Welcome to the Xylem third quarter 2020 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Matt Latino, Vice President of Investor Relations.
Thank you, Samantha. Good morning, everyone. Welcome to Xylem's third quarter earnings conference call. With me today are Chief Executive Officer Patrick Decker, Senior Advisor and former Chief Financial Officer Mark Rajkowski, and Chief Financial Officer Sandy Rowland. They will provide their perspective on Xylem's third quarter results and our outlook. Following our prepared remarks, we will address questions related to the information covered on the call. I'll ask that you please keep to one question and a follow-up, then return to the queue. As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website at www.xylem.com. A replay of today's call will be available until midnight on November 30th. Please note the replay number is 800-585-8367, and the confirmation code is 7096699.
Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide two. We will make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. 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 September 30th, 2020. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to slide three.
We have 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, and non-GAAP financials have been reconciled for you and are included in the appendix section of the presentation. Now, please turn to slide four, and I will turn the call over to our CEO, Patrick Decker.
Thanks, Matt. Good morning, everyone. Thank you for joining us. I hope all of you and those close to you are keeping safe and well. As reflected in our release this morning, our third quarter performance was better than anticipated. The team's operational execution was strong right around the world. You'll recall that after the low point of April, we saw sequential improvements in May and June. We continued to build on that positive trajectory through the summer. Our team took advantage of the market regaining pace and exceeded our revenue and margin guidance for the quarter while generating very strong cash flow. This performance reflects the team's focus on serving our customers and managing what we can control, whatever the dynamics are of the macro environment.
Through the quarter, we saw solid foundations of recovery in a number of places, and we are well-positioned to further capitalize on that momentum. The pandemic's impact hasn't been uniform, of course. Conditions varied significantly both by geography and by end market. For example, China's revenue returned a healthy growth of 17%. Western Europe overall was back to relative stability at 2% growth. The U.S. saw only slight recovery, still dealing with pandemic response and coming in at down 11%, although improving sequentially. In our end markets, we've seen ongoing resilience in the wastewater side of utilities, and our wastewater solutions returned to solid growth in the quarter. On the clean water side, we're delivering strong commercial momentum, including winning large, long-term transformational metrology deals, leveraging our differentiated platform, particularly in advanced metering infrastructure.
In addition to big wins with Anglian and in Winston-Salem, which we mentioned last quarter, the team recently won another marquee project in Columbus, Ohio, worth $94 million. This customer is a combined utility, meaning we will provide both water and electricity meters, plus advanced software and services. It's worth noting how compelling our value proposition is for combined utilities, addressing both water and energy applications with one portfolio and leveraging our unique FlexNet communication capability across both platforms to achieve economies of scale. The Columbus, Winston-Salem, and Angleton deals have together added about a quarter billion dollars to Xylem's backlog. Our metrology and communications offerings are clearly differentiated in their own right, but we also have the advantage of delivering unique value by combining infrastructure platforms with complementary digital solutions. Each value proposition enhances the other.
As anticipated, COVID impacts are causing delays in some metrology projects where timelines have shifted to the right. In parts of the U.S., replacement meter installations have been pushed out in the short term. Pipeline assessment services, a business that requires putting people on site, have been affected by COVID-driven restrictions on travel and fieldwork. At the same time, the pace of interest in digital solutions for remote monitoring and automated operations has accelerated. The pandemic has not only spotlight essential services; it has also illuminated utilities' need for much greater operational and financial resilience, which is now at the top of every utility operator's agenda. Digital transformation has gone from being attractive to becoming an imperative, and that's reflected in strong quoting activity in our digital solutions business, which has also increased by 50% its number of revenue-generating clients.
The revenues are still a small part of our top line; the acceleration of interest further strengthens our view on digital adoption in the sector. As the number and size of those projects grow, we are seeing a broadening scope of opportunities across software, services, and infrastructure products. While we don't expect this to be a straight -line recovery, Xylem is well-positioned irrespective of how the pandemic plays out. We anticipate quarter sequential improvements. Our financial health and liquidity are both strong. We're successfully reining in costs, executing the actions we announced earlier this year. We're shifting investment to adapt quickly to customers' evolving needs and new ways of working. Our supply chain has been exceptionally resilient, with the team keeping customers supplied even through the pandemic's peaks.
We're operating with discipline, strengthening our competitive position, and helping our customers serve their communities with uninterrupted essential services, despite whatever macro uncertainty may persist. As Matt mentioned at the top of the call, both Mark and our new CFO, Sandy Rowland, are with us today. Sandy joined us on October 1st, and it's been a great pleasure to welcome her to the team. Since Mark was in the chair through the end of the reporting period, he'll carry the commentary on our third quarter performance. Mark, over to you.
Thanks, Patrick. Please turn to slide five and I'll cover our Q3 results in more detail. Revenue declined 7%, which was better than anticipated as we entered the third quarter. We had strong performance in our wastewater utility businesses in the residential end market, both of which grew mid-single digits in the quarter. The return to growth in these markets was offset by the expected declines in our metrology project deployments and industrial and commercial businesses, which continue to be impacted by project delays and site restrictions. Geographically, as various countries have reopened and recovered, so has our business. In China, for example, we saw very strong performance with double-digit year-over-year growth. Despite the China business returning to pre-pandemic growth rates, emerging markets overall declined 7%.
