance for the year.
We grew free cash flow by 5% for the full year, exceeding our pre-pandemic free cash flow outlook, and delivered free cash flow conversion of 181%.
Our team has been focused on driving continuous improvement on working capital for a number of years.
In the difficult operating environment of 2020, they took that work another step forward, finishing at 17.6% of revenue.
This is a 40 basis point improvement year on year, excluding foreign exchange impacts, and reflects the team's progress in managing inventories and driving solid improvements in accounts receivable collections.
We benefited from favorable timing related to the settlement of restructuring, tax, interest and payroll liabilities, some of which will reverse in 2021.
Our balance sheet is well positioned and includes a $1.9 billion cash balance.
Net debt-to-EBITDA leverage is one and a half times.
As a reminder, we'll take advantage of our cash position to repay one of our senior notes amounting to $600 million in the fourth quarter.
And lastly, we announced an annual dividend increase of 8%.
This is our tenth consecutive annual increase.
2020 reminded us all that it's prudent to be humble about the fidelity of our foresight.
When COVID first began to spread around the world, we said we would focus on managing what we could control, while maintaining our investment for growth.
And that's exactly what we've done.
So with 2021 still presenting some uncertainty, we will apply the same kind of focus that guided us throughout 2020.
In our earnings call almost exactly a year ago, I said that I expected operational discipline would be a key capability for us.
I couldn't have anticipated then how much we could benefit from that capability.
When 2020's big challenges arrived, the team delivered on cost, on working capital, on free cash flow and on driving commercial value from our large installed base.
We're still in a challenging environment, so we'll continue to face spending until we further see improvement in our markets.
We'll keep executing the structural cost program begun in 2020, which is going to deliver savings through 2021.
And given some of the inflationary headwinds we're already seeing, we are redoubling our efforts to manage the price-cost dynamic.
We're keeping a very close eye on our supply chains, and proactively managing potential inflationary and logistics impacts.
Despite varying by market and geography, there are clearly opportunities for growth in a recovering environment.
In digital transformation, the pandemic demonstrated the imperative of operational and financial resilience for utilities, which is precisely the value proposition of our advanced digital solutions.
Pre-pandemic, the business case was already very compelling.
But as utility operators worked heroically to keep essential services running, the stresses of the pandemic made it clear that new approaches are required.
Remote monitoring, automated operations and smart infrastructure more broadly continue to see increased demand.
Backlog in our advanced digital solutions grew 70% year on year.
Although it's from a small base, the trajectory is clear.
It puts us in a very attractive position as we grow not only in software platforms, but in all of the digitally enabled parts of our portfolio.
Geographically, India and China will continue to drive high growth.
Despite experiencing COVID's earliest impacts, China actually grew last year.
And in the three years leading up to 2020, India and China posed a combined average annual growth rates in the double digits.
With localization strategies well advanced in both countries, our China and India teams are set to continue delivering impressive growth.
It's also worth mentioning a very solid financial foundation underpinning our growth.
With the current cash balance of nearly $1.9 billion, capital deployment is clearly top of mind for us.
Even with some debt repayment during the fourth quarter, that number still offers a lot of capacity.
Alongside organic investment, M&A remains a top priority, and we intend to be proactive in our deployment of capital, wherever the investment case warrants.
We remain disciplined about valuations, but we do see opportunity for additional investments over the next 18 months.
Growth is also important to our creation of social value.
We are in the very privileged position that sustainability is baked into our business model and strategy.
Our portfolio of solutions has a net positive impact, not only on water, but on a wide range of sustainability outcomes.
We took several bold steps on sustainability in 2020, most notably, our green bond offering.
And performance across these metrics continues to put us in a unique leadership position, both in the water sector and more broadly.
The team's progress has strengthened our position on a number of sustainability indices.
We were recently added to Bloomberg Barclays MSCI Green Bond Index.
Despite that gratifying recognition, we have so much more work to do to achieve our 2025 sustainability goals and to deliver on our mission.
Through 2020, utilities have been reassuringly resilient, down only mid-single digits.
As you see in the fourth-quarter results, M&CS and Water Infrastructure revenues held up better than anticipated.
Still, our outlook for 2021 reflects a tempered view that utilities have not seen the end of the pandemic impacts quite yet.
We anticipate our utility business overall, which is just north of 50% of Xylem revenues, will grow in the low to mid-single digits in 2021.
We expect that same growth rate on the wastewater side as utilities continue to focus on mission-critical applications.
And we expect modest recovery in opex growth on a global basis through the year.
In the U.S., wastewater capex is likely to be down modestly.
However, the decline should reflect postponements rather than reductions in projects.
As you would expect, we have kept close to our utility customers to understand how they are thinking about budgets and funding for this year.
And while some uncertainty remains, their deepest concerns have largely abated since the low point of the pandemic.
