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Text: They will provide their perspective on Xylem's second-quarter results and their outlook.
A replay of today's call will be available until midnight on September 1st.
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 period ending June 30, 2021.
In the appendix, we have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
For purposes of today's call, all references will be on an organic and adjusted basis, unless otherwise indicated.
So by now, you will have seen that second quarter performance exceeded our expectations on all major metrics, including orders, revenue, margin, and earnings per share.
I'm very beating the healthy pace we set in the first quarter and to delivering a very strong first half of the year.
Underlying demand for our solutions was robust across all segments and end markets.
The key to a great job converting that into better-than-expected performance and continuing to expand margin.
They delivered even more exceptional results on orders, which grew 29% on an underlying demand across all regions.
In addition, backlog is up 35% versus this point last year.
That broad expansion reflects commercial momentum that puts us in a strong position, both now and into the future as we continue to invest in sustainable growth.
At the end of the first quarter, we raised full-year guidance on revenue and earnings.
The second quarter's performance shows a continuing strong trajectory into the second half, and we're reflecting that by further raising full-year revenue guidance.
The top-line benefits are likely to be moderated somewhat by inflation and a challenging supply chain environment.
But we've been proactive on price and are working with our supply chain partners to mitigate the impact of those headwinds.
So we are also raising the midpoint on earnings per share guidance for the full year.
In a moment, I'll provide some additional color on what we're seeing globally.
But first, let me hand it over to Sandy to provide more detail on performance in the quarter.
The second quarter offered a strong story of continuing demand recovery as revenue grew 11% organically compared to the prior year.
We also saw momentum across most end markets on a quarter-sequential basis.
Utilities, our largest end market, was up 6% compared to the prior year, driven by clean water applications and continued wastewater utility OpEx demand.
Industrial was up 17% on broad-based strength as economies reopened and activity continued to ramp.
Commercial grew 12% and also improved sequentially, was by strength in the U.S. and Western Europe, while residential, our smallest end market, grew 29%.
Geographically, Western Europe and China were both up mid-teens with increasing demand seen across all end markets.
The U.S. returned to growth with site access restrictions easing during the quarter.
As Patrick mentioned, the team delivered exceptional organic orders growth of 29% on strong underlying demand across all segments and regions, with particular pace in M&CS, which grew orders 70% on large water metrology contracts.
This is our fourth consecutive quarter of sequential order improvement and reflects higher orders growth than in the same period in 2019.
Importantly, we exit the quarter with overall backlog up 35%.
Looking at the key financial metrics, margins were above our forecasted range with EBITDA margins coming in at 17.3%.
The 200 basis points of year-over-year EBITDA margin expansion came largely from productivity, volume, and favorable mix, partially offset by inflation and investments.
Earnings per share in the quarter was $0.66, which is up 65%.
Water infrastructure delivered strong results during the quarter.
Orders were flat, but up 22%, excluding the large prior-year deal in Telangana India, order intake was robust in treatment globally.
Revenues were up 6% organically.
Wastewater utilities remained resilient, and we are now seeing recovery in the industrial end markets.
Geographically, emerging markets delivered mid-teens growth from industrial recovery, driven in part by increasing mining demand in Latin America and Africa, while Western Europe delivered double-digit growth from continued strong utility OpEx activity.
In the U.S., healthy utilities OpEx demand reflected in strong orders growth was offset by the lapping of prior year treatment project delivery.
EBITDA margin was in line with the prior year as strong productivity savings and volume effects offset inflation and investments.
The applied water segment had a very strong quarter, driven by continuing market recovery across all regions and end markets.
Orders were up 43% organically in the quarter, with particular strength in the U.S. and Western Europe.
Revenue grew 18% in the quarter with double-digit industrial demand driven by reopening activity and especially in marine and food and beverage applications.
Residential growth continues to be robust and strong market demand.
Geographically, the U.S. was up double digits, while Western Europe contributed 27% growth on increasing industrial demand.
Emerging markets were up 24%, due in part to broad industrial recovery and momentum in China.
Segment EBITDA margin grew 200 basis points compared to the prior year the expansion came from strong volume leverage and productivity more than offsetting material and freight inflation.
M&CS delivered a strong quarter as large project deployments began to ramp.
We also realized gains in our industrial water quality testing business.
Orders for the segment were up 70% organically on strong demand.
Our M&CS backlog now stands at 1.5 billion, which is a historic high and almost 50% higher than at this time last year.
We have secured more than $400 million in large contracts in the last 18 months.
That reflects a number of major projects, which increasingly include our broader digital solutions in combination with our core metrology applications.
Revenue was up 11%, led by 17% growth in water applications, driven by large project deployments and double-digit growth in water quality applications.
Energy applications were down modestly due to project timing and supply chain constraints.
Unpacking the results by geography, emerging markets in Western Europe were up 20 and 25%, respectively.