India was down only modestly, while the Middle East and Latin America declined double digits as they continued to be impacted by shutdowns throughout the quarter. Across North America, recovery remains mixed. While revenues improved quarter sequentially, they were down year-over-year. While our wastewater business remained resilient, we continue to see timing effects on metrology deployments and softness in industrial markets. Western Europe grew 2% in the quarter as countries reopened and activity resumed, with revenue growing in each of our end markets with the exception of industrial. We also saw operating margins expand quarter sequentially to 13%, which drove EPS of $0.62, both better than expected. I'll cover the margin impacts by segment shortly. Overall, our teams maintained very sharp focus and executed well operationally by driving strong productivity and cost reductions. Please turn to slide six, and I'll review third quarter results by segment.
Water infrastructure orders declined 5%. Order trends in our wastewater utility businesses continued to be solid. Treatment orders were up 20%. Wastewater transport orders, down 9% for the quarter, would've been up mid-single digits but for lapping the large deal we won last year in India. Orders in the industrial end market were soft due to double-digit declines in our dewatering business. Long-term backlog continues to build as we're up over 30% for backlog shippable in 2021 and beyond. Segment revenues declined 2% in the quarter compared to the prior year. This was better than anticipated and reflects the resilience of utility spending to run and maintain their wastewater operations. Our wastewater transport business grew 4% in the quarter, and we saw continued strength in our treatment business, which grew 3% in the quarter.
The growth in treatment reflects what has been to date, the relatively uninterrupted deployment of wastewater CapEx projects. The dewatering business experienced continued softness. Revenues declined 14%, most of which was in the North American construction and industrial markets, which have been significantly impacted by site closures and access restrictions. Operating margin in the quarter was 18.5%, down modestly year-over-year from higher inflation, lower volumes, and unfavorable mix. However, the margin performance exceeded our expectations as the team's strong execution on cost reductions and productivity initiatives delivered 630 basis points in margin expansion. Please turn to slide seven. Orders in the Applied Water segment declined 1% in the quarter, and revenues declined 4% as softness in the industrial and commercial markets continued, particularly in the United States and the Middle East. The commercial end market declined 5% in the quarter.
As a reminder, this business is roughly two-thirds weighted towards repair and replacement work, which held up relatively well in the quarter despite shutdowns in some regions. Industrial was affected by similar regional dynamics, including site access restrictions, and declined 7%. A bright spot in the quarter was residential, which grew 4%. We saw particularly strong growth across Western Europe and from China. Overall, emerging markets declined 8% in the quarter. China had a very strong performance, growing 23%, as the team executed well, delivering on pent-up demand. This was more than offset by the declines in the Middle East and Latin American regions due to the ongoing lockdowns. Revenue in the United States declined 6% but improved quarter sequentially, with some softness across end markets driven by continued virus impacts. Operating margin in the segment was 15.9%.
Volume declines and inflation impacts reduced margins in the quarter but were largely offset by 530 basis points of cost reduction and productivity benefits. Now please turn to slide eight. Measurement & Control Solutions orders declined 19% in the quarter, and revenue declined 15%. We saw project timing significantly impact our metrology business, and COVID-19 restrictions push out our project revenues in our pipeline assessment services business. In metrology, we've seen relative stability in our OpEx replacement business from water metrology products. As a reminder, our OpEx exposure accounts for about 70% of our revenues. We've seen much more variability in the 30% of our metrology business that's tied to large project deployments or CapEx, particularly in our gas segment, where project revenues were down 60% in the quarter.
Here, we've been significantly impacted by project timing, particularly from lapping a large gas metrology project deployment, which was largely completed at the end of last year, and delays in another large gas project this year due to home access restrictions. Despite these challenges, our underlying North American water metrology book and bill business has remained relatively stable, and commercial momentum in winning new projects remains robust. This is highlighted by the large contract wins we had in the first half of the year and continued into the third quarter with the Columbus, Ohio, and Winston-Salem, North Carolina, wins. Patrick already covered Columbus; I'll quickly highlight a couple of important points on the Winston-Salem win. This is a $60 million contract to provide water metrology products under our network as a service offering, leveraging our FlexNet communications network.
Importantly, our teams differentiated the value of our offering by introducing several components from our digital solutions platform, enabling our customer to also seamlessly address critical needs around non-revenue water and their wastewater network. Our pipeline assessment services business has also been subject to significant near-term delays in project revenues driven by COVID-19 travel restrictions and site closures. As a reminder, there are two businesses within AIA: digital solutions and pipeline assessment services. It's in the latter business where we've experienced deferrals of pipe inspection work, and we expect those pushouts to continue into early 2021. We booked an accounting charge to reflect the impacts of those delays. We continue to strongly believe that the medium and long-term value proposition of this business is compelling, particularly as utilities move to address budget challenges by using pipeline assessment services to reduce future spend on pipe replacement.
We expect the project timing for deploying new metrology projects and the COVID-19 -related delays in pipeline assessment services to continue to impact us through the fourth quarter. This is reflected in our fourth quarter guidance, which Sandy will cover later, as shippable backlog for the fourth quarter is down roughly 25%. That said, it's significant that we've not had any project cancellations. Rather, we're seeing an acceleration of growth in our project pipelines, and we continue to win large new contracts. As a result, MCS's shippable backlog in 2021 and beyond is up over 30%, which is a pretty good indication of the power we're seeing with our digital platform. While these projects aren't currently reflected in the orders metric, they are the latest in a series of important wins that give us confidence in the medium and long-term growth profile of this segment.