On the clean water side, we anticipate mid single-digit growth.
As I mentioned, large project deployments should begin ramping again from the second quarter, accelerating through the end of the year.
The large multiyear metrology deals that we won in 2020 set us up for solid growth this year and beyond.
In industrial markets, we've seen good sequential improvement.
Short-cycle orders and project activity are definitely beginning to pick up, but are still likely to be limited by COVID impacts in the near term.
We expect industrial to be flattish to up low single digits.
Our commercial end market outlook varies quite a bit by geography.
The U.S. will continue to be sluggish.
Europe, on the other hand, should continue recovering, although not at the double-digit pace we saw in the fourth quarter.
And overall, we anticipate the commercial market to be flattish to down slightly for the year.
On Slide 12, you will see that we are reinstating annual guidance.
While uncertainty remains especially regarding the timing and cadence of recovery, we are confident our team will deliver results in line with the following framework.
For Xylem overall, we foresee full-year 2021 organic revenue growth in the range of 3% to 5%.
This breaks down by segment as follows: low to mid single-digit growth in Water Infrastructure, with solid growth in wastewater utilities being partially offset by flattish performance in the industrial markets, predominantly in our dewatering business; low single-digit growth in Applied Water.
While we see pockets of recovery in this segment globally, particularly in residential, the outlook for growth in the commercial building end market is more muted.
On top of that, our exposure to North America is heavier and the region has lagged on pandemic recovery.
In Measurement & Control Solutions, we expect mid- single-digit growth.
Customers indicate project deployments will likely resume late in the second quarter and further accelerate through the second half of the year.
We also expect to see our test assessment services and advanced digital solutions businesses, building on the momentum they delivered finishing 2020.
While we have typically provided you with both the adjusted operating margin and adjusted EBITDA margin in the past, you will notice that we are increasing our focus in reporting around adjusted EBITDA.
We believe that this measure more accurately reflects the cash performance of our businesses and will enable us to more transparently report margin performance after M&A without purchase accounting impacts.
For 2021, we expect adjusted EBITDA to be up 40 to 140 basis points to a range of 16.7% to 17.7%.
For your convenience, we're also providing the equivalent adjusted operating margin here, which we expect to be in the range of 11.5% to 12.5%, up 70 to 170 basis points.
This predominantly reflects the benefits from our restructuring savings, combined with volume leverage and favorable price/mix, more than offsetting inflation and investments.
This yields an adjusted earnings per share range of $2.35 to $2.60, an increase of 14% to 26%.
Free cash flow conversion is expected to be in the range of 80% to 90%, following free cash flow conversion of 181% in 2020 and 124% in 2019.
While we continue to drive continuous improvement, we expect to see increases in working capital as we return to growth, and some of the timing benefits we realized in 2020 related to the settlement of liabilities will reverse in 2021.
We believe this is purely a dynamic related to 2021, and we expect to drive 100% cash conversion in 2022 and beyond.
We have provided you with a number of other full-year assumptions on the slide to supplement your models.
One key item that I do want to draw your attention to is foreign exchange.
We're assuming a euro to dollar conversion rate of 1.22.
FX can be volatile, and so an FX sensitivity table is included in the appendix, which will help you if we continue to see variations in the rates.
Now drilling down on the first quarter, we anticipate that total company organic revenues will grow in the range of 1% to 3%.
This includes low single-digit growth in Applied Water and low to mid single-digit growth in Water Infrastructure.
M&CS is expected to decline low to mid-single digits as we anticipate continuing delays from COVID before projects begin to deployment in Q2.
We expect first quarter adjusted EBITDA margin to be in the range of 14% to 15%, representing 170 to 270 basis points of expansion versus the prior year, with the largest expansion coming from M&CS due to operational improvements and a prior year warranty charge.
We recognize both that the marketplace is stabilizing and that it's still likely to be unsettled for some time.
But we come into the new year with good momentum and an even stronger position emerging from the pandemic than when we entered it.
That position is built on a durable business model.
We have vital products at the heart of essential services.
And we have differentiated technology that provides a multiyear runway for attractive growth.
Our mission has perhaps never been more relevant.
And our underlying investment thesis remains robust.
Our near-term performance is delivering results, and we continue to invest for sustainable growth.
That's in line with our long-term strategy to create both economic and social value for our shareholders, our customers and our communities.
We'll provide an update on our key strategic priorities and our long-term plans at a virtual Investor and Analyst Day planned for later this year, where I look forward to sharing more detail on our technology and solution capabilities and to discussing our growth strategies.

user
compname posts q4 adjusted earnings per share $0.81.
q4 adjusted earnings per share $0.81.
sees fy 2021 revenue up 6 to 8 percent.
sees fy adjusted earnings per share $2.35 to $2.60.

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