All right. So we're gonna get started again. I'm very happy to have you all with us. We're extremely excited to have Xylem with us today. We've got Matthew Pine, who is the CEO, joined Xylem in 2020, became CEO in January—well, last month. And then Bill Grogan, who is the CFO, and joined Xylem in 2023, after a successful time at IDEX. So, maybe as I walk over here, Matt, you obviously just started as CEO, but you've been with Xylem now for several years. So, you know, maybe talk about, when you started and, you know, as you've kinda gone through the progress. You, you've talked about three main priorities, Evoqua value capture, higher overall company margin, and scaling service through digital.
What do you think is the heaviest lift given your operational background, and why-and ultimately, I know it's early-but when investors look back at the Matt Pine tenure, what are they gonna say about you?
Well, that's a good one. Yeah. A month and a half in, that's a tough one.
I know. Well, that's why I asked it.
Yeah, yeah. It's good. It's good. With the first one, you know, we have three execution priorities that we've talked about. We talked about on the recent earnings call. In terms of lift, I think they're all important, and they all probably require some level of effort. We—that's why we call them top-level improvement priorities. TLIPs is the acronym that we use in goal deployment. So I, I would say they're probably equally, you know, weighted in terms of execution. And I think we're off to a good start against them. So if you look at the Evoqua combination, we've, we've done well there with the synergy capture. We exited last year ahead of plan, $55 million. We've got $100 million in run rate for 2024. So that's off to a good start. We've integrated the businesses quickly.
We actually did a reverse integration, of our services business into the new segment WSS. So hopefully, those are proof points that things are moving in the right direction. You know, in terms of accelerating margin, rate in dollars, you know, this year we finished, in 2023 at 18.9% EBITDA margin rate. It was close to a 200 basis point improvement. So, you know, we're definitely focused on profitable growth. And, that's something that we're gonna be focused on in the future through productivity initiatives, operational excellence. So I think we're making good traction there. You've heard us talk about 80/20. I think that will only continue to enhance our journey in terms of getting good operating leverage on the growth going forward. So that's the second piece. But in terms of services, you know, we talk a lot about digital.
Digital is an enabler. But from a service point of view, you know, I think the proof point would be the quick integration of WSS, a proof point there. We're using digital to drive productivity in services. You know, when we have build-own-operate pieces of the business that are outsourced water, the more productive we can be, the more margin we can create, more value we can create. So we're using digital in that way. And then you've heard me talk about our partnership with Idrica, which is a Spanish digital platform that was born out of a utility operator. I believe that gives us the right to be the aggregator of data and utilities. And we're off to a really good start there. I, you know, now that, you know, I'm thinking about heavy lift, those are really the priorities.
The lift is on culture 'cause you, you can't do all those things unless you have the right culture in place. So we've, we've spent a lot of time focusing on our culture, what we call high-impact culture and high-impact behaviors. And that starts with, you know, myself and the senior leadership team. And if you heard us on the earnings call, a few weeks ago, we talked about, you know, driving productivity through our earnings call. We reduced our, our pages from 14 to six.
Very efficient, Matt.
Our presentation. Our talk time was down 27%. So it starts with us and how we model that. And I think that's really important for our culture. In terms of, you know, my tenure, you know, that's hard to think about. I at the end of the day, hopefully, people will see that it's a team sport. I came up through athletics. It's not about me. It's not about Bill. It's about the team. They'll see me as a collaborator, a team player, someone that's got humility, and, you know, does the right thing. I think those would be all good attributes that people would, you know, reflect back to me. And that we created a lot of value, both social and economic value.
Good legacies. Yes.
Thank you.
After two months. So maybe, Bill, I could ask you then just to follow up. You know, you obviously came from IDEX. You've talked about 80/20. You've got a couple of pilots in M&CS North American metrology in North American Applied Water. But you said it would take six to 12 months, you know, even for just the pilots to get results, right? So could you talk about, though, what the results are that you're looking for, you know, and what would be viewed as good if you look at those businesses?
Yeah. So, you know, 80/20, at its core, is a complexity reduction tool and a resource allocation tool. And ultimately, you know, if it gets a core tenet of the cultural change that Matthew just highlighted, I think we picked some businesses that will be a great test case for the organization to show the power of the tool. So for me, there's an element of going through the analytics. And, in the short term, there's an element of, you know, margin improvement as we look to rationalize our products and our customers that, you know, we shouldn't be spending our time and attention on and really focus on areas of the business where we can drive the most value.
