Hey, morning, everyone, or afternoon, everyone, I guess. My name is Mike Halloran, Industrial Analyst here with Baird. We're pleased to welcome the Xylem team with us. We are gonna basically be doing a Q&A session here, so any questions you might have, send me an email, raise your hand. We'll make sure we get them. Joining us today, Matthew Pine, COO, will be CEO, Jan 1? Jan 1. Bill Grogan, new CFO, and Andrea van der Berg, who's IR extraordinaire. We'll start with the easy ones. All right. We've had a 10-year journey under Patrick, where there's been a lot of asset accumulation, a lot of investment in growth areas. You guys are coming in here: What changes? Or in other words, the company's about to hit another phase of its evolution. Where is the focal point from your two's perspectives, Andrea as well, and what is that curve gonna look like, and why is it different? Well, maybe I'll first and just say, you know, Patrick's done an incredible job over the past decade, building out the portfolio that we have today and the platform that we built, you know, being the largest pure play water company in the world. And I think, you know, not that we haven't been executing, but we have been executing on that mandate of, you know, putting that portfolio together. And now it's really the next phase is continuing to execute on that platform. I think first and foremost is the recent Evoqua integration or acquisition and integration is first and foremost, making sure we get the value capture, both on the cost synergies and the revenue synergies. A big focus for us, which is a continuation of what we have been doing over the past few years, is through digital acquisitions, is expand our digital presence, moving from smart, connected products to more SaaS recurring revenue and using a digital platform to pull through our content. One of the, you know, I'd say, the strategic pieces of Xylem is we play across the whole water cycle, so it gives us really a, I'd say, a competitive advantage, but more of a holistic view on how to optimize and help utilities operate in a more efficient way. I would say, lastly, the thing that would be the focus and maybe a touch of a pivot is focus on really transactional excellence, modernizing our systems, and getting after what I call productivity for growth. It's productivity to help enhance our leverage, our drop-through on our volume, but more importantly, being able to take some of that, as well as invest in growth. So, you know, I think that's a little bit of the pivot. You know, not a big change in terms of the thesis and investment in terms of Xylem, but a little bit of a pivot, and focus on execution of the platform that's been built. Yeah, part of it just seems like you've got a lot of great pieces, and now we just need to make sure we optimize how those pieces both work together, but also how you functionally go to market. Right. Yeah. Bill, you know, maybe your perspective as well. A lot of people know you from the IDEX days. Yep. Very well thought of business model, business system, approach to capital allocation. You know, what do you see in your first days so far at Xylem, and how do you integrate some of your history into Xylem moving forward? Yeah, no, I think first and foremost, you know, just the recognition that we do have the best portfolio in the water space. Obviously, that was hugely attractive as I was coming in and making the decision to make the move. You know, lots of conversations with Matthew on, you know, how the Evoqua transaction is gonna help complement that and increase the capabilities of the portfolio. You know, my first day, we went to a wastewater treatment plant, and we were able to see kind of the combination of the two organizations to be able to address kind of almost 100% of the high-value content within that process. You know, then there's the operational focus, I think that, you know, as Matthew said, it's a slight pivot. Obviously, there's margin opportunity within the organization, and I think there's tools and some philosophies, I think, that the team was working on and I can bring over to the organization to help complement, to, you know, free up some of the organizational capacity and reduce some of the complexity to increase the innovation for our customers. And then also, free up resources, to reinvest in some higher growth opportunities and then improve overall profitability. You know, this is a cadence of some specific tools, 80/20 being one of them, but then also harmonizing the operating model and the cadence in which we operate the organization. You know, this is a portfolio that's been built up over the years, and I think there's some opportunity to get some better synergies from an operational capabilities perspective to enhance our margin profile. One of the things, when we had dinner last night together, that struck me was, you know, both from Andrea's perspective, who's been there longer, as well as your two, is that it's an organization that wants to get better, and internally. Yeah ... there's a lot of momentum to try to take these tools, maybe not these tools specifically, 'cause it's still early days. Yeah But there's this desire for something more. Yeah, yeah, I think that's right, and I think also the, g oing back to the integration of Evoqua, you know, we talk a lot about, you know, value capture, revenue synergies, cost synergies, but the soft side matters, too, by getting the right talent on the field, but more importantly, bringing the best cultures