Water, it's vital to human life, the very survival of our planet. Water challenges are growing more intense than ever before. Now, new technologies are offering bold new ways to protect and optimize water to help the world become water secure, and Xylem is leading the way. Xylem is a Fortune 1000 global water technology provider. We have a century-long track record of trust and reliability, providing leading-edge technologies, expertise, and equipment to utilities, industrials, and other users of water. Now we're leading the digital transformation of water, partnering with our customers and innovation leaders, discovering new ways to harness the power of data and analytics. Our commitment to sustainability is fundamental to our business strategy, guiding everything from how we design new products to our culture and people. Xylem is working every day to bring water technology and innovation to communities and people around the globe.
Water is always moving, and so are we. We're Xylem, and we're solving water. Join us.
Good morning, everyone. Welcome to Xylem's Investor Day. I'm Matt Latino, Vice President of Investor Relations at Xylem. On behalf of the leadership team, I want to thank you for your time and interest in the company. I hope all of you and your loved ones are staying safe and healthy at this time. I speak for all of us in that we wish this meeting was taking place in person at our new meeting space in Washington, D.C., and we look forward to a time in the hopefully not too distant future to welcome all of you there. I've been around the company since before our spinoff from ITT 10 years ago next month.
Safe to say there has been a lot of change in the business and our portfolio over that time, but we could not be more excited that the best is still yet to come for Xylem. I'm confident today's presentation will give you a better understanding of our business, an update to our strategy, and our long-term financial framework through 2025. With that said, let me take a minute to highlight today's agenda. We're going to have a series of speakers, beginning with our President and CEO, Patrick Decker. He will provide you with an update on our business and strategy, including sustainability, which as many of you know, is deeply embedded in the core of everything we do here. Following Patrick, you will hear from Al Cho, our Chief Strategy and Digital Officer.
He will give you an update on our digital strategy and also host a customer panel with several customers across the U.S., China, and Europe. Dave Flinton, our Chief Innovation, Technology, and Product Management Officer, will provide an update on how we think about innovation across our portfolio. Following Dave will be Franz Cerwinka, who leads the emerging markets, a key strategic pillar of our growth. Finally, Tony Milando, our Chief Supply Chain Officer, will wrap up part one of our presentations with how we live a continuous improvement culture at the company. Following these presentations, we'll host the first of two Q&A sessions. In order to keep the program on time, we'll plan to run the first session for about 20 minutes and keep it to the content that we covered in part one.
There will be a longer Q&A session following part two where you can ask questions of the entire presenting team. The Q&A will include live questions from analysts who will have the opportunity to come on video and ask their questions live. I will also include Q&A that comes in from the audience, so feel free to submit your questions using the Q&A function or email me directly. We will take a short break before part two of our presentations from our business segment presidents, Hayati Yarkadas, Matthew Pine, and Colin Sabol. We will wrap up with our CFO, Sandy Rowland, and some final remarks from Patrick before we go to part two of the Q&A. We will have all of our presenters available for that second Q&A session, which will last about 40 minutes. Please take note of the forward-looking statements on slide three.
We will make some forward-looking statements today, including references to future events or developments that we anticipate will or may occur in the future. On slide four, I would also draw your attention to some key items to the remainder of the presentations, which relate to our 2021 full year expected results, long-term targets, market growth estimates, and financial performance metrics. With that out of the way, I would like to welcome to the stage Xylem's President and Chief Executive Officer, Patrick Decker.
Thanks, Matt, and thank you all for joining us today. It's great to be with you. As you know, last year's Investor Day was canceled due to COVID, and I really hope that everyone and your loved ones are safe and healthy. We really look forward to when we can do this in person again. It's hard to believe that we at Xylem are close to our 10-year anniversary, which will be the end of this month. Some of you have been with us all that time, and many others have joined us more recently. When you reflect back 10 years ago, water was not a hot investment topic. There wasn't a variety of water investment funds to choose from. There were few articles about how to invest in water or frequent spotlights in the media. Water futures weren't traded as a commodity.
A sense of discovery, water is an investment trend. We've long held that water presents an incredibly powerful investment thesis. Merely playing in the water sector does not create growth or sustainability or attractive returns. What it comes down to are the fundamentals of the business, a focused and disciplined strategy, and a strong leadership team that executes. The key messages that I want to leave you with today, which is also part of Xylem's investment thesis, is that we have a proven durable business model and attractive growing water market. We have leadership in this market via sustainable digital water solutions. We are delivering faster than market growth with very attractive margins. Probably most important, resulting from all that is a strong cash-generating business, which creates the opportunity for significant capital deployment that creates a flywheel for sustained returns for years to come.
When I first arrived at Xylem 7.5 years ago, the biggest questions put to me were, first, could this business grow more than low single digits? Secondly, were there attractive assets for us from an an M&A standpoint? Let's fast-forward to here we are today. We have accelerated the growth profile over the last several years. We delivered a transformational deal in Sensus, plus many other small bolt-on digital deals. The key takeaway today is there is still so much room for us to create value. We are still in the early innings of this opportunity. I realize there is a trend that's accelerating about purpose-driven companies. For Xylem, this has been a true differentiator from the very beginning. In today's world, and more importantly, tomorrow's, solving water is far more than a set of products and services.
It's about delivering value, expertise, and experience as a company. By focusing on the problems that we're helping our customers solve, which really is about their impact on communities, all of that adds up to delivering on something bigger than ourselves. It's also about creating both economic and social value, or as we say at Xylem, doing well by doing good. We do that by addressing the problems that our customers need to help solve. These are really focused on three major secular challenges facing the world when it comes to water. The first is scarcity, the second is resiliency, and the third is how we address all that in an affordable way. With scarcity, it's examples like the generational drought in the Western U.S. It's day zero threats in cities around the world. Those once seemed so far off, but they're now happening.
For resiliency, it's the increasingly frequent dramatic storm events that are facing us. It's also the unfortunate trend of the effects of climate change. Again, how do we address this in an affordable way? How do you solve these challenges at a cost that communities can handle, both at an individual level, lowering the water bill for families and communities, and at a societal level, again, the macro affordability of infrastructure. Conventional approaches to water management are not going to solve these challenges. Only innovation and experience will help solve them. To address those challenges, our customers are looking for help to do a handful of things. First, minimize water and revenue losses for utilities. Reduce their capital spend to lower costs to communities. Minimize the impact of climate events. Reduce the cost of safely reclaiming wastewater.
Operate more sustainably without compromising, making sure that everyone meets regulatory demands. These needs are squarely in our wheelhouse at Xylem. We have foundational products and equipment, plus digital solutions and services. The pandemic has accelerated the trends. The fact is, we all need to do a whole lot more with a whole lot less. These are the challenges that have informed our investment over several years, and even more so now in the wake of the pandemic, it's now our time to deliver those services and solutions to our customers and to our communities. Where is Xylem today? We are a very diverse global business. We have end markets that range from the private sector, but also to public sector positions. Our geographies, we've got exposure to the fastest-growing markets around the world. We've got a position of strength.
We have more than $5 billion in revenue around the world. We have very attractive and expanding margins as a company. These are true strengths for us as a company. In addition to broad geographic and market positions, our portfolio at Xylem is uniquely positioned across the entire water cycle. This chart shows the cycle of water essentially from start to finish. It starts from where the water comes from reservoirs, the various watersheds around the world. We treat water and transport it. We transport it to the places water's used, in buildings, facilities, and homes, and farming communities. Once that water is used, we focus on transporting wastewater into its treatment, its testing, and then returning it to reservoirs and watersheds to start the cycle again. All the water that's ever been on the planet is on the planet.
As trends increasingly value all elements of water management, our position across the entire water cycle is an increasingly valuable differentiator. This is about a rich heritage of fortress brands, a global install base, and the investments in M&A that we've done have focused on moving us up the technology curve. We've got a strong base of foundational products that help us meet our customers where they are on their digital journey because they're not all starting from the same place. In terms of digital solutions, this is about helping customers address their new challenges affordably. We expect our digital solutions to grow from roughly 35% of our revenue today to more than half of our revenue by 2025. We've got digital solutions across all three of our segments.
Some have more digitization today than others, we see opportunities for driving growth across all three segments as a result of integrating digital into our offerings. To enable that digitization to happen across our portfolio, we've created a new platform that we call Xylem Vue. What is Xylem Vue? Xylem Vue is about combining the power of hardware, software, and service capabilities across our entire portfolio. This is to help our customers improve their outcomes and their impact on communities. All of our digital capabilities are integrated, they're interoperable, and they're secure. They also deliver unparalleled insights to our customers. We provide deep consultative relationships on top of our install base. Lastly, we're doing this by leveraging in powerful global selling channels. All of this is further accelerating our growing backlog, it's coming with very attractive and accretive margins.
Albert Cho is going to talk more about Xylem Vue shortly, and we're really excited about this. When we think about Xylem's business model, it's about durability. A leading technology is only one differentiator. In addition, we've built a business on durable competitive advantages. We have a deep install base with long-term customer relationships that are based on renowned fortress brands. We have a culture of continuous improvement. It's about driving relentless incremental performance gains. We're a global company that's investing in local capabilities in fast-growing markets. All of this differentiates Xylem and gives us a clear competitive advantage. It also makes us resilient when there are shocks across the market. COVID clearly being a lesson. We cannot anticipate every eventuality, but we can navigate from a position of strength.
Similarly, our current supply chain challenges being an example, which is affecting the entire industrial sector. It's deeper and more sustained than anyone anticipated. Our operating discipline and our agility is serving us well. It's lessening our impact so we can continue to serve our customers as underlying demand continues to accelerate, which is clearly reflected in our robust orders and our backlog growth. While there may be shifts in some timing due to external factors, we will continue to deliver sustained growth over the long term from our strong position on long-term macro trends. Amongst the strongest of those trends is demand for sustainable solutions. We've built a distinctive ESG leadership position by placing sustainability at the core of our business. Obviously, playing in the water space, sustainability is at the core of everything that we do.
Our framework, which is about creating sustainable impact across our customers, our communities, and our company. About the impact from serving our customers to benefit our communities. It's also about building a sustainable company. I am so proud of what this Xylem team has achieved, especially given Xylem is often one of the only industrial companies that are hitting these kind of goals. We are focused on the future. We remain fully committed to our 2025 Signature Sustainability Goals. Think about this. We are already enabling customers to recycle more than 1 trillion gallons of water. We're helping customers prevent over 7 billion cubic meters of polluted water from flooded communities or entering local waterways. Customer impact and community impact are intertwined. We at Xylem are focused on what more there is to do. What is the work ahead?
Today, we are adding to our commitment a net zero greenhouse gas emissions commitment. Our commitment is to science-based targets that are consistent with global 1.5 degree goals. We will be a part of Water Sector Show of Support at COP26 in November. Earlier, I mentioned purpose as a differentiator. We know that our purpose-driven business model attracts, motivates, and retains top talent. It is all about talent. Equally, our culture built on that purpose is a big competitive advantage. Again, because it attracts the best talent who recognize Xylem is not just talking about this stuff, we're doing it. It's about creating economic and social value through innovation, but innovation only thrives in an environment of diversity and inclusion. Fostering diversity is essential to solving the world's water challenges.
What we want to be is that company that says, "When you deal with Xylem, you're coming from a place of trust." Focusing our talent on the purpose of solving water challenges is part of our strategy that creates growth. It creates outstanding customer experiences via our digital transformation. It's about growing in emerging markets, largely about accelerating localization. It's about continuous improvement, driving out complexity, reinforcing the resilience of our supply chain, attracting and developing our top talent. Again, fostering an inclusive culture to attract and retain best and brightest in the marketplace, and reinforcing our leadership and technology. This is about growth that's built on sustainability at the heart of our business. Sustainability for Xylem is integrated into every part of our strategy. It's not a standalone pillar. Embedded in our strategy are opportunities for significant incremental organic growth well above the market.
We expect this to come in our utility sector from our work in digital and increasing our services offering. In industrial, we have many underserved segments and geographies that we are developing technologies and solutions to penetrate. In emerging markets, the markets themselves are growing at attractive rates. We expect to grow faster than that market growth. That really is driven by expanded coverage across markets, but also further accelerating our localization of products, solutions, and our talent. Clearly, we have a growing arsenal of liquidity for capital deployment. We believe that dry powder is about $4 billion. Our orientation to M&A is going to be consistent with our approach to date. We're going to focus on opportunities in each one of our end markets that deliver value to customers while accelerating our growth. As we've said before, we look at it by end market.
Within utilities, we believe that we largely have what we need today. We have a very strong portfolio. It is getting stronger by way of bolt-ons, via technology to enhance our solutions offering to our customers. With industrials, the opportunity there really is to help our water users meet their needs. It's about water services via technology, and we can only do that when we strengthen our channels to market. We're also looking in commercial, residential, and ag. These markets continue to grow, and we will continue to explore opportunities in those areas where we're looking for growth in margins at accretive levels. Reinforcing our investment thesis here is our confidence in our ability to meet our 2025 milestones. This is about a consistent strategy focused on strong macro trends. It's also about disciplined execution.
With all of that, we're confident about these goals, which are 4%-6% organic revenue growth, continued healthy year-on-year margin expansion. Underpinning all of that, annual free cash flow conversion, on average of 100% or better. This is not just a sound strategy or favorable trends that are going to deliver growth and margin expansion. It's being driven and led by a talented team that's aligned to accelerate on this strong momentum. I am so proud to be able to lead this team and to be a part of this team. Within this team, we also have a strong bench. Xylem veterans, combined with newer faces that are bringing very diverse and global experience. I am so pleased that you have the opportunity today to hear from most of them.
Would've loved for it to have been in person, to meet them in person, we'll do the best we can. The Xylem team is not just the faces on this slide. The Xylem team is more than 16,000 people strong. That's the team that enables us to deliver on our commitments and to achieve our mission to solve water. I am so proud of them. At the beginning of my remarks, I talked about a past when maybe water wasn't such an obvious investment thesis, and some of you saw what we saw. Together, we have been consistent in our thesis that investing in water creates exceptional economic and social value.
We believe, for Xylem, by building a leadership position in technology on the top of a durable business model, benefiting from strong underlying macro trends, and executing on a strategy that drives growth and margin expansion on the back of digitization, and then leveraging capital deployment to create significant accelerators, will deliver enhanced stakeholder value. I'd like to give you the chance to hear from the members of my team and to get some of the color and detail that supports this thesis. Thank you.
Greetings, everyone. I'm Al Cho, and I'm here to discuss Xylem's digital strategy before introducing you to some of our customers on today's virtual panel. I've been at Xylem for about nine years now, and it's been particularly exciting to be part of the digital evolution of this company, which continues to lead the digital transformation of our industry. You'll hear elements of what that looks like in the terrific customer panel discussion that we have for you in just a moment, as well as from Dave Flinton and our segment leaders later in today's presentation. Before we go there, I'd like to cover a few key messages. First, for all of the reasons that you're hearing about in the news and what you just heard about from Patrick, water challenges are rising, and they're accelerating digital adoption in our sector.
Xylem's integrated digital approach, which we call Xylem Vue, creates a market-leading customer experience that leverages our company's unparalleled installed base and global capabilities. Third, we at Xylem are uniquely positioned to lead this transition with our customers, and we're on track to have half of our revenues come from digital solutions by 2025. As Patrick mentioned earlier, the water sector is at a crossroads today because water utilities and water users alike are facing two colliding imperatives. On the one hand, our customers are being told to be more resilient, to deal with climate change, aging infrastructure, and to address emerging threats and regulations. They're also, at the same time, being told to be more affordable, to keep rates and costs low, and in the case of water utilities, to broaden access to services and even to address historical inequalities.
All the while, they have to do this without missing a beat, to maintain compliance, to manage an evolving workforce, and to stay out of the news. At the end of the day, delivering safe, compliant, reliable, and affordable water is getting harder than ever. Here at Xylem, our focus is helping our customers face these challenges with solutions that help them create value every day. Digital solutions are one of the most powerful levers that our customers have to become more resilient while remaining affordable. Before I define what we mean by digital, I first want to note that Xylem has a very strong portfolio of foundational technologies that address persistent water challenges, even if they don't have digital capabilities. Unconnected does not mean undifferentiated.
At Xylem, our focus has always been on delivering value to our customers, regardless of what the underlying technology is, whether it's hydraulic, biological, or electronic. Digital does have a special role to play, and our definition of digital focuses on solutions that combine foundational technologies with sensing, monitoring, and analysis to enable our customers to use data to improve their outcomes. Our portfolio includes a continuum of these solutions, from smart and connected devices, to advanced metering infrastructure, to advanced analytics and optimization solutions. At Xylem, these solutions are increasingly linked together to drive outcomes for our customers with ease. They help us meet customers wherever they are in their digital journey so that we can enable them to move even faster to create value.
Our analysis suggests that by creating efficiencies in operating expenses and capital investments, customers in the water sector could save as much as $70 billion a year in avoided costs. The desire, I would say even the hunger for those savings, as well as greater operational reliability and visibility, is driving disproportionate growth in digital water categories relative to other parts of the water sector. Let me show you what that looks like in practice and what it means for our customers. As many of you know, pumping and treating water and wastewater consumes a great deal of energy. Our intelligent digital solutions optimize energy usage in pumping systems and in treatment plants, enabling municipal, industrial, and commercial water users to save money and become more sustainable.
These technologies have helped major cities also deal with infrastructure headaches, like overflowing sewers, through capital optimization, saving hundreds of millions of dollars by leveraging the power of digital solutions. I know all of us have had a difficult 18 months, but all of us have also been very fortunate, at least here in the U.S., to have utilities work tirelessly to keep the water flowing. Digital solutions have helped utilities do more with fewer people on site. The Eastern Municipal Water District in California has been not an exception at all. They made an investment in Xylem's advanced metering infrastructure solutions, and because they were able to remotely monitor their metering network, they were able to redeploy 12 of their 16 meter management personnel to other higher priority tasks to help customers during the pandemic.
