Welcome to the Xylem First Quarter 2021 Earnings Conference Call.
Listen.
Listen only mode. I would now like to turn the call over to Matt Latino, Vice President of Investor Relations.
Thank you, Hillary. Good morning, everyone, and welcome to Xylem's Q1 earnings conference call. With me today are Chief Executive Officer, Patrick Decker and Chief Financial Officer, Sandy Roland. Listen. They will provide their perspective on Xylem's Q1 results and our outlook.
Following our prepared remarks, we will address questions related to the information covered on the call. Listen. As a reminder, this call and our webcast listen are accompanied by a slide presentation available in the Investors section of our website at www.xylem.com. A replay of today's call will be available until midnight on June 2. Please note that the replay number is 800 list of 5,850,367 and the confirmation code is 5,567,508.
Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to slide 2. We will make some forward looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. All references will be on an organic or adjusted basis unless otherwise indicated. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10 ks listen and in subsequent reports filed with the SEC, including in our Form 10 Q to report results for the period ending March 31, 2021.
Listen. Please note that the company undertakes no obligation to update any forward looking statements publicly to reflect subsequent events listen only for circumstances and actual events or results could differ materially from those anticipated. In the appendix, we have also provided you with a summary of our key performance of metrics including both GAAP and non GAAP metrics. Now please turn to slide 3, and I will turn the call over to our CEO, Patrick Decker.
Thanks, Matt. Good morning, everyone, and thank you for joining us. We announced earlier this morning that our first quarter results reflect strong operational performance, exceeding our expectations on orders, revenue, margin and earnings per share. The quarter's growth was broad based, reflecting increasing demand across all of our segments, our end markets and geographies. Listen.
Our momentum coming into the year accelerated through the quarter, with the team taking full advantage of economic recovery and pent up demand in our markets. Orders were up double digits in all three of our business segments and backlog was up 23% organically. Listen. Both Western Europe and Emerging Markets delivered exceptional organic revenue growth, with Western Europe up 11% listen and emerging markets up 33% year on year and with momentum up strong sequentially. U.
S. Demand also continued to recover with orders up 18%. Alongside top line growth, Our results reflect considerable margin expansion. I credit the team's discipline, building on the benefit of volume effects list and positive impact from the cost actions we took in 2020. Our financial position, which was robust coming into the quarter, strengthened even further on the combination of revenue growth and margin expansion.
Looking forward, listen. We are confident about the remainder of 2021 and beyond. Therefore, we are raising our full year guidance on the top line, margin list and EPS. I'll talk a bit more shortly about trends and focus areas for the team. But first, let me hand it over to Sandy to provide more detail on performance in the quarter.
Thank you, Patrick. Listen. The Q1 was clearly a meaningful step forward. The team delivered exceptional performance, capitalizing on demand recovery in the majority of our markets. Listen.
Revenue grew 8% organically versus the same period last year with performance better than our expectations across the board. Strong double digit revenue growth in wastewater utilities was paired with broad based industrial demand recovery. List. Geographically, emerging markets in Western Europe rose through double digits, while the U. S.
Was down 1%. I will touch on revenue performance in more detail covering each of the segments. But in short, utilities were up 3%, list. Industrial was up 14%, commercial up 5% and residential was up 31%. Organic orders grew 19% in the quarter as all three business segments contributed double digit order gains.
Listen. Importantly, it was also the 3rd consecutive quarter of sequential orders improvement. Listen. Looking at the key financial metrics, margins were above our forecasted range with EBITDA margin coming in at 17.1% listen and operating margin at 11.4%. The 480 basis points of EBITDA expansion came largely from volume and productivity, listen partially offset by inflation.
Earnings per share in the quarter was $0.56 which is up 143%. Listen. Please turn to Slide 5. I'll review our segment performance for the quarter. List.
Water Infrastructure orders in the Q1 were up 14% organically versus last year, with revenues up 11%. Geographically, Western Europe grew on healthy demand, while emerging markets delivered strong performance recovering from a COVID impacted quarter. Listen. EBITDA margin and operating margin for the segment were up 430 and 490 basis points, respectively, listen as strong productivity and volume leverage offset inflation. Please turn to Slide 6.
Listen. In the Applied Water segment, orders were up 25% organically in the quarter, driven by recovering demand in North America list and strength in Western Europe. Revenue was up 13% in the quarter with growth in all end markets and geographies. Listen. Residential and industrial grew 31% 15%, respectively, while commercial grew 5%.
Geographically, the U. S. Was up modestly as residential and industrial gains were offset by lagging commercial end markets. Listen. By contrast, IMPLAZID in Western Europe contributed 15% growth, additional strength in residential.
Listen. Emerging markets were up 6% due to the timing of prior year COVID shutdowns as well as commercial recovery in Middle East and Africa. Listen and productivity. And now please turn to Slide 7 and I'll cover our measurement and control solutions business. Listen.
In MNCS, orders were up 18% organically in the quarter with double digit growth across both water and energy applications, listen. Driven by large metrology projects, segment backlog is up 29%. As anticipated, organic revenue growth
listen to the business.
