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Text: They will provide their perspective on Xylem's first-quarter results and our outlook.
A replay of today's call will be available until midnight on June 2.
Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events.
All references will be on an organic or adjusted basis, unless otherwise indicated.
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, including in our Form 10-Q to report results for the ended -- the period ending March 31, 2021.
In the appendix, we have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
The quarter's growth was broad-based, reflecting increasing demand across all of our segments, our end markets and geographies.
Our momentum coming into the year accelerated through the quarter with the team taking full advantage of economic recovery and pent-up demand in our markets.
Orders were up double digits in all three of our business segments, and backlog was up 23% organically.
Both Western Europe and emerging markets delivered exceptional organic revenue growth, with Western Europe up 11% and emerging markets up 33% year on year and with momentum up strong sequentially.
demand also continued to recover with orders up 18%.
Alongside top-line growth, our results reflect considerable margin expansion.
I credit the team's discipline, building on the benefit of volume effects and positive impact from the cost actions we took in 2020.
Our financial position, which was robust coming into the quarter, strengthened even further on the combination of revenue growth and margin expansion.
Looking forward, we are confident about the remainder of 2021 and beyond.
Therefore, we are raising our full-year guidance on the top line, margin and EPS.
I'll talk a bit more shortly about trends and focus areas for the team.
But first, let me hand it over to Sandy to provide more detail on performance in the quarter.
The first quarter was clearly a meaningful step forward.
The team delivered exceptional performance, capitalizing on demand recovery in the majority of our markets.
Revenue grew 8% organically versus the same period last year with performance better than our expectations across the board.
Strong double-digit revenue growth in wastewater utilities was paired with broad-based industrial demand recovery.
Geographically, emerging markets in Western Europe both grew double digits, while the U.S. was down 1%.
I'll touch on revenue performance in more detail covering each of the segments.
But in short, utilities were up 3%; industrial was up 14%; commercial, up 5%; and residential was up 31%.
Organic orders grew 19% in the quarter as all three business segments contributed double-digit order gains.
Importantly, it was also the third consecutive quarter of sequential orders improvement.
Looking at the key financial metrics.
Margins were above our forecasted range with EBITDA margin coming in at 17.1% and operating margin at 11.4%.
The 480 basis points of EBITDA expansion came largely from volume and productivity, partially offset by inflation.
Earnings per share in the quarter was $0.56, which is up 143%.
Water infrastructure orders in the first quarter were up 14% organically versus last year with revenues up 11%.
Geographically, Western Europe grew on healthy demand, while emerging markets delivered strong performance, recovering from a COVID-impacted quarter last year.
The U.S. was flattish as double-digit growth in wastewater transport was offset by soft industrial performance.
EBITDA margin and operating margin for the segment were up 430 and 490 basis points, respectively, as strong productivity and volume leverage offset inflation.
In the applied water segment, orders were up 25% organically in the quarter, driven by recovery in demand in North America and strength in Western Europe.
Revenue was up 13% in the quarter with growth in all end markets and geographies.
Residential and industrial grew 31% and 15%, respectively, while commercial grew 5%.
Geographically, the U.S. was up modestly as residential and industrial gains were offset by lagging commercial end markets.
By contrast, improving commercial demand in Western Europe contributed 15% growth with additional strength in residential.
Emerging markets were up 51% due to the timing of prior-year COVID shutdowns, as well as commercial recovery in Middle East and Africa.
Segment EBITDA margin and operating margins grew 250 and 280 basis points, respectively.
The expansion came from volume, absorption and productivity.
In M&CS, orders were up 19% organically in the quarter with double-digit growth across both water and energy applications, driven by large metrology projects.
Segment backlog is up 29%.
As anticipated, organic revenue growth showed solid quarter sequential improvement but finished flat year on year.
Water applications grew in the mid-single digits with strong demand in the test business.
In energy applications, revenue was down mid-teens as certain large deployments were completed in the same period last year.
Geographically, the U.S. was down mid-single digits, but we anticipate project deployments will ramp through Q2 on loosening site access restrictions and then accelerate through the second half.
Emerging markets were up 8%, and Western Europe grew 9% from metrology project deployments and demand in the test business.
Segment EBITDA margin and operating margins in the quarter were up 770 and 600 basis points, respectively.
Modest price realization and strong productivity savings, as well as a prior year warranty charge, more than offset inflation.
Our balance sheet continues to be very strong.
We closed the quarter with $1.7 billion in cash.
Free cash flow was in line with our expectations, as well as our historical seasonality patterns.