That's what resilience looks like in difficult times, and you're going to hear a lot more examples of this during our customer panel. Our customers clearly see the value of digital adoption. They know that digital solutions will ease compliance, create cost savings, reduce system risks, and help them be more sustainable. They are equally vocal about how they want their digital solutions delivered. We hear from our customers all the time, "Bring us powerful solutions. Bring us powerful digital solutions, but for goodness sakes, keep them simple." That's because utilities and industrial users alike have ambitious goals, but they also have complex workflows, fragmented systems, and workforces that have to get trained on every new solution that is introduced into their systems. They want digital delivered simply, securely, and by trusted partners who understand how their systems work.
Put simply, they want a trusted technology partner that makes it really easy for them to capture the benefits of digital. That's what Xylem Vue is all about. I want to start with a few words on the name. Vue is all about visibility. Imagine being a utility or a water infrastructure operator, remember how hard it would be to see water clearly. It runs through thousands of miles of pipes in buried infrastructure and in tanks. Our customers manage massively distributed systems that they cannot see, where problems and leaks can come from anywhere. Xylem's tagline has always been, "Let's solve water." With Xylem Vue and with digital, it's, "Let's see how." Xylem Vue is our digital platform, the ecosystem of Xylem's digital solutions, and it's the first end-to-end digital solution ecosystem that leverages hardware, digital, and service capabilities for the water sector.
It's purpose-built to make it simple for customers to get started on their digital journey and unlock real value. Xylem Vue helps customers adopt the industry's best digital solutions, which are sold consultatively and delivered reliably by outstanding people. Let me highlight a few critical elements in this approach. First, it all starts with trust. Xylem has an unparalleled installed base with over 80 million connected assets across water, wastewater, and watersheds, with more being added every single day. Each of these points represents trust in our company's capabilities and a basis for doing more together. Second, a secure, interoperable technology platform. We've built global centers of excellence to develop common building blocks across the digital stack, and Dave Flinton will go into more detail in a moment. For our customers, this stack enables easy adoption. They're simple, secure, and interoperable.
For Xylem, it turns each of our solutions into an on-ramp to the broader Xylem Vue ecosystem, and you'll hear more about that from Matthew, Hayati, and Colin. Third, we have exceptional software and integrated solutions that we've built organically through mergers and acquisitions, and increasingly in partnership with our advantaged ecosystem of technology providers, including, for example, Esri. We've built integrated solutions that align these individual pieces to domain areas such as leak management, energy efficiency, or maintenance management. We continue to advance these solutions through R&D partnerships. Of course, we continue to evaluate mergers and acquisitions.
For our customers, this unparalleled portfolio of solutions unlocks real value, and for Xylem, our integrated solutions facilitate cross-selling across our portfolio. Fourth, we've built strong consultative selling teams and capabilities in each of our regions, and trained our people on customer use cases and the broader portfolio of our offerings, from products all the way to solutions as a service. For our customers, these teams help build roadmaps and expose them to the art of the possible. For Xylem, they boost our synergy multiplier and customer share of wallet. You're going to hear a lot more about the power of this approach from our customers in just a moment. As we accelerate this approach globally, convert our growing backlog, and continue to enhance our product through organic R&D, M&A, and partnerships, we will continue our growth momentum.
We've more than tripled our digital revenue as a percentage of our total sales in the last five years, and we expect to earn about half of our revenues from digital solutions by 2025, at accretive margins. Before I turn to our esteemed customer panel, let me recap our key messages. First, we are at a critical turning point in the sector's adoption of digital technology, and no company is better positioned to drive this change with our customers. We're seizing the opportunity by executing on integrated technology and commercial roadmaps, and we'll be in a position to earn about half of our revenue from digital solutions in 2025. Don't take my word for it. Let's hear from our customers.
I'm so pleased to be able to introduce some of our really outstanding customers to share their views on digital in the water sector, as well as Xylem's place in it, in this panel conversation. Thank you so much, and let's hear from our customers. Well, I'm very excited to be introducing our distinguished panelists from all around the world, who have all kindly agreed to share their perspectives on our sector and how their work with Xylem has helped them advance their objectives. I just want to say thank you, all of you, for making time to share your views with us today. To kick things off a bit, can each of you maybe tell me a little bit about the communities that you serve? Mandy, why don't we start with you?
Sure. WaterOne is an independent public water utility serving potable drinking water service to about 150,000 accounts or 450,000 people in the Johnson County, Kansas area.
Gruppo CAP is a public utility operating in the Milan suburban area, meaning that we serve almost 2.5 million inhabitants all around the big city of Milan.
Yes, sure. My name's Darren Stanley. I am the business partner for the commercial team, looking after the waste area of Thames Water.
Bin Jian from Shanghai Yunhan Water Company. I'm the board of director and also the general manager of this company.
Eric Horvath. I'm the public works director for city of South Bend.
I guess my next question is, what are the biggest challenges facing your organization? This time, let's start with you, Eric.
Yeah, for sure. Our biggest challenge is really trying to find a way to take care of a lot of assets that we have that are super old, and making sure that we do that in a way that we're not spending any more money on those assets as necessary.
What we are facing with the climate change, this is obviously a big challenge. We are dealing with the flooding. Yesterday, we had heavy rain, and I spent my evening dealing with mayors from different municipalities in order to find solution for the problems our infrastructure created in different areas.
Like many utilities today, we have constraints on rate tolerance, and that is not infinite. We're very blessed in that regard, but it is not infinite. There's always the challenges of keeping up with customer expectations.
In terms of Thames, as I said there, scarcity of supply. It's a real challenge, I think, for Thames also. There's issues with the aging infrastructure. With an aging infrastructure, the need for continued investment is a must, and looking really at new ways to become efficient and effective for the customers that we serve.
We're hearing a lot about both of these themes of affordability and resilience. With that in mind, maybe I could ask you all, what are your strategic priorities for the next few years?
First of all, drinkable water, we have to be sure that the quality is the right one, even considering new pollutants, because we are dealing with new pollutants as you are. We have to increase the network efficiency. Efficiency and quality. We have to monitor and decrease supply potential interruption. First three priorities. We have priorities with sewage, where we have to deal and to reduce flooding or overflow of the sewage. We have priorities on the quality of the service we give in terms of wastewater, so the quality of the treated wastewater. We have priorities on the way we are able to use the sludge produced by the wastewater treatment plants in order to decrease the use of landfill. Combined with these priorities as a company, we have other priorities. One is the digitalization, of course. The second one is to reduce our carbon footprint.
On the wastewater side, the big issue is the long-term control plan, that's making sure that we get some of the sewage out of the river that's currently going there. We've got an old combined sewer system. About 40% of our city is still combined, where the storm water and sanitary goes together, when it rains hard, we get quite a bit of sewage that flows into the river.
I'd say most related to Sensus and Xylem, it is how do we build out our AMI investment? We have been actively in the project since 2018, putting up infrastructure, installing SmartPoint, building out our customer portal. In the next five years, we're entering in a new maturity cycle for this project. We're calling it our smart utility network phase, and we're defining that as how do we use data as an asset? That's our problem statement. How do we use data as an asset? How do we convey it to customers, and assist them, and support them, and educate them in using their data that they now have access to? Broader, how do we internally at WaterOne use this rich data that we now have to inform our decisions? Not data-driven, but data-informed.
I guess I'm curious, how important is digital technology to your operations today and going forward?
I think digitalization is becoming more and more prevalent. I think that as we evolve as an organization, and you can see what's happening around us through COVID, we've had to radically change in terms of how we've been able to operate.
The world is changing so fast, and without digital technologies, we couldn't do what we do today in the same way. It saves us so much money, and enabled us to just be much smarter about the way we do things.
Since our founding in the 1960s, we have had people walking or driving from meter point to meter point, yard to yard, within our service area, collecting that data point. 2015, we started really doing in-depth case studies and business case analysis on the value payback for this kind of a project, for this kind of an investment in technology, and we got the authorization in 2018 from our governing board to move forward. That had followed an open competitive RFP process. Sensus with our history and known history of metering with them, but also the Network as a Service and the SmartPoint devices and the kind of FlexNet that they were offering really was the right solution for us.
Very interesting. I'm sure people are curious, what impacts have you already seen from digital, and why does this matter so much to you and to your customers?
I think that if you think around some of the smart pumps that you've got, we've got those in our business that are a help in the right areas, with areas that may have frequent blockages, things like that. I'm not saying that that type of pump is necessarily needed in all applications, but where you have got problems historically, we've got evidence to show that these pumps have come in and helped in those areas.
Here's the thing that I don't think gets enough attention is the impact to employee morale after you implement AMI. For context, WaterOne bills residential customers bimonthly, every other month. Every 60 days you're getting a bill. Bill shock happens. It's real. We don't intend to use that much water. We do. If you're on a 60-day billing cycle, well, gosh, it's hard for me to remember what I ate for breakfast, let alone how I used water 60 days ago. For a customer service rep, imagine going from having 12 data points a year to help a customer through understanding a higher bill than expected versus, "Well, Mr. Johnson, it looks like on May 15th at 5:00 A.M., you had a real spike in water. What might have been going on inside your home around that time period?
Can you think back to that time? That's transformational customer service change and employee morale of being able to effectively support the customer conversation. You feel like you're equipped with the tools to have those conversations. It's transformational.
Lots of operational savings. We used to literally go out to all of our CSO locations and have two full-time staff that would just monitor those. They would drive from location to location. They would look at them and see if they were overflowing. The problem is like if it started overflowing Friday night, it could be overflowing the entire weekend before somebody came in on Monday and drove around to see those again. With the sensors, we're getting data every five minutes.
Taking a bigger picture view, being able to use that data to get a more system-wide understanding of what was going on helped us really drive our long-term control plan costs down because what we were able to do is create through, again, this is through EmNet and Xylem, having those sensors allowed us to get 15 million data points every year, and then we use that data in a cognitive hydraulic response system or model that would look how our sewer system responded to a given rainfall event. Instead of building $400 and some million worth of infrastructure that then you'd have ongoing operational and maintenance costs on, we're able to do a lot less expensive by being smarter about the way we're doing things. That's thanks to Xylem's technologies.
I've got to ask, what has it been like working with Xylem on these initiatives?
It gives us the possibility to copy what I call geographical innovation. Sometimes there is the right technology from a company, but I don't know why, probably for sales strategies or whatever, nobody had tried to implement it in a specific country. But you know that the same technology from the same company in another country is working in a proper way. International case study and try and buy are an interesting way to collaborate with you, and we are satisfied with it.
The history we cooperated with Xylem, since there is a current trend of digitalization and informatization transformations, we are really looking forward to cooperate with Xylem to deepen the relations. We can have more cooperation on the digital and intelligence solutions.
Xylem as a supplier, not being complacent, always looking at new opportunities, always looking to really eke out that extra value, going that extra mile to look at new opportunities, new areas that we may not have considered, areas where you may have done something in a different market, in a different industry that could be transferable, innovation. Where's the next step change coming, again, in pumps? Where's that next groundbreaking idea? It's unlocking all of that out is key for me.
I'm told that WaterOne is one of the early adopters of Network as a Service, in terms of Sensus and Xylem technology. When we were at that decision point, and it was made available to us in our project planning, we looked at one another as a group and said, "Hey, we're experts on making water. We're not telecommunication experts." We believe what we have validated is that Sensus and Xylem have that expertise. We would rather, we see the value, the operating capital value in allowing Sensus to handle that in place of us. We are closely following the service level agreements, the SLAs, and have been really pleased, in the several years that the network has been stood up and operating, are really pleased with Sensus' ability to meet our SLAs so far.
Just for a last wrap-up question, how do you think things are likely to change and evolve over the next few years in your organization?
What we will require from our suppliers. In the past, people used to buy, I don't know, equipment with no SCADA automation. It will never happen again. I will never have a plant without the possibility to control the plant in a remote way. I will never have on my pumping station electrical connection to be controlled only on a local way. I will never accept it. I need to have the remote control of my plants, first. It will never happen in the future that we only buy a pump or a dryer. We will always look for something more, for the information we can have from that pump or from that dryer.
I see opportunity both in the hardware device side of the business as well as the data asset side of the business. Hardware first, we are experimenting with remote disconnect meters and where that makes sense to apply them, and there is a higher cost upfront to that, but are there customer scenarios where that would actually make better business sense to use for them? One of the first steps that I think we'll take during this next maturity cycle of building out AMI is standing up the meter health module. We are very interested in how AMI is going to help us identify slowing and stuck meters. Our view on that is not as a value proposition for revenue increase because we are a nonprofit. It's really about equity to customers.
Now that they're part of Xylem and having so many different other opportunities, sometimes they'll bring us things. We're looking at things like your Water Revenue Locator, networking with just trying to find places where we might be losing revenue on the water side, and where we can shore that up with our meters. Creating a digital twin model of our wastewater plant so we have a better understanding of the wastewater plant operations so that we can maybe tweak our operations there a little more. Ultimately, the goal would be to be net zero at our wastewater treatment plant.
Thank you to all of our panelists for those tremendously thoughtful insights, and just to say thank you to all of you for your tremendous work to serve your communities, always, but especially in this last difficult 18 months. To all of our viewers, I hope that gives all of you a good sense of how customers are thinking about the digital opportunity and Xylem's role in it. Now I'd like to pass it over to my friend and colleague, Dave Flinton, who will continue with the theme of innovation and technology. Over to you, Dave.
Thanks, Al. Hello, everyone. I'm Dave Flinton. I lead the teams that manage and evolve the products and solutions of Xylem. I've been with the company for a number of years and have been fortunate enough to work in or closely alongside all of the businesses and regions. I started in the company when we weren't a water business. I'll say that I love our new mission and purpose. It's why I'm more excited than ever. More excited about where we are in our innovation journey, particularly. More importantly, though, how that's positioning us to help our customers make a bigger impact on their most pressing water issues of resiliency, accessibility, and affordability. Throughout this conversation, I'd ask you to listen for a few key themes. First, we've matured and evolved our innovation approach to be more open and collaborative.
We've purposefully shifted our investment mix in recent years to better align with our strategy and growth aspirations. We've also built tremendous capability in emerging markets and are now positioned to deliver greater innovation in those regions for those regions. Finally, I'm really proud of how we're prioritizing sustainability in our innovation process. We're making some strong changes to how we innovate in Xylem, but that doesn't mean we're a stranger to innovation. We have a really long history of innovation in water, with some of our teams being pioneers and launching firsts in their space since the 19th century. We truly have many of the best and brightest minds in the water industry working for us, and I feel really privileged to be working alongside them.
Climate change and the issues it creates for our customers and our communities is quickly changing the need to bring more advanced and sustainable technologies to the market at a faster pace. We've evolved to meet these changing needs, and we'll continue to evolve our approach in the spirit of continuous improvement. We'll continue to invest in maintaining and building out the strong portfolio of products that you saw on the previous page. They're the foundation on which so much of our company's success is built. As Patrick and Al mentioned, they're also the foundation that our digital solutions and services depend on in order to deliver greater impact for our customers. What is changing, though, is how we're going about doing all of that.
To bring the best technologies to the market in the quickest way possible, we've adopted a much more open and collaborative approach, tapping into the diversity and power of the global water ecosystem and not trying to go it alone. This makes a lot of sense, after all, because our tagline is Let's Solve Water. It's about addressing these challenges together, not alone. We've built a global network of partners, from universities to venture capital firms to startups and other external partners, and we're working jointly on some of the most challenging customer water issues. I like to say that we've started innovating with a capital I, and I'll talk a little bit later about where some of that big I innovation work is focused and give you some proof points that we're succeeding.
As we've evolved our approach to innovation, we've also been working to change our investment mix and resource allocation over time to ensure we deliver on our strategy. Our strategic innovation pillars always provide an important guideline for us as we allocate those resources. Given the importance of digital in our ability to deliver greater impact for customers, we've shifted more of our R&D spend to build those solutions. Today, about 70% of our new product development spend is spent on digital products. Over the past three years, we've also more than doubled our spending on developing breakthrough products and solutions, which are products and solutions that are new to the world. These breakthrough technologies often start off at a really low maturity level and so tend to be longer-term investments that require patience and incubation.
We're starting to see the results of that now, and I'll share that with you shortly. We really do like this R&D spend mix and believe that this resource shift has been critical to be able to deliver on our goals. It gives us a lot of confidence in our ability to meet our future projections around digital sales and incremental growth. I mentioned that we're spending a majority of our development dollars on digitizing our portfolio and bringing new digital solutions and services to our customers. That core portfolio of technologies and installed base of pumps, mixers, treatment equipment, meters, is a huge strategic competitive advantage for us. We're taking those foundational products and converting them to connected products. That means that we're building in the ability to communicate wirelessly and transmit data.
That data, the software applications that visualize that data, and the ability to remotely control these devices gives our customers better insights into how to manage their infrastructure. Take, for instance, a machine like a pump, mixer, or meter that isn't connected and can't communicate. Customers have to manually monitor that equipment, physically drive out to the locations of machines, take readings off of it to figure out whether it's working or not, or to adjust how it's operating. If that machine can understand its own health and operational status, such as vibrating too much or not delivering the appropriate performance, and then send an alert to an operator instantaneously who can remotely check those things, or rectify the situation, imagine all of the time saved in that process. The reduced emissions from not driving around to the locations of all these machines.
That's a small example of how digitizing products help generate tremendous efficiencies, cost savings, and carbon reduction. It's what we like to say, making water more affordable and sustainable. Those connected products that we're shifting towards are creating a foundation for more sophisticated Xylem Vue digital solutions, like our advanced metering infrastructure or other such systems of connected products. These types of systems send large amounts of data to software that uses data analytics and machine learning to create predictive models of entire networks, so that those efficiency and sustainability savings I talked about can be had on a much larger scale. We at Xylem can even use our own suite of software applications and devices to deliver services to customers who may want or need our help managing their infrastructure.