In energy applications, revenue is now mid teens as certain large deployments list of our expectations and
our expectations for the quarter were completed in the same period
last year. Geographically, the U. S. Are mid single digits, but we anticipate project of appointments for Q2 on loosening site access restrictions and then accelerating the second half. Emerging markets were up 8% from metrology project deployments and demand in the test business.
Segment EBITDA margin and operating margins in the quarter were up 7 70 and 600 basis points respectively. List. Modest price realization and strong productivity savings as well as a prior year warranty charge more than offset inflation. Listen. Now let's turn to Slide 8 for an overview of cash flows and the company's financial position.
Our balance sheet continues to be very strong. We closed the quarter with $1,700,000,000 in cash. Free cash flow was in line with our expectations as well as our historical seasonality patterns. Managing working capital remains an enterprise wide priority and we are especially pleased with our accounts receivable performance. Net debt to EBITDA leverage was 1.6 times at the end of the quarter.
Now please turn to Slide 9 and I'll turn the call back over to Patrick.
Thanks, Sandy. I'd like to revisit the 3 focus areas we highlighted coming into the year. The performance of our growth platforms, listen to the team's operational discipline and our progress on sustainability. Turning first to our growth platforms. Listen.
You've already heard about our emerging markets team's exceptional first quarter performance with revenue and orders up 33% 21%, respectively. Up until now,
China
and India have taken the spotlight. In both countries, our investments in capabilities and localization have created strong engines for sustainable growth. But of course, other areas of the emerging markets also represent great opportunity for us. List. Many countries in Eastern Europe, for example, continue to modernize their economies and represent a long runway of investment in water infrastructure.
And in Africa, there are clearly big water challenges to solve as the higher growth nations continue to urbanize. Listen. We expect emerging markets overall will continue to be a source of healthy sustainable growth for the foreseeable future. Listen. The second platform that continues to underpin sustainable growth is our digital strategy.
Our broad on a listen only mode. The portfolio enables us to combine multiple digital technologies into integrated offers, including AI enabled software platforms, list of advanced communications networks and automated endpoints. Those capabilities have been key to our commercial With customer adoption of digital solutions accelerating through the pandemic. Listen. We've spoken previously about our headline wins in Texas and Ohio.
In Q1, we added a large of transformation project in Greensboro, North Carolina. And we have just signed another exciting deal to be announced in the next few weeks. All of these projects deliver network as a service, software as a service and advanced analytics. List. In each case, Xylem's ability to bring a suite of transformational capabilities distinguished us and was essential to winning.
And just last week, we further extended the digital capabilities we can offer our customers by partnering with Esri. Esri is the global leader in geographic information systems, GIS for short. These systems are an essential component of utilities operating environment. By integrating their technology with our advanced digital solutions, list. Water operators achieved unprecedented network visibility and a clear path to increased operational efficiency and sustainability.
Listen. And with last week's agreement, Xylem and Esri are bringing that powerful combination to the water sector together. Our partnership includes developing joint solution roadmaps and joint selling to water utilities around the world. Listen. We are very excited about this partnership and about the value we can deliver to customers together.
Turning next to operating discipline. Our operational capabilities were absolutely key to coming through 2020 on strong foundations. As you know, last year we made difficult but essential decisions on structural cost. Listen and we're now clearly seeing the benefit of those actions. In addition, the team drove strong productivity gains in the Q1, list which offset the early impact of rising inflation.
The result was solid margin expansion With incremental margins coming in at 55%. Over the last year, we've learned that we can do more with less That said, we are expecting some impact from the broad based inflation and component supply challenges that are affecting the industrial and tech sectors. Now we've already taken action by strategically investing in inventory to support areas of strong demand and we will continue driving productivity list and pricing to mitigate inflation. Still, the supply environment is likely to remain challenging for some time. The 3rd focus area we highlighted coming into the year was sustainability.
I think many of us worry that the cause of sustainability might suffer setbacks listen through the economic hardships of 2020. However, instead of a retreat, we've actually seen a broad and energetic global embrace of to sustainability. As an enterprise over the last year, we've taken several meaningful steps toward our signature 2025 list. We'll be highlighting those in our annual sustainability report to be published in June. From entering local waterways.
Now the report is largely retrospective, but of course, we continue to move forward. Listen. In 2021, we've deepened and broadened the link between compensation and sustainability performance. It is now a component in the long term incentive program for a range of key executives. Our commitment list and our action has put us in a leadership position, which is both gratifying and a tribute to the team.
That said, we all know we have a lot more work ahead of us to deliver on our goals and on our mission and purpose. With that, listen. I'll now hand it back over to Sandy to provide the forward view of our end markets along with guidance for the remainder of the year.
Listen. Thanks, Patrick. Consistent with our previous presentations, we have provided key facts for each end market in the appendix of our slide deck. Listen. The outlook for our end markets remains mostly consistent with our view from last quarter with a couple of notable changes.