EBITDA margin in the segment was 14.8%. The year-over-year margin decline was driven by lower revenues of high-margin North American metrology and pipeline assessment services due to project timing and COVID-19. This impact was partially offset by 630 basis points of cost reduction in the quarter. Now please turn to Slide nine, and I'll cover our cash flow performance for the quarter. We ended the quarter with approximately $1.6 billion of cash and short-term investments and $2.4 billion of liquidity driven by our very successful green bond issuance last quarter, combined with our strong cash flow performance throughout the year. In the face of substantial challenges presented by the pandemic, I'm very proud of the work of our teams in managing all aspects of our working capital performance. At quarter end, working capital was 20.3% of sales, representing an improvement of 30 basis points versus this time last year.
The team's focus on working capital, disciplined CapEx spending, and cost control through the quarter have continued to pay off, enabling us to generate free cash flow of $234 million, a conversion rate of over 200% in the quarter, which did see some benefit from favorable timing on payments, primarily related to taxes and interest. Before I turn it back over to Patrick, I'd like to take a moment to congratulate Sandy and welcome her as she steps into this new role. Having worked with Sandy previously, I wasn't at all surprised by how quickly she's come up to speed on our businesses and our markets and the pace with which she's developed relationships, all virtually, and taken on the leadership of the global finance team over the past month.
I couldn't be more confident about the future of Xylem or in Sandy's capability to help Patrick and the team accomplish our mission and take the company's performance to the next level. With that, I'll hand it back to Patrick for the last time.
Thanks, Mark. Before turning to our outlook, I just want to take a moment to reiterate two overall trends we're seeing as we look forward. The first is the influence of regional differences around the world. As you've heard, we've already seen big distinctions between China, Europe, and the U.S. in the third quarter. Long as the impact of COVID-19 continues to influence demand, we believe those geographic effects will be considerable through at least the end of the year. Xylem's global diversification puts us in a strong position as we serve the international markets that are furthest along in the recovery curve. It's worth noting, for example, that about 70% of our wastewater business is outside the U.S. The second overall trend to highlight is a shift of attention from reactive operational imperatives to medium and longer-term resilience.
The pressures utilities faced at the beginning of the pandemic are well-known. You simply can't stop providing an essential service, even if you're struggling to crews in the field and more end users than usual are having trouble paying their bills. Our customers have come through the most intense part of the crisis, serving their communities heroically. It's also been a wake-up call for the sector. Utilities leaders and operators have become acutely aware of the pressing need to invest in greater operational and financial resilience. Part of that investment will go to conventional infrastructure. That will have to be combined with new approaches if utilities are to address their overarching challenges, making the cost of infrastructure more affordable, extending asset life, and dramatically increasing labor efficiencies while maintaining safety. We've seen interest continue to ramp up in digital transformation, remote monitoring, automated operations, and smart infrastructure more broadly.
Of course, the implications of digitizing utility networks goes deeper than the software platforms in our digital solutions business. Beyond software and endpoints, transformation also requires the digitally enabled pumps and drives that make up the backbone of a smarter network, which is why we are implementing an integrated digital strategy across our entire portfolio. We're very excited about the opportunity of working with our customers to build the digital water and energy networks that will carry their communities into the future. Turning from those trends to outlook, in general, we have a much clearer view on Q4 than we had on Q3. We're seeing stabilization in a number of markets, we have even greater supply chain confidence, and we're executing well on cost, all of which leads us to expect quarter sequential improvement in margins. By end market, I'll start with our outlook for utilities.
The wastewater side has been exceptionally resilient. We expect OpEx to continue holding up well given the need to service mission-critical applications. Capital projects with secured funding continue to move forward. On the clean water side, as I mentioned, we have strong commercial momentum with multi-year projects like Angleton, Winston-Salem, and Columbus, setting us up for healthy growth in 2021 and beyond. In the short term, we expect performance to trail wastewater due to more pronounced COVID impacts, but we're not seeing structural changes in demand, and the growth profile of this segment is expected to remain highly attractive. We simply anticipate some continuing COVID impacts on deployment timing, and standard meter replacements are likely to remain soft until physical distancing eases. Please turn to slide 11. Looking at industrial and commercial end markets, the accessibility of industrial sites varies widely by region.
Where COVID-19 response has lagged, there have been site access restrictions, and work has been deferred. We're still anticipating softness through the fourth quarter, especially in North American construction and industrial markets, affecting dewatering business. In commercial, it's a mixed picture that varies by end customer. Demand at hospitals, data centers, and apartment buildings, for example, is very different than for offices and hotels. Less building use overall and soft North American construction suggest continued softness in the near term. I have the great pleasure of turning over to Sandy for the first time so she can provide some more specifics on our Q4 guidance.
Thank you, Patrick. Hello, everyone. I just want to kick off by expressing how excited I am to have joined the Xylem team. I joined Xylem because of the unique combination of strong commercial opportunities for growth and the compelling mission of the company. Xylem is also complementary to my previous experiences, which have included bringing together cutting-edge technologies with industrial products. I've spent the last month getting up to speed with the team alongside Mark, and I look forward to all we have ahead of us rounding out 2020 and beyond. With that, let's get into a few more details on our fourth quarter guidance. On the top line, we expect organic revenues in the range of down 6% to down 8%. This is a modest improvement in sequential performance versus the third quarter.
As we break it down by segment, we anticipate being down low single digits in Water Infrastructure, down mid-single digits in Applied Water, and down mid-teens in Measurement & Control Solutions, reflecting the project deployment delays we have continued to see through October. Operating margin in the quarter is expected to be in the range of 13%-13.5%, also a modest quarter sequential improvement. I also want to highlight a few full-year items. We expect to end 2020 with free cash flow conversion of greater than 100% for the full year. Restructuring and realignment costs are now expected to be between $75 million and $85 million, slightly lower than our previous guidance, while structural annual cost savings remain unchanged at approximately $70 million. We are lowering our estimated tax rate this year to 18.5% to reflect our updated mix of earnings.