Managing working capital remains an enterprisewide priority, and we are especially pleased with our accounts receivable performance.
Net debt-to-EBITDA leverage was 1.6 times at the end of the quarter.
I'd like to revisit the three focus areas we highlighted coming into the year: the performance of our growth platforms, the team's operational discipline and our progress on sustainability.
Turning first to our growth platforms.
You've already heard about our emerging markets team's exceptional first-quarter performance with revenue and orders up 33% and 21%, respectively.
Up until now, China and India have taken the spotlight.
In both countries, our investments in capabilities and localization have created strong engines for sustainable growth.
But of course, other areas of the emerging markets also represent great opportunity for us.
Many countries in Eastern Europe, for example, continue to modernize their economies and represent a long runway of investment in water infrastructure.
And in Africa, there are clearly big water challenges to solve as the higher-growth nations continue to urbanize.
We expect emerging markets, overall, will continue to be a source of healthy, sustainable growth for the foreseeable future.
The second platform that continues to underpin sustainable growth is our digital strategy.
Our broad portfolio enables us to combine multiple digital technologies into integrated offers, including AI-enabled software platforms, advanced communications networks and automated end points.
Those capabilities have been key to our commercial momentum over the last several quarters with customer adoption of digital solutions accelerating through the pandemic.
We've spoken previously about our headline wins in Texas and Ohio.
In Q1, we added a large transformation project in Greensboro, North Carolina, and we have just signed another exciting deal to be announced in the next few weeks.
All of these projects deliver network as a service, software as a service and advanced analytics.
In each case, Xylem's ability to bring a suite of transformational capabilities distinguished us and was essential to winning.
And just last week, we further extended the digital capabilities we can offer our customers by partnering with Esri.
Esri is the global leader in geographic information systems, GIS for short.
These systems are an essential component of utility's operating environment.
By integrating their technology with our advanced digital solutions, water operators achieved unprecedented network visibility and a clear path to increased operational efficiency and sustainability.
And with last week's agreement, Xylem and Esri are bringing that powerful combination to the water sector together.
Our partnership includes developing joint solution road maps and joint selling to water utilities around the world.
We are very excited about this partnership and about the value we can deliver to customers together.
Turning next to operating discipline.
Our operational capabilities were absolutely key to coming through 2020 on strong foundations.
As you know, last year, we made difficult but essential decisions on structural cost.
And we're now clearly seeing the benefit of those actions.
In addition, the team drove strong productivity gains in the first quarter, which offset the early impact of rising inflation.
The result was solid margin expansion with incremental margins coming in at 55%.
Over the last year, we've learned that we can do more with less, and we will remain absolutely vigilant on cost as economies reopen and demand continues to recover.
That said, we are expecting some impact from the broad-based inflation and component supply challenges that are affecting the industrial and tech sectors.
Now we've already taken action by strategically investing in inventory to support areas of strong demand, and we will continue driving productivity and pricing to mitigate inflation.
Still, the supply environment is likely to remain challenging for some time.
The third focus area we highlighted coming into the year was sustainability.
I think many of us worried that the cause of sustainability might suffer setbacks through the economic hardships of 2020.
However, instead of a retreat, we've actually seen a broad and energetic global embrace of sustainability.
As an enterprise over the last year, we've taken several meaningful steps toward our signature 2025 sustainability goals.
We'll be highlighting those in our annual sustainability report to be published in June.
We'll be reporting, for example, that, in 2020, we helped our customers prevent 1.4 billion cubic meters of polluted water from entering local waterways.
Now the report is largely retrospective, but, of course, we continue to move forward.
In 2021, we've deepened and broadened the link between compensation and sustainability performance.
It is now a component in the long-term incentive program for a range of key executives.
Our commitment and our action has put us in a leadership position, which is both gratifying and a tribute to the team.
That said, we all know we have a lot more work ahead of us to deliver on our goals and on our mission and purpose.
With that, I'll now hand it back over to Sandy to provide the forward view of our end markets, along with guidance for the remainder of the year.
The outlook for our end markets remains mostly consistent with our view from last quarter with a couple of notable changes.
First, in utilities, we continue to see strong commercial momentum in both wastewater and clean water, and anticipate our utility business will grow in the mid to high single digits.
On the wastewater side, operators remain focused on mission-critical applications and opex needs in the developed markets of Europe and North America.
Capital spending outlook and bid activity in China and India remains robust, although we expect some lumpiness in India due to high COVID case rates there.
On the clean water side, we are encouraged to see large project deployments beginning to ramp again.
We're clearly positive about the prospect of investment in modernizing the country's water infrastructure.