Listen. First, in utilities, we continue to see strong commercial momentum in both wastewater and clean water and anticipate our utility business list. Operators remain focused on mission critical applications listen and OpEx needs in the developed markets of Europe and North America. Capital spending outlook and bid activity in China and India remains robust. Listen although we expect some lumpiness in India due to high COVID case rates there.
On the Clean Water side, we are encouraged to see large project deployments listen beginning to ramp again. Before I move on from utilities, let me briefly touch on the U. S. Administration's infrastructure plan. Communities across the U.
S. To invest in greater resilience in several infrastructure categories, which would have the effect of reducing pressure on municipal budgets. We are encouraged by those possibilities. But to be clear, it's too early to know whether and in what form the plan may emerge from Congress. Listen.
Please turn to Slide 11. Listen. The second notable change in our outlook is in the industrial end market. We have seen a rebound in global industrial activity and sentiment across all three of our business segments. We expect healthy growth in emerging markets in Western Europe to continue in the first half, list while North America will deliver modest growth.
And then we anticipate those relative market performances will flip in the second half listen because of the compares. Importantly, the industrial dewatering business is recovering, driven by demand in list of the segments and we now expect the industrial end market to grow in the mid single digit for the year. Our outlook in the commercial segment remains unchanged. We continue to expect our commercial end market to be up low single digits. We're gaining share in Europe, unhealthy demand and the U.
S. Replacement business is stable, although new commercial building is expected to be soft for most of 2021. In residential, we now anticipate high single digit to low double digit growth for the full year, list which is up modestly from our previous expectations of mid to high single digits. We do expect growth will moderate through the second half due largely to prior year comparisons. Now let's turn to Slide 12, and I'll walk you through our updated guidance.
As you can see, we are raising our previous annual guidance. For Xylem overall, We now see full year 2021 organic revenue growth in the range of 5% to 7%, up from our previous guidance of 3% to 5%. Listen. This breaks down by segment as follows mid to high single digit growth in Water Infrastructure, up from low to mid single digit growth previously mid to high single digit growth in applied water, up from low single digit growth. And in measurement and control solutions, we expect listen.
We continue to expect mid single digit growth. While we anticipate delivering a number of large project deployments, growth may be somewhat constrained by component supply challenges. For 2021, our margin to be up 90 basis points to 140 basis points listen to a range of 17.2% to 17.7%. For your convenience, we are also providing the equivalent adjusted operating margin here, which we now expect to be in the range of 12% to 12.5%, up 120 basis points to 170 basis points. This higher range reflects our expectation that volume, price and productivity gains will more than offset inflation.
List. Benefits from restructuring savings remain unchanged. And this yields an adjusted EPS range of $2.50 to $2.70 list an increase of 21% to 31% over last year. We continue to expect free cash flow conversion of between 80% to 90% as previously guided, putting our 3 year average right around 130%, and we expect to continue delivering cash conversion of bigger than 100% listen. Our balance sheet will remain very strong even after $600,000,000 of senior notes are retired in the 4th quarter, which clearly offers considerable room for capital deployment.
We are continually assessing inorganic opportunities to strengthen our strategic position, to differentiate our portfolio and enhance market access. We have provided you with a number of other full year assumptions to supplement your models. List. Those assumptions are unchanged from our original guidance, including our euro to dollar conversion rate of 1.22. Listen.
And as you know, foreign exchange can be volatile and therefore we have included a foreign exchange sensitivity table in the appendix. Now drilling down on the Q2, we anticipate total company organic revenues will grow in the range of 8% to 10%. Listen. This includes high single digit growth in Water Infrastructure, low teens growth in Applied Water and mid single digits growth in M and CS. We expect 2nd quarter adjusted EBITDA margin to be in the range of 16.7% to 17.2%, representing 140 basis points to 190 basis points of expansion versus the prior year.
And with that, please turn to Slide 13 and I'll turn the call back over to Patrick for closing comments.
Thanks, Sandy. Xylem is clearly in a strong position coming out of Q1, and we expect this momentum to continue throughout the rest of the year and beyond. Demand recovery and strong commercial performance will drive organic growth. Operating discipline will deliver margin expansion list and strong cash conversion. And a robust balance sheet will continue to underpin our strategy.
More broadly, listen Our business and mission have never been more relevant than they are today. The economic and social value of critical infrastructure is more apparent than ever. Not only is it critical in times of crisis, but also as a driver of economic recovery. And it's a prerequisite for broader prosperity. From the shock for the last year, the world has embraced the need for greater resilience list and the imperative of a sustainable future.
In that context, our mission, our business list and our values put us in a privileged position, which will enable us to continue creating both economic and social value for our stakeholders of the medium and long term. We look forward to providing an update on our strategy and long term plans at our next Investor Day, Which is currently planned for September 30. It will most likely be a combined virtual and physical format, But we do hope to host as many of you as possible, COVID restrictions permitting. Matt and the team will follow-up with more details as soon as they're pinned down. Now with that, we'd be happy to take any questions you may have.
So operator, please lead us into Q and
listen. Your first question comes from the line of Scott Davis with list of Melius Research.