So by exiting those businesses or those customers and products, it will free up the team's time and capacity to reallocate and focus on the things that are gonna drive the best longer-term growth for us. So in the short term, I'd expect margin enhancement. With the midterm, will be an increased growth rate for those two businesses.
Bill, it's not lost on us that, you know, those two businesses in general, North American Applied tends to be a little bit more cyclical. You guys have said that. And metrology has a lot of opportunity for margin expansion, right? So, like, do you kinda have different initiatives for each one? Like, you make applied less cyclical, or you make it more growthy than you think, and/or, you know, it's more margin on the metrology side? Like, how do you approach it from that perspective?
No, I think there's an element of, you know, baselining both businesses to figure out, okay, what is truly driving the most value in each organization? And then, you know, I think for AWS, the business case there, I think, is, you know, we've talked obviously new to the business, but talking to the team, the amount of product proliferation that has happened as they've looked to overserve all of their customers over the last, you know, decades and decades. Some of the businesses there, I think the oldest one's 175 years old. So it has this reputation for solving some of its customers' most challenging problems over a very long cycle.
With that comes, you know, a lot of things that, you know, we're gonna take a hard look at and understand, you know, is it driving value, or is it not? You know, and then how do we rationalize the portfolio around that to really focus on the next generation of technology as, as it's a market leader, in the commercial building space as energy efficiency and sustainability is a much bigger portion of how folks are managing business and pushing the technology and focus around those applications. Then with M&CS, obviously, you know, they are probably the largest area of opportunity for margin improvement and leveraging that tool set to identify where there is laggards within the portfolio and then focus our actions there.
Also, though, it is just to free up the team's time as they continue to look to innovate on the software side to bring digital and incorporate with Idrica and a couple other software applications that we have, to provide a better suite of products for our customer base.
It's very helpful. I wanted to follow up on margin in the context of you mentioned this year you're targeting 50-100 basis points of margin improvement. A lot of that comes from Evoqua synergies, right? But it seems like, you know, even really without, you know, the 80/20 stuff, your incremental margins are getting better. You're guided into the low 40% range for 2024. So can you give us more color on what's going right at Xylem or what has changed versus history? Because I don't think it's just price versus cost. And so you're just expecting to cover cost more or less with price.
Yeah. I think, you know, there's a couple aspects. Obviously, the team's done a much better job on the price-cost piece of just understanding the economic value that they provide for their customers and capturing that at a rate that we hadn't historically. You know, obviously, price is rolling back a little as the rate of increase is rolling back a little bit than what we've seen over the last two years. But that price-cost spread is still positive. And that's really ultimately what we want the teams to manage to going forward. You know, then, you know, we've got some significant volume leverage in some of the segments. Obviously, M&CS is gonna continue to grow at significant rates.
And then the operational productivity that the teams are doing across the portfolio on how do we become more efficient with direct labor, our overhead, and look for sourcing and supply chain savings. You know, the team's actually done a really good job, obviously, lining up the synergies with Evoqua, but then just also some of the operational and supply chain efficiencies within our own four walls, pre-acquisition. So I think they've done a really good job of laying out a really robust funnel to help expand margin. So you've got, you know, price cost. You've got operational productivity and volume leverage later on, the Evoqua synergies, and then that pays for some of the incremental investments that, you know, will mitigate some of the EBITDA margin expansion.
Got it. And then maybe just a quick question on the near term. You're one of the rare multi-industry companies that are actually have a front-end loading guide in the sense that you're guiding to 4%-6% organic in Q1, but, you know, for the year, 3%-5%. And you, I think, have easier comparisons as the year unfolds. And so, you know, we know you talked about you're watching Applied. You're watching China. What, if anything, is worrying about y-you are you worried about here, you know, that gives you a pretty conservative, guide? And, you know, are you seeing anything in Applied Water in China, you know, over the last few weeks since earnings?