As we've brought more and more digital capability into the portfolio, we've been able to leverage those strong skill sets from places like Sensus and Pure and others across the enterprise to create a modular approach to digitizing our portfolio. Think about this as standard technology building blocks that speed up how fast we can develop and deploy digital solutions at scale. Those standard components are really important because they make for a consistently secure and seamless experience for our customers. Remember back to what Al said earlier, that our customers are looking for us to keep digital safe and simple. As Patrick mentioned in his comments and as Franz is going to speak about shortly, Emerging Markets is still a key growth focus for us.
We're in a strong position now to accelerate our product development capability in the region to develop more products and solutions locally that are more aligned with the needs of customers in those markets. Over the past decade, we've built strong engineering competence in both India and China and now have over 800 engineers and technical experts across the region. We're in a position to leverage that capability more fully to meet the unique needs of our emerging market customers. Today, a majority of our emerging market sales are from global products that have been localized in the region. However, a much smaller number of these sales are from products developed locally. Our focus here will be to grow the number of locally developed products and create more opportunities to take share.
We'll take some of this regional innovation back into developed markets where it makes sense, where those value propositions may be needed, so effectively increasing our overall product development capacity. One of the biggest levers we have to drive incremental growth is to bring new-to-world or breakthrough technologies to market. We've built strong capability here over the past few years and have established Xylem Innovation Labs to rigorously scout, incubate, and commercialize early-stage technologies. Think of it as a way to enhance our traditional R&D work and stay at the cutting edge of water technology. We work in partnership with university research firm teams and startup companies in four key areas that represent the biggest pain points and opportunities for our customers and communities.
As one of the largest water companies in the world, we're in the fortunate position to have visibility to the newest technologies and development almost everywhere. We evaluate both technically and commercially over 200 such technologies every year and are now seeing the results of that. We expect that by 2025, this work will be a meaningful contributor to our growth. What I want to do now is share some recent examples of work that exemplifies how this new approach to innovation is delivering results and opening up new opportunities. First one is Taron. It's a really good example of partnering with startups to accelerate innovation. Through our scouting and incubation work, we identified and worked with a startup company to commercialize a new-to-world wastewater treatment product that we call Taron.
This technology dramatically reduces the footprint of the treatment process and allows industrial and utility customers to increase their plant capacity using much of their existing space. The cost associated with footprint CapEx and installation and operating costs are also dramatically reduced, and that leads to a much more affordable solution. This is also a really great option for decentralized treatment schemes, which is a big need in emerging markets. From the time we identified this company to our first full-scale order for an industrial client was about 3x faster than our traditional development process. Next one is AquaTalk. AquaTalk is a great example of how we organically leveraged those global technology building blocks I talked about earlier and our emerging markets engineering teams to quickly deliver a new-to-the-region Vue solution for utilities and buildings.
This integrated digital water management product consolidates a lot of the disparate sets of operational data that customers struggle to make sense of and act upon quickly. We've created a single pane of glass, so to speak, with a simple interface that allows for more real-time decision-making, that increases efficiency and lowers costs. As our customer, Bin Jian, mentioned earlier, the digital water management market in China is moving and growing extremely fast. We believe this solution puts us in a leading position. Finally, I'll mention BLU-X wastewater network optimization solutions. This is our Xylem Vue digital solution that Eric Horvath of South Bend talked about earlier. I wanted to highlight that this is a great example of combining connected products, artificial intelligence, and software solutions to deliver dramatic infrastructure cost savings, in this case, cost avoidance.
With over 1 trillion gallons of sewage overflow globally every year, there are a lot of growth opportunities here. We work hard to embed sustainability in everything that we do, and we're taking that to heart in the innovation and product arena. More and more customers are concerned about the sustainability of their infrastructure. Naturally, they're concerned about the sustainability of the products in their facility. We're working to embed and prioritize sustainability into how we manage and develop our product portfolio. We've done really good work understanding the benefit our products bring to our customers, and that they have on the environment, their handprint, and we've established goals for that. Those are the signature customer goals that you see in our sustainability report. The business unit leaders are going to speak to some specific examples of how their solutions are helping deliver on those commitments.
However, what we're increasingly working on is minimizing the impact that our products have on the environment, or what's known as their footprint. We're beginning to look at sustainability as a measure of success for our product developments and design our products accordingly. As an example, a recent new clarifier development team very purposefully chose a non-standard design approach and novel materials to reduce the carbon footprint of that product during manufacturing, packaging, and shipment. We partner with industry leaders in this space to help us think through our approach and validate our work, and these include our friends at the MIT Sustainability and Health Initiative for NetPositive Enterprise, or the SHINE Institute. We're aiming towards labeling our products with carbon data so that customers can much more easily consider sustainability in their decision-making process.
I started off this conversation talking about our long history of innovation, and I want to close with some comments about where we see innovation going in the future. I really do believe we've got our feet firmly on the ground, but our eyes definitely on the horizon. As I mentioned, we've shifted significant time and resources today towards building interoperable digital architecture that will allow us to deliver digital solutions quickly, at scale, and in an easy-to-adapt way for customers. That's allowing us to accelerate the delivery of increasingly valuable services and business models that will enable the technology adoption that is so needed to unlock greater efficiencies and resiliency in our space. As we continue to evolve our digital solutions further, we'll create more autonomous solutions that have the ability to self-optimize and make decisions instantaneously.
That's going to help usher in the next wave of efficiency and resiliency for the sector. I hope you can understand why I'm so excited after all my years at Xylem. The more open approach and different R&D investment mix positions us well to deliver on our digital and growth aspirations. That innovation is going to play a central role in our next wave of growth in emerging markets and delivering more sustainable solutions for customers. Thanks for listening to this part of our story, and I'll now hand it over to Franz, who's going to outline our plans for emerging markets.
Thank you, Dave. Good morning, good afternoon, and good evening, everyone. Thank you for joining us today. My name is Franz Cerwinka, and I lead our emerging markets business based in Singapore. I joined Xylem a little over a year ago, and I'm very excited to be part of this team. I was actually born and raised in Mexico, and I've spent over 10 years in Asia, and I've witnessed firsthand how water scarcity and affordability can impact our communities. When the opportunity presented itself to join a team dedicated to solving water challenges, and in particular in emerging markets, I thought this was truly the opportunity of a lifetime. I'm very happy to be here and to share with you some of the things that we're doing in emerging markets.
Let me start by giving you the three things that you should take away from this presentation. First, that our company committed to emerging markets a long time ago, and over the years, our team has built a strong foundation that we're now using to accelerate our growth. Secondly, we're expanding our capabilities to focus on innovation and develop products and offerings that are fit for purpose, designed in the region and for the region, and that we're empowering our leaders to flex our muscles and to build our local muscles. Lastly, that we still have significant white space throughout these regions that we can expand into. Water challenges in emerging markets are quite daunting.
I'm not going to read the stats in front of you, but they do tell a compelling story about the critical challenges regarding safe drinking water, sanitation, hygiene, and irrigation that people are facing in these countries, and the exciting business and growth opportunities that these represent for Xylem. The challenges are big, but so are the opportunities. Emerging Markets is a vast set of regions. Many of these are experiencing high growth rates, and this is not only from an economic perspective, but also from a population. This growth in population is putting more and more strain on the existing infrastructure. As you can see from this map, our three business segments participate in most markets that are considered as emerging. These are supported by two technology centers in India and China, as well as manufacturing base across the entire region.
I spoke about having a strong foundation, but let me share with you what I see as our key advantages in these regions. As you heard in Dave's presentation, we're working on a number of fronts around technology and innovation, and many of them are targeted for emerging markets. These will continue to enhance our already broad product portfolio, which allows us to truly bring end-to-end solutions to our customers and do it in a socially and environmentally responsible way. I will share some examples here shortly. In addition to that, while we are a global company, we truly operate locally. Our teams enjoy tight relationships with our customers, partners, and suppliers, and we're very proud of that.
Just to give you one example, in China, which is one of our fastest growing businesses, we don't have a single expat, but we do have an incredibly talented team that operates like a local company. This is true in many other markets, such as India. While every market offers opportunities for growth in the water sector, from Eastern Europe to Latin America to Southeast Asia, I wanted to highlight three in particular where we see certain market trends and government commitments to multi-year infrastructure investments, which are already fueling our growth. These are China, India, and Africa. You can read some of the specific market drivers on this page as they do vary from one to another, but I will focus instead on what we're doing to address them.
First, we continue to localize products from our global portfolio to be manufactured in emerging markets and utilize our manufacturing base in the region to supply these markets. We're also aggressively expanding our innovation and design capabilities, growing our talent pool of engineers to develop fit-for-purpose products and offerings that meet market requirements and price points in a way that we can meet our margin objectives. One thing that is important to note about developing countries is that they're typically early adopters of new technology, and in many cases, they jump ahead in the technology curve, so they leapfrog. This is done out of necessity because new technology is simply more efficient and more affordable. Lastly, we're also aggressively expanding our reach, both through investment in new branches, new teams to serve our customers directly, as well as expanding our network of channel partners and distributors.
I would like to now give you a quick example of a project that our team developed. You heard from Al and Dave talk about how Xylem Vue allows us to leverage our hardware, digital, and service capabilities, offering powerful solutions. This is a great example of these capabilities meeting critical needs in emerging markets, and also highlights our new AquaTalk solution. This is the Drepung Monastery in Tibet, which is the largest monastery in the region. It is over 600 years old, and it sits almost 13,000 feet of elevation. As you can imagine, our customer faced many challenges with water supply, as it had to be transported through different means up to the monastery due to the lack of underground water.
Our teams designed a solution that utilized a broad set of products, from water supply, pump stations, leak detection, water quality sensors, UV disinfection, remote monitoring, and others. The catalyst that brought it all together ultimately was AquaTalk, which is part of Xylem Vue, allowing all of these different elements in the system to work in tandem. This allowed us to modernize this 600-year-old structure, which now has uninterrupted access to clean and safe water, and the performance of the entire system can be monitored and adjusted remotely 24/7. Finally, let me now provide you with a quick example of how our team in Emerging Markets is helping drive one of our key sustainability goals, which is to prevent 3.5 billion cubic meters of clean water leaking and losing it to the environment.
In many countries, due to aging or poor infrastructure, such leaks can cause the loss of 30%, 40%, even 50% of the clean water after it has been treated. In Malaysia, we partnered with a water utility to install over 1,700 sensors throughout more than 6,000 km of water pipes that serve over 8 million residents. These sensors, along with very specific algorithms, allow us to pinpoint when and where leaks are happening. This system has been operating since 2018, and it has detected almost 300 leaks, resulting in a very significant reduction in the loss of clean water. To wrap this up, and with all of this, we have very high confidence that our growth in emerging markets will double that of other regions. We have a great foundation with local capabilities to serve our customers and many exciting opportunities to continue to expand geographically.
I look forward to answering your questions later this morning. With that, I'll turn it over to Tony.
Thanks, Franz. I'm Tony Milando, and I'm responsible for the end-to-end supply chain here at Xylem. I am excited to be here with you today to share just how far we've come, not only in driving a culture of continuous improvement, but living that culture through everyone, every day. While today is a day that we look forward, let me offer a few thoughts on the current state of our supply chain. In the first half of this year, the teams have done a fantastic job in firming up supply and mitigating inflation. They've dealt with supplier disruption related to component shortages, labor availability, and a clogged freight and logistics network. We can't ignore the curveballs that Mother Nature has thrown our way with events like the ice storms in Texas, flooding in Germany, and hurricanes around the globe.
Through inventory protection, fixed pricing contracts, commodity hedging, and negotiations, we've successfully mitigated severe commodity inflation through Q2 of this year. Looking forward, however, as we signaled in our last earnings call, the second half of the year would be different given the severity of the supply situation and the trajectory of our inflation. Even since then, the situation has gotten less clear. The depth and breadth of our electronics and electronics-related commodity shortages continues to plow new ground. This will disproportionately affect our M&CS business. Many suppliers cannot give commitment times. In fact, they're decommitting. One electronic supplier extended lead times to over 100 weeks. Ocean bookings have been a challenge. Advanced reservations of four to eight weeks longer than normal are not unusual. All this is happening with the backdrop of a strong business rebound and high demand for our products and services.
Over the course of the past 20 months, our teams have built strong resiliency muscles and continue to work tirelessly to do all we can to fulfill our demand and backlog, including engaging in long-term PO commitments, leveraging our large contract manufacturer's buying power to firm up supply, dedicating engineering teams working on alternative designs and suppliers, and leveraging 3D printing to accelerate rapid qualification of alternatives. All that said, this is a turbulent period for all of us. We'll manage through this, and it doesn't change the strategies that we've put in place to optimize our supply chain. Let's proceed and move to those strategies. Three years ago, we set a strategy to simplify the business, drive cost leadership, and create a more sustainable supply chain, and we've made meaningful progress against these three priorities.
Continuous improvement is well-entrenched within the way we work, and the Xylem Production System, which I'll speak to in a moment, provides a great springboard for sustained improvement within our operations. While cost improvement continues to be the main theme to expand margins, we know that building a sustainable supply chain to ensure we are doing what's right for our planet, as well as building resilience within our operations, are critical for our success. Our roadmap is defined by these three key pillars: simplifying the business through global business services designed to simplify our back office, and then also simplifying how we manage working capital through disciplined standardization around the company.
As mentioned, cost leadership will be a major lever in driving margin expansion and delivering fuel for growth. We believe there remains substantial opportunities in our procurement organization through process digitization, and also within our network for conversion cost reduction by leveraging the Xylem Production System, footprint reduction, and Industry 4.0 technologies. Lastly, sustainability runs through everything we do. Here it has two meanings for us. One, how we treat our planet. Two, how we sustain our commitment to our customers and our communities through building resilience within our supply chain. Know for sure that continuous improvement is embedded in everything we do. We have clearly made progress in building a CI culture in the company over the past six years.
The levels of penetration across the company, whether you measure events or point Kaizens, absolute dollar savings, it's all evident, but we know we have much more we can do. We've expanded CI in areas outside the factory floor. For instance, how we do CI has even changed. As the pandemic struck, we installed tools to conduct virtual Kaizens. We've also designed processes to allow our customers to do critical witness test runoff virtually. CI is rooted in how we're driving our goal to 75% sustainable packaging by the year 2025. As we look forward, the Xylem Production System, fully deployed, will continue to drive the CI mindset within our operations, will embark on helping our suppliers become much more productive for us with our supplier engagement program, and of course, back-office simplification remains key.
We launched the Xylem Production System officially in August of 2020, although we've been working on it for the prior 18 months. It's a set of standards of excellence. We refer to it as our distinguishing features of our end-to-end operations. Each facility and integrated supply chain sub-function take on a maturity assessment to gauge their starting point and then use that with the playbooks to design their roadmap for improvement. Today, we've launched this across our top 25 manufacturing facilities, which represent about 75% of our operational cost structure. Over the course of the next 18 months, we'll launch this across the remaining smaller facilities and branch service network. Over the past year since we've launched XPS, we've already seen many success stories. This happens to be one with our Chinese supply of treatment sand media to customer locations.
We were experiencing suboptimal delivery rates, high freight costs, and excessive scrap rates. Using the tools within XPS and the process-oriented approach, we were able to redesign the supply chain, develop a different stocking approach, and deliver better performance, all while realizing nearly $600,000 in hard dollar savings. We believe XPS can have a profound and lasting impact on our operations ability to continue to improve for years to come. In 2017, we kicked off a program to simplify and improve our back-office functions, specifically focused on HR, procurement, and finance. Given our landscape, we knew then this would be a complex and multi-year project. The progress we've made to date has been significant and impactful to our organization. We now have a legitimate and robust HRIS system in Workday rolled out across the full company.
We've leveraged our catalog ordering system to attack thousands of what we call tail suppliers in the indirect space and are processing over 40,000 transactions per year. In the two and a half years since we've launched this, we've saved over $30 million, and we've reduced our supplier count by 10%. With the finance transformation, arguably the most difficult of the three, we've made great strides in AR efficiency and blueprinting the work to be done in record to report and the procure-to-pay processes in the future. Completion of this effort will drive scalable efficiencies for years to come. We discussed this at our last Investor Day and have made great progress in managing working capital, but more importantly, we've developed the capability.
Whether it's receivable risk profiling, where we were recognized by Gartner as a best practice, or inventory stratification through planning for every part, or expanding our supplier finance program, there are clear capabilities that we've developed and improved over the past four years. Without these capabilities in place, we would not have managed the severe demand downturn we experienced last year as a result of COVID. We're confident that we have the tools to manage with lower working capital going forward, enabling our goal of 100% free cash flow. Over the past five years, we've built repeatability in delivering 300 to 400 basis points of gross cost improvement through areas like centralization and maturing of our procurement organization, supplier and footprint rationalization, more deeply embedding CI in everything we do.
As we look forward, we've layered on the focus of conversion costs that will drive additional savings resulting from Industry 4.0 technologies that will address labor and material movement activities. Further localization of our manufacturing, which has always been the strategy to make where we sell. Further expansion of our continuous improvement efforts through the deployment of XPS and digitization of our procurement function to allow for more value-added work for our procurement teams. Within our facilities and across our integrated supply chain, we have set aggressive targets for ourselves, and we've made strong progress to date. In all of our major facilities, we've installed closed-loop water systems to reuse processed water. We only buy certified green energy, and where we can't find green energy, we've invested in other alternatives like solar.
For all of our goals, we have a discrete and detailed roadmap to achieve our commitments within the communicated timeframe. What is new is our expansion of our sustainability program into our full supply base. We are now engaging our suppliers in a much different way than we were even five years ago. For instance, we expect 80% of our global fleet vehicles to be electrified by utilizing electrified or hybrid vehicles by 2025. By that same timeframe, we expect roughly a third of our suppliers to be reporting transparently about the status of their supply chain. Like continuous improvement, we recognize there's much more to do here. Like CI, sustainability is embedded in virtually everything we do. If there was 1 element of our strategy that has gotten more discussion over the past 20 months, it's been resilience.