Hey, good morning, Patrick,
Sandy and Matt. Hey, good morning, Scott.
How are you doing? Hi, Scott.
Good. Congrats on the incrementals. Good to see for sure.
Thank you.
I'm not sure, Sandy, if you mentioned anything about price, I didn't hear it in the prepared remarks. But is price generally Up with your cost structure. Is there any color you can give us there?
Yes, sure, Scott. So I think you're asking specifically about the Q1. If we look at our Q1 performance around price, It's basically flat. It's slightly positive and very much in line with our expectations. We did go out with a price increase, But that was back end loaded in the quarter.
It didn't take effect until the back half of March. As We're not unique. We're seeing increased inflation headwinds. And so we do expect to see second quarter, and that actually was a higher price increase than what we went out with earlier in March. So
Scott, from our past experience, the teams are doing a rather good job on making sure the pricing sticks. So we get pretty good realization when we go out with these price increases. And I think the market is clearly expecting something from us and our competitors.
Okay. That's helpful. And then, it sounds like this quarter at least you have a lot higher confidence On the meter deployments, is it visibility is it clearly, site access is an issue kind of everywhere still, but Is the increased confidence more around the efficacy of vaccines and some reopening in developed markets? Or is there list. Are there any other factors that you want to discuss?
Yes. I think, Scott, I'll look at the data, right? So very encouraged about the projects that we have lined up from a deployment perspective. As we kind of track, We book an award. It goes into our backlog.
The next phase is that we receive tangible orders from our customers. List and then you start to see it reflected in our revenue. And so we're kind of at that middle stage now. If you look at our orders performance in the quarter, Within M and CS, we're right about 20% orders growth year over year. And a big piece of that is the large project deployment starting to convert into tangible orders.
So,
And we saw Scott to your question, It absolutely is being driven largely by sites opening up, not everywhere. But part of that is, The vaccine being distributed, I think part of it is just growing confidence on the part of the utilities to move forward listen with these projects and that's also what drove our strong order growth and backlog growth in dewatering that we're saying at this point in time is site access.
Listen. Your next question comes from the line of Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone.
Good morning, Dean.
Good morning, Dean.
I would like to talk about guidance and some of the embedded assumptions here. Listen. And first of all, I fully recognize it's a Q1 and you guys don't typically boost guidance. So that's, for starters, different. And we certainly recognize there's lots of COVID uncertainty still and we're early in the year.
But so it really does flag the listen. Just the questions about component shortages. And the 2nd quarter guide looks fine. And just That looks perfectly fine. So you're probably pretty locked in, in terms of visibility on the component supply.
So is this a second half list. Component supply, just a risk. And maybe you can give us some more details about list. Yes. What particular components?
I know it's probably changes day to day, but just as it stands today, which ones are where the supply chains are more stretched in a meaningful way?
Listen. Yes, sure, Dean. Let me start with some color. First of all, we think that our team did a really good job in the Q1 in meeting supply in what was a challenging supply chain environment. We feel like we're listen in good shape for Q2 and we're continuing to monitor the situation for the back half of the year.
It's a fairly dynamic situation and we have certain components microchips that Look good and then that can change and then we solve that problem. So it's a dynamic situation. Our team is on top of it, very focused on it. Listen. We've worked closely with our contract manufacturer partners, and they're very plugged in and larger than we are.
List and so we think that provides some protection. But having said that, it's a risk item for the second half of the year. List. And so we want to be measured and watch how this unfolds over the next 90 days. And listen.
Next time we're together, we'll come back to you with an update.
And this is Dean, as you well know, this is happening across Our sector, especially in the metrology piece of the business, but it's widespread across the sector. So, it's not really creating any competitive pressure right now. It would be a matter of, if we had shortage, things would move to the right In terms of installations, etcetera. So we're not seeing that as of yet, but it certainly if it's a risk, it would be a risk in the latter part
That's good to hear. And so certainly, that's helpful in terms of the assumptions. Listen. And then the second question is a broader discussion around the Esri partnership because listen. It really looks like this has significant implications in expanding your offerings in Smartwater, especially Applications using artificial intelligence in this, the launch project with the utility that you cite, the water main feature.
Yes. So just talk about specific applications. What does Esri bring to the table? A little more color about this, the of utility deal using AI for water main monitoring. And then any color on the economics of the partnership?
Is this shared economics and how is that structured? Thanks.
Sure. Yes. So on the In terms of what problem are we trying to solve for here, particularly with the utilities, we already had some of our businesses working with Esri. That was our pipeline condition assessment business, the ARTIS formula is Pure, as well as WOX Water, which does a lot of the kind of valve pipe replacement work for utilities. And so really building off of that long term partnership, But really expanding now across the rest of our portfolio that is sold into the utilities.
So it really is about harnessing the power of the geographical list of data that Esri has. They've got a very large share base of utilities around the world. This is not limited to a U. S. List of opportunities.