together. And I think Evoqua brings, because it's more of a service-oriented business, that sense of urgency, customer focus, hair on fire, you know, pivot that we're looking to, you know, move within the legacy Xylem business. And I think bringing that into the, into the business and that culture will help us, you know, move faster towards, you know, execution. Maybe we start on the Evoqua piece. Early days, how has the integration gone so far? And I think what a lot of people are asking about, and what we maybe we'll start with, is just the revenue piece of it and how these businesses fit together and how much they can do together. And I know there have been a lot of anecdotes that early days, there's just been some nice test cases- Mm-hmm. - on what can happen over time. Yeah. Maybe talk about some of those touch points that are very encouraging over time for what that revenue synergy piece could look like. Yeah, and so, you know, we're tracking on the cost synergies, which funds the deal, but the deal was put together for growth and putting two great companies together that are very complementary. I think out of the gate, the first thing that you get traction on right away is the services synergy. And I would say that was a little bit, not a surprise, but how quickly we've been able to get the teams to kind of come together, naturally. And, you know, for an example, where Evoqua has really helped the legacy Xylem business pull through into the industrial services business, where in the legacy business, we didn't have access before. An example would be, a refinery. We had issues in the wastewater treatment, not the, you know, the legacy, Evoqua business did the process water. The wastewater was done by the customer themselves, had an issue. Within 24 hours, both teams show up, you know, laid two and a half miles of pipe, put eight pumps on the ground and can treat all at the same time with one phone call. That's very promising, and we've seen, you know, four, five, six examples of that, where we get, you know, short-term contracts to come in and take care of, you know, these kind of emergency-related needs. You know, when you go out and look at sites, like heavy industrial sites, like power, you know, you get into oil and gas, you easily see that customers really only care about outcome. They don't care about what the products are in between. They want to know that the process water meets this spec, the wastewater meets this spec. So when you go look at these sites, we have Evoqua doing treatment, but we don't have Xylem pumps on the site. We don't have Xylem analytics on the site. So that's really exciting and a huge opportunity that we've already seen with customers to say, "Hey, we want to write you in to the contract, and we want to pull through more content with the new Xylem." So that's been very promising. We've moved quickly, probably more so on the industrial side. I'd say the municipal side of revenue synergies will take a little, you know, a little longer because it's more long cycle. It's more the treatment train, if you will. You know, we now have 80%-90% of the treatment train, both in clean water and wastewater. That takes a little bit more time as you walk through the front door, you meet with architects and engineers, but that's well on its way. I'm really excited that we did the integration of the legacy segment, APT, Applied Product Technologies, into water infrastructure. We finished that in October, so that really greases the skids for that to happen quickly. And we have a lot of momentum there with the sales teams. Yeah. Part of it is you just have different sales cycles, right? Right. You know, on the industrial side, it's a little more return oriented, and it's, "Let's just keep this going- Right. and make sure we can produce. Right. Bringing in some of that initial service content makes sense. Yes. Longer sales cycle on the utility side. Yep. The front-end side, do you think you have the right people in place to be able to say, "All right, we've got one source point that's gonna go to the utility and sell this"? Is that something that's just gonna take more time, and maybe talk about what that go-to-market approach looks like there. Yeah. So we've set up a good way to kind of pass the leads back and forth. We had, over the years, built what I would call is, you know, synergy sales teams in the regions that are already in play, and we've done a lot of that work over the years in the legacy Xylem business. So there's a natural muscle that's been built on taking the entire portfolio to a customer that's looking beyond just a treatment system or a pump or an analytical instrumentation. They want a solution. So that muscle is in the legacy Xylem business, and I think that helps us as we, as we do the integration. We have solution-selling teams that are in place in the regions, and it's a natural fit. You know, we are integrating the CRMs a s we speak, but in process right now, we've got some workarounds until that's kind of fully stood up over the next year. But yeah, I think the communication's sound, and the teams are very collaborative, and we have, again, built the muscle over the years on solution selling. No, it makes a lot of sense. Maybe also talk a little bit about what you're doing on the digital side of utility with the recent joint venture. Well, I don't know if joint venture is the right word. Yeah. But, you have a minority stake o ver time, that can grow. What that means for the ability to pull content