We started on this journey in 2018 when we were faced with a casting supplier issue. Since then, we've installed AI detection and escalation tools within our supply chain, enhanced our business continuity plans within our factories and our major suppliers, and leveraged technology to enhance resilience. To that point, the case study on the right of this chart is an innovative example from our Water Infrastructure business that has used 3D printing to manufacture sand molds for our aluminum die-cast operations in-house and with our suppliers. This has driven extreme reduction in mold lead time, resulting in a more resilient support model for a major portion of our business. Just to wrap up, we continue to execute our strategy as planned. CI will always be the foundation of all that we do, and XPS will ensure that we make meaningful progress for years to come.
We're confident that we have the right levers to continue to drive cost expansion. Our sustainability program will help us do our part in protecting the planet and maintaining continuity of supply for our customers and our communities. Thank you. I believe we're moving on to Q&A now.
Hi, everybody. Welcome to our first Q&A section. I'm here with our leadership team at our headquarters in Rye Brook. We're all vaccinated and following the proper safety precautions. We have 20 minutes for this portion of the Q&A. I have all of our presenters from part one, in addition to Claudia Toussaint, our Chief Sustainability Officer. Couple ground rules for this section, just because it's only 20 minutes. We're going to keep it to one question per analyst. Let's try to keep it long-term and strategic. We've got plenty of time in the second Q&A, which will be about 40 minutes, to cover all of the other questions. For the analysts in the queue, please raise your hand to indicate your intention to ask a question. With that, we'll hand it over to Macy to go to our first question from the analysts.
Our first question will come from Deane Dray with RBC Capital. Deane, please unmute yourself and ask your question.
Sure. Thanks. Good morning, everyone. Can you hear me okay?
Yeah. Hey, Deane, how are you doing? Good morning.
Morning.
Hey. Doing really well. Hey, great format and content. Appreciate it. It's a great start to the day.
Thank you.
The question and the topic is, one of the biggest drivers of your earnings roadmap to 2025 is this mix shift to digital, from 35% to over 50%. Maybe fill in some of the core assumptions that would help us kind of frame that out. I would trust it's not a linear progression because you run it early in the adoption stage, but how do you think it plays out in terms of the adoption? Al mentioned, and we've got this modeled, where the margins are significantly higher. He said accretive. We think it could be as high as 1,000 basis points, but just kind of level set us there. Lastly, p ricing because it's not a one-size-fits-all. You got 55,000 water utilities, and there's the real challenge to make it affordable. I know it's a multi-part question, but fill in what you can. Thank you.
No, that's fine, Deane. Again, thanks for the question. You've got it. As we said in our comments, each customer is on a different part of the journey. I always remind everybody, as you well know, that this is a global opportunity. It's not even just those 55,000 utilities in the U.S. It really is a global opportunity, and we're seeing conversion and adoption happening at different rates in different parts of the world. I think even Franz talked about that in his comments around what's happening in the emerging markets. You're right, it's not linear. Without further ado, I want to hand it back over to maybe both Al to talk about some of that.
Also I think Dave can offer some commentary on how we're not done yet in terms of what we're bringing forward to the market in terms of digital innovation. Before I get to you, Al, I think it's important, and again, Deane, you know this is it's not digital for digital's sake. It is what problems are we trying to help our customers solve for, not just utilities, but industrial, commercial, other sectors. Digital happens to be an enabler of that. Whether it be digital on its own or whether it be digitally enabled products and solutions. Al, why don't you comment a bit about kind of adoption curve and mix shift?
Yeah, that sounds great. Deane, great question. Good to hear from you. Wish we could see you in person. As Patrick said, just the 55,000 is in the U.S., and for us, digital is not a U.S. opportunity. It's a global opportunity. It's not just a utility opportunity, it's a water opportunity, which means that we are seeing adoption of digital technologies, not just in municipal water and wastewater, but in the environmental sector, in industrial and commercial building services. You're going to hear a lot more about that when Hayati, Colin and Matthew go through their presentations. To your point, just two quick points. The first is we do see adoption ramping over the course of the cycle through 2025. It's not a linear curve.
If you think back to what the customers were saying, listen to the customer that we spoke to from Italy, that going forward, he's not going to be procuring just pumps or things that are not connected. There's a structural shift toward how our customers are thinking about the adoption of these technologies. The second thing I would say is look at our backlog. We're building up a pretty significant orders backlog of digital solutions across the board, and that gives us a pretty strong foundation for growing that proportion of total revenue from around 35% where it is today to 50% in 2025. The third thing that I would just simply add on your margin point is across the digital portfolio, margins are generally accretive to our existing portfolio.
There are parts of the digital solutions ecosystem which represent real advancements in terms of adding sensing and connectivity to our existing foundational portfolio. Those solutions are modestly accretive to our existing margins in our traditional portfolio. Right now, those are a larger proportion of our total digital sales. There is a part of our portfolio which also has significantly larger and more accretive margins that leverage a lot of data analytics and other things, and also pull through foundational solutions. As we begin to see that mix shift evolve as well, that will continue to drive as Sandy will speak to in greater detail, the 50%-75% on average basis point improvement over the course of the next couple of years. Dave, is there anything you want to add there?
Yeah, no, the only thing I would add is, as I said in my commentary there, you notice that we're spending about 70% of our development dollars now on digital. I think that's a really great proof point of how we're going to get to that 50% in digital sales. We're not going to do all of that organically. We're going to do that in partnership with tech firms as well. I just wanted to make that point that 70% spend on digital development right now is also really important in helping us get to that 50%.
Deane, to the second part of your question around the pricing opportunity and how you've heard about how much value that we're helping create for customers, and how do we make sure we get our fair share of that from a revenue standpoint. A couple things. One, again, Al, I want to have you speak to this in terms of some of the developments that we've seen in terms of how we're sharing risks, and upside with customers, and pilots, et cetera. I want to punctuate absolutely, Deane, when you look at our backlog of what we even already have in orders in hand and that piece that is digitally enabled, we are absolutely seeing very attractive, very accretive margin, in the aggregate for Xylem. Again, Sandy will talk more about that in her section later this morning.
Just really quickly, Al, on some of the revenue models that we're doing.
Yeah. Deane, short answer is we're absolutely working on additional pricing models and business models that exploit the fact that digital creates significant shared value for us and our customers. The reality is that there are some customers who are leaning into that and saying, "We want to gain share, we want new business models." As we've been talking about all morning, we meet our customers where they are, and we continue on the journey with them. There are a number of customers that think that's a great idea but struggle with the fact that they either lack historical baseline data or have complicated procurement processes. They're at the earlier stages of adopting some of these new business models. The core message is, as we are beginning to see more customers lean into that, Xylem is hand in hand with them.
As those proof points begin to materialize, that becomes easier for other people to adopt as well.
Great. Macy, let's go to the next question in the queue.
The next question comes from Mike Halloran. Please unmute your audio and video and ask your question.
Hey, good morning, everyone. Thanks for taking the time.
Hey, good morning, Mike. How you doing? Hey, look at you. Good morning.
I thought about putting all my Liverpool stuff behind. I thought about putting all my Liverpool up for you guys. It's wait till next time. We might lose this weekend. I don't want to get in front of it. Let's stick on the R&D side of things. I like to see the 5%. I really appreciate all the splits that you gave to help understand where the spend's going. Obviously, there's a really good correlation between quality growth and how much you're spending on the R&D side. Maybe help us understand how you guys are going about measuring the success on a trailing basis.
Obviously, a lot of these investments have a long tail associated with them, but how do you guys look back and say, "We're seeing success, we're not seeing success, more for the program." What kind of metrics do you use, returns, et cetera?
Yeah. I'm going to hand it over to Dave here. I mean, at a high level, Mike, clearly we have not just a vitality index, we also have a breakthrough vitality index, and again, Dave can reiterate some of that messaging. Of course, we're always looking at win rates on large deals where especially technology or differentiated solutions are a part of that. Dave, you want to comment more?
Yeah. As you said, Mike, the spend's about 5% today. We like that spend. It obviously varies by business. The way that we measure our success is, as Patrick said, vitality index today. That's been trending up since the formation of Xylem. Today, it's about 20%. We believe that that is going to continue to trend up as more of our development moves towards digital. Those refresh rates are faster than traditional products as we build more lean techniques and agile techniques into our product development process. Frankly, we partner more externally. That all means that that vitality index is going to continue to move up. I would say, though, that as we become more of a digitally enabled services company, that vitality index alone isn't really the best measure.
We move towards things like digital revenue as a percentage of sales, annual recurring revenue as we get bigger in service, et cetera, and those are going to be really important metrics as well. We always measure Net Promoter Score, and that's a really great customer gauge at how well we're doing in terms of our entire offering, not just from a product standpoint, but us as an enterprise.
I would offer up, Mike, that we have a really disciplined process, which honestly, I would say we didn't have several years ago, less mature, and that was also the things that we have to kill, the long tail in the pipeline of things that people want to work on, skunk work kind of things. It was a great idea at the time. We've got a very disciplined gating process that Dave and the team have put in place to make sure that we're efficiently spending money along the way. The other thing we measure, of course Dave knows, is the profitability, the margin on these new products and new solutions. They've got to be accretive to where we are today.
I'll make one more point, Mike, if it's okay. I would also say, remember the shift we've also taken in our approach to innovation, this kind of more open, collaborative innovation. Really, we get more bang for our buck in that R&D dollars, if you will because we kind of tap into that global water innovation ecosystem, if you will, as opposed to trying to go it alone. 5% is good, but it's actually kind of effectively larger than 5%, given that more external approach we're taking, that partnership approach.
I think, Dave, to that point, it's a great point, and that is, you're right, Mike. The hardest measurement is the R&D % of revenue. It really is innovation's far broader than just R&D. It's the resources that all of our colleagues put into this and the fact that we built an ecosystem. I'm really proud of this team because as we built the brand of Xylem, and we've been building this thought leadership position, the inbound traffic that we get of ideas and people wanting to partner with us is extraordinary. To the point where that's become, quite frankly, one of the challenges, Dave, you and the team have to manage is how we filter where we're spending our time.
Yeah. That whole Xylem Innovation Labs that I talked about, there's actually a really rigorous process, kind of a gating process inside of that, of kind of what moves on and what doesn't. It's almost contradictory to an innovation process feels like it should be kind of loose, free-flowing. Given the amount of technologies we see on a regular basis, we've got to be really diligent about what passes through the various filters.
Mike, scarcity, resilience, affordability, those are the three big things that we're going after. Everything gets screened through, are we serving that purpose?
Hey, thank you for that. Really appreciate the complete answer.
Thank you, Mike.
Thanks, Mike.
Let's go to the next one, Macy.
Next up, we have Scott Davis with Melius Research. Scott, please unmute yourself and ask your question.
Good morning, everybody. Thank you for this. It has been great so far.
Hey, Scott. How are you doing?
Morning.
I'm good. Can we talk a little bit about Lean? It was profiled fairly highly, I think, in the presentation pretty effectively. What inning are we in here on the Lean, and how has been the internal kind of reception of the rollout?
Sure. I'll take that one. We launched Lean in earnest about six years ago. We trained the entire management team, and we launched a number of initiatives around just propagating and building the muscle around the company. Just recently we launched the Xylem Production System, between the two, we feel like we're really kind of just getting started, particularly in our facilities in a lot of respects. The Xylem Production System is ramped up across most of our facilities today. We launched last year.
There's a number of levels that each facility needs to go through. Overall, we're on the lower end of that. It's an adaptive model, which means that as we get higher and higher, we raise the bar, of course, we have more runway to go. I'd say we're still in the early innings in Lean across the company. If you look at our point Kaizens, point Kaizens are just do it. We've done 25,000. We have 16,000 employees, until we're doing one per employee per day, and you can do the math on that, I'll say we're really getting to the later part. We have a long way to go on our Lean journey.
I would offer up, Scott, that one of the things I am most encouraged by is when we do our regular engagement surveys of our employees and colleagues around the world, one of the true top trending themes that has come out loud and clear over the last couple of surveys is their embracing of both safety culture, which we are really, really proud of, but it is also Lean, continuous improvement. I think, Tony would agree, I am sure, one of the biggest areas of opportunity, I think we feel pretty good about inside the four walls of factories. There is still opportunity.
There is always opportunity. Obviously, good demand and volume growth like we are experiencing creates new opportunities. The biggest opportunity really is outside the four walls of the factory. It is throughout the entire value chain across the company and helping our colleagues understand that this is about simplification. It's about making their lives easier and making things faster every day.
Yeah.
You want to comment on?
No, absolutely. It's a good point. We do have a good foundation within our facilities, but most of these programs tend to atrophy after four or five years. We're going through a complete refresh. We're now focusing even heavier outside of the four walls. Transactional excellence, commercial excellence. We're working with our suppliers to help develop them so that they can provide us more productivity as well over time. We're really spending a lot more time outside of the four walls, although we still have a very solid base within, and that's where the Xylem Production System picks up. It really continues to drive that improvement within our factories.
Thanks, Scott.
Sounds impressive. Good luck, guys.
Thank you.
Thanks, Scott. Good question.
We have one from the audience here that's come in, and we're looking for some clarification around the 35% of digital that we have today. Maybe just give a sense for some color on what we include in there, how it kind of breaks down roughly by segment. Maybe Al could offer some of that.
Sure. I'll kind of come back to the remarks that we made earlier in the day on our definitions. Again, we have a significant proportion of our revenue in foundational products that are not connected, and I want to repeat the point that unconnected does not mean undifferentiated. We have very strong products across the portfolio that leverage biological technologies or mechanical technologies, hydraulic technologies, each of which are differentiated in the eyes of the customer. There is an increasing move in our sector, as, again, we discussed earlier today, towards building on those foundational technologies, and that's what we call digital. With sensors, connectivity, and communications, and the ability to use software and data analytics to drive greater operational visibility and optimization in our systems.
We think of those portfolios together because, as you heard from our customers, any one of those digital points, we meet our customers where they are, and we're there with them to accelerate their journey toward value creation. For example, you heard Mandy from WaterOne talking about starting with AMI and then moving into remote disconnect meters, or Eric Horvath talking about starting with our wastewater network optimization solutions and beginning to look at digital twins in the wastewater treatment plant. You see a range of different technologies. Again, the foundational things that Dave talked about around common interoperable secure technology stacks are really critical to making sure that our whole digital portfolio connects and that each of them serves as an on-ramp to greater value creation for our customers.
That's the 35% today that we expect will go to the 50% in 2025.
Great. Thanks, Al. Macy, let's go to the next one in the queue.
Next up we have Ryan Connors. Ryan, please unmute yourself and ask your question.
Great. Thanks for taking my question. Thanks so much for everything today. Really interesting, especially the customer panel. I thought that was great. Patrick, I wanted to kind of probe something that I thought was interesting when you were discussing your slide on market growth and how you expect to outgrow your markets, especially in utility. You made the comment that that was driven in part by expanded coverage. Franz made a similar comment in his remarks about emerging markets. I'm assuming that is related to distributor channel relationship management and things like that. Can you expand on what you mean by that and how material that is in the growth or the outgrowth of the market opportunity?
Sure. Yeah, I'll start and then I think, Franz, it would be good for you to double-click on the emerging market piece. You're absolutely right, Ryan. First of all, good morning. I would say, market coverage really comes in a couple of ways. It is geographic, and again, Franz can talk about that because, again, we're staying focused on those markets that we see that we really have a right to play in and that really where the money's flowing. It also is even when we look at end markets, as we're bringing more and more digital solutions to bear, it is expanding what the size of the market opportunity is in terms of what we're able to bring to customers.
When I think about that, even within the utility space, the kind of things that we would've competed for prior to building out more of a digital platform was much narrower than it is today. We're brought in now in consultative selling opportunities where the customer, we're no longer going in and trying to convince them that the problem they're solving for is a pumping issue or a treatment issue or an analytics issue. We're able to go in now and say, "Let's listen to you and have you talk through what your big challenges are." There's never a guarantee that we're going to have the solution, but more times than not, we have an opportunity there. We've expanded what our offering is there.
That's part of the coverage comment that I was making. Secondly, I talked about in the industrial space as an example. We've got gaps there in terms of channels to market, gaps in our portfolio that we're trying to develop both organically and inorganically. That's part of the coverage expansion as well. Again, channel, Franz, that really predominantly is an emerging market.
Good morning, Ryan. Look, the way we go to market typically is both on a direct basis and also indirect, through distribution and channel partners. We still see, like I said in my presentation, a lot of white space that we can go after, right? It could be, for example, in Africa, where we've set up new offices with teams in places like Egypt, like Morocco, Kenya, or in places like China, where we're expanding our presence into tier two cities, tier three, and really just to see more of the opportunities that are out there, right? We're not always present at the table in every case. It's that expansion that we see, again, both through direct and indirect channels.
I think, Ryan, another example I would give you, and Dave kind of alluded to this, it's also the type of commercial partnerships that we find ourselves being able to form now. We have this terrific partnership with Esri as one example. There are multiples of these where it's what role we play versus other service providers play, and the access they have that maybe we don't have or vice versa, to join each other at the table and bring a customer a very different solution. That's kind of encompassing what I was talking about in terms of expanded market coverage.
Great. Thank you.
Thank you.
Thanks, Ryan. With our final question here, reminder, we'll have another second Q&A session after the second round of presentations. With our final question here, Macy, why don't we open up the line one more time?
Okay, next question comes from Nate Jones. Nate, please unmute your audio and video and ask your question.
Good morning, everyone.
Hey, good morning, Nate.
Good morning.
It's early for you.
It was earlier two hours ago. I guess a question here on the margin and the margin targets here you've got over the next few years. 2021 margins are obviously down from 2019 levels. There's a whole lot of well-known disruptions here. Based on kind of the midpoint of those margin targets, it takes until about 2024 to get back to where margins were in 2019. We've talked a little bit about some of the tailwinds with mix and things like that being tailwinds to margin. Can you talk about some of the headwinds? Are there higher investment expenses you need here to drive growth? What are the things that are offsetting some of the tailwinds on margins here as we go forward?