The U.S. was up mid-single digits on strong demand for water quality applications and assessment services.
As a reminder, for this segment in particular, growth rates can be uneven due to the impact of project timing.
Segment EBITDA margin in the quarter was up 460 basis points compared to the prior year.
Strong productivity savings from prior year restructuring actions, favorable mix, and volume leverage more than offset inflation and investments.
Our balance sheet continues to be very strong.
We closed the quarter with 1.8 billion in cash and cash equivalents.
In the third quarter, $600 million of senior notes will mature to be paid with cash.
Free cash flow conversion was 172% in the quarter, in line with our expectations and historical seasonality patterns.
Net debt-to-EBITDA leverage was 1.3 times at the end of the quarter.
I'd like to touch on three areas briefly.
Our operating discipline, our growth platforms, and sustainability.
On operating discipline, the team did an excellent job on margins in the quarter, delivering 200 basis points of EBITDA margin expansion year on year in addition to quarter-sequential improvement.
We do anticipate some inflation and component supply challenges in the second half, but we're confident in our ability to manage through them and to mitigate their impact.
Earlier, I noted our extremely healthy backlog.
As we work through these volumes, the team is doing a great job making sure we manage the pressure on working capital this can create.
In fact, despite serving spiking demand, we've improved working capital both year over year and quarter sequentially.
As Sandy just mentioned, that performance puts us firmly on track to deliver our commitment on attractive free cash flow conversion.
We clearly have significant capacity for capital deployment.
On top of strong organic growth investment options, we have an attractive and active pipeline of M&A opportunities.
Our growth platforms are an area we'll be delving into at our Investor Day in September, so I'm going to refrain from too much detail here today.
I do want to draw attention to two things, however.
Last quarter, we highlighted the pace of growth in emerging markets.
This quarter, that pace has continued.
Despite India's hard acceleration through the quarter due to COVID impact there.
I'm very proud of the entire Xylem team's discipline and compassionate response in all countries affected by COVID, both in terms of our own operations and also how we've leaned in to support customers and help serve our communities.
I also want to take a moment to draw a connecting line between our portfolio and some of the dramatic water-centric events we've been seeing recently around the world, by which I mean the flooding in Europe, China, and Central Asia and the drought in American West.
These events reflect a trend as the effects of climate change become more and more apparent.
And that trend requires an affordable response to keep communities safe, resilient, and water secure.
So we continue to invest in specific technologies in our portfolio that respond to these challenges.
As an example, automated wastewater network optimization is among our most advanced digital solutions.
Its job is to manage overflows and prevent flooding.
And our customer deployments are already preventing 1.4 billion cubic meters of water from flooding communities.
Similarly, we also continue to innovate in the technologies that make communities more resilient to drought, technologies like leak detection, smart metering and especially water reuse.
Already 1 trillion gallons of water are being recycled using Xylem technology, which brings me to the topic of sustainability more broadly.
The numbers I just quoted come from our annual-sustainability report, which we published in June.
And I think they bear out what we've said for some time.
Our sustainability strategy is fundamental to our business strategy.
We were pleased to report, for example, that almost half of our major facilities are now operating on 100% renewable energy, helping reduce our greenhouse gas emissions intensity by more than 7% year over year.
Beyond our own footprint, our solutions have enabled our customers to reduce their carbon emissions by 700,000 metric tons last year.
The report details progress on all of our signature sustainability goals and shows how sustainability is deeply embedded in who we are as a company.
Now with that, I'll hand it back over to Sandy to provide commentary on our end markets and guidance for the remainder of the year.
Our full-year outlook for our end markets remains largely consistent with our view from last quarter with some positive evolution as a few end markets are showing even faster recovery.
In utilities, demand continues to be strong in both wastewater and clean water, affirming our anticipated growth of mid-to-high single digits.
On the wastewater side, we have seen steady demand in Western Europe and North America as operators continue to focus on mission-critical applications while also investing in larger scale upgrades on affordable funding from capital markets.
Bid activity and long-term capital spending outlook in emerging markets remains solid, though some COVID concerns linger in certain markets.
On the clean water side, demand for smart water solutions and digital offerings continues to be robust as utilities increasingly turn their focus to more resilient infrastructure and affordable water delivery.
Consistent with other technology companies, the connected nature of our solutions raises some risk in the second half, given prolonged supply chain constraints for electronic components.
Our teams are working closely with our suppliers and manufacturing partners to optimize deliveries.
Looking at the industrial end market, where we had expected mid-single digits growth for the year, we are now anticipated growing in the high single digits.
The growth is broad-based with rebounding industrial activity across all segments and regions.
We're seeing upticks in demand, particularly in our industrial dewatering business in emerging markets.
We're also seeing higher demand in marine and food and beverage, driven by recovery in outdoor recreation and the hospitality sector.
We are increasing our outlook in the commercial end market as well.