Before I hand it back to Patrick for some closing comments, I want to again thank Mark for his guidance during this transition. Having worked with Mark before, I know he and I bring similar perspectives and share a common approach to operational excellence and driving investment in innovation to support sustainable growth. Mark has built a great team, and I'm confident we have the organizational capability to focus to deliver. Now please turn to slide 13.
Thank you so much, Sandy. It's great to have you on the team. Just to wrap up before turning the call over to your questions, the team continues to demonstrate strong operational delivery, and that will enable us to capitalize on recovery everywhere it's happening through the end of the year and beyond. We will execute from a position of competitive strength, even in the more challenging environments. Our discipline on cost and cash will continue to pay off, both in the coming quarter and through 2021. Looking ahead, that quality of operational execution will enable us to continue driving sustainable margin expansion. Our robust financial health, which gives our customers confidence that they can rely on us in uncertain times, is built on the foundations of a strong balance sheet and cash generation.
Our leading market positions are paired with a differentiated product portfolio and a durable business model at the heart of essential services. Our strategy places Xylem in the lead as the water sector's digital adoption curve accelerates, providing a multi-year runway of attractive growth. We will deploy capital to continue strengthening our portfolio, investing in the solutions and services that anticipate our customers' needs. Both the economic and the social returns of those investments will be attractive over the medium and long terms. Our commitment to create value for all our stakeholders will continue to underpin the sustainability and resilience of our company, our customers, and our communities. We're now going to move to your questions, but first, I need to mention that although Mark will be advising us through the end of the year, this is his last earnings call.
Let me take this opportunity to say, once again, as I've said before, that all of Xylem's stakeholders have benefited profoundly from Mark's leadership and tenure at Xylem, but none more than me, as I have benefited tremendously from his counsel. Thank you, Mark. With that, I'd like to turn it over to your questions. Operator, please, we'll listen to Q&A.
The floor is now open for questions. At this time, if you have any questions or comments, please press star one on your touch-tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Scott Davis with Melius Research.
Okay.
Welcome.
Yeah, just little bit of a bad connection perhaps, but anyways. Are you guys surprised, if you can hear me, of course?
I can hear you, Scott.
Okay, good. Are you surprised by the negative price, the extent of it? I can't remember a quarter where you had this big of a cost price dislocation. Perhaps maybe dig into that a little bit more.
Yeah. Hey, Scott, it's Mark. The price overall for the company in the quarter was up 50 basis points. We continue to drive prices. A lot of the inflation has been labor -related, and we had some very strong price increases over the past 18 months. Some of this is reflective of the demand profile in the market. We continue to look to drive for price and get value for the products and services that we've rendered. We're doing it all within the context of the current competitive environment.
Does that mean, Mark, you're seeing pretty or tougher prices in the rental markets too? We've heard some competitors say it's actually been pretty stable this quarter. I was curious to see what your view is on that.
Yeah. It's competitive in the rental market for sure. Again, some of that's a function of the demand profile. That's not the only market. We're seeing it in a number of areas, but our teams are out there being very thoughtful. Certainly where there are opportunities to push on price, particularly where we're differentiated, they're doing that.
Yeah, I would say, Scott, this is Patrick; that price has not really been a concern of ours. It's not really been a meaningful change in trajectory. Obviously, we've been thoughtful during the pandemic; there's no structural change here in terms of how we feel about price in the market. I would say that, especially for us, we really focused in on engineered solutions versus commodity-oriented offerings. Where we have the more engineered solutions, we've built those into our base business, also into our contracts. That pricing has remained constant. In other words, we've not gone back and renegotiated contracts. We haven't had people coming back to us asking for changes in pricing given the pandemic. That's been very stable.
Okay. That's super helpful. Thanks. I'll pass it on. Thank you. Good luck, guys.
Thank you, Scott.
Our next question comes from the line of Deane Dray with RBC Capital Markets.
Wish Mark all the best and thanks for all your help.
Thanks, Deane. Yeah, you got cut off there a little bit. You were a little choppy there. I heard the last part of it and appreciate all the.
He heard the part that he wanted to hear.
Yeah, let me just say it again. This was also the welcome to Sandy. Appreciate all the color here this morning. This is the first question, and this is an important part of the theme for Xylem is this accelerated interest in smart water systems by the utilities. We hosted a water conference in September. We heard that directly from the utilities. They were all saying this. You got the win in Columbus. That's impressive. Patrick, the big question is how does this interest in quote activity start to translate into orders? We are seeing traction here, but if you can, maybe give us some size, what the quote activity is, what the expectation is around the timing.
Sure, yeah. Thanks, Deane, and good morning. As we mentioned at your conference, and I know many of the utility leaders spoke to this, and as I mentioned in my prepared remarks, the utility leaders, all that I've spoken to, this has really been one of the silver linings of the pandemic is the amount of time that I've had with these leaders by Zoom and other platforms, is they have moved from a number of these digital solutions being a nice-to-have to imperative. Just to reinforce, as I mentioned in my comments, the drivers behind that are the whole issue of them dealing with issues of how do they manage their assets remotely, how do they manage their workforces remotely. They are very much focused, especially post-pandemic, on this issue of affordability.
Again, I remind everyone that only 30% of our utility exposure is in the U.S. It's a very different kind of funding and economic dynamic outside of the U.S., whether it be in China, India, or Europe. Here in the U.S., 70% of their spending is on OpEx, and that comes from their existing rate base. When you think about the remaining 30%, which is CapEx, that comes from new rate cases that need to be justified. On the base case, on the OpEx, they're looking for ways to reduce the operating expense, to extend the asset life of those assets, to do remote work. On the CapEx side, it really is about making those new projects affordable so they can get rate cases approved.