through- Yeah. because that's part of what's gonna happen here with the Evoqua piece, right? Exactly. Yeah. So, you know, we took a step back and looked at our digital journey, and obviously, we want to go from, you know, really on/off, what I'll call dumb products, you know, they're, they're mechanical products, to smart, connected products, which do, which do carry more margin. But over time, it's about really using that data, and that's really important. But as you go out and talk to utility customers, especially, they have data coming out of their ears, and the biggest pain point they have is: How do I consolidate all this data? Whether it's, you know, PLC data, whether it's SCADA data, whether it's their ER- ERP, whatever it is, they've got lots of data coming at them, and they can't make sense of it. So we, we looked at doing something on our own, but, you know, that was gonna take years and lots of, lots of millions of dollars to do it. And we partnered with a company out of Spain called Idrica, which was a spinoff of a company called Global Omnium, which is like a Veolia in terms of they go out, and they manage concessions. They manage over 300 concessions. So they spent about 15 years building this platform. It's very light. Takes 3-4 months to implement it. What it does is it provides a single pane of glass for a utility customer to engage with all the data. One password, one dashboard, can democratize the data across the entire utility and gives them a platform to do analytics. On top of it, you know, bringing in not only our data but all their data, we can drop in applications that help them with specific use cases like non-revenue water, optimizing treatment. On top of that, because of our position that I talked about earlier, across the kind of the water value chain, we can pull our content in. So, for example, we had a customer in the southeast of the U.S., large utility, put the platform in, dropped in two applications, which is SaaS recurring revenue, and then pulled through a $40 million AMI deal. Same thing in Europe. We put the platform in, put in some applications on non-revenue water. We got an AMI deal and a treatment deal worth $20 million. So it's a little bit of a land and expand. You're helping the utility manage a major pain point, and then you're pulling through the content into a singular interface. Yeah, I mean, I think a lot of people had kind of a mixed relationship with the- Yeah. messaging over the years on how digital is gonna matter for you. But it certainly feels like the pieces are finally more in place, and you're at the point where the utilities are more willing to move forward on these? That's right. Maybe talk about what that engagement looks like. So when you're looking at these new projects and you're starting to bid, go through these bid cycles, are the conversations just always including this kind of data management in process, or how pervasive is it today? I think COVID really stepped it up because utilities, you know, they dealt with a lot of challenges, you know, during COVID, especially with labor, so they really want to optimize and drive productivity. So I would say, you know, obviously, the electric utilities are way ahead of water and gas in terms of their, you know, digital journey. But the water and gas utilities, especially water, they've been slower to adopt, but during COVID, they realized they've got to get with the program. I just came back from a user conference in Orlando, Florida, Saturday, Sunday and Monday of this week, where we had over 1,000 utility customers and channel partners. And one of the biggest pain points we heard there was, "Hey, we need a platform to stitch all of our data together." And we have that demo there, lots of engagement. So as we're engaging the utilities now, before we were pushing the rope, now, now we're being pulled into, "Hey, we need a solution for all of our data. Quit giving us all these discrete, bespoke applications. We need a, we need a platform like an iOS platform for a phone to stitch together all of our, all of our data. So why don't we stay on the utility side and maybe just talk about the demand cadence? I think, you know, the MCS order trends can be choppy quarter to quarter. 3Q, some pressure points, but holistically, still good book-to-bill ratios. I think you feel really good about the demand curve. Can we talk about the sustainability of the opportunity set as we work into next year on the utility side, and, and how you feel about the momentum underneath that business today? Yeah, I think more, y ou know, in general, we feel good about the momentum. You know, we had a really strong quarter in Q3. We've got good momentum with, you know, two companies coming together and building this, you know, large global platform that we have that's unique in the industry. If I think about some of the drivers out there that, you know, I think about 2024, we've got an incredible backlog, $5.3 billion of backlog. $2.3 billion of that is metrology, our MCS business, that, you know, if you look over the past two or three years, you'd look at our revenue and say, "Well, it hasn't grown well. Margins haven't done well." But a lot of it's trapped in backlog because of chip supply, which is now improving. So that's gonna be a great story over the next coming years. You look at the ISS segment, the Integrated Solutions and Services segment, that came over from Evoqua, 75% recurring revenue and aftermarket. Sticky business, gives us good diversity in the business