The U.S. replacement business is growing at a first pace.
New commercial building is expected to lag the recovery somewhat, but key leading indicators reflect optimism for late 2021 recovery in the institutional sector.
With growth in Western Europe and China sustained through the second half, along with modest share gains and supply chain resiliency, we now expect the commercial end market to be up mid-to-high single digits, up from the low single digits previously.
In residential, we now anticipate low teens growth for the full year, up modestly from our previous expectations of high single-digit to low double-digit growth.
We do expect growth will moderate through the second half, due largely to a more difficult year-over-year comparisons.
As you can see, we are further raising our previous annual guidance.
For Xylem overall, we now see full year organic revenue growth in the range of 6 to 8%, up from our previous guidance range of 5 to 7%.
This confidence is based on clear demand recovery, combined with the pricing actions we are taking to offset inflation.
This revenue guidance breaks down by segment as follows.
For water infrastructure, we expect mid-single-digit growth from a previous expectation of mid-to-high single digits.
We expect low double-digit growth in applied water, up from mid-to-high single digits.
And in measurement & control solutions, we expect mid-single-digit growth.
We also expect EBITDA margins in the range of 17.2 to 17.7%.
This guidance represents full-year margin expansion of 120 basis points at the midpoint.
That's grounded in a strong first-half performance with 300 basis points of expansion from restructuring savings on actions we took late last year, as well as volume leverage from the top line growth.
The third quarter is more challenging, primarily driven by the timing of inflation and price realization.
However, price realization will increase into the fourth quarter as we work through the large backlog built over the last several quarters.
Overall, we expect strong second-half margins compared to the first half of the year.
This yields an adjusted earnings per share guidance range of $2.55 to $2.70, reflecting increased confidence in our ability to lift the bottom end of the range while still managing through inflation and supply chain challenges.
That range now reflects a 28% increase in earnings per share guidance at the midpoint over last year.
We continue to expect full-year 2021 free cash flow conversion of 80 to 90% as previously guided, putting our three-year average right around 130%.
We have provided you with a number of other full-year assumptions to supplement your models.
Those assumptions are largely unchanged from our original guidance.
However, one item worth noting is our updated assumption on foreign exchange for the second half of the year.
Because of the recent dip in the euro and the disproportionate effect it had on our results, we've updated our euro to dollar conversion rate assumption for the second half from 1.22 to 1.18.
This change, along with some other currency movements has a $0.04 negative impact on our second-half outlook.
As you know, foreign exchange can be volatile, so we've included our typical foreign exchange sensitivity table in the appendix.
Also, we are making an adjustment to our restructuring and realignment guidance from 50 to 60 million to now 30 to 40 million, while still expecting to realize similar restructuring savings due to high natural attrition and the timing of actions.
And now before wrapping up, let me share some thoughts on our third-quarter outlook.
We anticipate total company organic revenues will grow in the range of 5 to 7%.
This includes mid-single-digit growth in water infrastructure, high single-digit growth in applied water, and low single-digit growth in M&CS.
We expect third-quarter adjusted-EBITDA margin to be in the range of 16.7 to 17.2%, largely in line with our strong second quarter.
While inflation and component supply are likely to present some headwinds in the third quarter, we are addressing them with the pricing and supply chain actions previously mentioned.
The team has been doing an outstanding job capturing market demand, giving us exceptional orders and backlog growth.
We expect to continue capitalizing on that underlying demand.
And the team will manage through the near-term supply chain environment with the same spirit and discipline they've demonstrated through the many external challenges of the past year.
Looking forward, trends toward new investment in infrastructure and particularly in the modernization of infrastructure are accelerating hand-in-hand with demand to make communities more resilient to climate change and to do it in a more affordable way.
Those trends only reinforce the strength of our investment thesis, that our differentiated portfolio of leading technologies, addressing scarcity, resilience, and affordability will drive increased revenue growth and margins, and sustainable growth with strong cash flow generation and increased opportunity for capital deployment.
This puts us in a privileged position to create both economic and social value for our stakeholders now and over the medium and long term.
We are genuinely excited about providing an update on our strategy and long-term plans at our upcoming Investor Day, which is scheduled for September 30th.
It will be the first opportunity for many of you to meet all of our business leaders and our entire senior leadership team, especially those who joined us over the past year.
So it's a great chance to provide a full-strategic update, including our long-term financial targets, and a deep dive into our vision of how digital solutions are transforming outcomes for our customers, including discussions with a few of those customers who've deployed some of our most advanced technologies.
Matt and the team will follow up with invitations and logistical details in the coming days.

user
compname posts q2 adjusted earnings per share $0.66.
sees fy adjusted earnings per share $2.55 to $2.70.
q2 adjusted earnings per share $0.66.
raises full-year organic revenue guidance to a range of 6% to 8%, and raises mid-point of earnings per share guidance.

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