Yeah. I can answer that. I don't think anything's fundamentally changed from what we discussed on the earnings call. You know, the two big watch items are China. You know, we're flat year-over-year. That's definitely a watch item to see if that, you know, goes the other way. It's really just a funding timing issue. We've got a really healthy backlog. And, you know, Applied Water is down low single digits. And it's probably, you know, more of a challenge in the first half versus second half. But we're looking at indicators like ABI just to see how far out that's probably 8-9 months out in terms of where we see the impact of construction, which is about 35% of the portfolio. But those are, I'd say, the two big watch items.
Nothing's really changed over the past couple weeks with those businesses. You know, and I'd say the broader portfolio is very healthy. When you look at the utility demand, that's really strong both on the clean water and wastewater side as well as the industrial piece of the Evoqua services businesses continues to have a strong funnel and pipeline. So, you know, nothing's really fundamentally changed in the past few weeks.
It's helpful, Matt. And one of the conversations we used to have with Patrick was on Applied Water's channel, you know, given its distribution focus. So how is the channel in terms of inventory and, you know, really, you know, thought Patrick went out of his way to say Applied Water shouldn't be that cyclical?
So how would you assess, you know, what's going on there?
Yeah. I mean, it's definitely has some cyclicality to it. If you kinda go back to 2016 with the kind of the last kind of industrial downturn, that business was down low single digits. So this is not an anomaly. It happens from time to time. You know, the business is roughly 75% replacement. So it's got some steady, repeatable revenue. It's really the new construction side that we watch. But, you know, all in all, you know, we feel good about the business. You know, Bill's talked a lot about 80/20. We're, you know, with the business being down this year, we're gonna be focusing on cost to make sure that it's not, you know, structural, but in getting after, you know, like we talked about, that business has a significant amount of SKUs.
You know, we have customers that, you know, buy Wednesdays, Tuesdays of things. So just cleaning up the operations and being more efficient and improving the margins and the margin rates of that business in the down year is the focus.
Got it. And, like, you talked about, you know, weakness in specific markets like Resi or Ag. Like, what are you seeing in those markets? And, like, you know, I would think Resi's been weak for a while.
Yeah.
Maybe it should turn at some point.
Yeah. I think Resi, Resi's probably, you know, starting to bottom out and should see the second half a more favorable comp in recovery. You know, some of that, you know, whether we like it or not, is due to the weather. We have an atmospheric river right now coming into the West Coast of the U.S.
A big part of our Resi business is U.S.-based.
Some of it's weather-related. And some of it is just some a little bit of hangover from discretionary income spending on second homes or updating folks' homes 'cause a lot of a lot of that product is tied to domestic water pumping. There's, like, 25 million wells in the U.S. And there was a lot of planned replacements, you know, I'd say planned replacements versus 911.
But I think that's starting to smooth out. We should see that recover, you know, in the second half of the year. But, definitely in the first half, it's a little bit of a hangover. And Ag, you know, it's a small part of our business. It's just less than 1% of our revenue. And, you know, again, that's really more of just a cyclical nature of the weather.
Got it. And then I wanted to ask you about backlog. Like, how do you think about what normalized backlog should be at Xylem? Or, you know, how should we think about orders going forward? Orders were up 11% in Q4, which was robust. But I would assume it'd be difficult to keep up that kinda pace given your organic revenue growth guide. So, you know, should we think something like book-to-bill of one? Like, how do you think about that as you go forward?
You wanna take that?
Yeah. No, obviously, you know, really strong order performance in Q4. Ultimately, from a backlog position, you know, we continue to look towards working down M&CS's backlog. Obviously, they entered the year at 30% past due, you know, ending the year close to 20%. We said, hey, we'd expect them to be kinda through that, you know, heading into 2025. But yeah, book-to-bill around one is probably a generic definition as we're just calibrating here as we go forward with probably more normalized trends in a couple of the segments to see. I mean, you know, orders are probably the most varied as we either have projects or things shift in different geographies.
But holistically, through the next couple quarters, I think, you know, book-to-bill in excess of one as we look to continue to have growth into next year.
Could I ask you guys, like, specifically to M&CS? Like, you know, how do I gauge sort of where you are in that business from a demand perspective? Like, you know, in terms of, you know, where are you in terms of smart meter penetration? You know, where could you go? Like, how are your conversations with utilities going?