Anything that we're able to do to reduce the cost of that new CapEx and make it more affordable is going to be even more important to them as they come out of the pandemic. In terms of what we're seeing in terms of proof points, we're seeing that we've had a 50% increase in the number of clients. That's one. We've seen north of a 20% uptick in orders, so there is conversion there in terms of orders off of a small base, but a growing base. These typically are, from the time that we get an expression of interest, and we've seen a big uptick there, of course, with the 50% increase, it's about a 12 to 18 month conversion on the digital side from going from an expression of interest into turning that into an order and then into revenue.
Secondly, what I would say most importantly here, Deane, is that it's not just the digital component. It's the opportunity that gives us to broaden the scope of deals that we would otherwise be negotiating. Some of the AMI deals on the metrology side, we would not have won them if it were not for the digital offering that we bring in complement to AMI. That's as important as actually going in and leading with digital and then pulling through AMI or also on the wastewater pumping side, the treatment side. The synergies here from a pull-through standpoint go two different directions. It can be, we lead with digital, we help the utility understand where their needs are, and then we bring in solutions behind that on the hardware and networking side.
It can also be where we're already in there negotiating on the hardware side, and the digital comes in over the top and differentiates us versus others. That's where we see the biggest opportunities going forward, and the expression of interest right now is absolutely accelerating based upon the economic challenges that the utilities are facing.
That's great to hear. Just to clarify, I knew it was like a year ago that the focus was on pilot programs. It sounds to me, A, some of those were revenue -generating. Are you waiting for any of the pilot programs to convert to orders? Where does that stand?
Sure, certainly. When we say that there is a 50% increase in client acquisition, those are predominantly speaking to pilots. We continue to see pilots increasing. Now, I want to be clear: when we say "pilots," these are revenue-generating pilots. We're not giving these things away. I would say that again, that balance of interest is as much outside of the U.S. as it is inside of the U.S. We're seeing big uptick in China, India, Europe, and certainly equally as much in the U.S.
Great. I just had a follow-up question for Mark. Just didn't want him to think he was getting off easy. Decrementals were a touch weaker than what we were expecting, and I'm just trying to bridge that difference. Did that include the charge that came through on the pipe inspection? Or just help us understand decrementals and then what you're expecting for the fourth quarter.
Yeah, no, that was on an operational basis. Now, are you talking about Q3 or the Q4 outlook?
Q4 outlook.
Yeah. Some of that is just a function of mix. Okay? We're continuing to see impacts in several of our lines of business, whether it's dewatering, whether it's some of the pipeline assessment work or in Sensus, the metrology deployments that are higher margin that are most impacted from a mix perspective in the fourth quarter.
Got it. Much appreciated. Thank you.
Thank you, Deane.
Our next question comes from the line of Nathan Jones with Stifel.
Welcome to the team, Sandy, and best of luck, Mark. It's been a pleasure getting to know you over the last few years.
Yeah, Nathan. Same here. Thanks, Nathan.
I'd like to dig into MCS a little bit more here. You have a large domestic meter competitor who put up some double-digit growth in the third quarter and was probably more bullish on the outlook, less concerned about project delays that you were talking about here today. I know you have other lines of business and a lot more international things going on in here. Sounds like the pipe inspection business is one of the worst ones. Could you maybe dig in a little bit more to the different pieces of MCS, what you're seeing specifically on the domestic water meter business, and how that outlook progresses?
Sure, Nathan. Good morning, this is Patrick. First of all, let's take the metrology piece of the business first, which is obviously the lion's share of MCS. Because I think we can take digital solutions off the table. It's trending very well, for the reasons that I expressed to Deane earlier. We'll come back to pipeline assessment in a moment. Obviously there we've had challenges in terms of site access. It's not been an issue in terms of level of interest. The orders are there. The work is there. It really is literally a matter of getting access on the site, given the nature of the work that's done there. Back to metrology, which is obviously the Sensus business. There, again, on that kind of 70%-80% of our business there, of that revenue, is again, basically meter replacement. The day-to-day kind of installation of replacement meters.
That business was down low to mid-single digits in the quarter. That largely was, again, site access restriction. A big chunk of that and differentials between us and maybe others; some are similar, some are different from a competitive standpoint. It really depends largely where you are geographically. We've got a heavier presence in some of the larger metro areas, certainly here on the East Coast, where there have been tighter COVID restrictions than perhaps parts of the rest of the country. We were down low to mid-single digits in the Q3. We expect that business to be up low single digits in Q4 as site restrictions begin to ease. Obviously, that depends upon this kind of next wave of the virus, so we keep our eyes closely on that.
Right now in our assumptions, we expect that to begin to recover and see growth in Q4, and certainly into 2021, where it normalizes. The piece in Sensus that hit us in Q3 was the capital projects. These large deals that we won and executed last year. One. We have a tough comp versus last year. Two, this year, we had some of the projects that we had already won. Think about Philly Water Department, very large project, a $100 million project. That has been shifted to the right. It's not been canceled. It's simply a matter of site access, and so we do see that coming back in Q4 and certainly into 2021. It's also when you look at, we had some delays in some of our gas project implementations, again, because of COVID-19. A number of these projects that are pandemic-related are still there.