as well. You know, helps manage some of the cyclicality in the legacy business. You know, if you just look at the trends that are out there around water scarcity, water quality, when we talk about PFAS and other forever chemicals, you know, look at the flooding that's going on around the world, just here in the US that you've seen in different cities. The secular trends are lining up nicely, and then you throw on top of it government subsidy around the world, not only in the U.S., with the infrastructure bill, but you've got the European investments, U.K. AMP cycle, and then some other investments in China and parts of emerging markets. You know, the setup is that our end markets are gonna be fairly resilient. Now, there's a few watch items I would point out. That's our Applied Water business, which is tends to be a little bit more cyclical. And the discussion we had on the earnings call around China, which is more, for us, a little bit of a, what we think is a push to the right versus a long-term issue. And it's really a funding issue because our book-to-bill is greater than one, and our backlog has grown there. Mm-hmm. It really, for us, it's, you know, just getting the funding squared away in China. China's not a huge percentage of the revenue. It's not. It's probably 5% now with the Evoqua, acquisition coming in, it's come down to 5%. Yeah. But what it seems to me is that the confidence in continuing to be able to backfill the backlog- Yes With the opportunity sets that you still see in the conversations you're having, it's quite high that that momentum is sustainable. Yes. On the industrial side, you know, utility, you have the architecture, and now you have the components. The industrial side, you're building something comparable? Correct. Maybe talk about how these pieces can fit together in a value chain today, and what that system offering might look like over time with that industrial base. Yeah, well, I think, you know, the Evoqua transaction gives us a pull-through into industrial. You know, we played industrial in the business, but it was more on the fringes, so they open up the door for us to bring a total solution together. Like I talked about before, the customers are looking for an outcome, so now we can put together our entire portfolio into a solution and then take that to the customer. So that's very strong. I think the other thing that I didn't talk about earlier, with industrial is it also enables us to take the legacy of Evoqua business international, where they were more focused in North America. Which made sense, because a lot of companies were still in fairly early innings in terms of, you know, outsourced water. And so, you know, staying focused in North America made a lot of sense. Because, you know, Xylem's got a global reach. We've got, you know, fixed overhead in Europe and emerging markets. We've got legal entities. We can make it easier to make that jump into international. We've already seen it on the capital side early on around using the legacy Xylem business to sell capital to the legacy Evoqua customers in Europe and emerging markets. But the services piece will be a little bit longer putt, but we have customers calling us today saying, "Hey, we want the same level of quality water that you give us in the U.S., in Spain, in Germany, in U.K., in South Africa," for example. And that'll be kind of a land and expand. We'll follow them, set up shop, we'll do some inorganic or organic building out of, you know, the assets we need, and then we'll start to grow the international business. So it's, I think it's very exciting. Yes. I mean, short term, it's basically you have the APT segment, the product content, you can push it through distribution. And then it's about being selective on how you want to expand the service networks over time. What's the criteria behind the decision-making on that service move internationally? So how—what, what's the return threshold? What's—how do you manage that risk? Yeah, so I think it just, it's looking at where we have where Xylem, Legacy Xylem, has a presence in these markets. It's obviously where the customer wants us to go, and then taking those two and marrying them up. And there's no doubt that we have to build the muscle, the capability, with the service technicians, which we call AQUA pros, and that's gonna happen through either just building it, which will take longer, and then through acquisition, over time. So that's kind of the, you know, in terms of the recipe we look at, and we'll, at the end of this year, kind of start the journey on making those, implementations into those countries. So when you think about the portfolio on the industrial side, do you feel like you've got the right template in place as far as product categories go? Are there gaps that you need to have maybe the full service offering, or maybe solution offering might be the better way? Think about a water reuse system or managing the water through the facility. You've got the pumps, you've got the legacy Evoqua. Is that enough to have that picture, or other pieces you need to do inorganically, organically? I'm sure there'll be, you know, small rounding out of the portfolio that's always probably been there for the legacy of Evoqua business, but I don't see anything major today. It's more rounding. It's really about continuing the journey that they've been on and doing the service tuck-ins and building out the service footprint. You know, one of the things that the legacy Evoqua business prided