Sure, I'll touch, Nate, at a high level right now, then I think we'll definitely come back around to that in our final Q&A when Sandy joins us here. Not putting it off, but I want to make sure you have a chance to listen to her section as well. We'll definitely come back around to this. At a high level, certainly, the tailwinds are favorable mix, given the digital move, how that impacts by segment. Again, 35%-50% on the digital side is clearly a tailwind for us. Good incrementals on volume growth at 4%-6% organic revenue growth. That's going to drop through at a very attractive rate. We're very confident about that. We see that in our backlog. This is not a wish me story. This is what we have in backlog.
I want to remind everybody, we've been growing 20% orders in the first half of the year. We're expecting that to be similar in Q3. Demand remains very strong, which gives us confidence around that top-line growth. The headwinds, obviously we're facing these challenges in the immediate term on supply chain like everybody else is facing, and we'll work through that. Secondly, there are some investments that we've been making. Since the last Investor Day, we've done a number of acquisitions to build out more of this digital offering, which with them came required investments to go ahead and build out that selling capability, as well as increased investments in R&D. I would say also, we've made investments in emerging markets, which has really supported the growth that we've seen there well above market in that part of the portfolio.
It is a mix of tailwind, but some investments along the way. Again, I'll let Sandy go through that framework overall in her section. Nate, let's come back and revisit that in the final Q&A.
Definitely. Thank you.
Thank you.
Thanks, everybody. With that, we're going to take about a 10-minute break here. Feel free to get up and grab another cup of coffee. We'll have a few videos that are playing in the break here, feel free to view those as well. We'll come back in about 10 minutes, beginning with our business leaders and Hayati Yarkadas, our President of Water Infrastructure and Europe will start us off. Thank you, and we'll see you soon.
Our utility clients have told us that they're faced with difficult and capital-intensive challenges, and are having to change how they manage water.
When I was CEO of D.C. Water, I wish I'd had a partner, had a full network-wide perspective, who could help our team make smarter decisions and build a cohesive digital transformation roadmap.
Xylem brings to the table a pretty unique mix of capabilities in optimizing water and wastewater infrastructure. In many cases, we've actually supplied the equipment and control logic behind some of the most critical parts of a water utility's operations, whether that's pump stations or lift stations or treatment plants. We also bring a curated mix of advanced digital solutions that helps bring it all together. The need to redefine what's possible for water has never been more important or more urgent. To do so, we're proud to introduce you to Xylem Vue, our end-to-end digital solutions platform that leverages smart hardware, digital, and services capabilities to help water utilities achieve better outcomes.
Building on Xylem's full stack of proven solutions, services, and digital technologies that support the entire water cycle, Xylem Vue brings together the problem-solving expertise of the industry's best talent and over 100 years of global water leadership, helping utility leaders solve their most pressing water challenges and delivering transformative outcomes.
We enable our clients to drive better outcomes at lower costs across the water cycle to make water safer, more affordable, and more accessible for all.
By leveraging our digital solutions and the consultative support of our technical and industry experts, utilities can make their systems more efficient, extend the life of their current investments, and confidently plan for the future.
Digital solutions is a fundamental building block of the utility of the future. It's not a question of when, but how fast, and where we will focus for the best outcomes for the environment and our customers.
Let's see how we can achieve more safe and affordable water.
Let's see what's possible for water.
Let's see how we can plan for the future of water today.
Let's do it together.
[Presentation]
When you think about the future, you might be thinking about flying cars or space travel, but what about ideas to solve the challenges facing our planet right now? Like climate change, pollution, and poverty. To protect our environment and its most valuable resources, we need to tap into the passion and bold thinking of the next generation. Initiatives like Xylem Ignite and the Stockholm Junior Water Prize give youth around the world the chance to innovate and push the boundaries of what's possible. Like students Hiroki Matsuhashi and Takuma Miyaki from Aomori, Japan. To help communities suffering from water scarcity, they used tataki, a traditional Japanese technique for hardening soil by adding sand and other ingredients to create a system for collecting and storing agricultural water. By solidifying the soil, less water is wasted, which means there's more available for food production.
Even better, it's inexpensive, sustainable, and environmentally friendly, and it all came from tapping into the limitless creativity of youth. As Takuma says, young people have an important role to play in solving water problems, coming up with creative ideas that can really change things. When you think about the future, think about how we can ignite the ideas of the next generation. Think about our world, better.
Water. It's vital to human life, the very survival of our planet. Water challenges are growing more intense than ever before. Now, new technologies are offering bold new ways to protect and optimize water to help the world become water secure. Xylem is leading the way. Xylem is a Fortune 1000 global water technology provider. We have a century-long track record of trust and reliability, providing leading-edge technologies, expertise, and equipment to utilities, industrials, and other users of water. Now, we're leading the digital transformation of water, partnering with our customers and innovation leaders, discovering new ways to harness the power of data and analytics. Our commitment to sustainability is fundamental to our business strategy, guiding everything from how we design new products, to our culture and people. Xylem is working every day to bring water technology and innovation to communities and people around the globe.
Water is always moving, and so are we. We're Xylem, and we're solving water. Join us.
Thank you, Matt. Good morning, everyone, and thank you for joining us today. I am Hayati Yarkadas. I joined Xylem 18 months ago in leading Water Infrastructure. Our purpose and the opportunity ahead of us have been a source of inspiration for me. Today, I'm really excited to share with you insights about Water Infrastructure. On the next slide, the key message that I want to leave with you today is, we are confident that we will accelerate growth consistently to mid-single digit levels by focusing on three key areas. Number 1 is utilities in developed markets. It's a strong foundation for us with our very strong installed base. We are extending our offering to end-to-end solutions to solve pressing issues that our customers are facing today. Number two is emerging markets.
Emerging markets have been an important growth engine for us, as you have heard from Franz. Next in our journey is further localization and expansion into new geographies and tier two cities. Third one is tapping into our large install base to grow life cycle services and digital solutions with Xylem Vue. I will say more on each of these focus areas. Before that, let me provide you a snapshot about our business. On the next slide, if you look at the entire water cycle from source to use, we operate mostly on the wastewater part with water utility customers. After use, water enters into wastewater network. We are present in pumping it, treating it, and removing it in the emergencies with our transport, treatment, and dewatering applications. This part of the cycle, the wastewater part of the cycle, has been very resilient because they are mission-critical operations.
A bit on the market on the next slide. As you see on the left side of the slide, we serve a large market with secular growth of around 3% annually, which we believe we can outpace. Having spoken to hundreds of customers since I've been on the job, top of mind for our customers are water scarcity, affordability, aging infrastructure, and sustainability at the core to all of that. On the next slide, let me unwrap the business a bit more for you in terms of where we play. We have a well-balanced geographical presence. We are operating over 120 countries in the world. As I mentioned, resilient utilities market makes up about 2/3 of our business. We have very strong brands, some over 100 years of presence in the marketplace.
Our three applications, as I mentioned before, transport, dewatering, and treatment, touch the critical operations of our customers, both in utilities and industrial markets. On the next slide, let me spend one minute on key sources of our strength and differentiation for our business. Number one, we are recognized as the innovation leader with multiple industry-leading technologies, as you heard from Dave and Al. Very strong installed base with over 2 million assets operating today, mainly in developed markets, a source of resiliency in our business. The third one, our business is truly global, with robust margins driven by strong portfolio and operational excellence. In the next slide, let me deep dive a bit more on how we will accelerate the growth in our business. On the first pillar, today, we serve our utility customers with our existing products and services very well.
At the same time, we see significant opportunities in providing end-to-end solutions enabled by digital offerings to address their pressing problems. Key to this is building strong solution selling teams and providing cross-Xylem solutions to our customers, which is what we are doing today. On the emerging markets, you heard that from Franz, we are driving further localization, new channels, and geographical expansion. Third pillar on the right side, critical for us, growing Xylem Vue and services. The key levers that we are working on are launching more digital products that are interoperable and building on strong installed base to grow lifecycle services faster. On the next slide, I would like to share with you a live case study that is linked to both pillar one and pillar three.
This example is with a utility customer servicing a large population in Western Europe, where we've had a long-standing business relationship with our foundational products and services. We engaged with the customer on consultative basis and identified together opportunities to optimize their wastewater network and plans for energy efficiency. With Xylem Vue solutions, we conducted various pilots. Now we are deploying real-time decision support systems to reduce energy consumption significantly, up to 30%, and also supply digitally enabled, more intelligent equipment. Sustainability has been in the core of what drives our customer in this example. On the next slide, as you know, on sustainability, we have enterprise-wide signature goals that the entire company is driving. The example that I want to share here with you is about water reuse, one of our key goals.
This time, case is in a city in Southern California, a city with severe water scarcity challenges and wanting to increase water reuse substantially. We have partnered with our customer in a reuse project. Project was aimed at increasing cities' self-sufficiency in water. The project incorporates various Xylem technologies to provide 11 billion gallons reuse water annually. In the next slide, in summary, we are very confident that we will accelerate growth in Water Infrastructure to mid-single digit levels consistently by focusing on those three areas that I covered. Sustainability is at the core to everything that we do. I want to thank you for your time, and happy to take your questions in the Q&A session. With that, I hand over to Matthew to cover Applied Water segment.
Thank you, Hayati. I'm Matthew Pine, President of Applied Water Systems and the Americas Commercial team. I joined Xylem in March of 2020, just one week before the COVID lockdown, so not the most optimal onboarding scenario, if you can imagine. It did force me to get up to speed very quickly and afforded me the opportunity to engage both wide and deep across the organization. Prior to joining Xylem, I was with United Technologies, now Raytheon Technologies. In my last role, I was president of the residential HVAC segment within Carrier. What drew me to Xylem was the mission and purpose of the company and the balance of what I call the three Ps: people, profit, and planet. I'm excited to be part of the team and take you through the Applied Water business today.
The key messages I would like to share with you today are this: we have leading global market positions, a broad portfolio of iconic brands, focused on underserved segments and geographies to enable growth in excess of the markets. We're increasing our investments in R&D and digital to further improve the customer experience and accelerate organic growth. We're continuing to focus on operational excellence to fund those growth investments. Applied Water serves three primary end markets in the water cycle: residential, commercial, and industrial. For example, in residential, we bring groundwater into homes for domestic use, as well as to boost the pressure of that water. Commercially, we distribute chilled water throughout a building for air conditioning. Lastly, on industrial, we pull water from a stream, river, or pond to provide cooling to manufacturing processes.
Our global served addressable market is $20 billion. That's broken up into three pieces: 50% industrial, 35% commercial, and 15% residential. The key market drivers for Applied Water are urbanization and growing middle class, which you heard Franz talk about earlier. In urbanization, 90% of that will happen in Asia and Africa. The middle-class growth will take place primarily in Asia. Climate and regulation. We're seeing more increased efficiency regulations along the way. Skilled labor and aging workforce. Productivity will become even more imperative for our customers. Lastly, digitalization. Enabling self-service, anticipating needs, and doing that with an intuitive user interface will be paramount. Let's take a look at Applied Water. The estimated revenue of the business is $1.6 billion. The geographic mix is 55% United States, 20% Western Europe, and 20% emerging markets. The segment mix is 90% equipment and 10% parts.
The channel, our go-to-market strategy, 85% is indirect and 15% is direct. Lastly, like I talked earlier, our end markets are three. Industrial makes up 45% of our revenue, commercial 35%, and resi 20%. We are in an enviable position. We have competitive advantage that has stood the test of time and provide a strong foundation for growth. We have a well-established footprint in developed markets. We are number one in residential and number one in commercial in North America. We have long-standing channel partnerships that go up to 90 years, and in one case, over 110 years old. We have iconic product brands. Lowara in Europe is 50+ years old. Bell & Gossett is over 100 years old, which is a North American commercial brand. Lastly, Goulds Water Technology in residential and industrial is over 170 years old. We have a reputation for quality and reliability.
Our defect rate is approaching best in class, and we've seen a 23% improvement since 2017, which is not too shabby. We have three growth strategies that we're making investments in in Applied Water: strengthen and grow the core, accelerate emerging market growth, and grow Xylem Vue digital solutions. With strengthen and grow the core, we're accelerating our new product introductions. We're taking our vitality rate from 15% to 25% over the next four years, which is a measure of new product sales over five years. We're expanding our segment participation, where we have little to no penetration today, and an example would be residential new construction. Transactional excellence, making it easier to do business with our customers is paramount. Accelerate emerging market growth. Expand beyond the geographic and market coverage in China, India, and Africa.
We'll continue product localization in region for the region, and we'll develop local tech resources and build out our sales channels, 2x the growth of developed markets is what we'll do in Applied Water in the emerging markets. We're going to grow our Xylem Vue solutions, smart connected products. We want to get those out there because we want to collect the data from those products to do application modeling and predictive analytics. That will feed the Xylem X app, which makes it easier for our customers to install and service our products, saving time on wrench, driving productivity, which is super critical. We're going to be making investments in R&D to the tune of 10% CAGR over the next four years to accelerate innovation. In industrial, we'll have a refresh rate of 35%. An example of that is our next-gen industrial water platform.
It's going to have out-of-the-box system health monitoring. It will be really expanding the portfolio to capture more applications. Commercially, again, 35% of that product will be refreshed. The smart commercial circulators will have best-in-class efficiency and improved user interface. Lastly, residential, a 30% refresh rate with a quiet resi pressure boost. It's compact, aesthetically pleasing, and will lead the industry in sound in decibels. At Xylem, we know how to innovate to drive growth. An example of this is the ecocirc+ resi circulator. Resi circulators are the heart of a heating and cooling system. It moves conditioned water to do heat transfer in a home. We continue to see more and more pressure on regulations with this product to drive efficiency increases. The voice of customer feedback is customers want a more compact, efficient, easy-to-install and service solution.
We launched this product in Europe in the middle of 2020 and rounded out the launch in the first quarter of 2021 in the U.S. It has best-in-class efficiency, Bluetooth connectivity through the Xylem Tech app for fast and simple installation. It has distinct operating modes for efficiency and comfort, and the outcomes are really phenomenal. 30% more efficient than its predecessor, 40% easier to install than our competitors, and lastly, a 10x improvement in quality. Not too shabby at all. Sustainability is at the core of our strategies at Xylem. An example of this within Applied Water Systems is the e-SM variable speed integrated drive and motor. This product is helping us to achieve our signature goal of reducing 2.8 million metric tons of CO2, as well as meet upcoming regulations in the EU and the U.S.
This product uses up to 60% less power, and each product has a CO2 reduction of 200 metric tons over its lifetime. We will grow at low single digits to mid-single digits CAGR through 2025, which is above the market. We'll leverage our leading global market positions and broad portfolio of iconic brands. We'll be focused on underserved segments and geographies and increase our investment in R&D and digital. We'll continue to be laser-focused on ops excellence to fund the growth investments. Thank you for listening today, and now I'll turn it over to Colin Sabol.
Hi, everyone. I'm Colin Sabol, and I lead the Measurement & Control Solutions segment here at Xylem. Today, I'll refer to that as M&CS. I'm one of the veterans here at Xylem. I just celebrated my 15th anniversary with the company, and I've been in this industry of water and energy for over 25 years. I'm more excited than ever about this industry, the company, and what the leadership team, backed by 16,000 colleagues around the world, are doing to create its future. Speaking about M&CS today, I'll be talking about the role of the segment in supporting Xylem's mission. Here's the key messages I want you to take for M&CS. First, we're focused on clean water and energy and driving operational and capital efficiency for our customers. This is a large market. It's $20 billion in size with accelerating growth characteristics.
Third, we have an enviable position, and this segment plays an important role as an on-ramp for digital utilities. Lastly, everyone loves a winner, and this segment is winning. We're gaining market share, we have an impressive backlog, and that will propel growth and margin expansion over the long range plan. Here's where we play. Patrick shared this slide earlier, as did some of the other business leaders. M&CS plays 90% in clean water and energy, and utilities are the largest of our customer types. We deploy sensors, communication networks, and software to provide insights to our customers. Our customers use those insights to manage source water, their distribution systems, and to engage with customers. Here's a snapshot of the market I mentioned earlier. $20 billion in size with mid-single-digit growth.
M&CS will grow high single digits, primarily because we're going to continue to gain share in the market. These markets are accelerating. On the right side, I refer to advanced metering infrastructure or AMI. Here you can see that the adoption rate in water and gas verticals is only about 30%. There's lots of room for growth. Whereas in electric, it's about 90%. In the electric space in particular, early adopters of AMI technology are now coming around and investing in AMI 2.0. That adds to the normal adoption rate growth that we see in the industry. The last thing I want to mention here is that the business case for AMI has changed. This market is no longer about AMI systems to do meter reading. The systems are being used for much, much more, things like detecting leaks.
This is where the Xylem Vue portfolio is a strong advantage for our company. Here's a little bit more about the segment. 65% of our revenues in M&CS is U.S.-based, and we have strong competitive advantages there. In the rest of the world, we're leveraging Xylem's channels to market, its infrastructure, and its talent to drive wins in those locations. Let me walk through the right side of this page and give you a little bit more insight into the solution types that comprise the revenue of this segment. First and largest is our smart metering platform. That's 70% of the revenue, and this is integration of sensors, communication networks, and software to help customers manage their solutions and systems much better.
Our analytical instrumentation business is an impressive portfolio of technologies to measure the parameters of water in outdoor water like rivers, streams, and oceans, as well as in wastewater treatment plants and in laboratories. Finally, at 10% of our revenue is the assessment services and optimization solutions part of our business. That represents 10%. It helps customers to make sure that their networks and pipelines have integrity and that they use digital technologies to optimize their operations. This business has rock-solid competitive positioning. Let me just touch on a few. Loyal customers. We have 80 million smart devices installed over 20,000 customers around the world. Let me just tell you what I mean by loyalty. We have 1,200 of those customers that purchase our software-as-a-service capability. With them, we have 1,200 of them, 100% of them have renewed that service over and over again.