They're going to be executed. They're simply a matter of shifting out to the right because of timing, of being able to get people on site. When you look at the backlog that we've got, our shippable backlog for the metrology business for 2021 and beyond is up 30%. This is not an issue of projects being canceled or projects being deferred with uncertainty. It's simply a matter of site access. We're very confident about that. When you think about the wins that we've got in Winston-Salem, Columbus, et cetera, that really speaks to the health of the market overall. The dynamic competitively is simply the fact that we have a larger project orientation of our business because of the AMI deals that we're winning versus a base meter replacement business.
I think that makes a lot of sense. I would have expected you guys to have a higher share in more densely populated areas where your site access could be different. All of the folks that we've talked to on the utility side have said that these non-revenue water pipe assessment projects and the meter deployments are likely to really go unaffected if you take it over a few-quarter kind of timeframe. Which would suggest to me that all this is doing here is really creating pent-up demand that's going to be released here over the next couple of quarters and should probably really all get caught up in 2021. This is not shifting permanently to the right. It's shifting the front end to the right, but the back end should be fixed?
That's exactly what we're seeing, Nathan, and that's exactly what I'm hearing from the utility leaders that I speak to, is when you think about the long-term structural demands in the water sector around the issues of affordability of water, whether it be at the macro level, meaning at the rate case level. Whether it be affordability at the end user, meaning a household owner. Those issues are becoming even more prominent because of the pandemic. Whether it be scarcity of water on the clean water side. Whether it be the resilience of their infrastructure. What we're hearing from the utility leaders is that it's becoming even more prominent for them, coming out of the pandemic. The issue is simply depending upon where you're looking around the country, because this really is more of a U.S. phenomenon. The geographic differences are stark in terms of the approach to the pandemic.
I think that all makes a lot of sense. Thanks for the color.
Thank you, Nathan.
Our next question comes from the line of Ryan Connors with Boenning & Scattergood.
Great. Thanks, Mark, and welcome, Sandy.
Yes.
My question—
Thanks, Ryan
A bit of a bigger picture question. I wanted to discuss the utility market from a different angle in terms of the municipal utilities versus the investor-owned utilities. I know if you listen to the investor-owned utilities, since this thing has hit, they're really now talking up the outlook for privatization, saying that some of these more stressed local systems are really coming under financial strain, and that's an opportunity for them to really accelerate their acquisitions and expand. I wanted to get your take on that theme in terms of, A, remind us of your current customer mix between those two groups and how they compare in terms of pricing and margins and that sort of thing. B, are you seeing that? Do you see that? If so, would that be a good thing, a bad thing, indifferent?
What's your take on that privatization angle here?
Sure. Great question. Certainly, as you obviously well know, the whole privatization debate has been going on for quite some time, and it's a quite contentious view within the utility space. It's always harder for the private utilities to do the consolidation than what they would certainly like. We certainly see that as being a trend that is accelerating for the reasons that you mentioned in terms of some level of economic distress in the sector. To be transparent, the private utility portion of our revenue is certainly far less than the public, as you well know. While we love our public-owned utilities, and we've got great share there across the board, when typically we find that when utilities are privatized, it does become a slightly bit easier negotiation because it then comes down a bit more to basic fundamental economics and returns on investment.
It's easier to sell longer-term solutions into them based upon the paybacks and financial benefits. That's not to say that on the public side, it's the exact opposite. That's just, it's a mix of utilities in terms of how they think about that. We see that, Ryan, very much as a positive trend for us over time. Again, I wouldn't want to parse between public and private as to whether one is good or the other one is not. I know you're not suggesting that.
Sure. No, that's understandable. No, that is useful perspective. My other question is a little more tactical. You mentioned residential as a tailwind in Applied Water in your release and in your slides there, and that's not a market you normally talk a lot about, and it was material enough that you did put it in there pretty prominently. Can you just remind us of what exactly you're doing there and sort of the outlook and what the real materiality is there?
Hey, Ryan. It's Mark. You're right. That has not been a recent highlight. The business has done a really nice job in really upgrading, improving their product sets there. What we've seen is that as more folks have spent more time at home, working from home, they're spending more money on those homes, including well pumps and other products that they need to maintain them. There's been really strong growth, not just in Europe, but we've seen some pent-up demand in the Asia Pacific region. Even in the U.S. we're seeing improvements and expect that to continue into the fourth quarter. It's a function of just one of the impacts of the pandemic, but also importantly, some nice improvements that our team has made to our product sets in that area.
I would just add that I think that, again, this is Patrick. I would say to complement what Mark had indicated, the team has done a great job of enhancing some of the product offerings, and we continue to build out that pipeline. I would say this is predominantly a short-term phenomenon. We don't have a different look over the long term as to what you should expect from a growth standpoint in that business. It really is kind of a low single-digit kind of GDP kind of business. In this quarter, it was predominantly driven by outsized growth that we saw in Europe and in China that really spiked the numbers, and that was really the reason we called it out.
Got it. Okay. That makes sense. Thanks so much.
Thank you.
Our next question comes from the line of Joe Giordano with Cowen.
Hey, guys.
Hey, Joe.
Hey, Joe.
Just wanted to keep going on the digital side here. I don't think anyone's really debating how valuable those types of technologies are long-term to utilities. I think the value proposition is pretty clear. When we were just recently surveying utilities, we got a pretty clear response that near term, those types of digital and technology investments were being deprioritized because of necessity and where they have to spend money. What are your thoughts on push-outs for anything, like for capital projects that are maybe signed but not shovels in the ground yet? It seems like that stuff has more risk of being pushed more meaningfully out. Just what are you seeing there?