We think that the power of the collective, I know they are very, very excited about working listen with us because what they don't have right now, we don't have access to the weather data, they do. At the same time, list. They don't have the deep subject matter expertise of being able to advise the utility on how to use this data to go address pipeline issues or water treatment plant issues, whatever challenges that utility may be facing. And that's what they're looking for us to really bring in. And they see it's the power and breadth of our portfolio since we're not limited on a few offerings in terms of equipment.
The case study example of the one utility that we talked about in the Mid Atlantic, We helped them reduce their non revenue water by through a 4x reduction in pipe failures, and that one project Is going to end up cutting their pipe replacement cost by $70,000,000 On the commercial side of the relationship. I'd rather not get into details on that right now. We can perhaps cover that maybe at our Investor Day later in the year.
Great. Thanks for the color and we'll just think it's an exciting development for you guys
on that front. So appreciate it. Absolutely. We're thrilled. Thanks, Dan.
Thanks, Dan.
Your next question comes from the line of Andy Kaplowitz with Citigroup.
Hey, good morning, guys.
Good morning. Good morning, Andy.
Patrick, you mentioned that China was up 90%, I think year over year. So while it's an easy comparison versus last year's. I think you had a 36% drop. I do think it puts your business there well over where it was pre COVID. So Can you talk about what is going on over there in terms of your penetration to that market?
You mentioned strength in transport and treatment, but maybe you could talk about How much is just more awareness about what our sustainability, your own sustainable growth strategy, how much that's helping you in emerging markets and what it can mean for Xylem's underlying growth moving forward.
Yes, sure. Great question. I would say that you're right, part of the Growth in Q1 is an easy comp, but we are expecting double digit growth for the full year in China. It's really it's broad based. It really is cutting across each one of our end markets.
So it's not limited to treatment or transport or utilities even. Part of that is, again, there has been improvement in China in terms of site access, kind of an opening up list more broadly of the economy, and so we see that investment flowing. From a long term perspective, there really are we see A couple of key drivers here. The whole focus on sustainability and environmental impact by the central government there, which has been part of their long range plan for a while now is driving real investment and we see that in our bidding pipeline and our project backlog. Secondly, it is really being driven also from a competitive standpoint by all of the work that we've done over the number of years to localize our supply chain as well as strengthening our engineering capabilities on the ground there and our selling list.
We've got a great team there, and we've got a quite strong brand name actually across China, Especially on the utility side.
Got it. Thanks for that, Patrick. And then Sandy, just following up on Dean's question, It looks like your implied incremental margins in the second half of the year are quite a bit lower than Q1. We know you have more difficult comparisons in the second half, but is your Second half guidance reflecting just conservatism regarding the component shortages we just talked about and price versus cost. And would you say listen.
We should just be careful about how we model M and CS margin improvement given those issues.
Yes. So good Question, Andy. I think, first of all, when we went out with our guidance for the full year of 2021, we did list. The margin expansion would be stronger first half, second half, and there's multiple reasons for that. Listen.
Starting with the restructuring actions that we took in 2020, we realized about of $70,000,000 of restructuring and structural cost benefit last year, about $50,000,000 of that was in the back half of the year. And we're calling for about $60,000,000 of restructuring savings in 2021 and that will be more front end loaded. So 2 thirds of that should come in the first half. So you have a little bit of a difference from a timing perspective on the restructuring side. Listen.
And then the other thing is, some of our discretionary costs. We took out about of $60,000,000 of discretionary costs last year. And in our plan, we have about 40% of that returning. Listen. That actually was a tailwind for us in Q1, because we've had travel and other items going on last year in Q1 that will start to flip in the second half of the year and become a headwind.
And the other area I think that it's really important is listen. We've strategically staggered the timing and phased the timing of our investments. And so those are to support our growth platform. So things like building out our digital platform, continuing to we just talked about the emerging markets. We're expanding our channel in the emerging markets, we're continuing to focus on localization.
And so those investments will come in higher in the listen second half of the year. And I think the new thing is that inflation and has continued to tick up. Listen. And while we're taking pricing actions, they don't always perfectly offset from a timing perspective. List and certainly we're watching the supply chain constraints closely.
Very helpful color Sandy. Thank you.
Listen. Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Good morning, Nate.
Patrick, I'd like to start off with
a comment you made in your prepared remarks talking about network as a service. I know you guys have been testing various business models around that area. Has there been Some movement on potentially putting Xylem's balance sheet to work a little bit more, to transform the business model around to how some of those things work. Any comments you can give around that initiative there?
Yes. We do a combination of structures And these are not actually for us large scale investments that are required. So I wouldn't want to list. Spook anybody on the call thinking that when we say we'd be using our balance sheet that we're talking about something larger than what it actually is. These are rather small list of investments in a network that we can make.
And it oftentimes happens when maybe there's a consortium list of utilities where on their own, they can't really afford it. They don't need to have it dedicated to them. So we will make the investment and we will we'll lease it back to them. Listen. It does address the affordability issues for the utility, for the customer.