themselves on was being two hours away from any customer. So continuing that journey, both in the U.S. as well as, you know, building that footprint out internationally in a very strategic, focused way. So you touched on it a bit. Maybe just talk about the risk element as we move into next year here. Record backlog. The backlogs remained at very elevated levels, even sequentially. What kind of visibility does that give you into next year, and how do you balance that against some of the maybe interest rate sensitive or some of the more challenging end markets? I'm gonna get my colleagues involved here. Yeah. I'll let Bill and Andrea maybe answer this one. I'll give you my high-level view. I think, you know, one of the things is just the durability of the portfolio with some of the end market exposures, and obviously, a significant exposure to the utility space, and where we think the funding levels are and growth rates in the next year will be pretty solid. Obviously, you compound that with the significant backlog we have, and then the Evoqua business, 75% of that business is recurring revenue. So relative to visibility, I think strong fundamentals going into next year, kind of across the portfolio, with the exception of the AWS business, which is more book and ship. You know, that's the one area we've seen a little bit, softer order patterns and, and probably is the biggest area of risk just as we look at their market exposures going into next year. You know, we talked a little bit about China. You know, not a huge part of the business, but that's probably, from a geography, the biggest area of concern. So confident, though, in the top-line visibility as we sit here today, and then really confident in a lot of the economic drivers just from things we're doing ourselves. You know, continue to look at, you know, internal costs and SG&A profile and opportunities there. We just kicked off the 80/20 tool within a couple facilities, and that's, that'll start to pay dividends next year. Obviously, we just started to lap some significant pricing that we went out with in 2022 here, but the team's actively working on trying to maintain that price-cost spread going into next year, to prop up the top line and the bottom line as well. So there's things, obviously, on the macro side, we're taking a look at, but a lot of the things that are internal control, I think, give us, you know, confidence in the bottom line aspect as well. Yeah, maybe touch on one more thing you said in there. I mean, a lot of people hear 80/20, and they think margins. You were meaning 80/20 from a growth perspective. Maybe talk a little bit about what that implementation looks like and how you're moving this to the organization, what you think it could do. Yeah, there's I think three pilot sites where we're testing the tool out, two in North America and one over in Europe. But ultimately, 80/20 is a complexity reduction tool. So obviously, you think about there's, you know, the hard benefits of the analytics you're gonna leverage to figure out your product and customer portfolio and actions to really understand what's driving true economic value within the business. But at a high level, though, there's also the complexity reduction, you know, we've talked about, you know, the organizational desire to get behind some of these things. And you talk to individuals, and you say: Hey, I'm gonna give you a tool that's gonna free up your time and eliminate the non-value-added activities and free up capacity to go spend on the highest growth drivers that we have in the organization and rally resources around that, both from an individual and team perspective. And I think that, unto itself, will unlock some additional revenue opportunities for us as, you know, the teams have a lot more time to spend on the commercial synergies with Evoqua, and then some of the own, you know, new product introductions that the teams are working on across the portfolio. You mentioned the pricing side of things. You know, I think the last couple years have been far more encouraging about discipline at Xylem on the pricing side of things. So twofold: One, how do you feel about your ability to maintain price and price-cost spread on a forward basis? And second, margins in the backlog, how do you feel about that? Because that will be a factor as we move into next year as well. Yeah, I mean, I think, you know, really in the business, in the past, we've been, you know, I'd say, in general, pretty good at price execution. Parts of our business that went through the 232 and the 301 tariffs, obviously, got really good at price. Other parts that hadn't gone through that, that went through the pandemic and the supply chain challenges and the inflation that came from that, we've developed some good muscle in the past, you know, 12-18 months, and we see that that will continue on. We feel good about the pricing that we put out in the marketplace. Obviously, price is negotiated every day. It's not, you know, you put it out, and it sticks for a year. You, you gotta make sure that you're, you know, managing that, but we feel good about where we are in the marketplace and that pricing will be resilient. And I, and I think we've built, you know, good, like I said, good muscles around this. And I do think the legacy of Evoqua business coming in has also been on a journey the past couple of years, especially in the service side of their business, really focused more on value-based pricing. And I think on the services part of