More broadly, the plan could represent an opportunity for communities across the U.S. to invest in greater resilience in several infrastructure categories, which would have the effect of reducing pressure on municipal budgets.
We are encouraged by those possibilities.
But to be clear, it's too early to know whether and in what form the plan may emerge from Congress, who have not built specific upside into our expectations.
The second notable change in our outlook is in the industrial end market.
We have seen a rebound in global industrial activity and sentiment across all three of our business segments.
We expect healthy growth in emerging markets in Western Europe to continue in the first half, while North America will deliver modest growth.
And then we anticipate those relative market performances will flip in the second half, primarily because of the compares.
Importantly, the industrial dewatering business is recovering, driven by demand in construction, mining and other verticals.
And we now expect the industrial end market to grow in the mid-single digits for the year.
Our outlook in the commercial segment remains unchanged.
We continue to expect our commercial end market to be up low single digits.
replacement business is stable, although new commercial building is expected to be soft for most of 2021.
In residential, we now anticipate high single digit to low double-digit growth for the full year, which is up modestly from our previous expectation of mid to high single digits.
We do expect growth will moderate through the second half, due largely to prior-year comparisons.
As you can see, we are raising our previous annual guidance.
For Xylem overall, we now see full-year 2021 organic revenue growth in the range of 5% to 7%, up from our previous guidance of 3% to 5%.
This breaks down by segment as follows: mid- to high single-digit growth in water infrastructure, up from low to mid-single-digit growth previously; mid- to high single-digit growth in applied water, up from low single-digit growth; and in measurement and control solutions, we expect -- we continue to expect mid-single-digit growth.
While we anticipate delivering a number of large project deployments, growth may be somewhat constrained by component supply challenges.
For 2021, we expect adjusted EBITDA margin to be at 90 to 140 basis points to a range of 17.2% to 17.7%.
For your convenience, we are also providing the equivalent adjusted operating margin here, which we now expect to be in the range of 12% to 12.5%, up 120 to 170 basis points.
This higher range reflects our expectation that volume, price and productivity gains will more than offset inflation.
Benefits from restructuring savings remain unchanged, and this yields an adjusted earnings per share range of $2.50 to $2.70, an increase of 21% to 31% over last year.
We continue to expect free cash flow conversion of between 80% to 90%, as previously guided, putting our three-year average right around 130%.
And we expect to continue delivering cash conversion of greater than 100% going forward.
Our balance sheet will remain very strong even after $600 million of senior notes are retired in the fourth quarter, which clearly offers considerable room for capital deployment.
We are continually assessing inorganic opportunities to strengthen our strategic position, differentiate our portfolio and enhance market access.
We have provided you with a number of other full-year assumptions to supplement your models.
Those assumptions are unchanged from our original guidance, including our euro to dollar conversion rate of 1.22.
And as you know, foreign exchange can be volatile and, therefore, we have included a foreign exchange sensitivity table in the appendix.
Now drilling down on the second quarter.
We anticipate total company organic revenues will grow in the range of 8% to 10%.
This includes high single-digit growth in water infrastructure, low teens growth in applied water and mid-single-digits growth in M&CS.
We expect second-quarter adjusted EBITDA margin to be in the range of 16.7% to 17.2%, representing 140 to 190 basis points of expansion versus the prior year.
Xylem is clearly in a strong position coming out of Q1, and we expect this momentum to continue throughout the rest of the year and beyond.
Demand recovery and strong commercial performance will drive organic growth.
Operating discipline will deliver margin expansion and strong cash conversion, and a robust balance sheet will continue to underpin our strategy.
More broadly, our business and mission have never been more relevant than they are today.
The economic and social value of critical infrastructure is more apparent than ever.
Not only is it critical in times of crisis, but also as a driver of economic recovery, and it's a prerequisite for broader prosperity.
From the shocks of the last year, the world has embraced the need for greater resilience and the imperative of a sustainable future.
In that context, our mission, our business and our values put us in a privileged position, which will enable us to continue creating both economic and social value for our stakeholders over the medium and long term.
We look forward to providing an update on our strategy and long-term plans at our next investor day, which is currently planned for September 30.
It will most likely be a combined virtual and physical format, but we do hope to host as many of you as possible, COVID restrictions permitting.
Matt and the team will follow up with more details as soon as they're pinned down, now with that, we'd be happy to take any questions you may have.
So operator, please lead us into Q&A.

user
sees fy adjusted earnings per share $2.50 to $2.70.
q1 adjusted earnings per share $0.56.
raising full-year organic revenue guidance to a range of 5% to 7%.

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