But that's not the only model we do. I mean, there are customers that literally make the investment themselves. And so 2 different models there. I would say we're still in early stage of scaling. And again, we'll have we'd have much more to share there in Investor Day in September.
Fair enough. The next one, my follow-up question then on productivity. I think productivity in the quarter was 510 basis points, which I don't think I've seen a number that high out of Xylem before in that category.
Can you
talk about what exactly goes into the productivity bucket and what What drove such good performance there in the Q1?
Yes. So, yes, we put a number of things in that bucket. And first of all, listen. I need to give a shout out to the team because the performance in the Q1 was exceptional and stronger than what we list. So we put things in there like our continuous improvement activities that take place in our manufacturing centers list and within our supply chain.
We also put our procurement negotiation upside that comes through productivity list of that kind of offset some of the inflation headwinds that we're feeling as we're able to incorporate things like value engineering or list better designs for existing products. Our restructuring savings were a contributor this quarter as well. That was about list 100 basis points purely restructuring and other structural cost savings takeout was another 100 basis points, 150 basis points. So it's really a combination of a number of factors and all parts of it contributed this quarter.
Great. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Ryan Connors with postponing and scatter good.
Great. Thanks for taking my questions. I think your slides and Q and A has been very comprehensive. So I just kind of have a couple of bigger picture questions. Patrick, you talked earlier about the sort of tech MCS side of the business.
Listen. And I understand that Smartwater is sort of an irresistible theme, but MCS, it's kind of lagged the growth and profitability relative to other parts of the listen. You're not alone in that. We've seen that from some other peers as well where sort of the more boring business, if you will, actually of forms, some of the sexier stuff, if you will. And what are your thoughts on that?
And to what extent can we conclude from that that maybe Boring is good and mature markets with good channels that are established are good. And how does that inform your M and A mindset going forward.
Yes. So obviously, we love all of our business. So I don't consider them being boring, but I know that's a bit tongue in cheek on your part. But if we think about our Kind of our core businesses over the history of Xylem. We've continued to invest organically in those businesses and we've done some small of tuck in bolt ons like in treatment, etcetera as well.
But we're increasing that investment in the second half of the year To where about 2 thirds of the investment that we're going to be making in the second half is weighted towards kind of the core equipment product list of offerings that we need to do, the remainder really being in more of the digital side. Listen From an M and A standpoint, we are open. We evaluate opportunities across the spectrum list for each one of our businesses in this segment because you're right, it's really important that we maintain and extend our market share leadership in those businesses And not be purely fixated on just what's going on within MNCS. So that's a big theme across the company right now. Listen.
In terms of the dynamics of slower ramp in top line growth and margin expansion in M and CS, I know we've said this before and you began to see that here in the Q1. That really is a function of timing. I mean as these large deals from an EBITDA standpoint relative to the rest of Xylem.
Okay. Okay. That's helpful. And then my second one was, again, another big picture question. Patrick, you're an important kind of voice in this industry and I want to get your response to something listen.
As it relates to federal dollars, right. So we've seen some great progress in the last decade on full cost pricing by local water systems. We've seen great progress on consolidation listen and acquisitions by investor owned players who are great customers for you as you've demonstrated in your past Analyst Days and so forth. So my question is, To what extent does a big infusion of sort of no strings attached to federal money into that sector put those sustainable drivers of list of full cost progress and consolidation at risk. In other words, you throw a lifeline, they don't have to increase price, they can even lower price, They don't have to sell to an investor owned.
What are your thoughts on that and the risks associated with federal money coming in, in a big way?
Listen. Yes, it's a great question. And the answer right now is no one really knows because nothing's been approved yet.
But I think directionally, as
you well know, historically CapEx in the U. S. Water utility space, which is really what we're talking about, it's more on the CapEx Has not been funded by federal legislation. And so, if this pile of money comes through, I mean, quite frankly, On a relative basis, right now, the number is around $110,000,000,000 I believe. That to me personally is underwhelming Relative to the price tag of the rest of infrastructure that's being kicked around.
And so I think by the time you spread that out across the utilities in the states At a local level, I don't think it's going to put as much pressure on utilities, as you pointed out, Moving away from otherwise progress they would be forced to make to protect their investments. We'll see when we get there. That's not the rumbling that we're getting. I mean, we stay close, for example, to NAWCA, which You well know it's the North American Clean Water Association. And that's one of the questions we ask of those large utility players What do they think about the proposed bill?
They're encouraged, but they're not making any plans based on it right now. I mean, not at least widespread.
Okay. That's very helpful, Frank. Thanks for your time this morning.
Thank you.
Your next question comes from the line of Connor Lynagh with Morgan Stanley.
Yes, thanks. I think we've spent a fair bit of time on the chip supply chain issues, but obviously there's plenty of issues list in sort of basic commodities as well. I was wondering if you could just discuss any sort of material pressure you're feeling from list steel or copper or anything like that, what your sort of sourcing strategy is and if we should expect any sort of impact on your margins from that.