Yeah. I can start us out. You know, I'd say we're still in fairly early innings. You know, I've talked a lot about in the U.S., which is predominately where our, our cash flows are and the revenues are in metrology, we're still in pretty early innings. There's 50,000 utilities. The top 400 make up, you know, close to 45% of the smart meter, capture, out there. The top 5,000, you know, make up 80%. And so that there's a very long tail. When you think about penetration in those two segments, the first one, the 400, is probably 40% penetration. And then the top 5,000 is probably in the mid-30. So, you know, the value proposition is very strong to move to AMI. There's a lot of benefits.
You know, you've got lots of trucks, lots of people going out reading meters, driving by to get meter data. You know, a lot of our utilities are focused on net zero, you know, driving out you know, driving down carbon emissions. And we've got, you know, millions of truck rolls out reading meters every year. That's a huge benefit. It's a huge cost savings. But it's also, from a net zero point of view, you know, something they're, they're keenly focused on. So, you know, we're, we're still in the early innings, I think, from an international perspective. You know, there's opportunity. We do quite a bit of business in the U.K. But outside of, the U.K. and the U.S., I'd say that, you know, the rest of the world's probably a decade behind, the U.S. and U.K. when it comes to, smart meter deployment.
You know, as water scarcity becomes more and more of an issue and countries are trying to manage, we call it non-revenue water 'cause it leaks and they can't charge for it. In essence, it's a leak. With water scarcity, they wanna make sure they get as much of their production to their end-user customer as possible, especially in certain parts of the world where water scarcity is becoming a real issue.
Very interesting. So I wanna open it up to the audience in a second. But maybe a little bit more into demand you're seeing by region. You know, we talked a little bit about China. You're forecasting flat, you know, in 2024. Is there anything more you can do there to help you drive growth above market? Or you just have to sort of, you know, wait for recovery? And then conversely, I think Europe has been, you know, a general strength for Xylem for quite a long time. Now you're taking Evoqua's business to Europe. So, you know, it's usually quite economically sensitive there for other multis. But does it continue to be a source of strength for you guys?
Maybe I'll touch on China first. You know, last year was actually, you know, from an orders perspective, fairly strong. I mean, we have significant backlog. As we look forward, it's really just funding timing. And some of those projects get funded and then put into play. You know, we've talked to the teams on the ground. I think they're fairly confident as China's in the fourth year of their five-year plan that those funds will be spent. Our expectations this year have been for 2024 is for it to be flat. You know, obviously, it's grown at significant rates over the last several years for Xylem and has been a key component of our growth algorithm. Excuse me. And we look for that to return here.
I think once we get past—I mean, they've got some larger, more broad economic challenges that they're facing. But obviously, you know, solving some of their challenges and building up their infrastructure to support their clean water and air initiatives is a key priority for them. So we look for that to come back. You know, more broadly, yeah. I think, you know, we continue to see strength both in Europe and in North America, you know, relative to some of the commercial synergies, you know, we expect to realize with Evoqua. And then just core market growth and demand for our technologies, as infrastructure demand and funding initiatives have both been created in the States and in multiple countries within Europe.
Yeah. You had, like, a big India win not so long ago. Like, maybe just talk about, you know, I've heard from other multis today, like, India's pretty fast growing, all that kind of stuff. Does it become, and especially for you guys, do some of these other developing markets become pretty big markets over the next, let's call it, five years?
Yeah. Bill and I were just in India at the beginning of the year. We spent about a week in India. They spent another, you know, four or five days in Dubai in the Middle East. Yeah. India's got great potential. I told the team there, the stars are aligning at the right time. They've had, you know, really good, consistent government policy. You know, businesses like consistency.
They've got a lot of water initiatives that are in play right now. Tap to every house is a big initiative bringing clean water to all the residents of India. They're doing lots of projects. We've been involved in these projects on river linking. So starting coming out of the Himalayas down through the central part of the country, linking rivers for irrigation, also for clean water delivery is a big focus. We've been involved in wastewater treatment plants in Mumbai. You know, 80%-90% of the wastewater goes straight into rivers without being treated in India. The same thing for Mumbai, one of the largest cities in India. We've won significant treatment projects in that region. You know, we see, you know, a lot of opportunity. There's a lot of consistency in funding.
The local government seem to be very aligned to the national government. You know, the other thing too there, we've got an incredible team. We've got a tremendous amount of R&D resources there, as well as commercial capability. We're looking to, you know, build more manufacturing capability as well, not only in-country, foreign country, but also is, is looking out to, export into the other parts of the regions around that area.