We haven't lost a single one. That's loyalty. That helps us to drive more share of wallet with our customers. Utility-grade communications expertise is another competitive advantage. This is the backbone of a smart utility. They use communication networks in a very different way from what you and I do with our smartphones and smart devices. We know how to provide those communication solutions for utilities that meet them at their needs. This segment plays another important role and it's another competitive advantage. That is we can introduce them to the broader Xylem Vue portfolio and help customers on the digital journey. I want to talk to you for a moment about the disciplined approach that we have to generating attractive returns for our shareholders. Starting on the left side of this page, we have a very strong capability to grow this business.
The market is growing quickly. It's accelerating, we are positioned very competitively. We are gaining share, we have a very strong backlog that we can leverage to drive high single-digit growth in this segment. In the center is about how we convert that growth to margin expansion, that is by driving rigorous deployment of continuous improvement and innovation capabilities to drive that high single-digit growth to be margin expanding to our portfolio. On the right, you can see why I'm confident that this segment will deliver 100-plus basis points a year in margin expansion. Things like leveraging the high single-digit growth, the array of new offerings have a margin uplift. Those are things that Dave Flinton spoke with you earlier about.
This portfolio is 85% digital, which means that we have more recurring revenues at premium margins, which provides, again, uplift to the margin profile of the segment. I get a lot of questions about advanced metering infrastructure or AMI. I thought I'd put in a couple slides to help you better understand what an individual deal looks like, and then in aggregate, what those deals do to the revenue profile of the segment. Starting with this slide on the right-hand side is a timeline of a large deal. In the first three years, we often do pilots and engage with customers to help them achieve regulatory approval, fill out RFPs, and meet with the customer to talk about the technology. That's all before a contract is signed with the customer.
Once the contract is signed, deployment commences, the deployment is pictured in the graph as a bump in that first three to five-year period. During that three to five-year period, what we're deploying are sensors, meters, communication networks, and software in the customer's environment. We get paid about 80% of the contract value over that three to five-year period for deploying those technologies and getting the customer up and running on their new AMI system. After that period, for the next 15 years, we get a recurring revenue stream that aggregates to about 20% of the total contract value. That recurring revenue stream includes things like Software-as-a-Service, our full replacement of sensors, and when the utility expands by adding new homes or connecting a new business, they need our products to be able to put them online. So that's creating that recurring revenue stream.
That's not the end of these individual contracts. Throughout the life of the contract, we're inventing new products, new applications, and customers often adopt those to get more out of the system than they originally envisioned when they purchased it. This is a really strong capability of the company as we can introduce them to things beyond the traditional AMI solutions, things like our Xylem Vue portfolio. What does all this AMI contract look like when it aggregates in the segment? Let me walk you through the graph on the left side of this slide. At the base of each of the bars, you can see a section that we call our core business. This is about 90% of the segment's revenue today, and it's growing at a rate of mid-single digit along with the market. Our long-term AMI contracts are additive to this core business.
They're growing at strong double-digit rates. They're about 10% of the segment's revenue today, but over the long-range plan period, they will grow to 20% of segment revenue. It's a really important part of the growth story of this segment. Here's why we're so confident in that growth. The funnel remains strong. It's been strong throughout the pandemic. Projects are being awarded at very healthy rates. We're gaining share on those awarded deals, and so that is growing our business faster than our competitors. Our visibility to this AMI long-term growth contracts has increased and is better than ever. We're very excited about this as a growth component to the segment. Before I wrap up, I want to talk about sustainability. Sustainability is not an initiative at Xylem. It is our business, and it's also the business of our customers.
Let me talk about one of the signature goals. We've committed to save 3.5 billion meters cubed of water at Xylem. Working with our customers, that will provide water for 55 million people on an annual basis. We do this, as we do with all of our signature goals, one customer at a time. I thought I'd take you through one customer and show you what it looks like. There's a resort town in the western U.S. where they were experiencing very large water losses caused by aging infrastructure and the fact that the population triples during the high season. The solution was a broad array of Xylem technologies implemented at this utility to trace losses, to detect leaks and bursts early so they could be dealt with, and to reduce pressure spikes in the system, which cause erosion of the infrastructure.
The outcomes were to reduce the non-revenue water significantly, improve the operating expense profile of the utility, and to prolong the life of the infrastructure, which is incredibly important to utilities as it's a big part of their capital budgets. This is just one example of thousands globally, and it demonstrates how we at Xylem, with our customers, create economic value and sustainability benefits one customer at a time. With that, I want to wrap up. For our customers, we deliver proven, reliable solutions to scarcity, affordability, and resilience. We're proud that with them partnering with us, we work to create a more sustainable world. We're confident that over the long-range plan, we will deliver high single-digit growth propelled by an attractive market that's accelerating, where we're gaining share and have a strong backlog.
With rigorous deployment of continuous improvement and innovation capabilities, we will drive efficiency in the portfolio and also an improved customer experience. Lastly, I have very high confidence that we will deliver outsized margin growth in this business on its margins over the long-range plan. With that, I'm going to turn it over to Sandy Rowland, our CFO.
Thank you, Colin. Good morning, good afternoon, good evening, everyone. Thank you for tuning in to our webcast. I've been fortunate to spend some time with many of you who are tuning in to learn more about the Xylem story. Those of you who I've not yet met, my name is Sandy Rowland. I'm delighted to be here today. It's really hard for me to believe, tomorrow is actually my one-year anniversary with the company. I thank you for celebrating that milestone with me. As I reflect back and think about why I chose to join Xylem, as a lover of nature and the outdoors, I was really drawn to the mission and purpose of the company.
As I got to spend time with Patrick and the rest of the leadership team, it became very clear to me how deeply vested the entire team is to the mission and purpose of the company of solving water. On top of that, I recognize the enormous opportunities on the commercial front for the company. I think that we can all agree that the world needs a more resilient water infrastructure. When you combine that with Xylem's brand, global footprint, and technology, the commercial opportunities are even greater. The third thing that attracted me is that I've always been passionate about businesses that can transform through technology and innovation. Those who bring connected, safe, and sustainable solutions to market are going to be the big winners in the next decade. I believe Xylem is very well-positioned to bring these types of solutions to our customers.
After one year with the company, the factors that attracted me to Xylem in the first place are only amplified. Now let's get going. I think we have a very exciting story and a very compelling investment thesis. As I look forward to the next few years, we believe that we have a very compelling growth story. We have leading market positions in large and growing markets, and by leveraging innovation and technology, we can bring differentiated solutions to our large customer base. We have two opportunity for margin expansion through operating leverage, driving commercial and operational excellence, and continuing to shift our portfolio towards digital solutions. At the same time, we'll keep our eye on free cash flow and leverage our strong balance sheet to purposely and thoughtfully allocate capital.
While today is mostly about the future, we did think that it was important to give you an update on our current outlook. For those of you who have been following the Xylem story know that our growth story was temporarily paused on the onset of the pandemic. Thanks to our large installed base and the critical nature of our products and services, our revenues were more resilient when compared to our competitors. Having said that, we're very pleased with the orders rebound that we're experiencing in the first half of the year. In fact, we're up about 20%, and when you look back and compare against 2019, our orders are also up about 15%. The strong rebound in orders is translating into higher revenues, and we're seeing that our revenues were up about 10% in the first half of the year.
We've been capitalizing on that volume leverage as well as productivity, which has more than offset inflation and investments. Our EBITDA margins grew by about 300 basis points in the first half of the year. Heading into the second half, we were expecting strong continued growth based on orders and pandemic recovery momentum. However, while there's been no slowdown in orders, we have seen an increase in global supply chain disruptions, particularly with respect to electronic components, including chips. We estimate that the impact of these disruptions will be about $100 million in the second half. This revenue shifts out of 2021, but is not lost. Having said that, our entire team remains very disciplined on cost, particularly discretionary spend, we still expect to deliver more than 100 basis points of margin expansion this year.
Of course, we'll be providing more color on our earnings call in a few weeks. In spite of the global supply chain challenges, the fundamentals of our business remain solid, and we are well-positioned for sustainable long-term growth. Now let's spend a couple of minutes and talk about the balance sheet. Over the past three years, we've generated $1.6 billion of free cash flow, and on June 30th, our liquidity was right around $2.6 billion. Offsetting that is about $3 billion of debt. However, our maturity dates are very well managed. In fact, on average, it's about 10 years out. In October, we're going to pay down about $600 million of debt. It's actually our highest interest rate debt, and once that is settled, our interest rate will drop to approximately 2%.
We're very committed to our current investment-grade ratings, with 1.3x debt-to-EBITDA ratio at the end of June, that provides us with a lot of flexibility on a going-forward basis. Let's talk a little bit now about sustainability and our capital market strategy. Just as sustainability is at the core of our business strategy, we've integrated sustainability into our capital market strategy. Last summer, we were the first industrial company to issue a green bond, and that bond funded projects that will improve water security and sustainability. We've also structured our revolving credit facilities whereby the interest that we pay is tied to our ratings in Sustainalytics. Most recently, last week, Goldman Sachs announced Xylem as the anchor partner in an ESG demand deposit program.
In this program, the return that we'll earn on our demand deposits is directly tied to our 2025 sustainability targets that Patrick talked about earlier in the session. As we continue to look forward, we'll work with all of our banking partners to further integrate sustainability into our financing strategies. Now let's spend a few minutes on capital deployment. Our general framework around capital deployment remains largely unchanged. Our top priority is to invest in our core business to drive profitable, sustainable growth. If you look over the past three years, that's how we've allocated the greatest amount of our capital, and we expect to continue to do so. Patrick also talked about M&A as an integral part of our strategy as an accelerator of growth. Finally, we'll continue to return capital to our shareholders.
If you look over the past several years, we have a strong track record of increasing our dividend, and we expect to continue to grow our dividend in line with earnings. We'll also use share buybacks as a mechanism to offset dilution, primarily from our equity-based compensation programs. Let's double-click and talk a little bit about how we're thinking about investing in our core. We're continuing to prioritize investments that drive above-market growth and enable margin expansion. In digital and services, we're investing so that we can enhance the interoperability of our products and drive a one Xylem portfolio. We're also investing in expanding the capabilities of our go-to-market organization so they are well-positioned to bring our digital solutions to market.
Investment in infrastructure in the emerging markets will far outpace the investment in the developed markets. Therefore, we're allocating capital to continue to localize our products and also to expand our channels. One of our key priorities is expanding our margins. So we're also investing in enabling capabilities. As Tony talked about, these include Industry 4.0 and value engineering, as well as the opportunity to further expand our shared services organization. Now turning to M&A. Earlier today, Patrick discussed our strategic framework around M&A. We're focused on the most attractive areas of the water sector, including systems intelligence, industrial water, and strengthening our core. We're really pleased with the pipeline that we are building. As you would expect, we also have a disciplined financial framework around M&A.
The investment needs to have an internal return above our cost of capital, and we target transactions that are EPS accretive on a cash basis one year after the transaction. Importantly, we view M&A as an accelerator for growth. Now let's switch gears a little bit and talk about our long-term financial targets. Our outlook for annual organic revenue growth is in the range of 4%-6% each year over the planning period. At the same time, we expect to drive EBITDA margin expansion of somewhere between 50 and 75 basis points. We expect that on average, we'll drive free cash flow conversion of about 100% over the planning period. You heard from all of our division presidents, segment presidents this morning, as well as Patrick, talking about some of the opportunities that we have by end market.
Let me bring it together and talk a little bit about our growth prospects by segment. I think we're really in a fortunate position where the growth is balanced across the company, and we're expecting all three of our reportable segments to contribute to our growth. Starting with Water Infrastructure, which is about 40% of our company, we expect to drive mid-single digit growth, which is modestly above the market outlook. We have the opportunity to leverage our large installed base, which provides a steady stream of recurring revenues and robust opportunities to drive life cycle services growth. We're also going to benefit from a tailwind related to the investment in infrastructure in the emerging markets. Finally, the investments that we're making in solution selling are going to enable us to use digital to drive pull-through sales of our core product lines.
In Applied Water, our outlook for growth is somewhere in the low single-digits to mid-single-digits range. We have very strong global distribution partners, and we're bringing sustainable and energy-efficient solutions to our customers, which they really are valuing. We're also capitalizing on growth in emerging markets by the localization that I talked about previously. We expect that M&CS will be our fastest-growing segment, and growth will be in the high single-digits. A lot of that growth is going to come from the deployment of our backlog of large AMI awards, and we expect to continue to win new projects as utilities continue to convert from analog to digital solutions. On balance, when you put it all together, we expect to deliver between 4% and 6% annual growth over the planning period.
Another proof point on how we derived our growth rate was we took a look at our backlog. We believe that it supports our long-term growth thesis. Our backlog hit an all-time high and approached $3 billion on June 30th. That's more than double where the backlog was five years ago. While there's some pent-up demand coming out of the pandemic, the majority of the growth has come from recent large digital metrology wins, as well as some large wins on the Water Infrastructure side. We're also excited as we continue to lean in and drive a conversion of our revenue portfolio towards digital, that roughly 50% of this backlog is higher margin digital business.
In combination with our top line, we're confident that we're going to be able to drive margin expansion in the range of 50 to 75 basis points over the planning period. The primary drivers of margin expansion include strong operating leverage from a growing top line, continued mix shift in our portfolio to digital solutions, as well as productivity and continuous improvement outpacing inflation.
We're still giving ourselves some room and flexibility to make incremental investments in digital services and the emerging markets. We believe that we have a sound financial and business strategy, and one that will continue to drive value for all of our stakeholders, including our investors. We're focused on delivering differentiated offerings to our customers and communities. By putting the customer front and center, we'll continue to drive profitable growth over the long term. Thank you for joining us today. Patrick and the rest of the SLT, I'd like to invite you to the stage to join me to take Q&A. Thank you.
Enjoyed the second half of our presentation, Sandy. We're here for part two of our Q&A session. We have this running for about 40 minutes here. For analysts in the queue, please raise your hand if you have a question. We'll put you into the queue. If you're in the audience viewing and you want to use the ask a question function on the live feed, please submit that as well, or feel free to email me directly. For this one, we have all of our presenters with me here on stage, as well as our Chief Sustainability Officer, Claudia Toussaint. With that, Macy, let's go to the first question in the queue.
Andrew, please unmute yourself and ask your question.
Hey, good morning, guys. Thanks for the presentation.
Good morning.
Morning.
Good morning.
I don't think any investor or most investors think of Xylem as overly cyclical. For instance, Matt talked about Applied Water only having 10% of its sales focused on parts. How does Xylem think about increasing the level of recurring revenue across the portfolio? I know that likely goes hand in hand with increasing digital to the 50%, and Colin talked about increasing AMI long-term revenue. Maybe you could elaborate on the company's ability to mute cyclicality.
That's a great question, Andrew. Why don't we just turn it over to the three segment leads and maybe have each one of you just talk a bit about how we're driving that.
Yeah, I'll start. This is Matthew. How you doing? Thanks for the question. In Applied Water, I think as you heard me talk about refreshing our industrial portfolio, that's really going to enable us to drive more parts sales. That's one of our big strategies, as we expand that portfolio to get into more applications, that's going to really enable a better mix, we'll see a bigger piece of parts play out. As we get into more digital offerings as well, we're going to see as a service start to play out, and then we're going to see more service revenue, reoccurring revenue play out over the next four years.
I'd say in the M&CS segment that I currently lead, there's a recurring revenue stream already that's a portion of the revenues. There's a large part of the business that we call flow business, and this is when someone, for an example, deploys an AMI system, and then they have an expansion in their city, and they're building new homes. We are the incumbent, and we sell the metrology to expand that system with them. Those are really almost like recurring revenues. As we grow that portion of our business, our recurring revenue and flow business will expand.
Andrew, great question, by the way. Water Infrastructure, it's all about service and digital. In the services, we are looking at tapping into our install base, and we've got great opportunity there to increase our service business, which is going to be mostly recurring revenue for us.
The last thing I would say as a wraparound, one of the clear priorities when we think about capital deployment vis-a-vis M&A, one of the profiles that we always prioritize in any acquisition is how big is that install base and recurring nature of the revenue, whether it be contractual service or to Colin's example, where you know you're the incumbent, so you're going to get the replacement. That is a very important criteria for us strategically.
Patrick, maybe if I could just related to that, back to the beginning of the presentation, you talked about industrial, and it seemed like the team mentioned white spaces quite a bit. If I look at that slide where you're talking about market outgrowth, industrial is the only area where I think you're saying Xylem is not going to outgrow the markets. Can you just invest organically, or do you really need to do M&A to sort of fill the white spaces there?
Yeah, it's a great question. It's a combination of both. There's certainly investments we're making, and it's a priority. I think Matthew talked about this in his segment that we are allocating increased R&D dollars to fill some of those gaps kind of organically. M&A definitely needs to be an important part of that. Right now, honestly, we have a lot of great aspects to our business. One of the areas that we would say is a bit of a gap for us is we largely play in the periphery in an industrial kind of landscape. We do some treatment work. Obviously, it's very attractive to us, but channels to market are really important to us. We've got to be able to build that and bring in that kind of direct expertise in an industrial landscape.
Again, we're doing some of that organically, but that's really where we see M&A playing a more significant part.
Thanks, guys.
Thank you.
Thank you.
Thank you. Macy, let's go to the next one in the queue.
Next question comes from Saree from Jefferies.
Hi. Thanks for taking my questions.
Good morning.
There's been a big focus on all the segments on growth in emerging markets. As you think about your top-line guidance of 4%-6%, how do we think about the contribution from developed versus emerging markets, and how does that impact margin performance?
Sandy, do you want to take that?
Yeah, sure. That's a great question, and it ties into one of our key focus areas. As we think about growth in the emerging markets, and we look out through our planning period, we think that the emerging markets can grow at 2x the rate of the overall Xylem rate. As Franz talked about, it's not a one-country strategy. It's pretty broad across the emerging markets. We already have a sizable foothold in China that we're capitalizing on and growing. We've won a number of large projects in India, and we're really starting to see some nice momentum in both Africa and Eastern Europe. I think we have a lot to build on there.