Sure, Joe. Again, as you know, I'm always prone to do here; let's first talk global. Again, 30% of our utility exposure is in the U.S. versus outside of the U.S.; this is a global phenomenon. We're seeing even more, I'd say, outside interest in the emerging markets. That's the first point. Two would be in North America or specifically in the U.S. What we're seeing there is, as we've indicated, we always view these projects as being, you do a pilot, it's a 12- to 18-month conversion from the pilot into orders and revenue. The way that we've structured these arrangements, where we're leading with purely digital, where our team goes in and they're doing a diagnostic, a consultative diagnostic with the utility. That whole thing, it's not a high-cost venture for the utility
It's to help them understand what are the needs they've got, where do they spend the next dollar of capital or OpEx going forward. That helps inform them on how they can manage their OpEx and CapEx needs more effectively. In those situations, when we talk about pull-through, that's always going to be a 12-18 month kind of horizon. We've got proof points of those already in hand. The other approach to selling is where a team is going in, most notably when it's an AMI metrology deal, and it's a competitive bid, and we're able to overlay unique digital solutions, whether it be meter optimization, whether it be adding on leak detection where it's a non-revenue water solution. These are the kind of things that can oftentimes help us seal the deal.
The proof point there is the quarter of a billion dollars of deals that we've gotten over the last quarter or two where absolutely the digital piece of the offering was a proof point that helped secure that deal. These are not high-cost items for a utility as it relates to purely the digital component. It's as much an enabler for them as they go forward. No doubt, in the immediate term, there are utilities that have had to make tough choices between the wastewater side, the clean water side. Is this a nice -to-have versus a need -to-have? We see that momentum accelerating, but as we said before, this is still a relatively small piece of our revenue, and the opportunity is all in front of us.
Yeah. I think that's fair. Last question from me, just on Pure. I understand that this is the most no one could have budgeted or thought of what's going on now, but we've had over the last two years write-downs of basically half the investment now. Just curious as to how that kind of informs the capital deployment decisions going forward and how you evaluate new potential targets.
Let me take that one first, Joe, and I'll have Mark walk through the thinking behind the write-down of additional goodwill, et cetera. Strategically, our view on this business is we remain very bullish on this business. Again, when you think about the needs the utility has around reducing their non-revenue water, a big part of that is leak detection. Everything I've heard from the utilities I've spoken to is they absolutely see that as being essential. Right now, again, it is site access, and when you think about the nature of the crews that we deploy around basically the brand name of Pure, the crews that we deploy there are traveling across state lines. They're very technical, so we have to deploy them broadly. There are the requirements of being sequestered when you're traveling state lines.
There are very practical aspects of our workforce right now that nobody could have possibly imagined coming into this. The fundamental needs remain the same. When you think about the fact that that market has only been penetrated by 3% of the need, all that opportunity is in front of us. It's going to be even more essential coming out of the pandemic than it was before because of the whole affordability angle. There's no fundamental change in view on this business, in our view, in terms of how attractive it is. I'll let Mark talk about the accounting drivers behind why there was a second impairment on this.
Yeah. I know you're a trained accountant by background, so you get all this. This is really a function of, as Patrick said, a significant temporary delay in the expected revenues to our pipeline assessment services business. It's more of a push out to the right by a couple of years. When you look at this business, the gross margin profile of the business is greater than 50%, so really rich gross margins. When those revenues push out, it has a big impact on the discounted cash flows used to determine the fair value of the business. You'll also, when we did our first write-down last year, about a year ago, you write that down; you've reset the fair value. That fair value is based on these future forecasted revenues. You really don't have a lot of headroom.
When you see a shock like this from the pandemic, it has an impact in terms of the accounting. As Patrick said, medium -term and long-term opportunities in this business, we remain very positive.
Joe, our nature on these things, whether it be from an accounting standpoint or an outlook perspective, is we take a conservative approach on this. We want to make sure that we're right down the middle of fairway. We're not going to move things around. The team felt it important at this point in time, given the shock of the pandemic on this particular business, most notably given its field-based services aspect, that it was a responsible thing for us to do. No change in strategic view on the assessment services business.
To you and Sandy. Look forward to it. Thanks, guys.
Thanks.
Thanks, Joe.
Your next question comes from the line of Andy Kaplowitz with Citigroup.
Hey, good morning, guys.
Good morning, Andy.
Good morning.
Patrick, you mentioned that your utility business is more international than the U.S., so it was good to see Europe return to growth, and China was obviously very strong. Could you give us more color into your thinking about these regions going forward? Have you seen any curtailing of the momentum you recently had in Europe, given the virus resurgence? Maybe any more color would be helpful.
Sure. It's a great question, and thanks for the international angle. Given that's the largest piece of that market for us, we just continue to see momentum building in Asia. We feel, obviously, who knows? I can't prognosticate on the pandemic and where cases are going to resurge, et cetera. Certainly within Asia, we have no reason to have any concerns either in Q4 or going into 2021 based upon what we see right now. If anything, the pent-up demand, we got hit first earliest in Q1 and in Q2 because of our weighted exposure in China and India. Our teams have proven very resilient there, as has the market. That's Asia. We'd expect that to have now returned to pre-pandemic levels. With respect to Europe, obviously we, like all of you, are monitoring case count.
We're seeing what's happening in the resurgence here over the last few days. There is uncertainty there. We feel that our guide for Q4 is a balanced guide. Obviously, if there was a disproportionate shock to the system, that needs to be kind of factored into our outlook for Q4. Our teams have been managing through this pandemic and the complexity of the pandemic for several months now. One of the most important things that we've learned is really making sure that we have a resilient and robust supply chain. It's not just us, but the suppliers around us and the ecosystem. We don't believe that there is a near-term meaningful impact on our business in the quarter around that. There is uncertainty there. We want to make sure that we continue to monitor that.