Any questions from the audience? Anybody wanna ask a question? Okay. I will continue. Let's talk about Evoqua. So, you know, you're going to be $100 million of run rate synergies, I think, a year and a half after deal closing, versus your guide of $140 million within three years. Does that mean you could end up, you know, much higher, $200 million, you know, of cost synergies versus your original target in regards to the exact outcome? Could you give us a little more color into what has gone better than expected so far? And where do you still see significant cost out opportunity?
Yeah. I, I think, you know, Bill can, can chime in on this one too. We, you know, we've made really good progress, better than we had, had planned for, which I think is a great thing. The teams have a lot of momentum. You know, when you're, you know, when you have that momentum and you're exceeding your targets, it kinda feeds on itself. So look, you know, the, the deal model we had we talked about $140 million of, of, cost synergies. You know, obviously, we're aiming higher than that, because you wanna make sure, A, deliver that. But, you know, we're tracking well. I think at the end of this year, we'll have a good idea how much more we potentially can deliver over the 140.
We'll be in a better position to talk about that. But, you know, we're off to a really good start. You know, the deal was obviously, you know, done to drive revenue as well. You know, the cost synergies pay for the deal. We're off to, I think, a good start. We, you know, obviously the cost synergies were well known when you come into the integration planning. It's, you know, redundant, you know, corporate cost. It's procurement. It's footprint. And those were known. And we got a head start. The revenue synergies, you gotta get the deal closed. You can't gun-jump.
A lot of those synergies are anchored around treatment, which is more of a long-cycle business. So I think from an activity standpoint, you know, you have to, you know, manage or measure activity now. The activities feel right. We have the regional revenue synergy leaders in place. Folks are being incentivized, I think, in the proper way to stay focused on revenue capture. I think the early indicators are that, you know, the revenue synergies are gonna be really, really good. You know, that's why we did the quick integration with WSS. We think the service revenue will come quicker. You know, I think there's some real home runs out there when we do European expansion, international expansion of the services business.
And then also, you know, what this combination gives us is 90% of content in a wastewater or clean water treatment plant we now have. And so we can walk in the door with our sales team basically being able to offer everything in a treatment plant. And so that'll take time to work with architects and engineers. But when you think about having all those products and capabilities, you can offer more of a solution when more those are knitted together in a more optimized way. So that's what the teams are getting educated on and figuring out how to deliver a solution versus a discrete product.
Matt, maybe just, one more thing on the cost synergies. Could you roughly bucket, like, you know, the usual suspects, like procurement and footprint rationalization and labor? Like, you know, I assume you can tackle labor somewhat quickly.
Yeah.
How are these things going versus your initial expectations and what timing of the rollout of these things?
Yeah. I think they're, you know, they're going well. The biggest one is procurement, out of the $140 million. That's over half. And then the next biggest one is corporate cost, functional, you know, redundancy. And then the last one is footprint, which is the smaller of the three. You know, what you've seen kinda with the $55 million run rate exit of 2023 is primarily corporate costs and redundant functional cost, the quick integration of APT into water infrastructure, as well as some of the reverse integration of WSS, which you know, of the Xylem legacy service business, which there'll be a little bit more to come there. But that was executed well. And we're off to a little bit better start than we thought on procurement.
So this year, it's more about, you know, moving deeper into procurement and then making sure we're tracking to the footprint moves that we need to make, probably more so at the end of this year and then end of 2025 and then early 2026.
I wanna just go back to one thing you said in the beginning about culture. Like, the two firms.
Yeah.
Similar culture? Like, how did you think about that? Like.
Yeah. I mean, I'd say pretty different. You know, I'd say we share, share a lot of things. I think we all share a passion for solving water. You can you can see that in both cultures that people care. There's a purpose. I think solving water, and the social impact that that has attracts talent to the organization. It retains talent. I would say that the legacy Xylem business, being more of a product and engineering business, moves at a different clock speed than Evoqua that was more of a service engine business. And they tend to move at more of a MASH unit, you know, kinda speed. You know, we, "Hey, we gotta do some triage here and make things happen." And so, you know, taking the best of both cultures is what we've been working on.