our business, that'll be something that, as we integrate that, that'll help our services business even get better at, at value capture on pricing on the services side as well. So we feel good about, you know, the momentum going forward. I do think that in 2024, we'll get back to kind of a little bit of the normal cadence of what price looks like in terms of kind of a, you know, between 1% and 2% capture, as inflation comes down. So maybe talk about what you're seeing on the regulatory funding side of things, IIJA, IRA, CHIPS, all those things. Are you seeing capital dollars come your way, or are these still conversations? And when do you think that can have an impact on the P&L or even the bookings? You know, I think it's gonna be a long process. We're starting to see interest or, you know, projects that are coming through that are funded through State Revolving Funds. As the money flows down from infrastructure through the EPA, it goes into what we call state revolving funds, then they get into shovel-ready projects. So we're starting to see that come through now. We'll start to bid that. I think that's more of a back half 2024 in terms of seeing that turn to revenue. But this is a, like a, I call it a dimmer switch. It's gonna be 6-7 years of just incremental, you know, subsidy that'll roll through. You're not gonna see some big pop. You know, same thing, a piece of that funding is also PFAS, which is getting after water quality forever chemicals. That'll be the same, same issue. It'll just be a long, drawn-out, you know, lift every year. Let's do the PFAS thing, because there were a couple questions about it. You know, how real of an opportunity is it for Xylem, and maybe talk remediation versus elimination and where we are on that curve? Right now, very heavy on the remediation side. Yeah. Right. The other is aspiration. Yeah, I mean, before the Evoqua acquisition, we were looking at this more in our innovation labs through, you know, startups and venture capital and, you know, doing tech scouting and looking at it through that lens and trying to, you know, develop innovation around that. But with bringing on Evoqua, we instantly get the capture portion of the equation. And I think, like everybody, there's invention required to get to how do you sense it, how do you sense for these chemicals at a very small, you know, micron level, and then how do you remediate it? And so I think there's still the jury's still out on what that looks like. People, you know, are using incineration today. That's probably not the most sustainable way to do it, because you're just reintroducing that back into the atmosphere. A lot of times, in my experience over the years with regulation is, a lot of times you're doing innovation alongside the regulation. The regulation's got a three-year horizon, and you're trying to figure out how you're gonna drive innovation to solve the problem. We're in the same case here, so on the sensing and the destruction part of it. Another one on the MCS margin trajectory. It's been cadencing higher through the year. I know there's a lot of internal confidence in the momentum that those margins can track higher. Maybe just talk about what gives you that confidence and how to think about puts and takes into next year from a volume mix, pricing and backlog, all that stuff? Yeah, I think a lot of confidence, the first thing is, when you get volume and get the leverage on the fixed overhead, it helps. And so as we get the volume, continue to ramp from getting better chip supply, that's a, that's a first part of the roadmap. You know, getting after price cost there, we've done well in the, you know, exiting last year and then into the first part of this year. We need to continue that momentum into 2024, so price cost will be something we've got to stay laser focused on. I think the third thing is, you know, driving productivity. One of the areas that we're focused on in 80/20 is our metrology business. You know, driving out that complexity and then, you know, taking that effort out and redeploying that effort for not only growth, but for margin expansion. We had to dedicate a lot of our resources during the chip redesign out of productivity into, you know, getting products available through new chip supply. So, you know, big focus on productivity, focus on price cost, are, you know, really two big drivers, and obviously, the volume converting the backlog will help the fixed overhead. Last one, 30 seconds. How are you thinking about capital allocation in the short term? Does Evoqua prevent you from doing anything? I'll just start on- Or still can do some- Yeah. I'll start and turn it over to Bill. I think, you know, obviously, in the short term, we're very focused on Evoqua and making sure that we drive that. It was our largest acquisition in our history, you know, $7 billion acquisition. We will make sure we get the value capture there. But, you know, we're very committed to M&A. A large part of our company is ring-fenced away from what we just did with Evoqua, and we have a good pipeline. So maybe, Bill, if you just wanna add? Yeah, no, I mean, tons of balance sheet flexibility. The team's working actively on, you know, several transactions, so I don't think there's a pause there. But yeah, it's a couple of small focus areas, with the core execution on the Evoqua track. If a lot of these things work, it frees up more capital for more compounding. Yep. Anyways, please join me in thanking the management team for their time today, Xylem.