Great. You also talked about the long-term AMI contracts as growing from 11%-20% of segment's revenues. Could you just talk about how that impacts margins as you think about the initial deployment stage versus the recurring revenue stage? How do you think about project risk, just given the long-term rollout and service of these contracts? Thank you.
Sure.
AMI is an important part of our segment today, at about 10% of the revenue. It will grow, as you said, to 20% of the overall segment revenue. The vast majority of that is already in our backlog. We are very confident that we'll be able to deliver on that growth in the segment. These are large projects for the most part, and they are competitive. The margins on these jobs are solid. They match the overall revenue of the segment when we deploy them. That said, we also grow the revenues after the initial deployment, and that growth of revenue after the initial deployment includes a lot of services, additional software applications, follow-on revenues that come at very attractive margins. Overall, these large deals over the lifetime are accretive to the overall segment margins.
I would just add that if you look at a number of the large deals that we've won here over the course of the last couple of years, one of the big differentiators, and virtually every one of them, was the analytics and software capabilities that we brought to bear that really have kind of helped kind of tip it in our favor along the way. That's really what Colin's alluding to in terms of that incremental margin, really even more so comes from that differentiation at the end. You might speak also a little bit, Colin, to the stickiness of these deals, because it's a painstaking process that utilities go through to even get a regulatory approval and a funding approval for a large AMI deal.
Yeah. An AMI process, just to get to a contract signing, you form a fairly deep relationship with these customers. It's what many of us have said today is it's kind of meeting them where they are and taking them on a journey from there. I really believe that, and we've seen it happen in the U.K., in the U.S., all around the world, that as they've got funding, they're ready to make a large investment, they really want to know, what more can I do to expand the business case that I initially signed up for?
I think you heard Mandy from one of our customers talk about it earlier on if you were on during Al Cho's segment, where it's a perfect example of how they invested in a system to do automated meter reading and now are taking that to a much greater business case, engaging with consumers, redeploying meter reading resources to do other things for customers. It really does give us a platform for future growth.
Thanks, Saree. Maybe with that, we'll pivot to an audience question that's been submitted. This one's more for Claudia and Patrick. Talk about the net zero commitment that you made today. That was a new target to put out there as part of our sustainability goals. Can you maybe spend a minute just talking about what that means for us and why we chose to do it today?
I'll start, make it very brief. I'd love to have Claudia spend more time on this. As I said in my comments, I'm so proud of what our 16,000 colleagues plus around the world have done already. It's also our channel partners. It's other partnership organizations that we have that are on this journey with us. Very proud of what we've accomplished thus far, but there's so much more to do. Sustainability for us, again, is integrated into our strategy. With the growing commitment globally for a net zero ambition, we felt, one, that we are ready to do it. We're ready to go there. We want to make sure that it truly is science-based, that it is auditable, it's measurable, because the commitments we make. We're serious about them.
It also was from the support of our colleagues that were asking us the questions as to when were we prepared to make this commitment. That's why we're doing it now, and we're very serious about this. Claudia, you've got more to share.
Yeah, I think well said. Our commitment really is to science-based targets, and what that means is that we want to do our part to make sure that temperature increases are limited to 1.5 degrees Celsius. In terms of our net zero commitment, it is really deepening our engagement across our value chain, both on the supply chain and on the customer side, to reduce our emissions so that there is a net zero impact. You've heard from all of my colleagues here today, and from our customers, that they really care about reducing emissions. This commitment will not only build on the execution and the capabilities that we have as a result of executing against our 2025 goals, but they will also allow us to really be partners with our customers to help them achieve their net zero goals.
Well said, Claudia. I'd only add that this really is about leadership. What I'm proud of is the role that Xylem and all of our colleagues and partners have done in really establishing a leadership position from a sustainability lens. It matters to our customers deeply. It matters to our suppliers deeply. It matters to our colleagues, our employees deeply. We just want to always be out in front and take the lead on these things, and we felt this was the right time to make the commitment.
Okay, Macy, maybe we'll go back to the next question in the queue there.
Next question comes from Scott Graham at Rosenblatt. Please unmute yourself and ask your question.
Good morning. Thanks for taking my question.
Hey, Scott.
I have actually a couple of questions for you all. Yeah, thank you. Hi, Patrick. Would you be able to, maybe this is a quick one for Sandy. Could you tell us the 4%-6% CAGR, I'm assuming that the baseline there is 2020, number one, and within that 4%-6%, are you able to put a percentage point increment from your digital strategies within there?
Yeah. Good question. The jump off point is 2021, our forecast for 2021, and we'll adjust that as we close out the year. As we look at our digital revenues, that is obviously a bigger part of our growth and it's growing about twice the pace of the rest of the portfolio over the planning period.
Got it. Thank you. Secondly, on the digital, what is the 35% jump up to 50% look like when we pull M&CS out of there? The reason why I'm asking is that if you look across the other, obviously Water Infrastructure and Applied Water, the adoption rates on FlexNet have been a little bit slow, maybe slower than certainly I expected, maybe you as well. I also look at the non-utility water customers, really not, whether it's industrial or commercial, water is not a priority that it is for utilities. I'm just kind of wondering how to get. We all know the efficacy of digital. I mean, it's clear, you've presented it well, and even the customers know them, but it's pulling the trigger on them, right?
How do we approach the water utilities with the slow adoption of FlexNet knowing that that's sort of been the history here, but also the non-water utility guys, which are not really prioritizing that year?
Yeah. Scott, there's a lot in that in terms of different end markets and customers, but it's a great question. That is the question, is where is the digital adoption curve across the landscape? I think it's probably one good, Colin, for you to maybe speak on just kind of FlexNet adoption and just the whole telecommunications, where we are on that adoption curve. I think for certainly Hayati and Matthew to talk a bit more about digital adoption in the other segments. Colin.
Yeah. FlexNet, you mentioned a couple of times. FlexNet is a narrowband communications network that's a utility-grade communications capability. I think some investors make a mistake by thinking that that is the communications capability and the only communications capability that Xylem brings to market, and it's not. I would say you should think of Xylem as having great communications expertise around the utility segment and the industrial segment and the building services segment, bringing communication solutions to those customers that are ideal for their particular needs. Utilities need something very different than consumers do from a communications network. We don't try to force fit that solution into an environment that might be more appropriate elsewhere. I'm going to turn it over to the other guys.
Yeah. For Water Infrastructure, if you think about the digital end-to-end from equipments that are digitally enabled all to o ptimization solutions, we see a significant acceleration, particularly post-pandemic, in adoption and being open to using digital to solve their problems. When you look at those from global perspective, yes, some customers are at a different place in their maturity. We are very optimistic about in terms of adoption in multiple stages, in reducing energy consumption, chemical consumption, et cetera, across the board.
Yeah. In Applied Water, you're seeing, like I talked about, a lot of regulation that's driving smart products. When you have smart products, you get data. Our customers, and one of the biggest pain points I talked about in the market drivers, was an aging workforce or lack of skilled trade, an aging workforce. As we get data, that can help us be more productive. We're seeing customers in these end markets using that data to drive productivity. I think that's really the difference when you think about Applied Water in those end markets in industrial and commercial and resi.
I would round it out, Scott, kind of putting a bow around this in terms of how it all comes together. Again, we come back to the big three challenges, scarcity, resilience, and affordability. That cuts across all end markets, but it differs by end market. The utilities, one of the biggest issues, obviously, is affordability of infrastructure, but it's also minimizing their water losses and other regulatory demands. On the industrial side, commercial side, it really is around energy efficiency and productivity, and that's where regulation has a big role to play here. I think, Al, you said it well earlier in our first round of Q&A, that no matter where you are in the landscape right now, and you made the comment, Scott, that digital is kind of obvious nowadays. It's clearly coming. It's happening. It's how you define it.
We have very few customers right now that are buying dumb products. As Al said, just because something may be unconnected doesn't mean it's not smart or unsophisticated. We, again, we're trying to move them along the journey. It's always slower than we want it to be. You got to build that trust, and then you get the accelerator and the flywheel.
I appreciate that. Is there any way of answering that earlier question of the 35% to 50%, what that looks like away from M&CS?
Sure. You want to, Hayati and Matthew?
Yeah. For Water Infrastructure, what that means, Scott, is about doubling the digital revenue over the next four years by 2025 and contributing to the 50% goal that the company has.
Yeah, it's the same for Applied Water in U.S. dollars. It's doubling the digital revenue over the next four years, and that's, for us, about 800 basis points of rate improvement against digital to total revenue.
Thank you very much for that.
Thanks, Scott. Let's go to the next one in the queue, Macy.
Next up, we have Brian Lee from Goldman Sachs.
Hey, team. Thanks for taking the questions.
Hey, Brian.
Appreciate all the long-term color. Good morning. Good afternoon at this point. I know this is the Q&A session where we can ask sort of some shorter term-oriented ones, so I'm going to throw two in here, if that's okay. I know you all love those. I know you're going to cover this in more detail on the Q3 call, but at a high level, can you talk a little bit about the component supply chain issue in M&CS? I think in early 2019, you had a similar issue related to an electronic component for the smart meters. Is it the exact same component you're struggling with this time around, or just any more details on specifics there?
Yeah. Thanks for the question, Brian. I'll direct traffic here a little bit because there's two pieces of that. Colin, why don't you talk just about the nature of the shortage, and then Sandy, you can talk certainly about how we're sizing up the impact as we see it today, because it's evolving.
Yeah. The types of components, I would say, has evolved. The types of components that were more challenging to us earlier in the cycle were things that we could design around. We could redesign our products around and find alternative sources of supply and manage it fairly effectively. There were alternative sources of supply in secondary markets that we could gain access to and build inventory for. It was a bit more manageable. Now, I would say the breadth of the types of components that are being impacted by the supply chain constraints has expanded. It's now moved into microcontrollers and other types of things that are more fundamental to the product's functionality. We're working with all of our suppliers, working with our engineering teams to try to redesign where we can to try to alleviate some of the strain. We work with Flextronics, our contract manufacturer.
It gives us a little bit more leverage in the marketplace. We think we're managing it as well as we possibly can. It's a very dynamic situation, and I would say it's broadened in its nature in terms of the impact on the company.
I think, Sandy, you'll talk and size up things, and it's important, I know you'll reinforce, is this is not a demand issue. Maybe start there, and then you can talk about sizing up what the impact on revenue is in the near term.
Yeah, exactly. Just building on that, we've seen really good order momentum in the first half of the year, that has not slowed down at all through the third quarter. We're really positive and encouraged by all the order momentum. Over the past 60 days, we have seen a lack of reliability on the supply chain that has increased. We sized it up about $100 million for the back half of the year. We're seeing about 35%-40% of that coming through in the third quarter. We know things are getting slightly worse. We've estimated that some of that carries over into the fourth quarter. Certainly, the teams, Tony's team, the entire organization is doing everything they can to get products out the door. We also know that we're not alone here, that this is kind of throughout the industry.
I think we're working hard to manage it as prudently as possible. I'd be remiss to not say, in light of some of these supply chain challenges, we are doubling down and looking at our cost structure very closely. We've been holding the line on discretionary costs and not letting them creep back in. We are trying to offset it as much as possible without jeopardizing our long-term growth story, because we're very encouraged across all three of our businesses about the growth prospects for the future.
Yeah. I would round it out, Brian, by saying that to this point of kind of how are we responding to it, we're certainly leveraging all of our competitive strengths to make sure that we get more than our fair share, so to speak, of allocation. That's easier said than done. We're not alone here. Two, we're making sure we do not make short-sighted near-term decisions that impact real demand and growth from an investment standpoint. Having said that, we're also not looking at this as necessarily as much as we want to believe it's transitory right now, we believe it is. We always have contingency. We are always looking at our cost structure and other things we can do if in fact this were to become a little bit more prolonged. Again, it's not a demand issue.
It's really a matter of when we can get these things out the door.
Yeah, that's super helpful color. I guess, just to kind of put it in the historical context one more time. Last time around, I think it was two quarters or so, which you saw the issues and then ultimately remedied them. I think this, like Sandy said, in her remarks, this is revenue you're not losing, it's in 2022. Will it come back as quickly? Is it first-half revenue recapture, or is this going to slip into the second half? I know everyone has their own crystal ball when it comes to the global supply chain and when we're going to be back to a normal state. How should we think about sort of the timing impact? It seems like there's a lot more balls up in the air, as you said.
Yeah, no, there definitely is, Brian, and I'll take that one. I think we're at a point, the team is all over this, meeting daily with suppliers. We're keeping real-time polls here, pulling all the levers we can. I wish I could tell you. One, it is not lost revenue. It's a matter of things shifting to the right. I wish I could tell you. I'm sure Colin wished he could tell me when. Is it gonna be Q4 to Q1, Q4 to Q2, Q3? We don't know enough right now because there's so many demands on the supply chain and people kind of trying to get their bits. We will have more color in the Q3 earnings call, coming up here in a month or so.
We'll reserve the right to be a little bit even smarter then than we are now on this fluid situation and how to kind of frame that out for you as best we can.
Okay, great. Well, hang tight. I'll pass it on. Thanks.
Thank you.
Thanks, Brian. Macy, let's go to the next one in the queue.
Next up, we have Joe from Cowen. Joe, please unmute your audio and video and ask your question.
Hey, guys. How are you?
Hey, Joe. How are you doing?
Hi, Joe.
Doing well. Thank you. Yeah. Patrick, just in light of the M&CS, the supply chain like we've had in the past, and now I know Flex does something like half of the business there. Is there a thought, do we have to be more vertically integrated in something like that to kind of isolate yourself from these issues in the past?
I'll let Colin and maybe Tony, supply chain tech, take that one.
Sure. Yeah. No. We like our relationship with Flex, and it's helped us out very well. We have a very strong strategic relationship. We really leverage their buying strength in the marketplace for these types of components. For us to go it alone and vertically integrate would be very expensive. Frankly, our volumes really are minuscule compared to some of the other big players out there. That wouldn't be a good proposition for us. It's not something on our radar screen right now. Colin, you want to?
Nothing to add to that.
I'd only say, Joe, that I think it's also not as if we only deal with Flex. We deal with their suppliers as well. We've got those embedded relationships already. Certainly, this has certainly kind of promulgated even more of that closer interaction. Part of this also is we try to play above our weight class, by way of Flex. Also, again, our preexisting relationships with these suppliers. Purpose of the company, mission of the company. I know that all sounds soft, but these things matter when they are making decisions around how they're going to allocate precious components. That's why we feel, while we don't like the situation we're in, we do feel good from a competitive standpoint as to our access to components.
Just to follow up on margins. Last Investor Day was 2017. I know a lot has happened since then. I'm not going to hold you to those numbers, but if I look at where we are on the margin side, if I look at 2022, which hopefully some things are more normal than in 2022, but estimates out there are $1 billion more revenue in 2022 than you had in 2017, and margins are actually lower on EBITDA. Can you kind of close that bridge for me? Because we were talking about much higher margins in 2020, obviously. Patrick, you didn't predict COVID, I'm a little upset with that. Can we just go through that bridge from the 2017 to where we are now on a much higher revenue base? What gives you confidence in the margin from here?
Sure. I'll let Sandy go first, and then I'll have a couple of comments.
Yes. Good question. It's one we talk about a lot internally as a team on how do we drive profitable growth with meaningful margin expansion. Obviously, COVID had an impact on not only our revenues, but on our margins. As we've seen this year, we've seen revenue growth in the first half, and we've seen that we can deliver really strong incremental margins across all three of our segments. As we thought about building our framework around our long-range plan, we looked at where we were today, and through the planning period, we're driving incremental margins of around 30%, which is a good place to be in the industrial space, and one that we feel that is one that we can deliver upon. It's a good foundational base. The biggest driver in our margin expansion is the leverage we'll get on our revenues.
Tony's team and the entire organization is focused around productivity and pricing outpacing inflation, that will be a margin tailwind for us. We do think it is prudent to leave some room for investments. We have a lot of opportunities across our portfolio, to not to leave a little bit of room for that, we think we'd be leaving things on the table.
Yeah. Joe, I would just round it out by saying, I think there's two parts to your question. One is kind of almost a little bit of the bridge of the past to where we are now, and then confidence going forward. I think one of that element of bridge to the past is we've also made some acquisitions over that timeframe that have required us and given us the opportunity to make investments. That certainly, while these are investments in new digital capabilities that are building channel coverage, building sales force capability, increased R&D investment, there were things and decisions that we made even through COVID, because we saw what the demand profile was on the business, and we want to keep that flywheel going. Obviously, COVID had the impact that we all know.
Going forward, to reinforce Sandy's comment, very confident about the margin expansion goals that we've laid out there because we do believe it affords us room to continue to invest strategically in this business. And part of that also is we're talking about outpaced growth in emerging markets. I think as Franz said earlier, the margins on that business over time are as attractive as the rest of the company. It's just that the mix of emerging market revenue is largely greenfield projects. Like any other part of our organization, margins on those upfront projects are always a little less than what they are on the aftermarket and recurring piece. Part of that also is the timing and mix impact. We're very confident about these targets that we've laid out.
Thanks, guys.
Thanks, Joe.
Thanks, Joe. With that, maybe we'll take one from the audience here that's come in. This one more for Patrick and Sandy. The company's been a little bit quiet on the M&A front over the last couple of years. What are you seeing in terms of M&A valuations, activity? Anything that's changing your view in terms of the landscape on the M&A front?
Again, terrific question. I think as I mentioned, and I think also Sandy mentioned, we've got a really strong, powerful arsenal of capital to deploy, and that only gets stronger over the course of this planning period. Nothing's changed in our view, in terms of our appetite to do strategic M&A. I would bring us back to what our priorities are. We focus this predominantly on what are the customer needs that we are trying to solve by end market. Utilities, again, as I mentioned earlier, we feel that we've got largely what we need. We'll continue to add bolt-on technology capabilities as we continue to learn more about what our customer needs are. Industrial is an area that, again, we've talked before about. It really is largely about service capability enabled by technology, and getting channel coverage and access.