You know, those high-impact behaviors we talk about, accountable to deliver, empowered empowering people to lead. And that's one thing that the you know, give, you know, Ron and the team a lot of credit from Evoqua. They empowered their people. There was not a lot of coming up for, you know, you know, approvals. And that's something we needed to work on in the legacy Xylem business. We're taking the best of both cultures. You know, that's the high-impact culture that I talked about and that we're deploying.
So, Matt, I know you talked more, you know, you said revenue synergy. More explanation is to come. But, like, maybe if I just think about sort of WSS and what you're doing, like, you combine ISS with Xylem's de watering business. Like, I remember, you know, Evoqua's service business was a sort of steady mid-single-digit grower. Like, is the opportunity for WSS better than that? Like, how do you think about, you know, the combination there?
Yeah. Well, I mean, we did WSS for several reasons. One, it was to accelerate synergies, both on the cost and the revenue side. When you have one leader versus two segment leaders in the business, not that we don't get along with each other, but it, it just makes it easier when one person owns it.
And so getting that alignment with one segment leader was important. You know, also, I'm very focused on the customer. And making it easier for our customers to access the solutions with one phone call is a big part of that. And we've already seen that play out. When we announced the new segment in December, we engaged some of our customers. We were 3X oversubscribed to the demand during the holidays to go meet with customers about how we put together, you know, transport, pumping transport and treatment of water.
So it's going really well. You know, that's where we're gonna see the initial wave of synergies. And then, like I said, you're gonna move into the longer cycle things that we're building capability around right now. So, you know, again, we're off to a good start. The WSS segment, I think, is a good proof point that we're making good progress.
Got it. And then, Matt, like, one of your main competitors I don't think you have a ton of overlap with them, but they're a new public company, so everybody compares you to them. Like, they've talked about a little bit of sluggishness in the U.S. from municipalities on spending, mostly in the testing area. You guys are pretty small in testing. You've been pretty bullish on U.S. water treatment. But maybe give us a view of, you know, your conversations with U.S. utilities on the ground.
Yeah.
You know, I know obviously, it's an election year. Like, so do you worry about that at all? Like, how do you think about growth for U.S. utilities?
Yeah. The U.S. utility demand has been really strong. You've seen it in our orders numbers. You know, we're very close to our customers. We're you know, talking to them all the time, kinda the bellwether, kinda big customers that we lean on. Their spend is growing. And so we feel really good. I mean, you know, when you kinda unpack utilities, you think about clean water. That's a proxy more for M&CS. You think about our AMI solutions. You look at our backlog.
You look at our order rates backlog up, you know, up again there in the business. That seems pretty healthy. When you kinda unpack, you know, the wastewater side, there's an OPEX and a CAPEX element on how we look at it. The OPEX is still very resilient. Then the CAPEX side, we were up double digits in the CAPEX portion, which is really treatment as a proxy for that, not only in the U.S., but, but globally, every region was up double digits. Then lastly, you know, we don't talk a lot about analytics, but, you know, that's a really good business for us. It sits in the M&CS segment. And we see that business demand kind of about mid-single-digit growth. And all in all, you know, that market has been really resilient for us, the U.S., especially in utilities.
So in the analytics space, you haven't really had anybody say, "Oh, you know, I don't wanna replace my equipment," or anything like that, you know?
No. It's, you know, it's again, that's a pretty global business for us. It's kinda spread out, you know, equally around the regions of the world. And, you know, we play in three pieces of three segments in that market. We're in what I would call, you know, lab.
We're in environmental. We're also in process, which is kinda the proxy for utilities.
You know, I think we're pretty well balanced in terms of our, our, end markets and where we focus in that business.
Then everybody asks me, and I'm sure they ask you, about, you know, fiscal stimulus and what that means. I think you guys have said, "Nah, you know, we might see stuff. We're not seeing a ton." Like.
Yeah.
Any update there? Like, does the CHIPS Act help you in focus on ultra-pure water, for example? Like, you know, obviously, there's stuff coming out now, so.
Yeah. I think there I just I always, you know, talk about it as icing on the cake, is how I see it. It's not really baked into our guide or a long-term framework. These things kinda take time to materialize. I think it's just gonna be like a you know, we kinda use the analogy of a dimmer switch. It's just gonna slowly build over time and move its way in, whether that's PFAS, you know, whether that's, funding for chips in terms of, you know, building, fab plants, infrastructure, you know, spending. It's just gonna take time to trickle down. It's the first time in U.S. history that we've had infrastructure funding from the federal government.