It really is too early to tell at this stage. We think we've taken a balanced approach to the quarter.
Thanks for that, Patrick. Just can you help us think about, this is probably for Mark or Sandy, the structural cost savings that you're focused on and how that can manifest itself beyond Q4? You already mentioned decrementals are still a little high in Q4 versus normal, but as you go into 2021, would you expect to see improved decrementals and/or incrementals given the level of cost-out that's ramping for you?
Yeah. This is Mark. For a couple reasons. One, we'll see some ramping in terms of the structural costs into 2021.
Meaning cost savings.
Cost savings.
Yeah.
Yep. Yes, cost savings. It's early to call, but when you think about the comps that we're going to be coming off and as we move through into 2021, that additional volume will certainly play well relative to what will then be incrementals.
Thanks, Mark. Appreciate it.
Yes.
Thank you.
We have time for one final question. Your last question comes from the line of Brett Linzey with Vertical Research Partners.
Hey, thanks for squeezing me in, guys. Hey, just wanted to circle back.
Good morning.
Yeah, how are you doing? Yeah, Mark, congratulations on the retirement and best of luck to Sandy. Yeah, just wanted to start with MCS.
Thank you.
Encouraging to see better engagement on the software and SaaS side. Just wanted to understand the profitability and monetization of that. Should we think of those opportunities as sort of an MCS average margin out the gate and then something that scales over time, or does it kind of lower in the initial part of that contract? Any color you can give us in terms of how those contracts will work once they're executed. Thanks.
Sure. I'll take it first; this is Patrick. Yeah, no, the projects that we've announced here, the deals that we've talked about, these would be accretive. This is not one of those where you make a big, huge investment of margin up front and then it pays back later. These are accretive to the segment margins. That's a big part of the attractiveness of these deals, is the value that we are selling to the utility. The payback it gives to them in terms of immediate revenue generation gives us the ability to really price it appropriately and protect ourselves from a future pricing kind of pressure. Once they're locked in, they're locked in. We start making really attractive margins at the very outset. Mark, you want to—
Yeah, those recent wins are water deals, and they're very profitable. The service and software part on top of that makes them even more attractive, and they're longer -term.
Yeah. Typically, the way these contracts will work is there's going to be, depending upon the number of, we call them endpoints, but the number of meters that are being installed. The metrology itself is very profitable. As those get installed, you layer on the ongoing monitoring piece of the contract, the data analytics piece of that contract, and the AI wrapped around that. Those are then kind of your SaaS margins that you would expect going forward. Those have a long tail. Again, can be anywhere between 10, 15 years of revenue tied to these. It's a smaller piece of the contract, but even the large piece of the contract, which is meters, is very attractive.
Okay. Got it. Just one follow-up on the cost targets. Are we still thinking $80 million is structural for 2021? Just trying to put a finer point on some of the moving cost items within 2020 in terms of temporary, the employee support costs and what that looks like in terms of the netting of a kind of headwind or tailwind as we get into next year.
Yeah. I'll jump in, and in terms of both the OpEx and some of the costs that we've incurred this year, listen, we've learned a lot in terms of working through the pandemic. We've found ways to keep these costs out, right? We'd expect to be able to continue to maintain those efficiencies based on the learning. Secondly, in terms of the support costs and other payments that we've made this year, certainly, assuming we move through this, that will be some tailwind as well.
I would just punctuate it by saying that the permanent structural savings that Sandy alluded to in the prepared remarks, we don't see any giveback on that. That should be locked in for 2021. Again, you're talking about roughly $80 million of kind of ongoing savings there. To Mark's point on the discretionary items, like pretty much every other company, we've turned it early on the discretionary side. We have $60 million of discretionary savings that are there. How much of that comes back? We're still in the planning process, as Mark said, we've learned a lot. We've learned how to do a whole lot more with a whole lot less, becoming more efficient, effective, whether it be travel, remote working, making sure that our service providers and suppliers are doing the same thing. Our teams have gone back and renegotiated contracts there.
Lastly, making sure that our own approach to work is aligned with what our customers are doing. They too have pulled back significantly on their own discretionary costs in terms of people working from home, et cetera. We're still working through that, but we're leaning in a big way. I wouldn't expect a lot of that to come back. There will be some, no doubt, because you always have some level of inflation on your wages and salaries, et cetera. We're going to do the right thing by our workforce over time, because we did take some very swift and aggressive actions on our headcount during this pandemic. We're going to remain disciplined and agile in what is otherwise an uncertain environment.
Great. Just a point of clarification on the structural cost savings. The $70 in 2020 and the $80 in 2021—that's an incremental $80 versus an incremental $10. Is that correct?
Yeah.
Yeah.
Okay. Got it. All right. Thanks so much.
It's cumulative.
Thank you.
Ladies and gentlemen, we have reached our allotted time for Q&A. I would like to turn the floor back over to Patrick Decker for any additional closing remarks.
Great. Thank you. Again, I want to reiterate where I started, and that is, I really hope that all of you and the people close to you are safe and healthy. Make sure you stay such. Really appreciate your continued interest and support. Thanks for joining the call today. We'll be back in touch soon. Thank you all very much. We won't speak to many of you, at least as a group, until after the holidays. Have a very safe and happy holiday season.
Thank you. This does conclude today's Xylem Third Quarter 2020 Earnings Conference Call. Please disconnect your lines at this time and have a wonderful day.