Yes. So thanks for the question, Conor. We're feeling It's something that we're watching closely both from an inflation perspective and a shortage perspective, Particularly from a shortage perspective around resins and plastics, we think that listen. The storm that took place earlier in the year in Texas put some pressure on the global on the supply chain. Stick shortages.
We feel good about the supply that we've secured for the Q2. And I think we're in a good place from a momentum perspective, list. Still work to do, but those are kind of resolving themselves in a favorable way. We're seeing inflation in copper, aluminum and steel and that's an important part of why we've gone out with a second price increase in the second quarter.
Yes, understood. So I think in the bridge you provided, it seems like price cost is pretty neutral thus I mean, I think you were guiding the full year to be marginally dilutive. Any updated thoughts on that? Just how you're thinking about all those different list.
Yes, I think that hasn't changed. But when you incorporate the productivity that we're going to continue to drive out of Our manufacturing sites and within our supply chain that will be on the positive side of that.
Listen. And I think partly what we're really suggesting here is The uncertainty continues around the supply chain in areas that it's moving around and we've just gone out with of price increases and we have another one being rolled out. So we really want to see how that sticks and how that plays out as we get through Q2 And then we'll have a better view on the second half at that point.
Yes, understood. I guess where I'm ultimately driving with this is, you're starting from a very list particularly in the Water Infrastructure and Applied Water businesses. It doesn't sound like you're seeing anything Right now, that would suggest we should assume an abnormal seasonal trend, which usually is a positive one, Correct.
No, I think if you look at what we implied through our guide, you'll see margin expansion in the second half compared to the first half. So listen. We are I think we're off to a great start. And we're on a quarter on a sequential basis, You should see margin expansion in the second half as well.
Clear. Thank you.
Your next question comes from the line of Sara Borgeski with Jefferies. Listen.
Good morning. So just a follow-up on your pricing commentary. You talked about this other price increase in the Q2, but given your strong orders and backlog, How do you think about when you actually see the benefit of this price increase?
Yes. I think that's a good question. There have been some orders that have been placed to take advantage of pre price listen before the price increase takes effect. And so that's why what we've modeled is that we'll see greater price realization coming in Q3 and Q4 as we work through the existing orders that are in backlog.
And then it looks like the 25% order increase in applied water was partially attributed to extended lead times in North America. How should we think about the impact of this and how is underlying demand trending?
Yes. So, first of all, With 25% year over year growth, there is definitely an uptick in demand. And so we can't dismiss we think that there was list of some placement of orders a little bit earlier than normal because many, many companies are dealing with the of supply chain constraints and shortages. And so customers want to get they want to be first in line to protect their supply. Listen.
But net net, very good performance. We're seeing good recovery on the industrial side. Residential remains strong And commercial is starting to come back particularly outside of the U. S.
Perfect. Thanks for taking my questions.
Your next question comes from the line of Scott Graham with Rosenblatt.
Hey, good morning, Patrick, Sandy, Matt. How are you? Good
morning, Scott.
Hey, Sandy, compliments on your handle over the details, listen. Just really impressive. I'm hoping to maybe tap into that a little bit more on the productivity. I know some questions have been asked around list of the productivity of 510 basis points. Certainly, we know that discretionary was a little bit additive within that.
And so structural, you said 100 to 150, but boy, that still leaves a lot of just sort of core productivity list of improvements in the quarter. And I'm just wondering if you can kind of take us underneath that a little bit and what that would look like for the rest of the year? Listen.
Yes. So if we look at Q1, what we're seeing is about 70 basis of points from came from what we call continuous improvement and that's hard work that takes place day after day in our manufacturing centers. Listen. And then our procurement organization delivered about 220 basis points of savings this quarter, list which was a really good number. And so I think that's a high number, but Net net, this productivity element is a core part of our planned margin expansion for the year and We're very glad to start seeing it right out of the gate.
So you think that, that what you just laid out, that 300
Our full year projection around productivity is right around 300 basis points.
Okay. So then that would imply that, that comes off a little bit in the second half. I understand.
A little bit. The first quarter was very strong.
Yes, yes, get it. This is one for you, Patrick. I didn't hear mention of AIA, Just maybe you can kind of assuming it's still called that, but kind of give us sort of what was the sales growth in What you've called AIA, and what is the thinking for the full year?
Sure. Matt, while you go through the numbers and I'll talk about what we're seeing in terms of just momentum in the business that we have. I mean, we still list show it as that from a reporting standpoint as AIA within the MNCF segment. But from a branding standpoint, we now heard a piece of that, which is the pure digital as XylemView, which is our consultative business. And we have the pipeline condition assessment business, list The Artis formerly known as Pure, that's in there as well.
So those are 2 very different businesses and they're now run separately. Listen. We saw nice momentum in both businesses. Mac can share the detailed numbers, But really good look at bidding activity on the digital side, order growth, backlog growth, margins, Strong incremental margins on that business. So that team that we set up last year really is going to get some big traction out, list Not just with utilities in the U.
S, but also across emerging markets in Europe.
Yes. Scott, I would listen Looking at it in a whole, right, in terms of AIA, we've been down a little bit in the Q1. Most of that is pure because seasonally, listen. This is usually a slower period of time for them doing a lot of that in pipeline assessment service work. Listen.