The process is not, you know, perfect. It's got some kinks that we're working through with EPA and others to get the money to flow. But, again, it's just gonna be a slow build over the next five to seven years.
You mentioned the CAPEX was reasonably strong. Like, you know, I used to think of Evoqua, like, in those two buckets, you know, the capital projects and then sort of everything else. Like, you know, as you look at that Evoqua platform in 2024, is it, you know, growing in line with the rest of the company, better, worse, just the capital projects, you think?
Yeah. I don't think about it in terms of, you know, capital versus kinda service. The business is 75% services and aftermarket. So a big chunk of it is services aftermarket with the balance being capital. But, you know, look, we like capital, but we also wanna make sure that we deploy capital and we can service it. So that's the mission. And we wanna work with our customers to say, "We can do it better.
Because we're, you know, we have the expertise. And with more regulation and, you know, challenges around, you know, if you look at just what happened in New Orleans with, you know, everybody read about the salt wedge coming up the Gulf because of lack of rain in the Mississippi River. And, you know, when that water changes, that composition and chemistry, it changes how you treat it. And if you're not kind of in tune to that, it can cause real havoc on your operation. So, you know, we have the folks that have that expertise and know how to adapt the treatment systems to deal with the changes in conditions of water. And we think we can bring, you know, a real value proposition to that versus just selling the capital. Obviously, there's customers that just want the capital, but. We prefer to do both.
Makes sense. And then you briefly mentioned PFAS. Like, still pretty small as a percentage of the company. Is there any clear timeline of when it might start to really ramp up?
All I know is that whenever the rule goes final from the EPA, which could be any day now, I'd imagine Q1, Q2 of this year, utilities have three years to comply. And I think you'll continue to see the utilities that are much more forward-leaning and proactive will start their journey. And some other smaller ones that maybe don't have the resources, it's gonna take them, you know we're gonna have a log jam. It's gonna take time. And so I think you're just gonna see a snowplow out three to four years from now, and everybody's gonna be trying to comply with the new standards. That's just my hypothesis. But, you know, I think we're three or four years from any meaningful demand in PFAS.
Are there any other emerging contaminants that, you know, we should be more excited about, do you think, or?
I hope not.
You'd be glad.
The consumer knows. Yeah. As a consumer, no. I mean, that's a big one. I mean, it's, you know, it's in 45% of our tap water. PFAS. And I read, I was trying to read the other day around bottled water. I said, "I wonder," you know, I googled it, so I don't know if this is true, but it said 38%. So it looked like a credible source that I read. But you know, it's probably equal to the tap water. So it's an issue. And you know, there's some long-term health effects from these things, and we've gotta get it cleaned up.
So you're telling us no water's safe. At least Google says that.
At least Google says that.
All right. And then I know you'll give us more at your Investor Day. But when you were asked about what Xylem might be interested in buying, you know, with its strong balance sheet, you suggested small to midsize bolt-ons. It's obviously early in your tenure, so I'm sure you don't wanna make some big bet. But, you know, are there any obvious white spaces for Xylem that you see 'cause you've been with the company for a while. And then the separate question is you mentioned you're bullish on Idrica. You know, is it gonna help you grow your service business? Like, how should we look at Idrica? Is it just really to get these larger AMI projects, all of the above? Like, I think I asked you five questions in there, so.
Yeah.
I'll remind you if.
Yeah. Remind me. So the first one's on capital deployment.
Yes.
Yeah. So the first thing is we've gotta execute on Evoqua, period. I mean, that's the largest deal in our history. There's a lot of value capture to be done there, and we gotta make sure we execute. So, but, you know, we've got a good balance sheet, a good healthy balance sheet. And there we have a strong M&A pipeline. There's good small to medium opportunities that we've got in front of us. We can ring-fence Evoqua, I think, fairly well in the organization and get after some of the other pieces in the pipeline that we've got. So that's what we're gonna do. And we're, you know, we're gonna be smart about it. We're gonna, you know, follow our process and make sure we're creating value. But we're gonna be, you know, we're gonna be active. And, we're gonna be able to, you know, be ambidextrous.
And then the second part was on digital.
Yeah. So white spaces and, you know.