We've got opportunities again in commercial building, in resi and ag. The pipeline is very attractive, very robust right now. It always takes two to tango. I can't predict exactly what the timing is on any one opportunity or multiple opportunities. No, there's nothing that we're seeing right now from a valuation standpoint that is causing us to pause. It's always a timing issue in terms of when you can make these things work. We're not going to go chase deals. We're not going to deploy capital for M&A just for M&A's sake. It always has to be consistent with our strategy that we've articulated over the last handful of years.
Macy, let's go back to the queue and take the next one from the line.
Next up we have Andrew Buscaglia from Berenberg.
Hey guys. Thanks for taking my question.
Good morning.
Hello.
Morning. I wanted to ask on that, the 4%-6% kind of target here, long term. If you go back to versus 2017, you had a similar target, yet so much has changed. You're talking a lot about digital adoption, spurred by COVID. You got these emerging markets seem to set up pretty nicely, and then you got kind of this underlying current of potential stimulus, federal stimulus, if that goes through. I would think that you could step that up, that 4%-6%, or maybe it's a way to think about it over the near term or medium term. Do we see a kind of grow at the higher end of that? Kind of just how are you thinking about that?
Why don't you go first, Sandy ?
Yeah. I think the purpose of an investor day is to give you a framework that we think we can work with. We look across our businesses and there is an upside case to the targets that we laid out. We wanted to approach it from a pragmatic perspective and come back to you and deliver upon those results. That's how we've approached it. We've broken it down by segment. We think we set a good framework that leverages the trends and let us go out and deliver that, and then we'll build on that from there. There's a lot to be encouraged about. We're excited about the digital opportunity. We're excited about emerging markets. We have a really good installed base of recurring revenues that serves us very well. We're gonna strive to deliver more.
Yeah. It wasn't that long ago that we were being questioned on a regular basis of can we grow faster than 1% to 2%? We've done that. Obviously, COVID had an impact, but if you take that noise out, we were growing in that mid-single digit, if not even higher, clip. Absolutely, we see an upside case. It's there, but we want to be prudent. We want to be responsible on the targets that we put out there. You can be sure that we're going to be working hard to overdrive this for a lot of the reasons, the tailwinds that you articulated.
Okay. A clarification. Obviously, a big takeaway today is sort of this digitization opportunity and getting to 50% of revenues in 2025. You might have said this, but I want to clarify, do you need M&A to get there to that 50%, or would M&A be upside to that target?
M&A would be upside to that. That's organic.
Organic.
Okay. Got it. Okay. Thank you. Thanks for the clarification.
Good question.
Yeah. Thank you.
Macy, let's go to the next one in the queue.
Next up we have John Walsh from Credit Suisse.
Hi. Good morning, everyone, and thank you for all the detailed information today.
Thanks, John.
I'll just have a couple of quick clarification questions at this point. You said demand hasn't slowed down. Maybe trying to put a number to this. Thinking about your orders is what you did in Q2, the $1.66 billion, is that the right way to think about Q3? Maybe just another quick clarification, thinking about that strategic deal or if you found a strategic deal, I think in the past you said you'd use equity. Wanted to confirm if you would still use your stock as a currency. Sorry, the last one, I promise they're all quick. When we get out to 2025, do all the segments look similar from an EBITDA margin perspective, or should we think that the digital opportunity at M&CS is a little bit better, so maybe they're above fleet average?
Just trying to calibrate how to think about the three different segments. I know you didn't want to go into kind of ranges in the presentation. Thank you.
No, that's fine. That's a great question, John. Why don't you take the orders question?
Okay. Starting with your orders question, John, I think as we look, we haven't closed the third quarter yet, but all the signs and we have 2 months under our belt, we think orders growth between 15% and 20% in the third quarter is where we're going to land. We'll obviously update you in a few weeks where the final tally is. I know our teams are still going out and driving that hard to the finish line. Second question was.
Did they answer that first question, John?
Yeah. No. That was perfect. Thank you.
Okay. On the second question, again, remind me again.
Equity.
Equity. Okay.
Equity.
Oh, just the use of equity in an M&A transaction.
Yeah. Again, we're not trying to signal anything there. I think I've been asked that question a couple times in earnings calls. I'm just affirming that yes, we certainly I mean, one, we don't always need to. We've got a great arsenal of cash in the balance sheet and the things to do. Would we be willing to use our equity as a currency? Certainly. For the right strategic deal, we certainly recognize the value in that currency, especially on a relative basis, depending upon what the target would be. Yes, we would consider doing that. Again, it's not the only lever that we need to be able to go out and do M&A. Third on the Margin question. Again, I'll turn back to Sandy and just talk about the lay of the land there.
John, I'll give you a little color on how to think about it. As we think about how does the margin evolution break out by segment. As we look forward, M&CS is our fastest-growing segment from a revenue perspective, and that also translates to a margin expansion target. We see that segment growing EBITDA margins by over 100 basis points per year over the planning period with incremental margins above 30%. The other two businesses we are going to continue to drive margin expansion as well. The incrementals are a little bit lower, and they're coming from a higher base today. Over time, the businesses start to converge.
It's a great question, John, because what you'll find is that for the reasons you articulated, digital adoption being even more prominent within M&CS, although it's not limited to that. The starting point, and the fact that we've made more investments in that segment over the last couple of years, back to Joe's question on kind of margin comparisons. We've been heavy in investment in that segment for growth reasons, and it's paying dividends at this point. The jumping off point is lower for M&CS. We do expect that there's going to be a convergence of EBITDA margins, and I'm talking EBITDA margins here amongst the three segments. It comes in line, it's more symmetry amongst the three. That's not a manufactured number. It's the way the math actually works at this point in time.
I wouldn't want to leave anybody with the impression that there isn't continued significant margin expansion opportunities in Applied Water and Water Infrastructure. We get questions sometimes, are we at peak margins in those two segments? Not at all. There's great growth there, and there continue to be continuous improvement productivity opportunities. The other element that the other two segment leads here, Hayati and Matthew might want to talk about is the nature of our innovation pipeline and new products are also all about accretive margins and accretive growth.
Yeah, as I said in my presentation, with the Applied Water, we're making big investments in R&D and taking our product vitality, which is a measure of new product sales over five years, up from 15%-25%. That's really going to help us, a portion of that obviously is driven by digital, that's going to drive margin expansion as well.
Same in Water Infrastructure. We talked about digital for our standard foundational products. Every time we go and launch a new of them, they come at accretive margins. That's also part of the whole margin journey for Water Infrastructure like it is in Applied.
Thanks, John. Good question.
Great. Thank you very much.
Thank you. Let's go to the next one on the line.
Next up, we have Michael Halloran with Baird.
Hey, everyone, thanks for taking another couple questions here. Two of them. First, both digital kind of view oriented. First, when you think about the architecture as it stands now and kind of the overall network view, what's the ability to wrap non-Xylem products into that visibility or into the stream? How much does that help you figure out where you need to spend money, invest, where it would be worthwhile to roll a lot of content in?
Sure. I'll have Al and Dave take that one.
I would say, it's a great question, Mike. The short answer is yes. Digital is not about a particular set of products from one company. We always look at it as what problem is the customer trying to solve.
They're trying to solve really complicated problems, as Patrick was saying, affordability, resilience, infrastructure in their infrastructure. That requires us, as you heard from Eric, routinely, we experience this. We will integrate, gather data from, and make recommendations on how to operate infrastructure as a system beyond the core Xylem product set that they may have bought in the past. Dave can speak to that from a technology building.
Yeah, I would just add to that, Mike, that's what we mean by interoperable. We recognize we're not the only equipment supplier out there. More and more, our technologies are interoperable with one another. The underlying digital architecture we're building is also welcoming of other manufacturers' products as well.
We've got good examples even right now in the metrology side. With FlexNet.
Yeah, there's choices we make to make sure that we aren't investing to build small quantities of certain specialized products for the marketplace and using up our R&D resources to do that. In the metrology space, we often use competitors' metrology, put a FlexNet radio in it so that it can provide some of the lower run level products in the network that's necessary. It's a nice way to enhance things, I think.
Yeah, thanks for that. Second one. When you think about the sales force, obviously, you have a lot of products that you're kind of rolling into a broad-based solution. Do you think the sales force is aligned to be able to sell that cohesively to the market? How do you think that stands? Obviously, the backlog building, the strong order book there must be doing something right, but curious how that whole strategy is playing out.
Yeah. No, great point, Mike. Why don't we, I think, Al, between you and Hayati, you guys can talk about some things for me.
Absolutely. I think this comes back to what we've been talking about as the top layer in the slide around Xylem Vue, which is the consultative sales force. Patrick talked about this, which is our ability to deliver value to our customers on digital is all about making it simple and easy for them to adopt. That means that our sales force is evolving to the point where they're able to start with what's the question. We're training them on what's in the portfolio, how do they fit together on the interoperable building blocks that Dave has been building with the team, and then recommending solutions which meet them where they are, and then recommend what's the next thing, what's the next thing, what's the next thing, so you can solve your problems more effectively over time. I did want to bring us back to that video.
If you hear from all of the customers who are talking about digital. What they said was, "What we love about Xylem is that our sales force comes in and they don't just say, 'Yeah, keep doing what you're doing.'" They challenge them, they push them, they bring experiences from other places. That's what we're hearing from our customers, is that they value Xylem's experience and the ability to work across the portfolio to make recommendations on how to make systems work more effectively. Hayati is a great example, I think, in Europe, of how we've been doing that.
The only thing I want to add, Al, you said it very well. What we are doing right now globally is to scale that consultative selling organization that doesn't necessarily go into a customer to sell a product, a particular product in a segment, but start with the problem that customer has and bring back to the home and then create the solutions. Very often, it will involve digital solutions in it, but in some cases, it will be mechanical solutions combined with digital solutions. We are scaling up that organization right now as we speak.
Mike, we would all acknowledge, with appropriate humility, we're on a journey. We're building these capabilities across the enterprise, and there are areas that we are further along than not. Where we are, again, you're seeing it show up in backlog and some of these large deal wins. What I get excited about is we're seeing the success, and the opportunity is still in front of us. You know it's not easy to train up a sales force to do something maybe a bit different than what they have historically done, but we're also not looking to make all of our salespeople generalists. We've layered in the organization, the roles and responsibilities and incentives that our sales teams have, so they work in complement as opposed to trying to train everybody to do all things. That's not a winning formula, and that's not the approach that we're taking.
Appreciate all the help. Thank you.
Thank you.
Thanks, Mike. Let's go to the next one from the line, Macy.
Next up, we have Nate Jones.
That's a long name.
Very long name.
Anyway. All right. Thanks for taking the questions. Patrick, a couple times today you've talked about channels to market and needing to improve channels to market. Can you talk a little bit about where you think the deficiencies are in terms of geographies or product capabilities or whatever it is that you're deficient in in channels to market, what you can do about that organically, and what you need to do inorganically to improve those things?
Great question. Great observation, Nate. Why don't I have maybe Franz go first on how we're thinking about channels in emerging markets, and then I'd say probably Matthew on the industrial commercial side, kind of what you're seeing given your experience coming in.
Okay. Yeah, look, I wouldn't necessarily call it a deficiency, but I would say that there's still a lot of white space that we can go after, right? Like I said earlier, when you break down a market, whether it's a country or a region, into specific markets down into cities, which is ultimately where we need to play, we still have a lot of white space that we need to go after. In some cases, we're doing that, like I said, with direct investment, meaning opening offices, hiring people, training people, and so on. In many cases, we're just doing that through channel partners. Whether it's distributors, reps, et cetera. Again, we still see a lot of opportunity for us to go chase more opportunities and build more relationships locally in those city level markets.
Yeah, I think as you mentioned in your comments earlier, I believe, Franz, that there are also some geographic expansion opportunities, Nate, where there are some markets. You'll recall, certainly whenever I first got here seven and a half years ago, we began talking about emerging markets, and it was very much we could play everywhere, but we chose not to. We really wanted to focus in on a few key markets. I think that served us very well through localization.
Now that we've built the muscle in the organization, we're saying, "Okay, let's go find a few more other areas." Eastern Europe is an area that is very attractive for us right now. It's been growing double digit for quite some time. We got opportunities in Africa. Part of this is also geographic expansion because we feel we're ready to go there now as an organization. Matthew, you want to talk about industrial and commercial?
Yeah. Look, North America, you heard me talk in my presentation, very strong channels, long-lasting, 60-90 years. Really well-established. I think in North America, for example, there's a real opportunity in industrial, and we call on OEMs today, and we go direct. I think there's a huge opportunity to scale that up further to really grow our industrial portfolio, as well as both in the U.S. and in Europe. I think there's a real great opportunity there. Another one we don't talk a lot about is residential. Most of our business is aftermarket. We have a huge opportunity to get out into residential new construction, where we really don't play that well today. That's another big channel, I think opportunity for us, not only in the U.S., but also in Europe.
I want to also go back to the margin question from before and the 50-75 basis points from 2021. We all know there's a huge amount of noise from 2019-2021 caused by COVID. What I'm really trying to get at with that question is, it seems like you're not baking in any of that inflation, supply chain disruption, all of that kind of stuff that we've seen for the last two years going away through that forecast horizon. Is that correct?
Yeah. I think that certain things have changed. We have seen a pickup in inflation. Our teams are doing a good job to drive price and price realization, That's offsetting it in a meaningful way. As we look at where we are today and how do we grow and still make purposeful investments, we think those margin targets are right in the right neighborhood.
Yeah, Nate, I think one question. Further to your question, Nate, in terms of Yes, I mean, obviously there's clearly uncertainty in the supply chain right now. We believe that as we're talking about a long-range plan here, that that noise will subside. We will navigate through it. We will work through it. It may have impact in any given quarter or two on timing of delivery, but it's not having an impact on demand. It's not changing the margin profile of what we have in backlog, and that's why we feel comfortable about those kind of targets that we've got for the planning period. Yes, you're right. We feel that we've got that baked in as best we can today. In terms of this other noise and uncertainty, absent, God forbid, another kind of major pandemic continuing on forever.
Those kind of shocks to the system. Hope not. Obviously we can't forecast or predict, as best as we see it here right now, we're very confident about these targets we've got.
Real brief one. You said $100 million of revenue deferred out of the second half from these supply chain challenges. What was the number baked into guidance when you gave it at the end of July?
That is incremental, but that $100 million.
Great. Thanks very much.
Thank you, Nate. Rebecca, why don't you take us into the last question that we have for today?
Last up, we have Ryan Connors from Boenning & Scattergood. Ryan, please go ahead and unmute yourself and ask your question.
Great. Yeah, thanks for fitting me in. I had one last one on the issue of emerging markets and China's been mentioned throughout the day, and repeatedly in the different presentations. Obviously, you even had a customer from China, so it kind of suggests you don't see a whole lot to a lot of the news flow we're reading, but it is kind of an elephant in the room. Can you give us a little update on, and not so much the Evergrande stuff, but the bigger picture of policy shifts and IP, things like that. If you look out to 2025, what are the risks to what you're assuming in China, if we get kind of a negative trend here in how they're commanding controlling that economy?
Yeah. I'll go first. First of all, we still see really big opportunities. It's the second-largest market for us globally, right? As I mentioned in my comments, we truly operate as a local company there. Yeah. We have local manufacturing of our products. We have local R&D. Like I mentioned, we don't even have an expat there. We feel comfortable about our position there and being able to grab more share, and we're grabbing share as we speak. We feel comfortable. From an IP standpoint, again, the issue with IP is always staying ahead of the curve, right? Coming up with new innovative products, which we're doing. Not only in the digital space, but also in the mechanical space. Again, we're very bullish on our situation in China. We think it's a great opportunity to continue to grow.
Yeah, I think Ryan, the only other thing I would offer is if you look back at proof points of the past, that is, I think back to the last time, and I forget which year it was. It seems like 2016? Again, woe is me, China's coming to an end. People were worried about what our impact was gonna be in China. What we found there was, again, roughly 2/3 of our revenue in China comes from the utility sector. Yeah. In the utility sector, it's all part of a long-range planning process the government has. They continue to fund it. It's one of their top policy mandates around clean water, environmental protection. That's not changing. That's not going away. That really drives a lot of our demand there. Industrial commercial continue to grow right now, very attractive rates.
That's where there might be a bit of volatility depending upon economic impact, et cetera. The past would suggest we're pretty resilient in China when it comes to just true market demand. IP side, Franz said it well. The key for us there is it's not just localizing our products and solutions. It's how we differentiate ourselves. China has been one of the earliest adopters. Our team there is fantastic. They were one of the earliest adopters of basically what we're calling Xylem Vue now, and bringing digital solutions to bear. That's not something that local players are able to provide right now. We're always trying to stay ahead of it and really bring true value to the table. I'm very confident, but at the same time, Ryan, you're right.
I mean, we keep our eyes on this all the time, because it could turn, but we're not seeing any signs of that right now in our demand profile or bidding pipeline or backlog.
Great. Thanks so much. Great event. Thank you.
Thank you.
Thanks, Ryan. Thanks, everybody, for your time today and staying with us through the course of the morning and into the afternoon here. We'll be around if you have any questions or you want to follow up over the next couple of days. With that, thank you for your support. I'm gonna turn it over to Patrick for a last couple of remarks.
Well, thanks, Matt. I'll keep these really brief because you've all been with us for a few hours today. One, I want to thank the team here for joining me. I want to thank all of you for your support, for your attendance this morning, for sticking with us. Those that watched it live, those that watch it on replay, I want to thank you for your support and your interest ongoing in Xylem. Really wish that you could have met this team in person. We look forward to that. Hopefully, you've been introed now and we'll get you access to each of them as frequently as we can so you can really even more get to know this leadership team. I'm really excited about our strategy, about where we're going.
Again, between now and then, stay safe, stay well, take care of those around you. We'll speak to you next in our Q3 earnings call. Thank you.