It's harder to do as you know in a lot colder freezing temperatures. So down a little bit, that was expected. They both are kind of on target for what our plan was. That will ramp. We're seeing good activity, good interest bidding around listen both of the businesses, some good orders, good momentum on the View side, and we'll have more to share about of that digital strategy and the component that is View at Investor Day.
But I think importantly too, it's also their synergies with that View business into other parts of the business. And so for example, we highlighted that Greensboro, win that we had, this quarter. And that is an AMI deployment, but it also comes with some digital components in terms of pipeline condition assessment service list on the wax water piece, so it addresses non revenue water and also our Valor analytics list technology that goes at the meters that need to be replaced and targeted first listen to address. So both of those are in that deal. It's nice to see that bidding and scope work getting expanded.
And I would say, Scott, it was those digital capabilities that were, in some cases, the Distinguishing competitive advantage that really kind of helped get it across the finishing line.
Yes. That was Something you've been talking about for a while, Patrick. Thank you all.
Yes. Thank you. Take care.
Your next question comes from the line of Brian Lee with Goldman Sachs.
Hey, good morning, everyone. Thanks for taking the questions.
Good morning, everyone.
A lot
to cover here. Hey, good morning. Listen. I just wanted to maybe talk about MCS for a second. It's the only segment that isn't getting a bump up in the listen to the outlook for the guidance.
So just trying to understand how much of that is just project timing and visibility not having improved or changed much list versus just building in more risk for supply chain issues. So maybe the puts and takes there as you thought about providing the updated guidance here. Call. And if it is some of the latter, I know you talked about this a little bit, but what specific actions are you taking to mitigate? Are you adding new suppliers?
Are you building inventory? I just want to better understand kind of what the situation is there.
Yes. Thanks, Brian. Good question. I think From the orders growth, if we did not have supply chain constraints, we would have likely increased The guidance there because the large project deployments, which is a core part of our plan are coming through in line with our list of expectations and our customers are ready to go, which we're very, very encouraged about. But the situation on the electronics components is very dynamic.
And so we want to continue to monitor and see how list that plays out over the next few months. And we've taken extra inventory where it was possible. Listen. It takes a little bit of time to substitute parts out and get those certified, but that's something that our team is also working on. Listen.
And I think we're not alone here. So, I think this is well understood in the industry that there's a shortage of microchips. Listen. And so far, we've kept everything up and going and we're going to keep fighting.
Yes, we have been working to qualify additional suppliers, but the predominant work that's been done is to work closely with our Largest contract manufacturer, which is Flextronics. And obviously, with their large procurement capabilities and the mass listen. Procurement, they do. We've got a really nice partnership with them and we've been able to make sure up to this point list that we're getting our fair share of the components that are out there despite the shortage. And we just got to stay close to them and keep working that through the year.
Okay, great. That's helpful. And then maybe one for you, Patrick, and I'll pass it on. Just high level, big picture outlook for M and A, you guys We have a very healthy balance sheet, sticking to the free cash flow view here for the year. Generally, what are you seeing in terms
of multiples out there? Are there
is there anything more attractive in the context of your list of questions out there. Is there anything more attractive in the context of your stock having done well over the past year? And then just what focus areas or holes listen. You might be looking to address in the portfolio here. Thanks guys.
Yes. No, thanks. M and A is Clearly an important piece of our long term strategy. And so we continue to actively cultivate the pipeline. It is a very robust pipeline.
It's a very active we would really be focused on further strengthening our digital platform, really Diversifying some of our end market concentration. So as we said before, perhaps something in the industrial Water space and then of course as I mentioned earlier, always look at opportunities to strengthen our core. In terms of valuation, We have seen some multiple inflation there, but really tends to be around things in the digital space list of scale. We've not been actively participating in some of those deals that have been announced here recently because we like the portfolio that we've got, But we're always in the game on those in terms of looking at it. But we do want to be disciplined on valuation.
What I would say is I acknowledge your comment and that is we've got a strong balance sheet. Our equity is a valuable currency right now. And both of those give us, we think, relative advantage to bring some of these differentiated assets into our portfolio. Listen. There is a reminder that we've got this $600,000,000 note that's due in early Q4.
So that's not going to constrain us. But as you all are modeling cash and balance sheet, just make sure that you keep that in mind.
Okay. Thank you. Appreciate the call.
We have reached the end of our allotted time for questions. I will now turn the floor back over to Patrick Decker for additional or closing remarks.
Thank you. Well, thank you all for joining and for your continued interest list and engagement here. Really appreciate the support. Look forward to seeing you again on our next call. Earnings call, but also at our Investor Day, September 30.
Matt and the team will be reaching out and coordinating with all of you listen to make sure that you we get that scheduled for you. And so in the meantime, again, have a great remainder of your spring and summer. Stay safe, listen. Stay well, and all the best to your families and colleagues. We'll see you soon.
Thank you. This does conclude today's Xylem