Oh, white space. Yeah. So the white space, that's a great question. We, about 2015, you know, I guess Patrick and the team did a lot of great work on something called value mapping. And it's trying to operate, you know, build the opportunity set of what we how we can build the company. And, you know, we've done a great job of taking a $3.5 billion spin-out from ITT, which is more or less a pump company, and creating a very large water platform. Now it's time to execute against the platform. But we've started last year our next kind of set of value mapping work. And, we're kind of; next week, we've got a board meeting. We're gonna be kind of finalizing the report out on that.
In our investor day, it'll inform some of not that we're making a big strategic buyout move, but it will inform a little bit of where we're gonna shift our focus in terms of future M&A, future focus on organic growth, when we're finishing that work right now.
Got it. And then Idrica, just, you know, what's the main goal, really, of Idrica? And then maybe there's a bigger question to you that you mentioned around recurring revenue.
Yeah.
You know, and again, Evoqua had a good core in service. I feel like you guys were working toward that.
Yeah.
But still maybe more of a product company.
Yeah. I think, you know, Idrica is, if you don't know what Idrica is, it was a digital business that was spun out of a company called Global Omnium in Valencia, Spain. Global Omnium's much like a Veolia Suez. They're a utility operator. So they've been able to kinda, you know, use the utility as a sandbox to develop this digital platform over 15 years. It has a lot of capability. For us, it's about, again, partnering with them. We have expertise. The joint venture has expertise in deploying this platform 'cause the one of the things, you know, again, it starts with the customer. The customer's biggest pain points, we talk to utilities, they say, "I've got, like, you know, 50 data sets coming at me, and I can't make sense of them all.
And I've got multiple passwords, multiple, multiple interfaces and applications, and it's just super clunky." So how do we, you know, much like a, a phone, an operating system, how do we stitch together all the applications, one password, one user interface? How do we democratize the data across the utility so they can run analytics off of it and then drive productivity? That's the mission. Now, with that, I call it a land-and-expand strategy. You get the platform in place. You help them solve their biggest problem, whether it's our solutions or, you know, other, other company solutions. And, it's agnostic. And then we bring in our bespoke discrete applications that help the utility with a specific problem. That is a recurring revenue stream on top of the platform. And then we bring in our traditional products.
Now, we've had, you know, examples I've talked about, where we've gone to utilities. We've put the platform in. We've dropped in a few applications to help them with whether it's wastewater treatment optimization or treatment optimization for energy usage. And then we won an AMI deal, $50 million. We won a treatment deal, $20 million. And so, you know, bringing our solutions to bear and I think that's really the value proposition that Xylem has is we cover the entire water value chain. Now, that can be a blessing and a curse because we also gotta get focused, and we are through 80/20 and really prioritizing. But it gives us a holistic view of the utility, and we can come in and offer a solution. So that's really, you know, that in a nutshell.
It's get in, help them with a pain point, and then expand our solutions into the platform.
So very quick last question, that I've asked all the companies. What are the top two or three innovations and structural changes affecting your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse?
I don't think there's anything that's earth-shattering that's not already known. You know, if you think about some of the trends that are out there, I talked about this earlier today in our breakouts. In the U.S., specifically, we need $750 billion to maintain the current service of wastewater and clean water. The infrastructure spending's around $66 billion just to get, so it's nothing. So that's a real problem. So affordability. Two-thirds of companies are gonna run into water scarcity challenges, and it should be on their enterprise risk management matrix. That's a real problem in resiliency of business that we've gotta address. We talked about, you know, water scarcity. 40%—there'll be 40% more demand globally for water than supply by 2030. That's a real problem. I talked about PFAS, 45% of tap water.
These are real big issues that we have to tackle. They're not new, but that's where we're focused. I think if I had to leave with one thing that's emerging that, you know, has come out of our ra value mapping work and that we're looking at, it's water reuse. Where you're getting into a lot of areas that are stressed in water. And that affects industrial customers and making sure they're water neutral. That's why what we do with the acquisition of Evoqua matters. And then, you know, from a utility standpoint, when they don't have access to water, we have to reuse water. And so taking wastewater and making that for either irrigation or for treating that back in through a tertiary process to make it drinking water again
You're starting to see that happen in the US and different states, and you're seeing it around the world. So that trend is really emerging right now, water reuse and circular water.
Very interesting. Well, Matt, Bill, Andrea, thank you so much for being here. Appreciate it.
Thank you.